Garcia, Nigel R.

2015-0448
Atty. Molina
Legal Research Midterms Exam
SUN 08:00AM-10:00AM
BSP Authority on Interest Rates

A. Statement of Issue:

Whether or not BSP is authorized to lift the ceiling on interest rate imposed by Banks.

B. Position:

Negative. Art. III, Sec. 10 of the 1987 Constitution and Art. 1306 of the New
Civil Code guaranteed the parties freedom to contract limiting the authority of BSP to
regulate interest rates depending on the prevailing economic and social conditions in
the country.

C. Discussion:

The right to enter into contracts is one of the guaranteed to individuals by the
Constitution, it also signifies or implies the right to choose with whom one desires to
contract (Obligation and Contracts, De Leon, pp. 491). Under Art. III, Sec. 10 of the
Constitution, it prohibits the passage of any law impairing the obligations of contracts.
However, the constitutional prohibitions refer only to legally valid contracts. (San Diego
vs Mun. Of Naujan, 107 phil. 118). In other words, individuals do not have an absolute
right to any kind of contracts such as contracts with unreasonable interest rates that is
against morals and public policy. (Lorenzo vs Martinez, 146 SCRA 323). When contracts
are valid, the parties are bound to its provisions under the principle that the contract is
law between the parties (Art. 1315 and Art. 1159 of the New Civil Code).

Though there are limitations to the freedom to contract, such as when the
government exercising its police power through passing of law counter-balancing the
principle of autonomy by limiting contractual stipulation reasonably for public welfare.
Far from being an impairment of contractual obligation, the exercise of such power
constitutes a mere enforcement of one of the conditions deemed imposed on all contracts.
(Obligation and Contracts, De Leon, pp. 494).

The Philippines used to have an anti-usury law that set a cap on the interest rate
on loans. However, it was suspended in 1983, and efforts to revive the law have
languished in Congress. It was scrapped on the belief that the court can decide whether or
not an interest rate in a loan agreement is acceptable once a case is brought before it.

The Supreme Court had already noted in numerous rulings that while the usury
law was suspended by Central Bank Circular No. 905 effective Jan. 1, 1983, and that
parties to a loan agreement were given wide latitude to agree on any interest rate,
“nothing in the said circular grants lenders carte blanche authority to raise interest rates to
levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.
The stipulated interest rates are illegal if they are unconscionable.” (DBP v. PEREZ, GR
148541, November 11, 2004; SPS. ISAGANI CASTRO and DIOSDADA CASTRO vs.
ANGELINA DE LEON TAN, G.R. No. 168940, November 24, 2009.; UNIVERSITY
OF PANGASINAN, INC., vs. FLORENTINO FERNANDEZ, G.R. No. 211228,
November 12, 2014)

As of now, under The Lending Company Regulation Act of 2007, lending firms
are allowed to loan money to borrowers at “reasonable” rates and charges, provided that
the Monetary Board, in consultation with the SEC and other stakeholders, may set
ceilings on interest rates depending on prevailing economic and social conditions.