Why Digital Lending is a Regulatory Issue
The core promise of digital lending is fast approval, minimal documentation, and app-based disbursement of funds. However, these features also create a high-risk environment for predatory lending practices, particularly through (a) excessive interest and fees, (b) vague pricing and “hidden charges”, and (c) collection tactics that pressure borrowers into paying amounts not reasonably tied to the principal obligation.
Philippine government regulation addresses these risks through a two-track regime: (a) prudential and corporate regulation of lending and financial entities, primarily by the SEC, and in certain cases, the BSP for BSP- supervised entities and (b) consumer protection regulation applicable to financial products and services under the shared mandate of financial regulators.
Who Regulates “Digital Lenders”?
A common misconception is that “online” lenders are automatically BSP-regulated. In reality, regulatory jurisdiction depends on the entity’s legal and its connection to the banking system.
SEC Supervision as the Default for Lending Companies
Under the Lending Company Regulation Act, lending companies are under SEC supervision and regulation, with the SEC empowered to regulate and supervise their operations, require reports, exercise visitorial powers, and impose sanctions which may include suspension and revocation of authority and even impose fines for violations of the Act and SEC Rules.
Lending Companies are generally SEC-supervised except when they are subsidiaries or affiliates of banks or quasi-banks.
BSP Supervision in Specific Cases
The BSP exercises supervision in cases involving:
- Banks or quasi-banks, or other BSP-supervised financial institutions engaged in lending activities; and
- Lending companies that are subsidiaries or affiliates of banks or quasi-banks, pursuant to the applicable delineation rules on BSP supervision and examination.
Consumer Protection Overlay: R.A. 11765 and “Market Conduct”
Even where SEC or in some cases BSP is the primary supervising authority, consumer protection obligations are reinforced by the Financial and Products Services Consumer Protection Act (R.A. 11765).[1]
The law applies broadly to all financial products or services offered or marketed by any financial service provider. It expressly designates the BSP, SEC and even the Insurance Commission as “financial regulators”[2] to enforce its standards on financial service providers under their jurisdiction.
In practice, R.A. 11765 creates a market-conduct framework that addresses issues involving marketing, disclosure, fair dealing, and responsible pricing expectations. This includes pricing terms that are fair and affordable to clients while remaining sustainable for providers.
The law also broadly defines investment fraud, including Ponzi-type schemes and unlicensed offerings or solicitations of investments. This becomes particularly relevant where “lending apps” are used as fronts for unlawfully soliciting funds from the public without the required licenses or regulatory authority.
Predator Practices: Unconscionable Interest and Charges
Even when a lender argues that the borrower “consented” to the rates in a click-through contract, the Courts can strike down or reduce oppressive interest rates, penalties, and charges.
Courts May Nullify “Grossly Excessive” Interest and Charges
The Supreme Court has consistently held that courts may equitably reduce or nullify stipulated interest rates and penalty charges in loan agreements when such rates are found to be grossly excessing, unconscionable, or contrary to law, morals, good customs, public order, or public policy.
In essence, contractual autonomy does not protect unjust or oppressive stipulations.
The Court has likewise condemned arrangements that allow lenders to unilaterally modify interest rates, holding that such provisions violate the principle of mutuality of contracts. These arrangements are often viewed as manifestations of unequal bargaining power that undermine fairness in credit relations.
Conclusion
As digital lending continues to expand in the Philippines, regulatory scrutiny over abusive lending practices, unlawful collection methods, excessive charges, and deceptive financial schemes is likewise increasing. Both regulators and the courts have recognized that the speed and accessibility of digital lending should not come at the expense of transparency, fairness, and consumer protection.
ABO and PEÑARANDA LAW FIRM assists borrowers, investors, and businesses in navigating the evolving legal framework governing digital lending and financial technology. We provide legal representation in cases involving abusive lending practices, unconscionable interest rates, regulatory compliance with the SEC and BSP regulations, and disputes arising from online lending transactions.
[1] R.A. No. 11765 Financial Products and Services and Consumer Protection Act, 06 May 2022.
