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BSP Twin Issuances Expected to Bring New Transparency Regime

04.27.2012

The Monetary Board has approved the twin measures that complete the efforts toward an enhanced transparency regime.  Circular No. 754 updates the rules implementing the Truth in Lending Act (Republic Act No. 3765) for non-bank financial institutions (NBFIs) under BSP supervision such as Quasi-Banks, Non-Stock Savings and Loan Associations, Credit Card Companies, Investment Houses and Pawnshops.  On the other hand, Circular No. 755 covers entities such as microfinance non-governmental organizations (NGOs) and in-house financiers, among others.  These credit-granting entities are now given the opportunity to register with the BSP and demonstrate their commitment to social responsibility towards protecting their clients. 

These new measures complement the earlier regulatory issuances as follows: 

Regulatory Agency

Issuance

Covered Entity

BSP

Circular No. 730 Series of 2011 dated 20 July 2011; Memorandum No. M-2011-040 dated 28 July 2011 

All Banks

SEC

SEC Memorandum Circular No. 7 Series of 2011 dated 15 September 2011 

All Lending and Financing Companies

IC

Circular Letter No.: 31-2011 dated 5 October 2011

All Insurance/Reinsurance Companies and Mutual Benefit Associations

CDA

Memorandum Circular No. 2012-05 Series of 2012 dated 14 March 2012 

Credit and Multi-Purpose Cooperatives with savings and loan services


Taken together, this set of rules aim to upgrade the transparency and disclosure practices of the entire credit-granting industry leading to a more level and robust competitive environment among credit providers and more importantly ensuring better informed and protected consumers. 

The new regulations reiterate the manner of computing interest by requiring NBFIs under BSP supervision and entities with credit-granting facilities to charge interest only on the outstanding balance of a loan at the beginning of an interest period or each installment period, and disclose to borrowers the true cost of credit. This rule effectively prohibits charging “flat” interest rates and other methods which misleadingly feature a markedly lower contractual interest rate.  The new rule requires quoting the Effective Interest Rate (EIR) which 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.   

The new rules likewise reiterate the definition of 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 sample format of disclosure is provided to ascertain that every borrower is provided with the minimum information that he or she needs to know about his or her loan in a manner that is simple and easy to understand.

To ensure strict and continuing compliance to the Truth in Lending Act, the new regulations also provide sanctions and penal provisions for non-compliance with certain provisions of the Circulars relative to the manner of interest computation and disclosure/posting of required information, in addition to sanctions provided under Section 6 of the Republic Act No. 3765.

The BSP believes that the updated rules will help ensure the protection of consumers, promote healthy competition among credit providers.  These new transparency rules will take effect on 01 July 2012, simultaneous with the effectivity of BSP Circular No. 730, to allow a nationwide adoption and smooth implementation.

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