Creditor’s guide in ensuring truth in lending
Among the most common transactions that entrepreneurs enter into are securing loans. Even for big businesses, borrowing money is sometimes even necessary, especially when infusion of additional capital is needed, say, for expansion or for making some investments in allied industries. As great business minds already know, that in certain instances, securing loans is needed in order to make more money.
For some, lending is even their main business. Many creditors, however, take advantage of others’ need for additional financing to pad their own receivables by imposing finance charges and other payables upon the debtor. Though the law on contracts in general allows the parties to stipulate their terms, including the imposition of such additional charges on top of the loaned amount, it is, however, a must for all creditors to know that they have to be transparent to their debtors in lending.
The Truth in Lending Act
Under R.A. No. 3765, otherwise known as the Truth in Lending Act, creditors are required to disclose all finance charges in extending credit to others. The law was enacted to protect the people from 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 [Sec. 2].
For purposes of the Truth in Lending Act, the term “finance charge” includes interest, fees, service charges, discounts, and such other charges incident to the extension of credit [See: Sec. 3(3)].
Who are covered?
The Truth in Lending Act covers any creditor, who shall be 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 [Sec. 3(4)].
Relative to this, the following entities are likewise covered by the law:
|Banks and banking institutions||Banko Sentral ng Pilipinas|
|Lending and financing companies||Securities and Exchange Commission|
|Insurance/reinsurance companies and mutual benefit associations||Insurance Commission|
|Credit and multi-purpose loan cooperatives with savings and loan services||Cooperative Development Authority|
Obligation of truth and transparency
Before the transaction is consummated, the law requires creditors to furnish to those whom credit is extended a clear statement in writing setting forth, to the extent applicable, the following information:
- The cash price or delivered price of the property or service to be acquired;
- The amounts, if any, to be credited as down payment and/or trade-in;
- The difference between the amounts set forth under itms (1) and (2) above;
- The charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of credit;
- The total amount to be financed;
- The finance charge expressed in terms of pesos and centavos; and
- The percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.
Effect of failure to disclose
Despite non-compliance with the requirements of the Truth in Lending Act, the contract or loan transaction remains valid and enforceable [See: Sec. 6(b)]. Such non-compliance, however, subjects the creditor to civil and criminal penalties.
Thus, any creditor who in connection with any credit transaction fails to disclose to any person any information required to be disclosed shall be liable to such person in the amount of P100.00 or in an amount equal to twice the finance charged required by such creditor in connection with such transaction, whichever is the greater. Such liability, however, shall not exceed P2,000.00 on any credit transaction [Sec. 6(a)].
Action to recover such penalty may be brought by the aggrieved borrower within one year from the date of the occurrence of the violation, in any court of competent jurisdiction [Ibid]. Since the imposition of the penalty depends on the finance charge required of the borrower, the borrower’s cause of action would accrue not from the time the loan was made, but only when the finance charge is required [See: G.R. No. 159912].
Moreover, any person who willfully violates any provision of the Truth in Lending Act shall be fined in the amount of P1,000 to P5,000, or imprisonment of not less than 6 months, nor more than 1 year, or both [Sec. 6(c)].
Our government’s mandate in ensuring transparency in extending credit is among the matters that creditors definitely have to consider. There may be nothing wrong in just doing business, but it should be done fairly and truthfully. Though penalties are put in place, the best business environment is still one where fair business dealings are the norm. To this end, the practice of ensuring transparency in extending loans would help in building up and maintaining good relationships between fair creditors and their well-informed debtors.