Truth in Lending Act

1. DEVELOPMENT BANK OF THE PHILIPPINES vs. ARCILLA

Facts: Atty. Felipe P. Arcilla, Jr. was employed by the Development Bank of the Philippines (DBP)
in October 1981. About five or six months thereafter, he was assigned to the legal department,
and thereafter, decided to avail of a loan under the Individual Housing Project (IHP) of the bank.
On September 12, 1983, DBP and Arcilla executed a Deed of Conditional Sale over a parcel of
land, as well as the house to be constructed thereon, for the price of P160,000.00. Arcilla
borrowed the said amount from DBP for the purchase of the lot and the construction of a
residential building thereon. He obliged himself to pay the loan in 25 years, with a monthly
amortization of P1,417.91, with 9% interest per annum, to be deducted from his monthly salary.
DBP obliged itself to transfer the title of the property upon the payment of the loan, including any
increments thereof. It was also agreed therein that if Arcilla availed of optional retirement, he
could elect to continue paying the loan, provided that the loan/amount would be converted into a
regular real estate loan account with the prevailing interest assigned on real estate loans, payable
within the remaining term of the loan account.

Arcilla was notified of the periodic release of his loan. During the period of July 1984 to December
31, 1986, the monthly amortizations for the said account were deducted from his monthly salary,
for which he was issued receipts. The monthly amortization was increased to P1,468.92 in
November 1984, and to P1,691.51 beginning January 1985. However, Arcilla opted to resign
from the bank in December 1986. Conformably with the Deed of Conditional Sale, the bank
informed him, on June 11, 1987, that the balance of his loan account with the bank had been
converted to a regular housing loan.

Arcilla filed a complaint against DBP with the Regional Trial Court (RTC) of Antipolo, Rizal, on
February 21, 1994. He alleged that DBP failed to furnish him with the disclosure statement
required by Republic Act (R.A.) No. 3765 and Central Bank (CB) Circular No. 158 prior to the
execution of the deed of conditional sale and the conversion of his loan account with the bank
into a regular housing loan account. Despite this, DBP immediately deducted the account from
his salary as early as 1984. Moreover, the bank applied its own formula and imposed its usurious
interests, penalties and charges on his loan account and advances.

Issue: Is DBP, as creditor obliged to furnish the client with certain information prior to the
consummation of a loan transaction?

Ruling: Yes. Section 1 of R.A. No. 3765 provides that prior to the consummation of a loan
transaction, the bank, as creditor, is obliged to furnish a client with a clear statement, in writing,
setting forth, to the extent applicable and in accordance with the rules and regulations prescribed
by the Monetary Board of the Central Bank of the Philippines, 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 charges expressed in terms of pesos and
centavos; and (7) the percentage that the finance charge bears to the total amount to be financed
expressed as a simple annual rate on the outstanding unpaid balance of the obligation.
If the borrower is not duly informed of the data required by the law prior to the consummation of
the availment or drawdown, the lender will have no right to collect such charge or increases
thereof, even if stipulated in the promissory note. However, such failure shall not affect the validity
or enforceability of any contract or transaction.

2. UCPB vs Spouses Beluso

G.R. No. 159912, August 17, 2007

FACTS:
This is a Petition for Review on Certiorari declaring void the interest rate provided in the
promissory notes executed by the respondents Spouses Samuel and Odette Beluso (spouses
Beluso) in favor of petitioner United Coconut Planters Bank (UCPB).
UCPB granted the spouses Beluso a Promissory Notes Line under a Credit Agreement
whereby the latter could avail from the former credit of up to a maximum amount of P1.2 Million
pesos for a term ending on 30 April 1997. The spouses Beluso constituted, other than their
promissory notes, a real estate mortgage over parcels of land in Roxas City, covered by Transfer
Certificates of Title No. T-31539 and T-27828, as additional security for the obligation. The Credit
Agreement was subsequently amended to increase the amount of the Promissory Notes Line to
a maximum of P2.35 Million pesos and to extend the term thereof to 28 February 1998.
On 30 April 1997, the payment of the principal and interest of the latter two promissory
notes were debited from the spouses Beluso’s account with UCPB; yet, a consolidated loan for
P1.3 Million was again released to the spouses Beluso under one promissory note with a due
date of 28 February 1998. To completely avail themselves of the P2.35 Million credit line extended
to them by UCPB, the spouses Beluso executed two more promissory notes for a total of
P350,000.00. However, the spouses Beluso alleged that the amounts covered by these last two
promissory notes were never released or credited to their account and, thus, claimed that the
principal indebtedness was only P2 Million.
The spouses Beluso, however, failed to make any payment of the foregoing amounts.
On 2 September 1998, UCPB demanded that the spouses Beluso pay their total obligation of
P2,932,543.00 plus 25% attorney’s fees, but the spouses Beluso failed to comply therewith. On
28 December 1998, UCPB foreclosed the properties mortgaged by the spouses Beluso to secure
their credit line, which, by that time, already ballooned to P3,784,603.00.
On 9 February 1999, the spouses Beluso filed a Petition for Annulment, Accounting and
Damages against UCPB with the RTC of Makati City.
Trial court declared in its judgment that:
a. the interest rate used by [UCPB] void
b. the foreclosure and Sheriff’s Certificate of Sale void
 c. UCPB is ordered to return to [the spouses Beluso] the properties subject
of the foreclosure
d. UCPB to pay [the spouses Beluso] the amount of P50,000.00 by way of
attorney’s fees
e. UCPB to pay the costs of suit.
f. Spouses Beluso] are hereby ordered to pay [UCPB] the sum of
P1,560,308.00.
Court of Appeals affirmed Trial court's decision subject to the modification that defendant-
appellant UCPB is not liable for attorney’s fees or the costs of suit.

ISSUES:
1. Was the stipulated interest rate void?
2. Were Spouses Beluso subject to 12% interest and compounding interest stipulations even
if the amount declared by UCPB was excessive?
3. Was the foreclosure valid?

RULING:
1. YES, stipulated interest rate is void because it contravenes the principle of mutuality of
contracts and it violates the Truth in Lending Act.
The provision stating that the interest shall be at the “rate indicative of DBD retail rate or
as determined by the Branch Head” is indeed dependent solely on the will of petitioner UCPB.
Under such provision, petitioner UCPB has two choices on what the interest rate shall be: (1) a
rate indicative of the DBD retail rate; or (2) a rate as determined by the Branch Head. As UCPB
is given this choice, the rate should be categorically determinable in both choices. If either of
these two choices presents an opportunity for UCPB to fix the rate at will, the bank can easily
choose such an option, thus making the entire interest rate provision violative of the principle of
mutuality of contracts.
In addition, the promissory notes, the copies of which were presented to the spouses
Beluso after execution, are not sufficient notification from UCPB. As earlier discussed, the interest
rate provision therein does not sufficiently indicate with particularity the interest rate to be applied
to the loan covered by said promissory notes which is required in Truth in Lending Act

Discussion: Liability for violating the Truth in Lending Act

• UCPB contests this:
o Barred by the 1 year prescriptive period (latest of the promissory notes was
executed on Jan 2, 1998, but original petition was filed on Feb 9, 1999)
o The original complain did not explicitly allege a violation of the Truth in
Lending Act and no action to formally admit the amended petition was made
o Being a criminal offense, it cannot be inferred nor implied from the
allegations
• CA says (and the SC agrees): there was no explicit allegation but the infringement
may be inferred from the allegations when the Belusos executed the promissory notes,
the interest charged were left blank. Thus, UCPB failed to discharge its duty to disclose in
full to the Belusos the charges applicable on their loans.
 • SC says: the allegations in the complaint are controlling. SC adds some other parts
in the complaint from which some violations can also be inferred: unilaterally imposed an
increased interest rate by relying on the provision in the promissory note that granted it
the power to unilaterally fix the interest rate. Such interest rate was not determined in the
promissory note but was left solely to the will of the branch head.”
o This means the promissory notes did not contain a clear statement in
writing of the finance charge expressed in terms of pesos and centavos/the percentage
that the finance charge bears to the amount to be financed expressed as a simple annual
rate on the outstanding unpaid balance of the obligation

2. YES. Default commences upon judicial or extrajudicial demand. The excess amount in
such a demand does not nullify the demand itself, which is valid with respect to the proper amount.
There being a valid demand on the part of UCPB, albeit excessive, the spouses Beluso are
considered in default with respect to the proper amount and, therefore, the interests and the
penalties began to run at that point. As regards the award of 12% legal interest in favor of
petitioner, the RTC actually recognized that said legal interest should be imposed, thus: “There
being no valid stipulation as to interest, the legal rate of interest shall be charged.” It seems that
the RTC inadvertently overlooked its non-inclusion in its computation. It must likewise uphold the
contract stipulation providing the compounding of interest. The provisions in the Credit
Agreement and in the promissory notes providing for the compounding of interest were neither
nullified by the RTC or the Court of Appeals, nor assailed by the spouses Beluso in their petition
with the RTC. The compounding of interests has furthermore been declared by this Court to be
legal.

3. YES. The foreclosure proceedings are valid since there was a valid demand made by
UCPB upon the spouses Beluso. Despite being excessive, the spouses Beluso are considered in
default with respect to the proper amount of their obligation to UCPB and, thus, the property they
mortgaged to secure such amounts may be foreclosed. Consequently, proceeds of the
foreclosure sale should be applied to the extent of the amounts to which UCPB is rightfully entitled.