BSP: Stricter Truth in Lending Act guidelines now in effect

The Bangko Sentral ng Pilipinas announced that the stricter guidelines implementing the Truth in Lending Act have taken effect on Monday. The BSP is calling on all banks and non-bank lending companies to comply with the updated rules.

 

The Truth in Lending Act essentially requires banks to be transparent about the information related to loans they extend. 

 

BSP Deputy Governor Nestor Espenilla said that the updated implementing guidelines are stricter because it is necessary to address misinformation experienced by some borrowers on the loans they secure. He said addressing this problem was needed to avoid cases of over-indebtedness and loan defaults. 

 

“It is appropriate to implement enhancements to the Truth and Lending Act. Clients should know the actual price, terms, and conditions of financial products sold to them,” Espenilla said in a press conference. 

 

“Informed clients make informed decisions and avoid over-indebtedness,” he added.

 

The stricter guidelines are embodied in BSP Circular 730, which the central bank issued in July last year. The BSP gave banks and non-bank institutions it regulates one year to prepare for the implementation of the stricter guidelines. 

 

Computing interest

 

One of the key refinements to the guidelines is related to the manner of computing interest. Usually, Espenilla said, banks compute monthly interest using the total loan amount as a base. 

 

But this kind of interest rate “deceives” borrowers, said Espenilla in a phone interview with GMA News Online. 

                                                                                           

If an amortization is paid, Espenilla explains, the outstanding amount of the loan declines. 

 

“(It’s imposing) an interest on the outstanding balance when in fact it’s already declining. Why will you charge interest on something that is no longer outstanding?” said the BSP deputy governor. 

  

Espenilla explained that borrowers of small consumer loans opt for the flat interest scheme because of its simple calculation. 

 

“But what is simple is actually misleading,” said Espenilla.

 

The updated Truth in Lending law states that lending firms must compute interest using the outstanding balance of the loan and not the total amount of loan as base. 

 

A Monday BSP news release said that the new rules applies to all kinds of loans, specifically on retail loans like small business, agriculture and consumer loans which the BSP noted are more vulnerable to unfair lending practices.

 

Disclosure statement

 

Another key refinement to the guidelines is the requirement for banks and non-bank lending institutions to release disclosure statements to their borrowers. 

 

Such statements contain all loan-related information, including the total amount to be financed, finance charges, net proceeds of the loan, and the percentage that the finance charge bears to the total amount to be financed.

 

“It is the right of the borrowers to demand for this statement,” Espenilla said. 

 

Depending on the number of offenses, penalties range from monetary fines to revocation of license. 

 

Espenilla said other government agencies that regulate companies engaged in the business of lending have also issued their own circulars containing the updated implementing guidelines of the Truth in Lending Act. 

 

The other government agencies include the Securities and Exchange Commission, and the Cooperative Development Authority, among others. — DVM, GMA News