Written by Thelma T. Mundin, 27 September 2007
Money lending has been part of the Philippine economy for as long as I can remember. Loans are offered in many forms and under different terms and conditions depending on various factors such as, who the parties are, e.g., their status and financial position, and the amount, purpose or duration of the loan.
Loans may be secured from various sources such as banks, financing institutions, lending investors (corporate or single proprietors), including the so-called “loan sharks” who extend small amounts of unsecured loans to the common “tao” (either for business or personal purposes) at usurious rates ranging from 10% to 20% interest per month commonly referred to in our local lingo as the “5-6 system”.
Thus, loans in whatever form or from whatever source, have become the lifeblood of the Philippine economy whether from a micro or macro perspective especially among small businesses who constitute a substantial part of our underground economy.
The lending business of the above-mentioned entities are generally regulated under special laws specifically applying to them. For example, financing and leasing companies are regulated by Republic Act (RA) 8556, otherwise known as the “The Financing Company Act of 1998” which took effect in 1998.
However, in the case of lending investors, there was no law specifically regulating them until only recently when RA No. 9474 otherwise known as the “Lending Company Regulation Act of 2007” was enacted in May of 2007. Prior to RA 9474, lending investors without quasi-banking functions were placed under the regulatory power of the SEC as confirmed by the Department of Justice in its Opinion No. 046, dated September 17, 2001.
On October 11, 2001, the SEC issued Memorandum Circular No. 13 providing for the guidelines in the regulation of lending investors. Basically, the Circular required all corporations engaged in direct lending activities to comply with the requirements of R.A. 8556 and all existing lending investors organized as partnerships or single proprietorships to convert into corporations within 1 year from the effectivity of the Circular. However, SEC Circular No. 13 was contested by a certain lending investor which eventually resulted in the Court issuing a decision ordering the SEC to stop the implementation of the Circular effective November 10, 2005.
Perhaps to address this stalemate, the Philippine Congress finally enacted RA 9474 specifically regulating lending investors which took effect on June 12, 2007. The law, as stated in its Declaration of Policy, seeks to regulate the establishment of lending companies and to place their operation on a sound, efficient and stable condition to derive the optimum advantages from them as an additional source of credit and also to protect the public by preventing and mitigating, as far as practicable, practices prejudicial to public interest.
RA 9474, which basically reiterates the guidelines contained in SEC Circular No. 13, contains, among others, two very important features:
One is the requirement that a lending company shall be established only as a corporation, at least a majority of the voting capital of which must be owned by citizens of the Philippines and with a minimum paid-in capital of P1M, which can be increased by the SEC if warranted by circumstances.
This requirement shall likewise apply to lending investors already operating upon the effectivity of RA 9474 although they may be given by the SEC a grace period of not less than 3 years to comply with said requirement.
Moreover, in the case of lending investors existing and operating prior to RA 9474 but are organized as single proprietorships or partnerships, the law effectively mandates them to convert their respective businesses into a corporation within 1 year after the effectivity of RA 9474, since after this period, they will no longer be allowed to engage in the lending business.
The other feature is the restriction imposed on the amount and charges (interest) on the loans. Under the law, the loans granted shall be in such amounts and reasonable interest rates and charges agreed upon by the parties subject to the the provisions of the “Truth in Lending Act” and the “Consumer Act of the Philippines”.
What is noteworthy is the provision which states that the Monetary Board may, in consultation with the SEC and the industry, prescribe such interest rate as may be warranted by prevailing economic and social conditions. Hopefully, regulating the interest rates at reasonable levels would put a stop to the existing practice of many lending investors of imposing arbitrary interest rates on small borrowers who are always at their mercy.
A common practice in the lending/financing industry is the so-called loan brokering, which was not covered under both RA 9474 and RA 8556. Loan brokers are independent entities or persons who refer prospective borrowers to lending entities. For their services, they collect a commission (generally 3% of the gross amount of the loan) from the lender and an additional referral charge of 15% on the amount of the approved loan from the borrower, thus, a whooping double whammy. I believe, this business practice, which is often times abused, should also be regulated to protect the borrower who ultimately bears all the costs.
By and large, RA 9474 is a good legislation since it seeks to protect not only the interest of the lending investors but also the borrowers. However, whether the law would meet its objectives still remains to be seen.
From a practical standpoint, many lending investors especially single proprietors doing business within the sphere of the so-called underground economy, might find it difficult to comply with the strict requirements of RA 9474 notwithstanding the stringent penalties it provides. Thus, existence of unregistered and unregulated lending investors would still proliferate.
At the same time, small borrowers who do not have sufficient property or papers to secure/support their loan applications would in all likelihood, still prefer to deal with the unregistered lending investors regardless of the onerous interest rate charged since said lenders can easily extend them credit without documentation. The onus now is on the SEC to ensure the efficient implementation of RA 9474 to achieve the law’s objective as intended by Congress.
