BSP Authority to Set Interest Rates and Protect Borrowers After Usury Law Suspension

The Supreme Court, in Advocates for Truth in Lending, Inc. v. Bangko Sentral Monetary Board (G.R. No. 192986, January 15, 2013), settled key questions about the Bangko Sentral ng Pilipinas' (BSP) authority over interest rates. The case confirms that the BSP Monetary Board may continue enforcing Central Bank Circular No. 905, which suspended the interest rate ceilings under the Usury Law. At the same time, the Court reminded lenders that removing ceilings does not permit charging unconscionable interest rates.

Background: The Usury Law and Its Suspension

The Usury Law (Act No. 2655) of 1916 originally set maximum interest rates for loans. In 1980, Presidential Decree No. 1684 amended the law, authorizing the Monetary Board to prescribe maximum interest rates and change them when warranted by economic conditions.

In 1982, the Central Bank Monetary Board issued CB Circular No. 905, effective January 1, 1983. Section 1 of the Circular provided that interest rates on loans "shall not be subject to any ceiling prescribed under or pursuant to the Usury Law." This effectively suspended the Usury Law's interest rate limits.

When Republic Act No. 7653 created the BSP in 1993 to replace the Central Bank, questions arose about whether the new BSP Monetary Board retained the power to enforce CB Circular No. 905.

The Petition and Its Procedural Defects

The petitioners, a non-profit corporation and its president, filed a petition for certiorari directly with the Supreme Court. They argued that the BSP Monetary Board had no authority to continue enforcing CB Circular No. 905, claiming the Circular exceeded the authority granted under the Usury Law and that R.A. No. 7653 did not re-enact the Central Bank's rate-setting powers.

The Court dismissed the petition on several grounds. First, certiorari under Rule 65 applies only to tribunals exercising judicial or quasi-judicial functions. The Monetary Board performs executive functions when issuing circulars, not judicial functions. Second, the petitioners lacked legal standing because they did not allege any personal injury from the Circular's enforcement. Third, the Court found the petition raised no issues of transcendental importance, noting that the high interest rates cited occurred 15 to 29 years earlier, while current rates had dropped significantly.

The BSP's Authority Confirmed

On the merits, the Court confirmed that CB Circular No. 905 did not repeal the Usury Law but merely suspended its effectivity. A circular cannot repeal a law; only another law can. The Court cited its earlier ruling in Medel v. Court of Appeals that "usury has been legally non-existent in our jurisdiction" and that parties may agree on interest rates freely.

The Court also rejected the argument that R.A. No. 7653 impliedly repealed the Monetary Board's rate-setting authority. Section 1-a of the Usury Law, as amended by P.D. No. 1684, remains in effect and is broader in scope than the old Section 109 of R.A. No. 265. Since repeals by implication are not favored, and no irreconcilable conflict exists between the Usury Law and R.A. No. 7653, the BSP Monetary Board retains its authority.

Protection Against Unconscionable Interest

The Court emphasized that the lifting of interest ceilings does not give lenders "carte blanche authority" to charge excessive rates. Stipulations authorizing iniquitous or unconscionable interest are void for being contrary to morals and public policy under Article 1409 of the Civil Code.

Where a court finds interest unconscionable, the lender may still recover the principal loan amount, but the excessive interest is removed. Following the guidelines in Eastern Shipping Lines, Inc. v. Court of Appeals, legal interest of 12% per annum applies to loans or forbearance of money, while 6% per annum applies to other obligations involving damages.

Practical Takeaways

• Interest rates are generally free from ceilings. Under CB Circular No. 905, lenders and borrowers may agree on interest rates without statutory limits.
• The BSP retains regulatory authority. The BSP Monetary Board may prescribe maximum rates when warranted and continues to enforce CB Circular No. 905.
• Unconscionable interest is not enforceable. Courts will strike down interest rates that are excessive, iniquitous, or unconscionable, even if voluntarily agreed upon.
• Borrowers retain remedies. Where excessive interest is voided, the principal debt remains collectible, and legal interest applies in its place.
• Documentation matters. Borrowers should review loan agreements carefully and seek legal advice if interest rates appear excessive or if lenders impose unilateral increases.

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