The Monetary Board, through MB Res. No. 1018 dated 07 July 2011, has approved the updated rules implementing the Truth in Lending Act aimed to enhance loan price transparency and improve disclosure practices thereby ensuring better consumer protection.
Current practices of some credit providers, particularly the use of so-called “flat” interest rates, show contractual rates for loans that substantially differ from the effective interest rate or EIR. There were also observations on hidden charges and deliberate quoting of lower interest rates with higher up front charges to enhance loan product marketability. As a result, the public may be misinformed or misguided about the true cost of their borrowings.
The new regulations seek to address these problems directly. Under the new rules, banks are required to charge interest on the outstanding balance only of a loan at the beginning of an interest period. This rule effectively prohibits charging “flat” interest rates and other methods which misleadingly feature a markedly lower contractual interest rate than the actual EIR. The EIR is defined in accordance with the Philippine Accounting Standards (PAS) as the rate that exactly discounts estimated future cash flows through the life of the loan to the net amount of loan proceeds. This EIR, whether quoted annually or monthly, shall be the only rate quoted in all loan documents including the marketing materials. As guidance in implementing the Circular, the BSP has also issued a Memorandum to All Banks providing illustrations of EIR calculation for various loans and scenarios.
The new rules likewise clearly define finance charges which include interest, fees, service charges, discounts, and such other charges incident to the extension of credit and require a uniform way of disclosing such information. A standard format of disclosure is provided to ascertain that every borrower is provided with information that he or she needs to know about his or her loan in a manner that is simple and easy to understand.
The BSP believes that the updated rules implementing the Truth in Lending Act to enhance loan transaction transparency will help ensure the protection of consumers, promote healthy competition among credit providers, and enable the smooth and orderly functions of the entire financial system. This regulation is also very timely as calls for enhanced consumer protection is intensifying specifically as affirmative financial inclusion policies lead to availability of an ever widening range of financial products and services.
While the new enhanced transparency rule applies only to banks at this time, it is intended that the requirement will be imposed on all credit providers in accordance with the Truth in Lending Act which covers all credit granting institutions. In order to ensure a level playing field among all regulated credit providers, the BSP will soon issue the counterpart guidelines for non-bank financial institutions under its supervision like pawnshops and non-stock savings and loan associations. Likewise, BSP will enjoin the other agencies regulating other credit-granting institutions such as Securities and Exchange Commission, Insurance Commission and Cooperative Development Authority to issue parallel regulations for the implementation of institutions under their respective jurisdictions. The BSP is also coordinating with the Microfinance Council of the Philippines to bring credit granting NGOs into conformance with the new transparency rule.
The new transparency rule will take effect on 01 July 2012 or one year after publication to allow mounting of a comprehensive information campaign and facilitate smooth implementation.