Dio vs. Japor

DIO vs.
JAPOR In conclusion, the interest rate for the subject loan owing to QDB,
or whoever is now the party mortgagee, is hereby fixed at 5% for the
FACTS: first two months following the date of execution of the Deed of Real
Estate Mortgage, and 12% for the succeeding period. The penalty
Respondents spouses Japor obtained a loan amounting to rate is fixed at 1% per month. Petitioner Dio is free of any obligation
P128k from the Quezon Development Bank (QDB) as evidenced by to return to the respondents Spouses Japor any surplus in the
a duly executed Deed of Real Estate Mortgage. The spouses failed foreclosure sale price.
to pay their loan obligations. However, before the foreclosure of the
property, the spouses Japor offered to mortgage their properties to
petitioner Teresita Dio after obtaining from her a loan worth P350k. A
new Deed of Real Estate Mortgage was executed in favor of
petitioner Dio.
Under the terms of the deed, the respondents agreed to pay
petitioner a 5% interest rate per month for a period of two months
with an additional 5% penalty rate for every month in case of default
or delay.
However, despite repeated demands, respondents failed to pay
causing petitioner to foreclose the mortgage.
The respondents filed a petition for the fixing of their contractual
obligation. They alleged that the Deed of Real Estate Mortgage was
null and void since it did not state the true intent of the parties, which
limited the 5% interest rate to only two months from the date of the
loan and which did not provide for penalties and other charges in the
event of default or delay. Respondents vehemently contend that they
never consented to the said stipulations and hence, should not be
bound by them.
Petitioner countered that the upon the suspension of the Usury
Law, interest rates may accordingly be pegged at such levels or rates
as the lender and the borrower may agree upon. Petitioner further
points out that the 5% interest rate was proposed by the respondents
and have only themselves to blame if the interests and penalties
ballooned to its present amount due to their willful delay and default
in payment.
The CA fixed the respondents’ liability at 12% per annum and an
additional 1% penalty charge per month.
ISSUES:
1. W/N the 5% interest rate is iniquitous, unconscionable, and
exorbitant. YES
2. W/N the 5% interest rate for two months should be applied.
YES
3. W/N the spouses Japor are entitled to the surplus. NO
RULING:
First issue
Central Bank Circular No. 905 effectively removed the ceiling on
interest rates for both secured and unsecured loans, regardless of
maturity. However, it does not grant lenders carte blanche authority
to impose interest rates which would result in the enslavement of
their borrowers or to the hemorrhaging of their assets.
While a stipulated rate of interest may not technically and
necessarily be usurious under Circular, the rate may be equitably
reduced should the court find it to be iniquitous, unconscionable, and
exorbitant, and hence, contrary to morals (contra bonos mores), if not
against the law. What is iniquitous, unconscionable, and exorbitant
shall depend upon the factual circumstances of each case.
In the case at bar, the interest and penalty rates in the Deed are
excessive, hence legally impermissible and should therefore be
reduced.
Second issue
Nevertheless, even if the agreed interest rate is deemed
excessive, the respondents are now estopped from claiming
otherwise because evidence shows that it was respondents who
proposed the 5% interest rate per month for two months. However,
for the succeeding period after the two months, the interest rate
should be reduced to 12% per annum and the penalty rate to 1% per
month, in accordance with Article 2227 of the CC.
Third issue
There is no "surplus" to speak of. In adjusting the interest and
penalty rates to equitable and conscionable levels, what the Court
did was merely to reflect the true price of the land in the foreclosure
sale. No surplus in the purchase price was thus created to which the
respondents as the mortgagors have a vested right.

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