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The Securities and Exchange Commission (SEC) has produced a draft memorandum circular that will put a cap on lending and financing companies’ interest rates and other fees, as well as their online lending platforms (OLPs).

The proposed rules, which were submitted for public comment on January 27th, will put the Bangko Sentral ng Pilipinas (BSP) Circular No. 1133 Series of 2021 into effect, which sets the maximum interest rates and other fees that lending and financing businesses, as well as their OLPs, can charge.

The BSP set the maximum nominal interest rate at 6% per month, or about 0.2 percent per day, and the effective interest rate (EIR) at 15% per month, or about 0.5 percent per day, for covered loans, which are unsecured, general-purpose loans with a tenor of up to four months and a maximum nominal interest rate of PHP10,000.

The EIR is defined as the rate at which expected future cash flows are discounted to the net amount of loan proceeds throughout the loan’s duration.

It comprises the nominal interest rate as well as any additional fees and charges that may be relevant, such as processing fees, service fees, notarial fees, handling fees, and verification fees, among others. Fees and penalties for late and non-payment are not included in the EIR.

Late payment on outstanding scheduled sums due may be charged at a rate of up to 5% per month by lending and financing organizations.

A total cost cap of 100% of the total amount borrowed will also be enforced, which will apply to all interest, other fees and charges, and penalties, regardless of how long the loan has been outstanding.

The cap on interest rates and other costs will apply to covered loans that lending and financing organizations will issue once the new rules take effect, according to the draft SEC memorandum circular.

The SEC has 60 business days from the date BSP Circular No. 1133, Series of 2021 became effective on Jan. 3, 2022, to establish rules and regulations imposing the interest rate and other charges cap imposed by lending and financing businesses and their OLPs.

For the first and second offenses, lending firms will be fined PHP25,000 and PHP50,000, respectively, while financing organizations will be fined PHP50,000 for the first offense and PHP100,000 for the second violation.

Both lending and financing companies will face a penalty of twice the amount imposed for the second offense, up to PHP1 million; a 60-day suspension of their financing and lending activities; or the revocation of their certificates of authority to operate as a financing/lending company for the third offense (CAs).

Following the installation of rate caps, all lending and financing companies must submit an impact evaluation report by January 15 of the following year.

Noncompliance will result in a penalty of PHP10,000 plus PHP200 per day for financing firms and PHP10,000 + PHP100 per day for lending firms. The second and third offenses will result in their CAs being suspended and revoked, respectively.

The impact evaluation report will be included in the reports that the SEC must submit to the BSP one year after the interest rate and other charges imposed by lending and financing companies are capped.

In turn, the BSP will examine the policy, which is meant as a time-limited relief tool for the unbanked and underserved part of the population during the epidemic, taking into consideration the commission’s reports.

On the SEC’s initiative, the Monetary Board, which exercises the BSP’s powers and activities, imposed the maximum interest rate and charges on covered loans supplied by lending and financing businesses and their OLPs.

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