Unilateral Interest Rate Hikes When Banks Overstep Their Bounds In Loan Agreements

The Supreme Court has reaffirmed a fundamental principle in Philippine loan agreements: a bank cannot unilaterally change interest rates without the borrower's consent. In Metro Alliance Holdings and Equities Corporation v. Philippine Veterans Bank (G.R. No. 240495, September 15, 2021), the Court struck down interest rate increases imposed by Philippine Veterans Bank (PVB) on a ₱550 million loan, declared the resulting foreclosure void, and ordered the return of the mortgaged property. The ruling serves as a strong reminder that the principle of mutuality of contracts protects borrowers from one-sided terms.

The Facts of the Case

In January 2004, PVB granted Metro Alliance Holdings and Equities Corporation (MAHEC) and Polymax Worldwide Limited a ₱550 million short-term loan. The loan was secured by a real estate mortgage over a Pasig City property owned by Wellex Industries, Inc., as well as a chattel mortgage over shares of stock.

The loan agreement initially provided for a 14% per annum interest rate. However, PVB later imposed increased rates of 14.74% and 12.6316% per annum without the borrowers' consent. When MAHEC and Polymax failed to pay the amounts as recomputed by PVB, the bank foreclosed on the mortgaged property. The borrowers sued, arguing that the unilateral interest rate hikes were void.

The Issue

The central question was whether PVB's unilateral imposition of increased interest rates was valid, and if not, whether the subsequent foreclosure proceedings could stand.

The Ruling

The Supreme Court ruled in favor of the borrowers. It held that the interest rate increases imposed by PVB were null and void for violating the principle of mutuality of contracts under Article 1308 of the Civil Code, which provides that a contract "must bind both contracting parties; its validity or compliance cannot be left to the will of one of them."

The Court emphasized that even if a loan agreement gives a bank the "license" to fix and adjust interest rates at will, that license is void. Such a provision reduces the contract to one of adhesion, where the borrower's only option is "to take it or leave it." Courts must protect the weaker party against such abuse.

However, the Court clarified that while the unilateral interest rates were void, the borrowers still owed interest on the loan. When an interest rate is struck down for violating mutuality of contracts, only the rate imposed is nullified—the agreement to pay interest remains. The legal interest rate prevailing at the time the agreement was entered into (12% per annum) applies instead, until June 30, 2013, after which the rate becomes 6% per annum under BSP Circular No. 799, consistent with Nacar v. Gallery Frames.

The Foreclosure Was Void

Because the interest rate increases were void, the computation of the borrowers' outstanding obligation was wrong. The foreclosure proceedings based on that erroneous computation were therefore premature and void. The Court ordered the reconstitution of the title to the Pasig property in favor of the mortgagor, Wellex Industries, Inc., and directed PVB to pay reasonable rent to Wellex from the time it was unjustly dispossessed until possession is restored.

The Court also ordered PVB to desist from foreclosing the chattel mortgage on the shares of stock, since the secured obligation had been fully paid when the loan was recomputed at the correct legal interest rates.

Practical Takeaways

• Banks cannot unilaterally raise interest rates. Any stipulation allowing a bank to fix or adjust rates at will is void for violating the mutuality of contracts principle under Article 1308 of the Civil Code.
• Only the rate is void, not the obligation to pay interest. When a unilateral rate is struck down, the legal interest rate prevailing at the time the agreement was entered into applies—12% per annum before July 1, 2013, and 6% per annum thereafter.
• Foreclosure based on void interest computations is itself void. If the bank's computation of the outstanding balance relied on illegal interest rates, the resulting foreclosure may be nullified, and the property must be returned.
• Borrowers who were dispossessed may claim rent. A mortgagor who was unjustly dispossessed of property due to a void foreclosure may recover reasonable rent from the bank.
• Review loan documents for escalation clauses. Borrowers should scrutinize any provision that appears to give the lender discretion to adjust interest rates without mutual agreement.

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