BPI vs SPS YU

Doctrine: Truth in Lending Act; substantial compliance with truth in lending

act

Facts:

1.Respondents Norman and Angelina Yu (the Yus), doing business as Tuanson

Trading, and Tuanson Builders Corporation (Tuanson Builders) borrowed
various sums totaling P75 million from Far East Bank and Trust Company.

2.For collateral, they executed real estate mortgages over several of their
properties,1 including certain lands in Legazpi City owned by Tuanson
Trading.2

3.In 1999, unable to pay their loans, the Yus and Tuanson Builders requested
a loan restructuring,3 which the bank, now merged with Bank of the Philippine
Islands (BPI), granted.4

4. In this case, although BPI failed to state the penalty charges in the
disclosure statement, the promissory note that the Yus signed, on the same
date as the disclosure statement, contained a penalty clause that said: "I/We
jointly and severally, promise to further pay a late payment charge on any
overdue amount herein at the rate of 3% per month."

5.Despite the restructuring, however, the Yus still had difficulties paying their
loan. They asked BPI to release some of the mortgaged lands since their total
appraised value far exceeded the amount of the remaining debt.

6. When BPI ignored their request, the Yus withheld payments on their
amortizations.

7.Thus, BPI extrajudicially foreclosed6 the mortgaged properties in Legazpi City

and in Pili, Camarines Sur.

8. On October 24, 2003 the Yus filed their new complaint before the Regional
Trial Court (RTC) of Legazpi City, Branch 1, in Civil Case 10286 against BPI for
recovery of alleged excessive penalty charges, attorneys fees, and foreclosure
expenses that the bank caused to be incorporated in the price of the auctioned
properties.

9. Furthermore, they demanded that the penalty be deleted for violation of

Truth in Lending Act and that the interest be reduced because it is inequitable.
Issue: WON the BPI is in violation of the truth in Lending Act?

WON the penalty is unconscionable

Ruling:

1. BPI did not violate the truth in lending act because it made substantial
compliance.
. Both the RTC and CA decisions cited BPIs alleged violation of the Truth
in Lending Act and the ruling of the Court in New Sampaguita Builders
Construction, Inc. v. Philippine National Bank40 to justify their deletion
of the penalty charges. Section 4 of the Truth in Lending Act states that:

SEC. 4. Any creditor shall furnish to each person to whom credit is

extended, prior to the consummation of the transaction, a clear
statement in writing setting forth, to the extent applicable and in
accordance with rules and regulations prescribed by the Board, the
following information:

(1) the cash price or delivered price of the property or service to be

acquired;

(2) the amounts, if any, to be credited as down payment and/or trade-in;

(3) the difference between the amounts set forth under clauses (1) and
(2);

(4) 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;

(5) the total amount to be financed;

(6) the finance charge expressed in terms of pesos and centavos; and

(7) 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.

Penalty charge, which is liquidated damages resulting from a breach,41

falls under item (6) or finance charge. A finance charge "represents the
 amount to be paid by the debtor incident to the extension of credit."42
The lender may provide for a penalty clause so long as the amount or
rate of the charge and the conditions under which it is to be paid are
disclosed to the borrower before he enters into the credit agreement.

The question is whether or not the reference to the penalty charges in the
promissory note constitutes substantial compliance with the disclosure
requirement of the Truth in Lending Act.

Yes there is substantial compliance.

The RTC and CA relied on the ruling in New Sampaguita as authority
that the non-disclosure of the penalty charge renders its imposition
illegal. But New Sampaguita is not attended by the same circumstances.
The Court has affirmed that financial charges are amply disclosed if
stated in the promissory note in the case of Development Bank of the
Philippines v. Arcilla, Jr.49 The Court there said, "Under Circular 158 of
the Central Bank, the lender is required to include the information
required by R.A. 3765 in the contract covering the credit transaction or
any other document to be acknowledged and signed by the borrower. In
addition, the contract or document shall specify additional charges, if
any, which will be collected in case certain stipulations in the contract
are not met by the debtor." In this case, the promissory notes signed
by the Yus contained data, including penalty charges, required by
the Truth in Lending Act. The promissory note is an
acknowledgment of a debt and commitment to repay it on the date
and under the conditions that the parties agreed on.43 It is a valid
contract absent proof of acts which might have vitiated consent.
They cannot avoid liability based on a rigid interpretation of the
Truth in Lending Act that contravenes its goal.

In short, they wanted the penalty be deleted on account that it was not
stated in exact figures, for example 10 thousand. In this case, it was only
mentioned as percentage. The supreme court said there was substantial
compliance.

2. The penalty is unconscionable

Nonetheless, the courts have authority to reduce penalty charges when

these are unreasonable and iniquitous.50 Considering that BPI had
already received over P2.7 million in interest and that it seeks to impose
the penalty charge of 3% per month or 36% per annum on the total
amount dueprincipal plus interest, with interest not paid when due
added to and becoming part of the principal and also bearing interest at
the same ratethe Court finds the ruling of the RTC in its original
decision51 reasonable and fair. Thus, the penalty charge of 12% per
annum or 1% per month52 is imposed.