The Usury Law

1. Act No. 2655, as amended, Sec1-12

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.

2. Cases
❶ LIAM LAW, Plaintiff-Appellee, v. OLYMPIC SAWMILL CO. and ELINO LEE CHI
G.R. No. L-30771. May 28, 1984

 FACTS:
 On 7 September 1957, Liam Law (plaintiff) loaned P10,000.00, without interest, to Olympic
Sawmill Co. and Elino Lee Chi, as the latter s managing partner (defendants). The loan became
ultimately due on 31 January 1960, but was not paid on that date, with the debtors asking for an extension
of 3 months, or up to 30 April 1960. On 17 March 1960, the parties executed another loan document.
Payment of the P10,000.00 was extended to 30 April 1960, but the obligation was increased by P6,000
which formed part of the principal obligation to answer for attorney s fees, legal interest, and other cost
incident thereto to be paid unto the creditor and his successors in interest upon the termination of this
agreement. The defendants again failed to pay their obligation.
On 23 September 1960, the plaintiff instituted the collection case before the Court of First
Instance of Bulacan. The defendants admitted the P10,000.00 principal obligation, but claimed that the
additional P6,000.00 constituted usurious interest. Upon the plaintiff s application, the Trial Court
issued a writ of Attachment on real and personal properties of defendants. After the Writ of Attachment
was implemented, proceedings before the Trial Court versed principally in regards to the attachment. On
18 January 1961, an Order was issued by the Trial Court allowing both parties to simultaneously submit a
Motion for Summary Judgment. On 26 June 1961, the Trial Court rendered decision ordering defendants
to pay the plaintiff the amount of P10,000.00plus the further sum of P6,000.00. The defendants appealed
before the then court of Appeals, which endorsed it to the Supreme Court stating that the issue involved
was one of law.
ISSUE:
Whether the allegation of usury should be made in writing and under oath, pursuant to Section 9
of the Usury Law.
RULING:
The main thrust of defendants’ appeal is the allegation in their Answer that the P6,000.00
constituted usurious interest. They insist the claim of usury should have been deemed admitted by the
plaintiff as it was "not denied specifically and under oath" pursuant to Section 1, Rule 9 of the Rules of
Court and Section 9 of the Usury Law (Act 2655). The foregoing provision envisages a complaint filed
against an entity which has committed usury, for the recovery of the usurious interest paid. In that case, if
the entity sued shall not file its answer under oath denying the allegation of usury, the defendant shall be
deemed to have admitted the usury. The provision does not apply to a case, as in the present, where it is
the defendant, not the plaintiff, who is alleging usury.
For sometime now, usury has been legally non-existent. Interest can now be charged as lender and
borrower may agree upon (Central Bank Circular No. 905, Series of 1982, 78 Off. Gaz. 7336). The Rules
of Court in regards to allegations of usury, procedural in nature, should be considered repealed with
retroactive effect.

❸ SPOUSES DAVID B. CARPO & and RECHILDA S. CARPO vs. ELEANOR CHUA and
ELMA DY NG
GR. Nos. 150773 & 153599, September 30, 2005

FACTS:
Herein petitioner spouses David Carpo and Rechilda Carpo contracted a loan from Eleanor Chua
and Elma Dy Ng for a certain sum of money payable within six (6) months with an interest rate of six
percent (6%) per month secured by a mortgaged of the spouses Carpo of their residential house and lot.
Petitioners failed to pay the loan upon demand. Consequently, the real estate mortgage was extrajudicially
foreclosed, mortgaged property sold at a public auction, and the house and lot was awarded to
respondents, who were the only bidders. Unable to exercise their right of redemption by petitioners, a
certificate of sale was issued in the name of respondents. However, petitioners continued to occupy the
said house and lot, thus respondents file a petition for writ of possession which was granted by the Trial
Court. Petitioners filed a complaint for annulment of real estate mortgage and the consequent foreclosure
proceedings claiming that the rate of interest stipulated in the principal loan agreement is clearly null and
void for being excessive, iniquitous, unconscionable and exorbitant. Consequently, they also argue that
the nullity of the agreed interest rate affects the validity of the real estate mortgage.
ISSUE:
1. Whether or not the agreed rate of interest of 6% per month or 72% per annum is so excessive,
iniquitous, unconscionable and exorbitant that it should have been declared null and void.
2. In a loan with usurious interest, may the creditor recover the principal of the loan?
HELD:
1. In a long line of cases, the Supreme Court has invalidated similar stipulations on interest rates for
being excessive, iniquitous, unconscionable and exorbitant. Pursuant to the freedom of contract
principle embodied in Article 1306 of the Civil Code, contracting parties may establish such
stipulations, clauses, terms and conditions as they may deem convenient, provided they are not
contrary to law, morals, good customs, public order, or public policy. In the ordinary course, the
codal provision may be invoked to annul the excessive stipulated interest. In the case at bar, the
stipulated interest rate is 6% per month, or 72% per annum. By the standards set by
jurisprudence, this stipulation is similarly invalid.
2. In the case of Pascua vs. Perez we expressly held that when a contract is found to be tainted with
usury "the only right of the respondent (creditor) . . . was merely to collect the amount of the loan,
plus interest due thereon. "The view has been expressed, however, that the ruling thus
consistently adhered to should now be abandoned because Article 1957 of the new Civil Code —
a subsequent law — provides that contracts and stipulations, under any cloak or device whatever,
intended to circumvent the laws against usury, shall be void, and that in such cases "the borrower
may recover in accordance with the laws on usury." From this the conclusion is drawn that the
whole contract is void and that, therefore, the creditor has no right to recover — not even his
capital.
We do not agree with such reasoning. Article 1411 of the New Civil Code is not new; it
is the same as Article 1305 of the Old Civil Code. Therefore, said provision is no warrant for
departing from previous interpretation that, as provided in the Usury Law (Act No. 2655, as
amended), a loan with usurious interest is not totally void only as to the interest.
The principal debt remaining without stipulation for payment of interest can thus be
recovered by judicial action. And in case of such demand, and the debtor incurs in delay, the debt
earns interest from the date of the demand (in this case from the filing of the complaint). Such
interest is not due to stipulation, for there was none, the same being void. Rather, it is due to the
general provision of law that in obligations to pay money, where the debtor incurs in delay, he
has to pay interest by way of damages (Art. 2209, Civil Code). The court a quo therefore, did not
err in ordering defendants to pay the principal debt with interest thereon at the legal rate, from the
date of filing of the complaint."
The Court’s wholehearted affirmation of the rule that the principal obligation subsists
despite the nullity of the stipulated interest is evinced by its subsequent rulings, cited above, in all
 of which the main obligation was upheld and the offending interest rate merely corrected. Hence,
it is clear and settled that the principal loan obligation still stands and remains valid. By the same
token, since the mortgage contract derives its vitality from the validity of the principal obligation,
the invalid stipulation on interest rate is similarly insufficient to render void the ancillary
mortgage contract.

❹ AURELIO G. BRIONES V. PRIMITIVO P. CAMMAYO, ET AL.

G.R. No. L-23559 October 4, 1971

FACTS:
Briones filed an action in the MTC of Manila against defendants, all surnamed Cammayo, to
recover from them, jointly and severally the amount of Php 1,500.00 plus damages, attorneys fees and
cost of suit. The defendants answered that a mortgage contract executed for securing the payment Php
1,500.00 for a period of 1 year, without interest, but the plaintiff delivered to the defendant primitive only
the sum of Php 1,200.00 and withheld the sum of Php 300.00 which was intended as advance interest for
1 year; that on the account of said loaning Php 1,200.00, defendant primitive paid to the the total sum of
Php 330.00 which plaintiff, illegally and unlawfully refuse to acknowledge as part payment of the account
but as an interest of the said loan for an extention of another term of one year; and that said contract of
loan entered into between plaintiff and defendant primitive is a usurious contract.
Briones denied the allegations of the counterclaim. The MTC rendered judgement sentencing the
defendants to pay the plaintiff with interests thereon plus attorney’s fees. The CFI of manila also ordered
the defendants to pay the plaintiff. Defendants; claim that the trial court erred in sentencing them to pay
the principal of the loan notwithstanding its finding that the same was tainted with usury. It is not now
disputed that the contract of loan in question was tainted with usury.
ISSUE:
Whether the creditor is entitled to collect from the debtor the amount representing the principal
obligation.
RULING:
Yes. Under Act 2655 a usurious contract is void; that the creditor had no right of action to recover
the interest in excess of the lawful rate but that this did not mean that the debtor may keep the principal
received by him as loan- thus unjustly enriching himself to the damage of the creditor.
The usury law by its letter and spirit did not deprive the lender of his right to recover from the
borrower the money actually loaned to and enjoyed by the latter.
In simple loan with stipulation of usurious interest, the presentation of the debtor to pay the
principal debt, which is the cause of the contract, is not legal. The illegality lies only as to the prestation
to pay the stipulated interest; hence, being separable, the latter only should be deemed void, since it is the
only one that is illegal.
The principal debt remaining without stipulation for payment of interest can be recovered by
judicial action. And in case of such demand, the debtor incurs in delay, the debt earns interest from the
date of demand. Such interest is not due to stipulation, for there was none, the same being void. Rather, it
is due to the general provision of law that in obligations to pay money, where the debtor incurs in delay,
he has to pay interest by way of damages.

❺ First Metro Investment vs. Este. Del Sol

G.R. No. 141811, November 15, 2001, 369 SCRA 99

FACTS:
Petitioner FMIC granted respondent Este del Sol a loan of Seven Million Three Hundred Eighty-
Five Thousand Five Hundred Pesos (P7,385,500.00) to finance the construction and development of the
Este del Sol Mountain Reserve, a sports/resort complex project located at Barrio Puray, Montalban, Rizal.
Under the terms of the Loan Agreement, the proceeds of the loan were to be released on
staggered basis. Interest on the loan was pegged at sixteen (16%) percent per annum based on the
diminishing balance. The loan was payable in thirty-six (36) equal and consecutive monthly
amortizations. In case of default, an acceleration clause was, among others, provided and the amount due
was made subject to a twenty (20%) percent one-time penalty on the amount due and such amount shall
bear interest at the highest rate permitted by law from the date of default until full payment thereof plus
liquidated plus attorney’s fees equivalent to twenty-five (25%) percent of the sum sought to be recovered.
Respondent Este del Sol also executed, as provided for by the Loan Agreement, an Underwriting
Agreement with underwriting fee, annual supervision fee and consultancy fee with Consultancy
Agreement for four (4) years, coinciding with the term of the loan The said fees were deducted from the
first release of loan. Respondent Este del Sol failed to meet the schedule of repayment in accordance with
a revised Schedule of Amortization. Accordingly, petitioner FMIC caused the extrajudicial foreclosure of
the real estate mortgage on June 23, 1980. At the public auction, petitioner FMIC was the highest bidder
of the mortgaged properties. Failing to secure from the individual respondents the payment of the alleged
deficiency balance, despite individual demands sent to each of them, petitioner instituted the instant
collection suit against the respondents to collect the alleged deficiency balance.
ISSUE:
Whether or not the fees provided for in the Underwriting and Consultancy Agreements were mere
subterfuges to camouflage the excessively usurious interest charged.
RULING:
Yes. The Loan, Underwriting and Consultancy Agreements are separate and independent
transactions. The Underwriting and Consultancy Agreements which were executed and delivered
contemporaneously with the Loan Agreement were exacted by petitioner FMIC as essential conditions for
the grant of the loan. An apparently lawful loan is usurious when it is intended that additional
compensation for the loan be disguised by an ostensibly unrelated contract providing for payment by the
borrower for the lender’s services which are of little value or which are not in fact to be rendered, such as
in the instant case. In this connection, Article 1957 of the New Civil Code clearly provides that:
Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent
the laws against usury shall be void. The borrower may recover in accordance with the laws on usury.
 In usurious loans, the entire obligation does not become void because of an agreement for
usurious interest; the unpaid principal debt still stands and remains valid but the stipulation as to the
usurious interest is void, consequently, the debt is to be considered without stipulation as to the interest.
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the
principal debt, which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality
lies only as to the prestation to pay the stipulated interest; hence, being separable, the latter only should be
deemed void, since it is the only one that is illegal. Thus, the nullity of the stipulation on the usurious
interest does not affect the lender’s right to receive back the principal amount of the loan. With respect to
the debtor, the amount paid as interest under a usurious agreement is recoverable by him, since the
payment is deemed to have been made under restraint, rather than voluntarily.

❻ TEODORO SANCHEZ V. HON. CARLOS R. BUENVIAJE

G.R. No. L-57314 November 29, 1983

FACTS:
On August 25, 1976, Sanchez and Santilles in the Municipal Court of Bato, Camarines Sur, for
the recovery of P2,000.00 which the latter had promised to pay in two notes. Said notes also contained
stipulations for interest at the rate of 10% per month. The Municipal Court rendered judgment ordering
Teodoro Sanchez only to pay to Alejo Sanchez P2,000.00 plus interest thereon at the legal rate from the
filing of the complaint. Teodoro appealed to the Court of First Instance who affirmed the decision of the
municipal court with modifications.
In his petition for review, Teodoro claims that in a loan with usurious interest both the loan and
the usurious interest are void. However, Alejo died and accordingly, his children were impleaded as
respondents and required to file comment which they failed to do despite notice to them.
The court settled that: "the Usury Law by its letter and spirit, does not deprive the lender of his
right to recover of the borrower the money actually loaned this only in the case that the interest collected
is usurious. The law, as it is now, does not provide for the forfeiture of the capital in favor of the debtor in
usurious contract ... “
True it is that in Briones vs. Cammayo, justices opined that both loan and usurious interest are
void. However, it must be emphasized that eight other justices maintained that only the usurious interest
is void but not the principal obligation.
 ISSUE:
Whether the usurious interest be substituted by a legal interest?
 RULING:
It was held that the Usury Law permits the creditor to recover the principal but not the stipulated
usurious interest. This could well be taken to mean a forfeiture of the right to any interest so as not to
arrive at a contradiction in terms.
But in that same Sajo case, Justice Malcolm noted that the court has fallen into the habit in usury
cases of allowing the creditor the legal rate of interest on the judgment for the principal from the date of
the filing of the complaint.
 Parenthetically, it may be stated that Presidential Decree No. 116, as amended by Presidential
Decrees Nos. 858 and 1684, has transferred to the Monetary Board the power to fix the maximum rate of
interest. Section 7 of the Law was amended by Presidential Decree No. 116. It does not provide for the
forfeiture of the principal of a usurious loan.

❼ First Metro Investment vs. Este. Del Sol

G.R. No. 141811, November 15, 2001, 369 SCRA 99

FACTS:
Petitioner FMIC granted respondent Este del Sol a loan of Seven Million Three Hundred Eighty-Five
Thousand Five Hundred Pesos (P7,385,500.00) to finance the construction and development of the Este
del Sol Mountain Reserve, a sports/resort complex project located at Barrio Puray, Montalban, Rizal.
Under the terms of the Loan Agreement, the proceeds of the loan were to be released on staggered basis.
Interest on the loan was pegged at sixteen (16%) percent per annum based on the diminishing balance.
The loan was payable in thirty-six (36) equal and consecutive monthly amortizations. In case of default,
an acceleration clause was, among others, provided and the amount due was made subject to a twenty
(20%) percent one-time penalty on the amount due and such amount shall bear interest at the highest rate
permitted by law from the date of default until full payment thereof plus liquidated plus attorney’s fees
equivalent to twenty-five (25%) percent of the sum sought to be recovered.
Respondent Este del Sol also executed, as provided for by the Loan Agreement, an Underwriting
Agreement with underwriting fee, annual supervision fee and consultancy fee with Consultancy
Agreement for four (4) years, coinciding with the term of the loan The said fees were deducted from the
first release of loan.Respondent Este del Sol failed to meet the schedule of repayment in accordance with
a revised Schedule of Amortization. Accordingly, petitioner FMIC caused the extrajudicial foreclosure of
the real estate mortgage on June 23, 1980. At the public auction, petitioner FMIC was the highest bidder
of the mortgaged properties. Failing to secure from the individual respondents the payment of the alleged
deficiency balance, despite individual demands sent to each of them, petitioner instituted the instant
collection suit against the respondents to collect the alleged deficiency balance.
ISSUE:
Whether or not the fees provided for in the Underwriting and Consultancy Agreements were mere
subterfuges to camouflage the excessively usurious interest charged.
RULING:
Yes. The Loan, Underwriting and Consultancy Agreements are separate and independent transactions.
The Underwriting and Consultancy Agreements which were executed and delivered contemporaneously
with the Loan Agreement were exacted by petitioner FMIC as essential conditions for the grant of the
loan. An apparently lawful loan is usurious when it is intended that additional compensation for the loan
be disguised by an ostensibly unrelated contract providing for payment by the borrower for the lender’s
services which are of little value or which are not in fact to be rendered, such as in the instant case. In this
connection, Article 1957 of the New Civil Code clearly provides that:
Art. 1957. Contracts and stipulations, under any cloak or device whatever, intended to circumvent the
laws against usury shall be void. The borrower may recover in accordance with the laws on usury.
In usurious loans, the entire obligation does not become void because of an agreement for usurious
interest; the unpaid principal debt still stands and remains valid but the stipulation as to the usurious
interest is void, consequently, the debt is to be considered without stipulation as to the interest.
In simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt,
which is the cause of the contract (Article 1350, Civil Code), is not illegal. The illegality lies only as to
the prestation to pay the stipulated interest; hence, being separable, the latter only should be deemed void,
since it is the only one that is illegal. Thus, the nullity of the stipulation on the usurious interest does not
affect the lender’s right to receive back the principal amount of the loan. With respect to the debtor, the
amount paid as interest under a usurious agreement is recoverable by him, since the payment is deemed to
have been made under restraint, rather than voluntarily.

❽ DEVELOPMENT BANK OF THE PHILIPPINES v. BONITA O. PEREZ and ALFREDO

PEREZ
G.R. No. 148541; November 11, 2004

FACTS:
DBP sent a letter to respondent Bonita Perez, informing the latter of the approval of an industrial
loan for the acquisition of machinery and equipment and for working capital, and an additional industrial
loan to cover unforeseen price escalation.
The respondents were made to sign four promissory notes covering the total amount of the loan,
P235,000.00. Three promissory notes were executed, totaling P214,000.00. These promissory notes were
all due on August 31, 1988. A fourth promissory note due on September 19, 1988 was, likewise, executed
to cover the additional loan of P21,000.00. The promissory notes were to be paid in equal quarterly
amortizations and were secured by a mortgage contract covering real and personal properties.
Due to the respondents' failure to comply with their amortization payments, the petitioner decided
to foreclose the mortgages that secured the obligation. However, in a Letter dated October 7, 1981, Mrs.
Perez requested for a restructuring of their account due to difficulties they were encountering in collecting
receivables.
The loan was restructured and the respondents signed another promissory note in the amount of
P231,000.00 at eighteen percent (18%) interest per annum, payable quarterly at P12,553.27, over a period
of ten years.
The respondents filed a Complaint for the nullification of the new promissory note with damages
and preliminary prohibitory injunction. The complaint alleged that the petitioner restructured the
respondents’ obligation in bad faith. They averred that the interest imposed on the said transaction was
usurious.
A judgment is rendered dismissing the complaint for failure of plaintiffs to prove their causes of
action by clear preponderance of evidence, with costs against them. And defendant Bank's counterclaim is
hereby granted, and plaintiffs are hereby ordered to pay the former with interest thereon at the legal rate
of twelve (12%) percent per annum pursuant to Sec. 2 of CB Circular No. 905.
Upon the petitioner’s motion for reconsideration, the trial court issued an order amending the
dispositive portion of its decision by changing the rate of interest to eighteen percent (18%) per annum.
The CA held that since the loan is secured by a mortgage contract, the eighteen percent (18%) interest
rate was excessive and usurious under CB Circular No. 817. Both parties moved to reconsider the said
decision. The CA denied the said motions in a Resolution.
ISSUE:
Whether or not this Honorable Court of Appeals committed grave abuse of discretion when it
ruled that pursuant to Central Bank Circular No. 817 the 18% interest per annum agreed upon by the
parties in the restructured promissory note is usurious, and that the same should be reduced to 12% being
the legal rate of interest.
RULING:
The CA held that under CB Circular No. 817, if the loan is secured by a registered real estate, the
interest of eighteen percent (18%) is usurious. The petitioner, however, argues that usury has become
legally inexistent with the promulgation of CB Circular No. 905. It contends that the interest rate should
be eighteen percent (18%), the interest rate they agreed upon. For their part, the respondents argue that
the Central Bank engaged in self-legislation in enacting CB Circular No. 905.
We agree with the ruling of the CA. It is elementary that the laws in force at the time the contract
was made generally govern the effectivity of its provision. We note that the new promissory note was
executed on May 6, 1982, prior to the effectivity of CB Circular No. 905 on January 1, 1983. At that time,
The Usury Law, Act No. 2655, as amended by Presidential Decree No. 116, was still in force and effect.
Under the Usury Law, no person shall receive a rate of interest, including commissions,
premiums, fines and penalties, higher than twelve percent (12%) per annum or the maximum rate
prescribed by the Monetary Board for a loan secured by a mortgage upon real estate the title to which is
duly registered.
In this case, by specific provision in the new promissory note, the restructured loan continued to
be secured by the same mortgage contract executed on May 18, 1978 which covered real and personal
properties of the respondents. We, therefore, find the eighteen percent (18%) interest rate plus the
additional interest and penalty charges of eighteen percent (18%) and eight percent (8%), respectively, to
be highly usurious.

❿ ADVOCATES FOR TRUTH IN LENDING, INC. VS. BANGKO SENTRAL NG PILIPINAS

G.R. No. 192986 / January 15, 2013              

FACTS:
Advocates for Truth in Lending, Inc. and its President, Eduardo Olaguer claim that they are
raising issues of transcendental importance to the public and so they filed Petition for Certiorari under
Rule 65 ROC seeking to declare that the Bangko Sentral ng Pilipinas Monetary Board (BSP-MB),
replacing the Central Bank Monetary Board (CB-MB) by virtue of R.A. No. 7653, has no authority to
continue enforcing Central Bank Circular No. 905, issued by the CB-MB in 1982, which "suspended" the
Usury Law of 1916 (Act No. 2655).
 R.A. No. 265, which created the Central Bank (CB) of the Philippines, empowered the CB-MB
to, among others, set the maximum interest rates which banks may charge for all types of loans and other
credit operations, within limits prescribed by the Usury Law.
In its Resolution No. 2224, the CB-MB issued CB Circular No. 905, Series of 1982. Section 1 of
the Circular, under its General Provisions, removed the ceilings on interest rates on loans or forbearance
of any money, goods or credits.
On June 14, 1993, President Fidel V. Ramos signed into law R.A. No. 7653 establishing the
Bangko Sentral ng Pilipinas (BSP) to replace the CB.

ISSUE/S:
1.    Whether the CB-MB exceeded its authority when it issued CB Circular No. 905, which removed all
interest ceilings and thus suspended Act No. 2655 as regards usurious interest rates. NO
2.      Whether under R.A. No. 7653, the BSP-MB may continue to enforce CB Circular No. 905. YES

RULING:
1. The CB-MB merely suspended the effectivity of the Usury Law when it issued CB Circular No. 905.
The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long
been recognized and upheld in many cases. As the Court explained in the landmark case of Medel v. CA,
citing several cases, CB Circular No. 905 "did not repeal nor in anyway amend the Usury Law but simply
suspended the latter’s effectivity;" that "a CB Circular cannot repeal a law, [for] only a law can repeal
another law;" that "by virtue of CB Circular No. 905, the Usury Law has been rendered ineffective;" and
"Usury has been legally non-existent in our jurisdiction. Interest can now be charged as lender and
borrower may agree upon."
By lifting the interest ceiling, CB Circular No. 905 merely upheld the parties’ freedom of contract
to agree freely on the rate of interest. It cited Article 1306 of the New Civil Code, under which the
contracting parties may establish such stipulations, clauses, terms and conditions as they may deem
convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
2. The BSP-MB has authority to enforce CB Circular No. 905.
Section 1 of CB Circular No. 905 provides that, "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." It does not purport to suspend the Usury Law only as it applies to banks, but to all lenders.
Petitioners contend that, granting that the CB had power to "suspend" the Usury Law, the new
BSP-MB did not retain this power of its predecessor, in view of Section 135 of R.A. No. 7653, which
expressly repealed R.A. No. 265. The petitioners point out that R.A. No. 7653 did not reenact a provision
similar to Section 109 of R.A. No. 265.
 A closer perusal shows that Section 109 of R.A. No. 265 covered only loans extended by banks,
whereas under Section 1-a of the Usury Law, as amended, the BSP-MB may prescribe the maximum rate
or rates of interest for all loans or renewals thereof or the forbearance of any money, goods or credits,
including those for loans of low priority such as consumer loans, as well as such loans made by
pawnshops, finance companies and similar credit institutions. It even authorizes the BSP-MB to prescribe
different maximum rate or rates for different types of borrowings, including deposits and deposit
substitutes, or loans of financial intermediaries. Act No. 2655, an earlier law, is much broader in scope,
whereas R.A. No. 265, now R.A. No. 7653, merely supplemented it as it concerns loans by banks and
other financial institutions. Had R.A. No. 7653 been intended to repeal Section 1-a of Act No. 2655, it
would have so stated in unequivocal terms.
Further, the lifting of the ceilings for interest rates does not authorize stipulations charging
excessive, unconscionable, and iniquitous interest. It is settled that nothing in CB Circular No. 905 grants
lenders a carte blanche authority to raise interest rates to levels which will either enslave their borrowers
or lead to a hemorrhaging of their assets. Stipulations authorizing iniquitous or unconscionable interests
have been invariably struck down for being contrary to morals, if not against the law.