University of the Philippines College of Law

Topic Truth in Lending Act

Case No. 610 SCRA 412 (2010)
Case Name Bank of the Philippine Islands v. Yu
Ponente Abad, J.

RELEVANT FACTS
The Spouses Yu, doing business as Tuanson Trading and Tuanson Builders Corp., obtained various loans from Far
East Bank, amounting to a total of P75M. To secure the loans, they executed REM over several of their properties,
including parcels of land in Legazpi City. The Sps. Yu defaulted in the loan obligations and requested the bank,
which merged with BPI, for a restructuring of loans.

Despite restructuring, however, they still met difficulties in paying the loan. They requested BPI to release some
of their mortgaged lands since the total appraised value of the properties exceeded the amount of their balance.
This was ignored by the BPI so the Sps. Yu withheld their payment on their amortizations. Subsequently, BPI
extrajudicially foreclosed the mortgaged properties, namely the parcels of land in Legazpi and in Camarines Sur.

Sps. Yu filed an action against the BPI for the recovery of excessive penalty charges, attorney’s fees and foreclosure
expenses that BPI incorporated in the price of the auctioned properties. Sps. Yu alleged that the BPI imposed
excessive penalty charges and interests amounting to over P5M in penalty charges at the rate of 36% p.a. which
is much more than 12% p.a. or the rate that the Court has fixed in prior cases.

In a partial summary judgment, the RTC reduced the rate of the penalty charge from 36% p.a. to 12% p.a. until
the debt would have been fully paid. Sps. Yu moved for reconsideration and argued that the penalty charges
should be deleted for violation of the Truth in Lending Act (TILA). According to Sps. Yu, BPI’s disclosure did not
state the rate of penalties on late amortizations.

The RTC ruled in favor of Sps. Yu and deleted the penalty charges for non-compliance with the TILA. The CA
affirmed the RTC decision in toto. Both courts cited New Sampaguita Builders Construction Inc. v. PNB to justify
the deletion of the penalty charges.

ISSUE AND RATIO DECIDENDI

Issue Ratio
W/N the penalty The penalty charge, which is liquidating damages resulting from a breach, constitutes a
charges were finance charge as provided in Sec. 4 (6) of the TILA.
correctly deleted
because of BPI’s A finance charge represents the amount to be paid by the debtor incident to the
alleged failure to extension of credit. The lender may provide for a penalty clause as long as the amount
comply with the or the rate and the conditions for its payment are disclosed to the borrower before
TILA – NO he/she enters into the credit agreement.

In this case: the BPI failed to state the penalty charges in the disclosure statement.
However, the promissory note that the Sps. Yu signed on the same date as the disclosure
statement, contained a penalty clause which stated that they promise to pay a late
payment charge on any overdue amount at the rate of 3% per month. The PN is an
acknowledge of a debt and a commitment to repay it on the date and under the
 University of the Philippines College of Law

conditions the parties agreed on and is a valid contract absent proof of vitiation of
consent.

As to whether the reference to the penalty charges in the PN constitutes substantial

compliance, the Court ruled in the affirmative.
First, the Court discussed that New Sampaguita is not squarely applicable. In New
Sampaguita, what was disallowed because of the non-disclosure in the disclosure
statement or in the PN was the unilateral increase in the rate of the penalty charge, and
not the penalty charge itself. In this case, there was no allegation that BPI increased the
rate of the penalty charge.

Rather, the Court cited the case of Consolidated Bank v. CA in resolving the present case.
In the Consolidated Bank, the Court declared valid the penalty charges that were
stipulated in the PN.
• Moreover, in DBP v. Arcilla, the Court held that financial charges are amply
disclosed if the same are stated in the PN. In the said case, the Court cited a
Circular of the Central Bank which requires the lenders to specify any additional
charges in the contract covering the credit transaction or any other document
to be acknowledged and signed by the borrowers.
In the present case: the PN signed by the Sps. Yu contained a statement of the penalty
charges as required by the TILA. Thus, the Court held that they cannot avoid their liability
based on a rigid interpretation of the TILA that contravenes its goal.

Nonetheless, the Court found it proper to reduce the interest rate from 36% p.a. to 12%
p.a. as ruled by the RTC in its original decision, since 36% p.a. is unreasonable and
iniquitous and since the BPI had already received over P2.7M in interest.

RULING
WHEREFORE, the Court DENIES the petition and AFFIRMS the Court of Appeals Decision in CA-G.R. CV 86577 dated
January 23, 2008 subject to the RESTORATION of the penalty charge of 12% per annum or 1% per month of the
amount due computed from date of nonpayment or November 25, 2001.

NOTES
SEC. 4. Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the
transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and
regulations prescribed by the Board, the following information:

(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in connection with the
transaction but which are not incident to the extension of credit;
(5) the total amount to be financed;
(6) the finance charge expressed in terms of pesos and centavos; and
(7) the percentage that the finance bears to the total amount to be financed expressed as a simple annual
rate on the outstanding unpaid balance of the obligation.