TL;DR

The Philippine Supreme Court ruled in favor of borrowers Ramon and Anita Viroomal, declaring the interest rates imposed by Manila Credit Corporation (MCC) on their loan as unconscionable and void. The Court affirmed that while contracts have the force of law, excessively high interest rates that are against public morals and policy will not be upheld. This decision means lending institutions cannot impose exorbitant interest and penalty charges that exploit borrowers, and courts are empowered to reduce such rates to equitable levels, ensuring fair lending practices and protecting borrowers from predatory schemes.

Predatory Lending Exposed: When Loan Contracts Become Instruments of Oppression

This case uncovers a stark reality in lending practices: the potential for contracts, meant to facilitate financial agreements, to become tools of oppression when laced with unconscionable terms. At the heart of Manila Credit Corporation v. Viroomal lies a loan agreement gone awry, not due to the borrower’s unwillingness to pay, but because of interest rates and penalties so exorbitant they defied legal and moral standards. The central question before the Supreme Court was clear: can lending institutions impose interest rates and charges that, while stipulated in a contract, are so excessive that they shock the conscience and undermine public policy?

The Viroomals initially secured a PHP 467,600.00 loan from MCC, agreeing to a 23.36% annual interest, payable over five years. However, the promissory note also included additional charges: a daily interest of 1/10th of 1% for overdue payments, a 1.5% monthly penalty, and a PHP 100 collection fee, all compounded monthly. Later, seeking to restructure their loan, they entered into a second promissory note for PHP 495,840.00 at a 24.99% annual interest. Despite making substantial payments totaling PHP 1,175,638.12, MCC claimed an outstanding balance and proceeded with foreclosure. The Viroomals contested, arguing that the effective interest rate (EIR) of 36% per annum, along with other charges, was unconscionable. MCC, on the other hand, insisted on the sanctity of contracts and the borrowers’ consent to the terms.

The Regional Trial Court (RTC) and the Court of Appeals (CA) both sided with the Viroomals, declaring the interest rates void and reducing them to the legal rate of 12% per annum. The CA highlighted that MCC, beyond the stipulated 23.36% interest, also imposed a 3% monthly EIR, bringing the total annual interest to a staggering 77.36%. The Supreme Court, in affirming the lower courts’ decisions, emphasized the principle of autonomy of contracts, allowing parties to freely stipulate terms, but underscored that this freedom is not absolute. Article 1306 of the Civil Code sets the boundaries:

Article 1306. The contracting parties may establish such stipulations, clauses, terms and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.

The Court found that the compounded 3% monthly EIR, unilaterally imposed by MCC and not clearly stated in the original promissory note, violated the mutuality of contracts, as stipulated in Article 1308 of the Civil Code, which prevents one party from unilaterally altering contract terms. Furthermore, citing established jurisprudence, the Supreme Court reiterated that interest rates of 3% per month or 36% per annum are considered excessive and unconscionable. While the Usury Law’s interest ceilings are no longer in effect, the Court clarified that this deregulation does not grant lenders carte blanche to impose exploitative rates. Interest rates must be reasonable and fair, and when they exceed twice the legal rate without justifiable reason, they become suspect.

Applying the legal interest rate of 12% per annum to the original loan, the Supreme Court meticulously recalculated the Viroomals’ payments. The computation, presented in a detailed table within the decision, revealed that the principal obligation was fully paid by August 2012, with a significant overpayment. Consequently, the second promissory note, PN No. 8351, intended to cover the supposed unpaid balance, was declared void for lack of consideration. The Court ordered MCC to refund the overpayment, including the amounts paid under the second promissory note, with legal interest. The foreclosure proceedings were also nullified, and the title to the mortgaged property was ordered to be reverted to the Viroomals, as the extinguishment of the principal debt automatically extinguished the accessory real estate mortgage.

This ruling serves as a crucial reminder of the judiciary’s role in protecting borrowers from predatory lending practices. It reinforces that contractual autonomy has limits, especially when exercised in a way that contravenes public policy and morality. The case underscores the principle of equitable reduction of penalties under Article 1229 of the Civil Code, allowing courts to intervene when contractual terms become instruments of injustice. The Supreme Court’s decision in Manila Credit Corporation v. Viroomal provides a significant precedent, empowering borrowers and setting a clear standard against unconscionable interest rates in loan agreements.

FAQs

For inquiries regarding the application of this ruling to specific circumstances, please contact Atty. Gabriel Ablola through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Manila Credit Corporation v. Ramon S. Viroomal and Anita S. Viroomal, G.R. No. 258526, January 11, 2023.