Truth in Lending

• Truth in Lending Act (TILA)


  An act to require the disclosure of finance charges in connection with extensions of credit
• REPUBLIC ACT No. 3765
• Purpose of TILA


  To protect citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy
• Board


  The Monetary Board of the Central Bank of the Philippines
• Credit


  Any loan, mortgage, deed of trust, advance, or discount; any conditional sales contract; any contract to sell, or sale or contract of sale of property or services, either for present or future delivery, under which part or all of the price is payable subsequent to the making of such sale or contract; any rental-purchase contract; any contract or arrangement for the hire, bailment, or leasing of property; any option, demand, lien, pledge, or other claim against, or for the delivery of, property or money; any purchase, or other acquisition of, or any credit upon the security of, any obligation of claim arising out of any of the foregoing; and any transaction or series of transactions having a similar purpose or effect
• Finance charge


  Includes interest, fees, service charges, discounts, and such other charges incident to the extension of credit as the Board may be regulation prescribe
• Creditor


  Any person engaged in the business of extending credit (including any person who as a regular business practice make loans or sells or rents property or services on a time, credit, or installment basis, either as principal or as agent) who requires as an incident to the extension of credit, the payment of a finance charge
• Person


  Any individual, corporation, partnership, association, or other organized group of persons, or the legal successor or representative of the foregoing, and includes the Philippine Government or any agency thereof, or any other government, or of any of its political subdivisions, or any agency of the foregoing
• Disclosure requirements


  • Total amount to be financed
  • Finance charges and all other charges incident to the loan
  • Net proceeds of the loan
  • Schedule of payments
  • The percentage that the finance charge bears to the total amount to be financed expressed as an Effective Interest Rate (EIR)
• The borrower has a right to demand a copy of the disclosure statement
• The disclosure statement in writing is a required attachment to the credit transaction contract
• The imposition of finance charges is void if not disclosed in the disclosure agreement
• Although penalty charges are not stated in the disclosure statement, reference to the penalty charges in the promissory note constitutes substantial compliance with the disclosure requirement in TILA
• Even if disclosed, exorbitant rate may be declared unconscionable
• Rationale for the disclosure

  To protect users of credit from lack of awareness of the true cost thereof, proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interests from the loaned amount, and the like
• Escalation clause


  TILA may be violated if the agreement provides for an escalation clause on interest which is dependent solely on the will of the bank
• Subsequent compliance with the disclosure requirement cannot be deemed in substantial compliance with TILA
• Liabilities for violation of TILA

  • Civil liability: P100 or twice the finance charge, whichever is greater, up to P2,000
  • Criminal liability: Fine of not less than P1,000 or more than P5,000, or imprisonment for not less than 6 months, nor more than one year, or both
• Prescriptive period for civil liability is 1 year from the date of demand and not from the date of execution of the promissory note
• Related law: The Consumer Act of the Philippines (R.A. No. 7394)


  Requires disclosure for consumer credits
• Consumer


  A natural person who is a purchaser, lessee, recipient or prospective purchaser, lessor or recipient of consumer products, services or credit
• Consumer credit


  Any credit extended by a creditor to a consumer for the sale or lease of any consumer product or service under which part or all of the price or payment therefor is payable at some future time, whether in full or in installments
• Consumer loan


  A loan made by the lender to a person which is payable in installments for which a finance charge is or may be imposed. This term includes credit transactions pursuant to an open-end-credit plan other than a seller credit card
• Required disclosures on consumer loans not under open-end credit plan (RA 7394)


  • The amount of credit of which the debtor will have the actual use, or which is or will be paid to him or for his account or to another person on his behalf
  • All charges, individually itemized, which are included in the amount of credit extended but which are not part of the finance charge
  • The total amount to be financed or the sum of the amounts referred to in paragraphs (a) and (b)
  • The finance charge expressed in terms or pesos and centavos
  • The effective interest rate
  • The percentage that the finance charge bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation
  • The default, delinquency or similar charges payable in the event of late payments
  • A description of any security interest held or to be held or to be retained or acquired by the creditor in connection with the extension of credit and a clear identification of the property to which the security interest relates
• All disclosures required under RA 7394 shall be made clearly and conspicuously in writing before the transaction is consummated
• Information required in periodic statement of charges (RA 7394)


  • The simple annual rate
  • The effective interest rate
  • The date by which, or the period (if any) within which payment must be made in order to avoid additional finance charges
  • Method of determining the balance upon which the finance charge may be imposed
• Exempted transactions from disclosure requirements (RA 7394)


  • Those involving extension of credits for business or commercial purposes, or to the Government and governmental agencies and instrumentalities, juridical entities or to organizations
  • Those in which the debtor is the one specifying the definite set of credit terms such as bank deposits, insurance contracts, sale of bonds or analogous transactions
• Penalties for non-disclosure (RA 7394)


  • P1,000 or twice the finance charge, whichever is greater, up to P3,000, plus actual damages
  • Action to recover penalty may be brought within 1 year from the date of the violation