Published 12 April 2019, The Daily Tribune

It has been said that one of the greatest disservice you can do a man is to lend him money that he can’t pay back.

Republic Act No. 3765, aptly entitled “Truth in Lending Act”, aims to protect the public from lack of awareness of the true cost of credit by requiring from the creditor the disclosure of full information incident to a credit transaction.

A creditor is required to supply to the borrower prior to each credit transaction a clear statement in writing of the following information: the amount of the loan or credit service extended; any down payment or trade-in made; individually itemized charges, fees and other related costs; the total amount to be financed or amount of loan extended; the interest or finance charge to be paid, expressed in terms of pesos and centavos; and  the percentage that the interest or finance charge bears to the total amount to be financed. The interest must be expressed as a simple annual rate.

It is not just banks and other financial institutions that must follow these requirements. Any person in the business of extending loans, or selling or renting property or services on a time, credit, or installment basis, either as principal or as agent, is required to make the same written disclosure. Thus, if you are acquiring a vehicle under a financing scheme, or purchasing a mobile phone on installment basis, the seller is required to provide you the information enumerated above.

The creditor’s failure to comply with these requirements does not mean that the debt is forgiven, or that the goods purchased on credit or installment basis are deemed fully paid. The transactions remain valid and enforceable. The lender, however, will have no right to collect such charge or increases thereof, even if stipulated in the promissory note (Development Bank of the Philippines vs Arcilla, 462  SCRA 599).

In one case decided by the Supreme Court, although the creditor failed to state the penalty charges in the disclosure statement, the penalty charges were upheld because the borrower signed a promissory note detailing the penalty charges. Since the promissory note was signed on the same date as the disclosure statement, and the promissory note is an acknowledgment of a debt and commitment to repay it on the date and under the conditions that the parties agreed on, the same is a valid contract.

In another case, the Supreme Court held that a promissory note which grants the creditor the power to unilaterally fix the interest rate means that the promissory note does not contain a clear statement in writing of the finance charge. Such provision is illegal not only because it violates the principle of mutuality of contracts but it also contravenes the Truth in Lending law (UCPB vs Veloso, 530 SCRA 567).

In case there is a violation, the borrower may file a civil case for recovery of damages in the amount of Php 100 or of twice the finance charged required by the creditor, whichever is greater, but not to exceed P2,000. A criminal case may also be filed against the creditor. The action to recover the penalty should be brought within one year from the date of the occurrence of the violation and may be instituted by the aggrieved private person separately and independently from the criminal offense.

With the disclosure required by law, it is expected that borrowers are able to weigh the pros and cons of borrowing. Such information allows them to evaluate their options in arriving at business decisions. Thus, even in matters of credit, knowing the truth sets us free.

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