Credit Card Debt: Unconscionable Interest Rates and the Duty to Respond

The Supreme Court recently reminded borrowers that while courts will protect them from excessive credit card charges, they cannot simply ignore a collection lawsuit. In Louh v. Bank of the Philippine Islands (G.R. No. 225562, March 8, 2017), the Court reduced a bank's staggering 114% annual interest rate to a reasonable 12% per annum. However, it also upheld the default judgment against the borrowers who filed their Answer more than three months late.

The Facts of the Case

BPI issued a credit card to William Louh, Jr., with his wife Irene as an extension cardholder. The credit card agreement imposed a 3.5% monthly finance charge and a 6% monthly late payment charge—amounting to 42% and 72% per annum, respectively.

The Louhs made purchases and paid regularly until October 14, 2009, when they fell behind. Despite demand letters from BPI, their account remained unsettled. By September 14, 2010, BPI claimed they owed P533,836.27. The bank filed a collection suit in 2011.

The Procedural Misstep

The Louhs requested and received a 15-day extension to file their Answer, making the deadline March 4, 2012. They failed to meet it. They filed their Answer only on July 20, 2012—over three months late. The trial court declared them in default, and they never filed a motion to set aside that order.

On appeal, the Louhs argued their delay was excusable because William needed heart bypass surgery. The Supreme Court disagreed. Citing Magsino v. De Ocampo, the Court stressed that procedural rules may be relaxed only for the most persuasive reasons and upon a showing of justifiable reasons and a reasonable attempt at compliance. The Louhs showed neither diligence nor a valid excuse for their prolonged silence.

The Unconscionable Interest Rates

Despite the default, the Court did not ignore the fairness of the charges. BPI's combined monthly charges translated to a cumulative annual interest of 114%. The Court found this excessive and unconscionable.

Citing Macalinao v. BPI, the Court reiterated that stipulated interest rates of 3% per month or higher are excessive, iniquitous, and unconscionable. Such stipulations are void for being contrary to morals. When a stipulated interest rate is void, it is as if no express contract existed on that point, and courts may reduce the rate as reason and equity demand.

Likewise, under Article 1229 of the Civil Code, courts may reduce penalties that are iniquitous or unconscionable. The Court also cited Article 2227, which allows equitable reduction of attorney's fees that are iniquitous or unconscionable.

The Court's Ruling

The Court affirmed the lower courts' decisions holding the Louhs liable but modified the amounts:

• Principal amount: P113,756.83, based on the Statement of Account dated October 14, 2009, when the Louhs first became delinquent—not the inflated P533,836.27 that included the excessive charges.
• Finance and late payment charges: Reduced to 12% each per annum, computed from October 14, 2009 until full payment.
• Attorney's fees: Reduced to 5% of the total amount due, consistent with MCMP Construction Corp. v. Monark Equipment Corp.
• Filing fees and costs of suit: Retained at P8,064.00.

The Court refused to dismiss the case or remand it for further evidence, noting that the Louhs slept on their rights to refute BPI's evidence, including the statements of account and demand letters they received.

Practical Takeaways

• Answer lawsuits on time. Courts rarely excuse prolonged delays, even for medical reasons. A motion to set aside a default order must be filed promptly, with proof of excusable negligence and a meritorious defense.
• Credit card interest rates have limits. Monthly charges of 3.5% finance and 6% late payment fees (114% annually) are unconscionable. Courts will reduce them to reasonable rates, typically 12% per annum each.
• Check your statements. The principal amount owed is based on the statement when you first became delinquent, not the accumulated balance after excessive charges have ballooned.
• Attorney's fees can be reduced. A contractual stipulation of 25% of the amount due as attorney's fees is excessive; courts may reduce it to 5% under Article 2227 of the Civil Code.
• Ignoring a lawsuit has consequences. A default judgment means the court accepts the plaintiff's evidence as true, and the borrower loses the chance to dispute the amounts claimed.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.