Regulatory Framework for Business Transactions ATTY. JOHNSON A.H.

ONG, CPA, MBA

RFBT Truth and Lending Act SUMMER 2021
STUDENT HANDOUTS

Truth in Lending Act bank and debtor, given at the time of the transaction in
R.A. 3765 partial payment for the property or service purchased.
Approved: June 22, 1963 (3) the difference between the amounts set forth under
clauses (1) and (2);
AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE (4) the charges, individually itemized, which are paid or to
CHARGES IN CONNECTION WITH EXTENSIONS OF CREDIT be paid by such person in connection with the
transaction but which are not incident to the extension
Declaration of Policy of credit;
It is hereby declared to be the policy of the State to protect its (5) the total amount to be financed;
citizens from a lack of awareness of the true cost of credit to the Amounts to be financed consist of the cash price plus
user by assuring a full disclosure of such cost with a view of non-finance charges less the amount of the down
preventing the uninformed use of credit to the detriment of the payment and value of the trade-in.
national economy. • Non-finance charges correspond to the amounts
advanced by the bank for items normally
Requirement under R.A. 3765 associated with the ownership of the property or
1. Any creditor shall furnish to each person to whom credit is of the availment of the service purchased which
extended. are not incident to the extension of credit. For
• "Creditor" means any person engaged in the business example, in the case of the purchase of an
of extending credit (including any person who as a automobile on credit, the creditor may advance
regular business practice make loans or sells or rents the insurance premium as well as the registration
property or services on a time, credit, or installment fee for the account of the debtor
basis, either as principal or as agent) who requires as (6) the finance charge expressed in terms of pesos and
an incident to the extension of credit, the payment of a centavos; and
finance charge. (Sec 3 (4)) • "Finance charge" includes interest, fees, service
• “Credit" means any loan, mortgage, deed of trust, charges, discounts, and such other charges incident to
advance, or discount; any conditional sales contract; the extension of credit.(Sec 3)
any contract to sell, or sale or contract of sale of (7) the percentage that the finance bears to the total
property or services, either for present or future amount to be financed expressed as a simple annual
delivery, under which part or all of the price is payable rate on the outstanding unpaid balance of the
subsequent to the making of such sale or contract; any obligation. (Sec 4)
rental-purchase contract; any contract or arrangement • Simple annual rate is the uniform percentage
for the hire, bailment, or leasing of property; any which represents the ratio between the finance
option, demand, lien, pledge, or other claim against, or charge and the amount to be financed under the
for the delivery of, property or money; any purchase, or assumption that the loan is payable in one (1) year
other acquisition of, or any credit upon the security of, with single payment upon maturity and there are
any obligation of claim arising out of any of the no upfront deductions to principal.
foregoing; and any transaction or series of transactions For loans with terms different from the above
having a similar purpose or effect. (Sec 3(2)) assumptions, the EIR shall be calculated and disclosed
• Person" means any individual, corporation, to the borrower as the relevant true cost of the loan
partnership, association, or other organized group of comparable to the concept of simple annual rate. For
persons, or the legal successor or representative of the loans with contractual interest rates stated on monthly
foregoing, and includes the Philippine Government or basis, the effective interest rate may be expressed as a
any agency thereof, or any other government, or of any monthly rate. In accordance with the Philippine
of its political subdivisions, or any agency of the Accounting Standards (PAS) definition, EIR is the rate
foregoing. (Sec 3(5)) that exactly discounts estimated future cash flows
2. It must be made prior to the consummation of the through the life of the loan to the net amount of the loan
transaction proceeds. For consistency, methodology and standards
3. There must be a clear statement in writing the following for discounted cash flow models shall be prescribed to
information: be used for the purpose.
(1) the cash price or delivered price of the property or
service to be acquired; Information to be disclosed
Cash price or delivered price, in case of trade As a general rule, loan terms shall be disclosed to all types of
transactions, is the amount of money which would borrower.
constitute full payment upon delivery of property For small business/retail/consumer credit, the following are
(except money) or service purchased at the bank’s the minimum information to be disclosed
place of business. In the case of financial transactions, a. The total amount to be financed;
cash price represents the amount of money received by b. The finance charges expressed in terms of pesos and
the debtor upon consummation of the credit centavos;
transaction, net of finance charges collected at the time c. The net proceeds of the loan; and
the credit is extended (if any). (306, MORB 2018) d. The percentage that the finance charge bears to the total
(2) the amounts, if any, to be credited as down payment amount to be financed expressed as a simple annual rate or
and/or trade-in; an EIR. EIR may also be quoted as a monthly rate in parallel
Down Payment represents the amount paid by the with the quotation of the contractual rate. Banks are
debtor at the time of the transaction in partial payment required to furnish each borrower a copy of the disclosure
for the property or service purchased. Trade-in statement, prior to the consummation of the transaction.
represents the value of an asset agreed upon by the (306, MORB 2018)

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 ATTY. JOHNSON A.H. ONG, CPA, MBA

Scope of MORB 2018 • No punishment or penalty provided by this Act shall

The following regulations shall apply to all banks engaged in the apply to the Philippine Government or any agency or
following types of credit transactions: any political subdivision thereof.
a. Any loan, mortgage, deed of trust, advance and discount; • A final judgment hereafter rendered in any criminal
b. Any conditional sales contract, any contract to sell, or sale proceeding under this Act to the effect that a defendant
or contract of sale of property or services, either for present has willfully violated this Act shall be prima facie
or future delivery, under which part or all of the price is evidence against such defendant in an action or
payable subsequent to the making of such sale or contract; proceeding brought by any other party against such
c. Any rental-purchase contract; defendant under this Act as to all matters respecting
d. Any contract or arrangement for the hire, bailment, or which said judgment would be an estoppel as between
leasing of property; the parties thereto.
e. Any option, demand, lien, pledge, or other claim against, or
for delivery of, property or money; In addition to the sanction under R.A 3765
f. Any purchase, or other acquisition of, or any credit upon 1. Bank may also subject to appropriate monetary penalties
security of any obligation or claim arising out of any of the under Sec. 1102, depending on the severity of non-
foregoing; and disclosure, number of loans and amount involved in the
g. Any transaction or series of transactions having a similar violation.
purpose or effect. 2. The following sanctions may be imposed under MORB:
The following categories of credit transactions are outside the a. First offense. Reprimand on the erring officer/s;
scope of these regulations: b. Second offense. Reprimand on the entire board of
(1) Credit transactions which do not involve the payment of directors; and
any finance charge by the debtor; and c. Subsequent offense/s:
(2) Credit transactions in which the debtor is the one specifying (1) Suspension of the erring officer/s and/ or entire
a definite and fixed set of credit terms such as bank board of directors; and
deposits, insurance contracts, sale of bonds, etc. (2) Restriction on lending activities.
3. This is also without prejudice to other penalties and
Inspection of contracts covering credit transactions sanctions provided under Sections 36 and 37 of R.A. No.
Banks shall keep in their offices or places of business copies of 7653. (New Central Bank Act)
contracts which involve the extension of credit by the bank and
the payment of finance charges therefor. Such copies shall be
available for inspection or examination by the appropriate
supervising department of the Bangko Sentral. (306, MORB
2018)

Posters
Banks shall post in conspicuous places in their principal place
of business and branches, the information as contained in the
revised format of disclosure statement in Appendix 16. The
posters shall include an explicit notification that the disclosure
statement is a required attachment to the loan contract and the
customer has a right to demand a copy of such disclosure. (306,
MORB 2018)

Penalty under the Truth and Lending Act

1. Any creditor who in connection with any credit transaction
fails to disclose to any person any information required
under the Truth and Lending Act.
• Liable to such person P100 or in an amount equal to
twice the finance charged required by such creditor in
connection with such transaction, whichever is higher,
except that such liability shall not exceed P2,000 on any
credit transaction.
• Prescriptive period
o Action to recover such penalty may be brought by
such person within one year from the date of the
occurrence of the violation, in any court of
competent jurisdiction.
• In any action under this subsection in which any person
is entitled to a recovery, the creditor shall be liable for
reasonable attorney's fees and court costs as
determined by the court.
• This shall not affect the validity or enforceability of any
contract or transactions.

2. Criminal penalty
Fined by not less than P1,00 or more than P5,000 or
imprisonment for not less than 6 months, nor more than
one year or both.

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