BSP tightens rules on loan transparency

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has tightened its rules on loan transparency by prohibiting the charging of “flat” or markedly lower contractual interest rates that mislead borrowers, as part of efforts to ensure the protection of consumers, promote healthy competition among credit providers, and enable the smooth and orderly functions of the entire financial system.

BSP Governor Amando M. Tetangco Jr. said the central bank’s Monetary Board has approved a resolution last July 7 updating the rules implementing the Truth in Lending Act or Republic Act 3765 passed in 1963 aimed to enhance loan price transparency and improve disclosure practices, thereby ensuring better consumer protection.

Tetangco said the new guidelines added a new subsection of the Manual of Regulations for Banks concerning the method of computing interest wherein banks now would only be allowed to charge interest based on the outstanding balance of a loan at the beginning of an interest period.

“For a loan where principal is payable in installments, interest per installment period shall be calculated based on the outstanding balance of the loan at the beginning of each installment period,” Tetangco stated in the circular.

This rule effectively prohibits charging “flat” interest rates and other methods that misleadingly feature a markedly lower contractual interest rate than the actual effective annual interest rate (EIR) which is defined in accordance with the Philippine Accounting Standards (PAS) as the rate that exactly discounts estimated future cash flows through the life of the loan to the net amount of loan proceeds.

He pointed out that all loan-related documents should show repayment schedules as well as marketing materials and presentations should be consistent with the new regulation.

The new rules likewise clearly define finance charges which include interest, fees, service charges, discounts, and such other charges incident to the extension of credit and require a uniform way of disclosing such information.

A standard format of disclosure is provided to ascertain that every borrower is provided with information that he or she needs to know about his or her loan in a manner that is simple and easy to understand.

Current practices of some credit providers, particularly the use of so-called “flat” interest rates, show contractual rates for loans that substantially differ from the EIR.

The BSP has been receiving complaints about hidden charges and deliberate quoting of lower interest rates with higher upfront charges to enhance loan product marketability.

“As a result, the public may be misinformed or misguided about the true cost of their borrowings,” the BSP said.

Tetangco said the new transparency rule would take effect on July next year or one year after publication to allow mounting of a comprehensive information campaign and facilitate smooth implementation.

The BSP said the implementation of the new regulation is very timely as calls for enhanced consumer protection is intensifying specifically as affirmative financial inclusion policies lead to availability of an ever widening range of financial products and services.

While the new enhanced transparency rule applies only to banks at this time, it is intended that the requirement would be imposed on all credit providers in accordance with the Truth in Lending Act that covers all credit granting institutions.

In order to ensure a level playing field among all regulated credit providers, the BSP would soon issue the counterpart guidelines for non-bank financial institutions under its supervision like pawnshops and non-stock savings and loan associations.

The BSP would enjoin the Securities and Exchange Commission (SEC), Insurance Commission (IC), and Cooperative Development Authority (CDA) to issue parallel regulations for the implementation of institutions under their respective jurisdictions.

It would also coordinate with the Microfinance Council of the Philippines to bring credit granting non-governmental organizations (NGOs) into conformance with the new transparency rule.