Updated BSP Rules Implementing the Truth in Lending Act

The Monetary Board issued Circular No. 730, Series of 2011 on July 20, 2011 entitled “Updated Rules Implementing the Truth in Lending Act to Enhance Loan Transaction Transparency.” These Updated Rules shall take effect on July 1, 2012.

The Truth in Lending Act was a law passed in 1963 to promote awareness by the public of the true cost of credit.  It requires a creditor to furnish the debtor prior to the consummation of the transaction a clear statement showing, among others, the total amount to be financed, the finance charges, and the percentage that the finance charges bear to the total amount to be financed expressed as a simple annual rate.  A person who willfully violates the provisions of the Act may be fined or imprisoned, or both.  Violation of the Act, however, will not affect the validity of the credit transaction.

The Act gave the Monetary Board the power to promulgate rules and regulations to carry out its provisions.  Pursuant to that rulemaking power, the Monetary Board mandated under the Updated Rules that banks may only charge interest based on the outstanding balance of a loan at the beginning of an interest period. For a loan where the 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. All loan-related documents and marketing materials shall show repayment schedules in a manner consistent with these guidelines.

The Updated Rules also clarified the definition of finance charge as including interest, fees, service charges, discounts and such other charges incident to the extension of credit. On the other hand, simple annual rate has been defined as the uniform percentage which represents the ratio between the finance charge and the amount to be financed under the assumption that the loan is payable in one year with single payment upon maturity and there are no upfront deductions to principal. If the loan has terms different from these assumptions, the effective annual interest shall be calculated and disclosed to the borrower as the true cost of the loan. The total amount to be financed, the finance charges, expressed in terms of pesos and centavos, the net proceeds of the loan, and the percentage that the finance charge bears to the total amount to be financed expressed as a simple annual rate or an effective annual interest rate shall be disclosed to the borrower in a disclosure statement prior to the consummation of the transaction.

Banks are required to post in conspicuous places in their premises the information as contained in the revised format of disclosure statement and the posters shall include an explicit notice that the disclosure statement is a required attachment to the loan contract and that the customer has a right to demand a copy of such disclosure.

The revised format of disclosure statement is specifically targeted towards small business, retail and consumer loans, the borrowers of which, historically, are almost always the victims of lack of information or misinformation regarding the true cost of credit.

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