Usury Law

I.

Usury Law
A. Definition of usury
Usury may be defined as contracting for
or receiving something in excess of amount allowed
by law for the loan or forbearance of money, goods or
chattels. (Tolentino v. Gonzales, 50 Phil. 558)
1. Elements of usury
a. a loan or forbearance;
b. an understanding between the parties
that the loan shall or may be returned;
c. an unlawful intent to take more than
the legal rate for the use of money or its equivalent;
d. the taking or agreeing to take for use
of the loan of something in excess of what is allowed by
law.
2. Applicability of usury law
a. Loan - mutuutum but does not apply
to commodatum because there inso interests in
commodatum as it is purely gratuitous.
b. Forbearance - a contratual obligation
of the creditor to forbear during given period to require
the debtor, payment of an existing debt then dean
payable.
3. Determination of existence of usury
Where there is no loan of forbearance,
there can be no usury.
B. Interest/ Forbearance
1. Definition
Interest is the compensation allowed by
law or fixed by the parties for the loan or forbearance of
money, goods or credits.
2. Kinds of interest
a. Simple interest - that which is paid for
the principal at a certain rate fixed or stipulated by the
parties.
b. Compound interest - that which is
imposed upon interest due and unpaid. The accrued
interest is added to the principal sum and whole is
treated as a new principal upon which the interest for
the next period is calculated.

c. Legal interest - that which the law

directs to be charged in the absence of any agreement as
to the rate between the parties.
d. Lawful interest - that which the law
allows or does not prohibit, that is, the rate within the
maximum prescribed by law.
e. Unlawful or usurious interest - that
which is paid or stipulated to be paid beyond the
maximum fixed by law.
3. Interest rates
a. Legal rate - 12%
b. Maximum rate
i. 12% per annum - if the loan
secured in whole or in part by a mortgage upon real
estate with a Torrens Title; or any agreement conveying
such real estate or an interest therein.
ii. 14% per annum - if the loan is
not secured by those which are above stated.
iii. that prescribed by the
Monetary Board of the Central bank.
*** Central Bank Circular No.
817 fixed the eective rates of interest as follows:
i. not exceeding 16% per annum,
including commissions, premiums, fees, and other
charges for secured loans of 365 days or less;
ii. not exceeding 185 per annum,
if such loans are unsecured; and
iii. if the maturity of the loan is
more than 365 days, the interest shall not be subject to
any ceiling.
4. Distinction between Section 2 and Section 3
a. In Section 2, the taking or receiving
(not merely agreeing) of usurious interest is the act
penalised, while in Section 3, the mere demanding or
agreeing to charge excessive interest is also punishable;
b. In Section 2, the loan or forbearance
is secured by a real estate, while in Section 3, it is not
so secured or there may be no security at all;
c. In Section 2, commissions, premiums,
fines, and penalties are included in the computation of
interest, while in Section 3, they are not considered.
*** Under both sections, it is only the
creditor who is criminally liable.

payable

5. Eect of where principal is not absolutely

Usury statues have no application to

those uncertain transactions in which the lender incurs

risk of losing in whole or in part the principal sum lent,

or in which the payment of the amount is contingent
upon conditions beyond the control of the parties.
C. Interest that can be charged by a pawnshop
as of February 29, 1980
1. 2.5% per month - when the sum is
not more than P 2,000.00.
2. 18% per annum - when the sum lent
is more than P 2,000.0o.
D. When compound interest is allowed
1. When there is an express stipulation
to that eect or, in default thereof;
2. Upon judicial demand and this so
even if the contract be silent upon this point. ***the
debtor is not liable to pay compound interest even after
judicial demand where there is no stipulation for the
payment of
interest.
1. Right of creditor to charge advance interest
a. One year or less - It is permissible
under Section 5 for the creditor to charge interest in
advance corresponding to not more than one year
whatever the duration of the loan may be.
b. More than one year - under Section 5,
the taking of interest for more than one year is
apparently prohibited. It is believed, however, that
interest may be taken in advance for more than one year
as long as the EFFECTIVE RATE OF INTEREST
CHARGED
BY THE CREDITOR SHALL NOT
EXCEED THE EQUIVALENT MAXIMUM RATE
PRESCRIBED BY THE MONETARY BOARD, i.e. the
deduction of interest for more than a year is possible if
the interest is taken at a lesser rate.
***usury= deducted interest > lawful maximum rate
upon the money received by the borrower

paid

E. Right to Recover
1. Borrowers right to recover usurious interest

As provided by Section 6 of the usury

law, a borrower who has paid or deliver usurious
interest may recover the entire interest he paid with
costs and attorneys fees.
2. Right under the Civil Code
Article 1413 of the Civil Code provides:
Interest paid in excess of the interest allowed by the

usury law may be recovered by the debtor, with interest

thereon from the date of the payment.
***Stipulation whereby the interest rate is usurious
amounts to a void stipulation of interest and thusthe
Supreme Court allowed the debtors recovery of the
entire interest paid. (In a latter case, the SC entitles the
debtor of the recovery of the interest paid with legal
interest from the date of payment)
***there is no pari delicto rule in usury cases.
3. Right to recover cost and attorneys fees
Section 6 of the usury law expressly
provides that the costs and attorneys fees may be
allowed by court - thus, the law recognises the courts
discretionary power to fix the amount of fees to be
awarded.
***The purpose of the law is to encourage persons who
have suered from contracts of usurious character to go
to court and vindicate their rights and to serve as
wholesome deterrent to the taking of usurious interest.
***The ignorance of the creditor of the law against
usury is not a defence to relieve him from the
consequences - dura lex sed lex.

interest

F. Section 7
1. Usurious loan void only with respect to

The Usury Law did not intend to

absolutely nullify a contract which contains stipulations
that violate the usury law, but merely nullifies the
stipulation with respect to the agreed interest.

interest

2. Eect of clerical error in the computation of

Mistakes in calculation or errors in the

computation made in good faith resulting to the
lenders UNINTENTIONAL charging or receiving
interest in excess of what is allowed by law does not
render the contract void.
3. Usurers right to principal
A usurious loan is void but this does not
mean that the debtor may keep the principal received by
him as loan thus, unjustly enriching himself at the
expense of the creditor, but the creditor has no right of
action for the recovery of the stipulated interest,
although he may seek for the recovery of the principal
loaned by judicial action.

***see solutio indebiti

***in some cases, the SC
awarded legal interest to the usurer.
4. Escalation clause in loan agreement
The unilateral determination and
imposition of increased interest by the lender will be
violative of the principle of mutuality of contracts.
Stipulations providing for adjustments in the interest
rate agreed upon in the event there is a change in the
legal rate interest aected by law or the Monetary Board
as authorised by law should benefit both parties creditor and debtor. Thus escalation clause must not be
solely potestative; the inclusion of an escalation clause
should necessarily include a de-escalation clause as to
give both parties equal rights provided for by law.
(***does not include Central Bank circulars)
5. Interest to be based on prevailing market rate
Where the clause authorises the creditor
to correspondingly increase the rate of the interest in
the event of changes in prevailing market rates, it
cannot be said to be dependent solely on the will of the
creditor as it is also dependent on the prevailing
market rates. The fluctuation in the market rates is
beyond the control of the creditor.

G. Determination of Interest where loan of

money is payable in kind
Where the
interest of a loan or
forbearance is paid in a medium other than money, the
means of ascertaining whether the payment exceeds the
rate allowed by law is to reduce the medium of payment
to its equivalent in Pesos AT THE TIME THE
OBLIGATION FALLS DUE AT THE CURRENT LOCAL
MARKET PRICE.
1. Usurious if the value of the medium
when so ascertained is more than the lawful rate upon
the debt upon which the interest is paid.
GR: usurious if value of medium >
lawful interest ***usurious because the commodity used
to pay the obligation is not properly appraised i.e. way
under estimated the real value (LUGI sa price si debtor)
EXC: debtor is given the option of
discharging his obligation by paying the sum lawfully
due from him within a specified period.
2. Not usurious - the contract specifies a
usurious rate of interest, but the interest is made

payable in a specified quantity of goods, the transaction

is not usurious if the money equivalent to the goods
delivered in payment does not exceed lawful
interest on the principal sum.
H. Denial of usury under oath
1. Eect of failure to make denial of
usury under oath
When an action for recovery of usurious
interest is instituted, Section 9 requires the person
against whom the action is filed, to file his answer in
writing under oath. If allegations of usury are not
denied specifically and under oath, they are deemed
admitted. But the only thing admitted is the
allegation that the interest charged is usurious, not
that the contract entered into is a loan which is
something that must be proved independently of the
admission.
If the person or corporation sued shall not
file its answer under oath denying the allegation of
usury by the plainti (debtor), the defendant
(creditor) shall be deemed to have admitted the
usury.
***Section 9 does not apply to a case where it is the
defendant (debtor), not the plainti (creditor) in an
action by the latter for collection, who is alleging
usury.
2. Rule subject to waiver
The rule is a procedural one which is
subject to waiver. In a case (***perhaps for the
collection of sum of money) it was held that the failure
of the plainti (creditor) to make a denial of usury
under oath is not deemed an admission where the
defendant (debtor) has been declared in default for
failure to appear at the pre-trial.

under oath

3. Reasons for requiring denial of usury

The law was enacted to do away with

usury. It was passed against the usurer and not in his
favour. And finding, no doubt, that the evil to be
eradicated was so widespread, the legislator felt justified
in presuming that it existed whenever its existence was
alleged unless denied under the oath, thus demanding
the guaranty of his oath, not in the allegation, but in the
denial of this fact.

I. Prescription of criminal action

The crime of usury prescribes in four (4)
years from its commission.
Where the accused received the annual
usurious interest every year for three (3) years, the
prescriptive period is to be counted from the date of the
last payment of usurious interest.
cases: Usury law
1. Megaworld v. Engr. Parada
2 . R o l a n d o d e l a C r u z v. L & J
Development Corporation, September 8, 2014