Obligations and Contracts

Interest; Interest Rates

USURY LAW

ACT NO. 2655 – AN ACT FIXING RATES OF INTEREST UPON LOANS AND DECLARING THE
EFFECT OF RECEIVING OR TAKING USURIOUS RATES AND FOR OTHER PURPOSES

Section 1. The rate of interest for the loan or forbearance of any money goods, or credits and the rate allowed
in judgments, in the absence of express contract as to such rate of interest, shall be six per centum per
annum or such rate as may be prescribed by the Monetary Board of the Central Bank of the Philippines for
that purpose in accordance with the authority hereby granted.

Sec. 1-a. The Monetary Board is hereby authorized to prescribe the maximum rate or rates of interest for
the loan or renewal thereof or the forbearance of any money, goods or credits, and to change such rate or
rates whenever warranted by prevailing economic and social conditions.

In the exercise of the authority herein granted, the Monetary Board may prescribe higher maximum rates
for loans of low priority, such as consumer loans or renewals thereof as well as such loans made by
pawnshops finance companies and other similar credit institutions although the rates prescribed for these
institutions need not necessarily be uniform. The Monetary Board is also authorized to prescribe different
maximum rate or rates for different types of borrowings, including deposits and deposit substitutes, or loans
of financial intermediaries.

Sec. 2. No person or corporation shall directly or indirectly take or receive in money or other property, real
or personal, or choses in action, a higher rate of interest or greater sum or value, including commissions,
premiums, fines and penalties, for the loan or renewal thereof or forbearance of money, goods, or credits,
where such loan or renewal or forbearance is secured in whole or in part by a mortgage upon real estate
the title to which is duly registered, or by any document conveying such real estate or an interest therein,
than twelve per centum per annum or the maximum rate prescribed by the Monetary Board and in force at
the time the loan or renewal thereof or forbearance is granted: Provided, That the rate of interest under
this section or the maximum rate of interest that may be prescribed by the Monetary Board under this
section may likewise apply to loans secured by other types of security as may be specified by the Monetary
Board.

Sec. 3. No person or corporation shall directly or indirectly demand, take, receive or agree to charge in
money or other property, real or personal, a higher rate or greater sum or value for the loan or forbearance
of money, goods, or credits where such loan or forbearance is not secured as provided in Section two hereof,
than fourteen per centum per annum or the maximum rate or rates prescribed by the Monetary Board and
in force at the time the loan or forbearance is granted.

Sec. 4. No pawnbroker or pawnbroker’s agent shall directly or indirectly stipulate, charge, demand, take or
receive any higher rate or greater sum or value for any loan or forbearance than two and one-half per
centum per month when the sum lent is less than one hundred pesos; two per centum per month when the
sum lent is one hundred pesos or more, but not exceeding five hundred pesos; and fourteen per centum per
annum when it is more than the amount last mentioned; or the maximum rate or rates prescribed by the
Monetary Board and in force at the time the loan or forbearance is granted. A pawnbroker or pawnbroker’s
agent shall be considered such, for the benefits of this Act, only if he be duly licensed and has an
establishment open to the public.

It shall be unlawful for a pawnbroker or pawnbroker’s agent to divide the pawn offered by a person into
two or more fractions in order to collect greater interest than the permitted by this section.

It shall also be unlawful for a pawnbroker or pawnbroker’s agent to require the pawner to pay an additional
charge as insurance premium for the safekeeping and conservation of the article pawned.

Sec. 4-a. The Monetary Board may eliminate, exempt from, or suspend the effectivity of, interest rate
ceilings on certain types of loans or renewals thereof or forbearances of money, goods, or credit, whenever
warranted by prevailing economic and social conditions.

Sec. 4-b. In the exercise of its authority to fix the maximum rate or rates of interest under this Act, the
Monetary Board shall be guided by the following:

1. The existing economic conditions in the country and the general requirements of the national economy;
2. The supply of and demand for credit;

3. The rate of increase in the price levels; and

4. Such other relevant criteria as the Monetary Board may adopt.

Sec. 5. In computing the interest on any obligation, promissory note or other instrument or contract,
compound interest shall not be reckoned, except by agreement: Provided, That whenever compound interest
is agreed upon, the effective rate of interest charged by the creditor shall not exceed the equivalent of the
maximum rate prescribed by the Monetary Board, or, in default thereof, whenever the debt is judicially
claimed, in which last case it shall draw six per centum per annum interest or such rate as may be
prescribed by the Monetary Board. No person or corporation shall require interest to be paid in advance for
a period of more than one year: Provided, however, That whenever interest is paid in advance, the effective
rate of interest charged by the creditor shall not exceed the equivalent of the maximum rate prescribed by
the Monetary Board.

Sec. 6. Any person or corporation who, for any such loan or renewal thereof or forbearance, shall have paid
or delivered a higher rate or greater sum or value than is hereinbefore allowed to be taken or received, may
recover the whole interest, commissions, premiums penalties and surcharges paid or delivered with costs
and attorneys’ fees in such sum as may be allowed by the court in an action against the person or corporation
who took or received them if such action is brought within two years after such payment or delivery:
Provided, however, That the creditor shall not be obliged to return the interest, commissions and premiums
for a period of not more than one year collected by him in advance when the debtor shall have paid the
obligation before it is due, provided such interest, and commissions and premiums do not exceed the rates
fixed in this Act.

Sec. 7. All covenants and stipulations contained in conveyances, mortgages, bonds, bills, notes, and other
contracts or evidences of debts, and all deposits of goods or other things, whereupon or whereby there shall
be stipulated, charged, demanded, reserved, secured, taken, or received, directly or indirectly, a higher rate
or greater sum or value for the loan or renewal or forbearance of money, goods, or credits than is
hereinbefore allowed, shall be void: Provided, however, That no merely clerical error in the computation of
interest, made without intent to evade any of the provisions of this Act, shall render a contract void:
Provided, further, That parties to a loan agreement, the proceeds of which may be availed of partially or
fully at some future time, may stipulate that the rate of interest agreed upon at the time the loan agreement
is entered into, which rate shall not exceed the maximum allowed by law, shall prevail notwithstanding
subsequent changes in the maximum rates that may be made by the Monetary Board: And Provided, finally,
That nothing herein contained shall be construed to prevent the purchase by an innocent purchaser of a
negotiable mercantile paper, usurious or otherwise, for valuable consideration before maturity, when there
has been no intention on the part of said purchaser to evade the provisions of this Act and said purchase
was not a part of the original usurious transaction. In any case, however, the maker of said note shall have
the right to recover from said original holder the whole interest paid by him thereon and, in case of
litigation, also the costs and such attorney’s fees as may be allowed by the court.

Sec. 8. All loans under which payment is to be made in agricultural products or seed or in any other kind
of commodities shall also be null and void unless they provide that such products or seed or other
commodities shall 6e appraised at the time when the obligation falls due at the current local market price:
Provided, That unless otherwise stated in a document written in a language or dialect intelligible to the
debtor and subscribed in the presence of not less than two witnesses, any contract advancing money to be
repaid later in agricultural products or seed or any other kind of commodities shall be understood to be a
loan, and any person or corporation having paid otherwise shall be entitled in case action is brought within
two years after such payment or delivery to recover all the products or seed delivered as interest, or the
value thereof, together with the costs and attorney’s fees in such sum as may be allowed by the court.
Nothing contained in this section shall be construed to prevent the lender from taking interest for the
money lent, provided such interest be not in excess of the rates herein fixed.

Sec. 9. The person or corporation sued shall file its answer in writing under oath to any complaint brought
or filed against said person or corporation before a competent court to recover the money or other personal
or real property, seeds or agricultural products, charged or received in violation of the provisions of this
Act. The lack of taking an oath to an answer to a complaint will mean the admission of the facts contained
in the latter.

Sec. 9-a. The Monetary Board shall promulgate such rules and regulations as may be necessary to
implement effectively the provisions of this Act.
Sec. 10. Without prejudice to the proper civil action violation of this Act and the implementing rules and
regulations promulgated by the Monetary Board shall be subject to criminal prosecution and the guilty
person shall, upon conviction, be sentenced to a fine of not less than fifty pesos nor more than five hundred
pesos, or to imprisonment for not less than thirty days nor more than one year, or both, in the discretion of
the court, and to return the entire sum received as interest from the party aggrieved, and in the case of
non-payment, to suffer subsidiary imprisonment at the rate of one day for every two pesos: Provided, That
in case of corporations, associations, societies, or companies the manager, administrator or gerent or the
person who has charge of the management or administration of the business shall be criminally responsible
for any violation of this Act.

Sec. 11. All Acts and parts of Acts inconsistent with the provisions of this Act are hereby repealed.

Sec. 12. This Act shall take effect on the first day of May, nineteen hundred and sixteen.

ENACTED, February 24,1916.

DISCUSSIONS:

TWO LEGAL RATES OF INTEREST

There are two (2) legal rates of interest in our jurisdiction – the first being that under Article 2209 of the
Civil Code which provides that if the debtor incurs default, in the absence of stipulation, the indemnity
shall be the legal interest which is 6% per annum. The second is under the Usury Law or Act No. 2655
which provided for a legal rate of 6% per annum applicable for “loan or forbearance of any money, good or
credits and in judgments.” How do these two rates correlate with each other?

For some background, the Usury Law provided as an alternative to the 6% interest such rate as may be
prescribed by the Monetary Board. In 1974 the Monetary Board issued Circular No. 416 increasing such
legal rate of interest from 6% to 12%. The same rate of 12% was reincorporated in Circular No. 905 issued
by the Monetary Board in 1982. In 2013, the Monetary Board issued Circular No. 799 providing that the
legal rate of interest shall be back to 6%.

Article 2209 of the Civil Code refers to monetary obligations in general while the Usury Law refers to “loans,
forbearances and judgments”. “Loans” refers to a contract giving rise to a debtor-creditor relationship
(Article 1933, Civil Code). On the other hand, “forbearance” refers to an agreement by the lender to refrain
during a given period of time, from requiring the debtor to repay a loan (Fitch, Dictionary of Banking
Terms). In the celebrated PIATCO case (G.R. No. 181892, September 8, 2015), the Supreme Court amplified
that “the just compensation due to the property owner (in expropriation) is effectively a forbearance of
money, and not indemnity for damages.”

Regarding the rate “in judgments” as used in the Usury Law, the Supreme Court held that it does not apply
to any judgment which has nothing to do with, nor involving loans or forbearance of any money, for it is not
within the ambit of the authority granted to the Monetary Board (Reformina et..al. vs. Hon. Tomol Jr., et.
al., L-59096, Oct. 11, 1985). In another case, the Supreme Court stated that Circular No. 416 does not apply
to actions based on a breach of employment contract (Florendo vs. Hon. Ruiz, et. al., G.R. No. 64571, Feb.
21, 1989).

Subsequently, there was jurisprudence applying the legal rate of interest under the BSP Circulars to
insurance claims. Under the Insurance Code (Sections 248 and 249), if there is failure or refusal to pay
insurance claims, the beneficiary or assured shall be entitled to collect interest “at the rate of twice the
ceiling prescribed by the Monetary Board.” The Supreme Court held that this ceiling means the legal rate
of interest of 12% per annum as prescribed in Circular No. 416 (Prudential Guarantee and Assurance, Inc.,
Inc. vs. Trans-Asia Shipping Lines, Inc. G.R. No.151890, June 20, 2006).

The conclusion that can be derived is that the legal rate of interest provided for under the Usury Law, as
now implemented by Circular No. 799, applies to (a) loans, (b) forbearances and (c) judgments involving
loans or forbearances, just compensation and insurance claims. For transactions other than this
enumeration, the legal rate of interest shall be that under Article 2209 of the Civil Code. For practical
considerations, however, making such distinction may appear unnecessary now since both types of legal
interest have been unified at 6%, unlike before when there was a variance between the two. Nonetheless,
when charging the legal rate of interest, it would still be good policy to have a clear citation in law for the
imposition.

USURY AND UNCONSCIONABLE RATE INTERESTS

With the suspension of the Usury Law and the removal of interest ceilings, the parties are generally free
to stipulate the interest rates to be imposed on monetary obligations. As a rule, the interest rate agreed by
the creditor and the debtor is binding upon them. This rule, however, is not absolute.

In a recent case, the SC again dealt with the validity of interest agreed by the parties, stating that:

Stipulated interest rates are illegal if they are unconscionable and the Court is allowed to temper
interest rates when necessary. In exercising this vested power to determine what is iniquitous and
unconscionable, the Court must consider the circumstances of each case. What may be iniquitous and
unconscionable in one case, may be just in another.

In that case, the SC reduced the interest rate from 18% to 12% per annum, noting, among others, that the
amount involved has ballooned to an outrageous amount four times the principal debt.

Indeed, there is no hard and fast rule to determine the reasonableness of interest rates. Stipulated interest
rates of 21%, 23% and 24% per annum had been sustained in certain cases.

On the other hand, there are plenty of cases when the SC equitably reduced the stipulated interest rates;
for instance, from 18% to 10% per annum. The SC also voided the stipulated interest of 5.5% per month (or
66% per annum), for being excessive, iniquitous, unconscionable and exorbitant, hence, contrary to morals
(“contra bonos mores”), if not against the law. The same is true with cases involving 36% per annum, 6%
per month (or 72% per annum), and 10% and 8% per month. In these instances, the SC imposed the legal
interest of 12%.

Just to be clear, “legal interest” doesn’t mean that anything beyond 12% is “illegal”. It simply means that
in a loan or forbearance of money, the interest due should be that stipulated in writing, and in the absence
thereof, the rate shall be 12% per annum.

ARTICLE 2209 OF THE CIVIL CODE

If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the indemnity
for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed upon,
and in the absence of stipulation, the legal interest, which is six per cent per annum

CENTRAL BANK CIRCULAR NO. 905-82

The Monetary Board, in its Resolution No. 2224 dated December 3, 1982, approved the following regulations
governing interest rates on loans or forbearance of money, goods or credit and the amendment of Books I to
IV of the Manual of Regulations for Banks and Other Financial Intermediaries:

General Provisions

SECTION 1. The rate of interest, including commissions, premiums, fees and other charges, on a loan
or forbearance of any money, goods, or credits, regardless of maturity and whether secured or unsecured,
that may be charged or collected by any person, whether natural or juridical, shall not be subject to any
ceiling prescribed under or pursuant to the Usury Law, as amended.

SECTION 2. The rate of interest for the loan or forbearance of any money, goods or credits and the
rate allowed in judgments, in the absence of express contract as to such rate of interest, shall continue to
be twelve per cent (12%) per annum.

SECTION 3. Loans denominated or payable in a foreign currency shall continue to be subject to

Central Bank regulations on foreign borrowings.

BOOK I

Commercial Banks

SECTION 4. Subsection 1254.3 of the Manual of Regulations is hereby deleted.

SECTION 5. Section 1303 of the Manual of Regulations is hereby amended to read as follows:
“SECTION 1303. Interest and Other Charges. — The rate of interest, including commissions, premiums,
fees and other charges, on any loan, or forbearance of any money, goods or credits, regardless of maturity
and whether secured or unsecured, shall not be subject to any ceiling prescribed under or pursuant to the
Usury Law, as amended.”

SECTION 6. Subsection 1303.3 of the Manual of Regulations is hereby deleted.

SECTION 7. The first paragraph of Subsection 1303.4 of the Manual of Regulations is hereby amended
to read as follows:

“The rate of interest on a floating rate loan during each interest period shall be stated on the basis of a
reference rate plus a margin as may be agreed upon by the parties.”

SECTION 8. Subsection 1303.6 of the Manual of Regulations is hereby amended to read as follows:

“Subsection 1303.6. Short-term rate.— Expanded commercial banks, commercial banks and specialized
government banks shall post their respective short-term prime rates in a conspicuous place in their
principal offices, branches and other banking offices. Expanded commercial banks and the Land Bank of
the Philippines shall publish every other Monday their respective prevailing short-term prime rates in at
least one daily newspaper of general circulation throughout the Philippines and on the effective date of any
change of at least one-half per cent (½%) per annum from the last published rate, in at least one daily
newspaper of general circulation throughout the Philippines. For purposes of this subsection, the short-
term prime rate shall be the lowest effective rate which a bank will charge on availments of P500,000.00
and above with a maturity of 90 days, more of less , against credit lines of the bank’s more established
clients, provided that such availments are not eligible for rediscounting with the Central Bank at
preferential rates and that the borrowers are not directors, officers and stockholders, including their related
interest, of the lending bank.

Likewise, for purposes of this subsection, “more established clients” is defined as client who has been
availing himself of the facilities of the bank for number of years, by maintaining substantial deposit
balances, utilizing foreign exchange facilities such as exports, imports and remittances on a regular basis,
or availing himself of other fee-based services.

“For statistical and monitoring purposes, banks shall report these rates monthly to the Department of
Economic Research, Domestic, Central Bank of the Philippines. Changes in these rates shall also be
reported to said Department on the day the changes are to be effective.

“Banks shall report monthly to the Department of Economic Research-Domestic the volume and interest of
availments of P500,000.00 and above with a maturity of 90 days, more or less, against credit lines of their
clients.”

SECTION 9. Item “d” of Section 1349 of the Manual of Regulations is hereby amended to read as
follows:

“d. Terms, interest and charges. — The maximum term of loans money shops may grant shall in no case
exceed 180 days and the rate of interest on such loans, inclusive of commissions, premiums, fees and other
charges, shall not be subject to any ceilings prescribed under or pursuant to the Usury Laws, as amended.”

SECTION 10. Subsection 1388.1 of the Manual of Regulations is hereby amended to read as follows:

“The rate of yield, including commissions, premiums, fees, and other charges, from the purchase of
receivables and other obligations, regardless of maturity, that may be charged or received by banks
authorized to engage in quasi-banking functions or by non-bank financial intermediaries authorized to
engage in quasi-banking functions, shall not be subject to any regulatory ceiling.

“Data on the volume and interest rates of domestic loans and discounts with original maturities of more
than 365 days shall be reported by expanded commercial banks and commercial banks to the Department
of Economic Research, Domestic, Central Bank of the Philippines, not later than the 15th banking day after
end of reference month.”

BOOK II

Thrift Banks

SECTION 11. Subsection 2254.3 of the Manual of Regulations is hereby deleted.

SECTION 12. Section 2303 of the Manual of Regulations is hereby amended to read as follows:

“SECTION 2303. Interest and other Charges. — The rate of interest, including commissions, premiums,
fees and other charges, on a loan or forbearance of any money, goods or credits, regardless of maturity, and
whether secured or unsecured, shall not be subject to any ceiling prescribed under or pursuant to the Usury
Law, as amended.”

SECTION 13. Subsection 2303.3 of the Manual of Regulations is hereby deleted.

SECTION 14. The first paragraph of Subsection 2303.4 of the Manual of Regulations is hereby amended
to read as follows:

“The rate of interest on a floating rate loan during each interest period shall be stated on the basis of a
reference rate plus a margin as may be agreed upon by the parties.:

SECTION 15. The last paragraph of Subsection 2303.4 of the Manual of Regulations is hereby amended
to read as follows:

“Where the loan agreement provides for a floating interest rate, the interest period, which shall be such
period of time for which the rate of interest is fixed, shall be such period as may be agreed upon by the
parties.”

SECTION 16. The first paragraph of Subsection 2303.6 of the Manual of Regulations is hereby deleted.

SECTION 17. Item “c” of Section 2349 of the Manual of Regulations is hereby amended to read as
follows:

“C. Terms, interest and charges. — The maximum term of loans money shops may grant shall in no
case exceed 180 days and the rate of interest on such loans, inclusive of commission, premiums, fees and
other charges, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as
amended.”

SECTION 18. Subsection 2388.1 of the Manual of Regulations is hereby ended to read as follows:

“Subsection 2388.1. Yields on purchases of receivables. — The rate of yield, including commissions,
premiums, fees and other charges, from the purchase of receivables and other obligations, regardless of
maturity, that may be charged or received by banks authorized to engage in quasi-banking functions or by
non-bank financial intermediaries authorized to engage in quasi-banking functions, shall not be subject to
any regulatory ceiling.”

BOOK III

Rural Banks

SECTION 19. Item “c” of Subsection 3152.3 of the Manual of Regulations is hereby amended to read as
follows:

“c. Terms, interest and charges. — The maximum term of loans money shops may grant shall in no case
exceed 180 days and the rate of interest on such loans, inclusive of commissions, premiums, fees and other
charges, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.”

SECTION 20. Subsection 3254.2 of the Manual of Regulations is hereby deleted.

SECTION 21. Paragraph “a” of Subsection 3303.1 of the Manual of Regulations is hereby amended to
read as follows:

“a. Interest rate. — The rate of interest, including commissions, premiums, fees and other charges, on a
loan or forbearance of any money, goods, or credits, regardless of maturity and whether secured or
unsecured, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended.”

SECTION 22. Item “b” of Subsection 3303.1 of the Manual of Regulations is hereby deleted and items
“c”, “d”, “f” and “g” of the same Subsection are hereby relettered as items “b”, “c”, “d” and “e”, respectively.

SECTION 23. The first paragraph of Subsection 3303.2 of the Manual of Regulations is hereby deleted.

SECTION 24. Subsection 3303.5 of the Manual of Regulations is hereby amended to read as follows:
“Subsection 3303.5. Floating rates of interest. — The rate of interest on a floating rate loan during each
interest period shall be stated on the basis of a reference rate plus a margin as may be agreed upon by the
parties.

“Reference rates for various interest periods shall be determined and announced by the Central Bank every
week and shall be based on the weighted average of the interest rates paid during the immediately
preceding week by the ten (10) commercial banks with the highest levels of outstanding deposit substitutes
on promissory notes issued by such banks, with maturities corresponding to the interest periods for which
such reference rates are being determined. The commercial banks to be included for purposes of computing
the reference rates shall be reviewed and determined at the beginning of every calendar semester on the
basis of the levels of their outstanding deposit substitutes as of May 31 or November 30, as the case may
be.

“The rate of interest on floating rate loans, existing and outstanding as of April 2, 1982 shall continue to be
determined on the basis of the reference rate obtained from the weighted average of the interest rates paid
by the five banks with the largest volume of business transacted during the immediately preceding thirty
(30) days, on time deposits with maturities of more than seven hundred thirty (730) days, which shall be
announced by the Central Bank every month for as long as such loans are existing and outstanding:
Provided, however, That the parties to such existing floating rate loans agreements are not precluded from
amending or modifying their loan agreements by adopting a floating rate of interest determined on the
basis of the reference rate mentioned in the preceding paragraph.

“Where the loan agreement provides for a floating interest rate, the interest period, which shall be such
period of time for which the rate of interest is fixed, shall be such period as may be agreed upon by the
parties.”

BOOK IV

Non-Bank Financial Intermediaries

SECTION 25. The last paragraph of Subsection 4283Q.1 of the Manual of Regulations is hereby
amended to read as follows:

“Procedures for demand deposits of NBQBs with the Central Bank as provided in Appendix 14 shall be
followed.”

SECTION 26. Subsection 4303Q.1 to 4303Q.9 of the Manual of Regulations are hereby amended to read
as follows:

“Subsection 4303Q.1. Purchase of Receivables. — The rate of yield, including commissions, premiums, fees
and other charges, from the purchase of receivables and other obligations, regardless of maturity, that may
be charged or received by NBQBs shall not be subject to any regulatory ceiling.

“Receivables and other obligations shall include claims collectible in money of any amount and maturity
from domestic and foreign sources. The Monetary Board shall determine in doubtful cases whether a
particular claim is included within said phrase.”

“Subsection 4303Q.2. Loans. — The rate of interest, including commissions, premiums, fees and other
charges, on loan transactions, regardless of maturity and whether secured or unsecured, shall not be subject
to any ceiling prescribed under or pursuant to the Usury Law, as amended.”

“Subsection 4303Q.3. Floating rate of interest. — The rate of interest on a floating rate loan during each
interest period shall be stated on the basis of a reference rate plus a margin as may be agreed upon by the
parties.

“Reference rates for various interest periods shall be determined and announced by the Central Bank every
week and shall be based on the weighted average of the interest rates paid during the immediately
preceding week by the ten (10) commercial banks with the highest levels of outstanding deposit substitutes
on promissory notes issued by such banks, with maturities corresponding to the interest periods for which
such references rates are being determined. The commercial banks to be included for purposes of computing
the reference rates shall be reviewed and determined at the beginning of every calendar semester on the
basis of the levels of their outstanding deposit substitutes as of May 31 or November 30, as the case may
be.”

“The rate of interest on floating rate loans, existing and outstanding as of April 2, 1982 shall continue to be
determined on the basis of the reference rate obtained from the weighted average of the interest rates paid
by the five banks with the largest volume of business transacted during the immediately preceding thirty
(30) days, on time deposits with maturities of more than seven hundred thirty (730) days, which shall be
announced by the Central Bank every month for as long as such loans are existing and outstanding:
Provided, however, That the parties to such existing floating rate loan agreements are not precluded from
amending or modifying their loan agreements by adopting a floating rate of interest determined on the
basis of the reference rate mentioned in the next preceding paragraph.

“Where the loan agreement provides for a floating interest rate, the interest period, which shall be such
period of time for which the rate of interest is fixed, shall be such period as may be agreed upon by the
parties.”

“Subsection 4303Q.4. Effect of prepayment. —If there is no agreement on the rebate of interest in the event
of prepayment of the loan, the creditor is not under any legal obligation to return the interest corresponding
to the period from date of prepayment to the stipulated maturity date of the loan. Any prepayment made
by the debtor should not, therefore, affect the computation of the effective rate stipulated in the loan
contract.”

SECTION 27. Subsections 4303Q.10 and 4303Q.11 of the Manual of Regulations are hereby
renumbered as Subsections 4303Q.5. and 4303Q.6, respectively.

SECTION 28. Subsection 4303N.1 of the Manual of Regulations is hereby amended to read as follows:

“Subsection 4303N.1. Interest Rates. — The rate of interest including commissions, premiums, fees and
other charges on loans and forbearance of money, regardless of maturity and whether secured or unsecured,
shall not be subject to any ceilings prescribed under or pursuant to the Usury Law, as amended.”

SECTION 29. Subsections 4303N.2, 4303N.4 and 4303N.5 of the Manual of Regulations are hereby
deleted, and Subsections 4303N.3, 4303N.6, and 4303N.7 thereof are hereby renumbered as Subsections
4303N.2, 4303N.3 and 4303N.4, respectively.

SECTION 30. Section 4303P of the Manual of Regulations is hereby amended to read as follows:

“SECTION 4303P. Interest, Fees and Other Charges. — The rate of interest including commissions,
premiums, fees and other charges on any loan or forbearance of money extended by a pawnshop,
pawnbroker or pawnbroker’s agent, regardless of maturity, shall not be subject to any ceiling prescribed
under or pursuant to the Usury Law, as amended.

“No pawnshop shall collect interest on loans in advance for a period of more than a year.”

SECTION 31. Subsection 4303P.1 of the Manual of Regulations is hereby deleted.

SECTION 32. Whenever any person or entity violated any of the provisions of this Circular, the person
or entity responsible for such violation shall be subject to the penalties prescribed in the first paragraph of
Section 34 of Republic Act No. 265, as amended, and/or the penalties prescribed in Section 10 of Act No.
2655, without prejudice to the imposition of administrative sanctions under Sections 34-A and 34-B of
Republic Act No. 265, as amended.

SECTION 33. This Circular shall take effect on January 1, 1983.

FOR THE MONETARY BOARD:

(SGD.) JAIME C. LAYA

DISCUSSION:

Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended
the latter’s effectivity. The illegality of usury is wholly the creature of legislation. A Central Bank
Circular cannot repeal a law. Only a law can repeal another law. (ADVOCATES FOR TRUTH IN
LENDING vs. BANGKO SENTRAL MONETARY BOARD, G.R. No. 192986 January 15, 2013)

CENTRAL BANK CIRCULAR 416

CBP CIRCULAR NO. 416-74 July 29, 1974

By virtue of the authority granted to it under Section 1 of Act No. 2655, as amended, otherwise known as
the "Usury Law", the Monetary Board, in its Resolution No. 1622 dated July 29, 1974, has prescribed that
the rate of interest for the loan or forbearance of any money, goods or credits and the rate allowed in
judgments, in the absence of express contract as to such rate of interest, shall be twelve per cent (12%) per
annum.

This Circular shall take effect immediately.

(SGD.) G. S. LICAROS
Governor

BSP CIRCULAR 799

The Monetary Board, in its Resolution No. 796 dated 16 May 2013, approved the following revisions
governing the rate of interest in the absence of stipulation in loan contracts, thereby amending Section 2 of
Circular No. 905, Series of 1982:

Section 1. The rate of interest for the loan or for bearance of any money, goods or credits and the rate
allowed in judgments, in the absence of an express contract as to such rate of interest, shall be six percent
(6%) per annum.

Section 2. In view of the above, Subsection X305.1 of the Manual of Regulations for Banks and Sections
4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for Non-Bank Financial Institutions are hereby
amended accordingly.

This Circular shall take effect on 1 July 2013.

DISCUSSION:

 When there is no stipulated interest in a contract of loan, the legal interest shall be 6%
 Thus, from the foregoing, in the absence of an express stipulation as to the rate of interest that
would govern the parties, the rate of legal interest for loans or forbearance ofany money, goods or
credits and the rate allowed in judgments shall no longer be twelve percent (12%) per annum– as
reflected in the case of Eastern Shipping Linesand Subsection X305.1 of the Manual of
Regulationsfor Banks and Sections 4305Q.1, 4305S.3 and 4303P.1 of the Manual of Regulations for
Non-Bank Financial Institutions, before its amendment by BSP-MB Circular No. 799 – but will now
be six percent (6%) per annum effective July 1, 2013. It should be noted, nonetheless, that the new
rate could only be applied prospectively and not retroactively. Consequently, the twelve percent
(12%) per annumlegal interest shall apply only until June 30, 2013. Come July 1, 2013 the new rate
of six percent (6%) per annum shall be the prevailing rate of interest when applicable.