Development Bank of the Philippines, Petitioner, vs.

Bonita Perez and Alfredo

Perez, Respondents.
G.R. No. 148541, November 11, 2004
Callejo, Sr., J:

Facts: The Development Bank of the Philippines (DBP) approved two industrial loans in
the amounts of P214,000.00 and P21,000.00 in favor of respondents Bonita and Alfredo
Perez. The respondents signed four promissory notes covering the total loan amount of
P235,000.00. The promissory notes were to be paid in equal quarterly amortizations
and were secured by a mortgage contract covering real and personal properties.

DBP decided to foreclose the mortgages that secured the obligation because the
respondents failed to comply with their amortization payments. However, Mrs. Perez
requested for a restructuring of their account which was approved by the bank.

In relation to the restructured loan, on May 6, 1982, the respondents signed another
promissory note in the amount of P231,000.00 at 18% interest per annum, payable
quarterly at P12,553.27, over 10 years. In the promissory note, the first amortization
was due on August 7, 1982. The respondents made their first payment only on April 20,
1983. The second payment which was due on November 7, 1982, was paid only on
December 2, 1983, and only in the amount of P5,000.00. The third payment was made
at the time of the ninth amortization was due. Then the respondents stopped paying.
They were only able to pay a total of 35,000.00 after the loan was restructured.

DPB instituted foreclosure proceedings on the mortgages. However, before the

scheduled foreclosure sale, the respondents filed a Complaint for the nullification of the
new promissory note with damages and preliminary prohibitory injunction. One of their
allegations is that the interest imposed on the restructure loan was usurious.

The trial court ordered DBP to desist from holding the public auction of the respondents’
properties; and ordered the respondents to pay DBP P1,384,465.71, representing their
obligation with interest at the legal rate of 12% per year pursuant to CB Circular No.
905. Upon motion, the trial court modified its decision changing the interest rate to 18%
per year.

The CA held that since the loan is secured by a mortgage contract, the 18% interest
rate was excessive and usurious under CB Circular No. 817. According to the appellate
court, CB Circular No. 905, series of 1982, simply suspended the effectivity of the Usury
Law; it did not authorize either party to unilaterally raise the interest without the other
party's consent.

DBP argued that usury has become legally inexistent with the promulgation of CB
Circular No. 905. It contended that the interest rate should be 18%, the interest rate
they agreed upon.
Issue: Under the applicable Central Bank Circular, is the interest rate of 18% agreed by
the parties in the new promissory note usurious on the ground that it was secured by a
mortgage over a registered real estate.

Ruling: Yes.

The Supreme Court agreed with the CA in ruling that under CB Circular No. 817, if the
loan is secured by a registered real estate, the interest of 18% is usurious.

The Court said that it is elementary that the laws in force at the time the contract was
made generally govern the effectivity of its provision. It explained that The Usury Law,
as amended was still in force and effect at the time the new promissory note was
executed on May 6, 1982, because CB Circular No. 905 only took effect on January 1,
1983.

Under the Usury Law, no person shall receive a rate of interest, including commissions,
premiums, fines, and penalties, higher than twelve 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. The Court held that the
18% interest rate plus the additional interest and penalty charges of 18% and 8%,
respectively, to be highly usurious.

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 the absence of an express stipulation as to the
rate of interest, the legal rate at 12% per annum shall be imposed.