Facts
Respondent Sps. Ramon and Anita Viroomal obtained a loan from petitioner Manila Credit Corporation (MCC) under Promissory Note (PN) No. 7155 in the amount of 467,600.00 payable in 60 months.
The loan has an interest rate of 23.36% per annum, and is secured by a real estate mortgage (REM) over Ramon’s property in Paranaque City.
They later requested a loan restructuring, resulting in the execution of a second promissory note, Promissory Note No. 8351 (PN 8351), in the amount of PhP495,840 payable in 84 months at 24.99% interest per annum. The restructured amount represents the unpaid balance in PN 7155, including interests and penalty charges.
When Spouses Viroomal failed to make timely authorizations, MCC demanded full payment of the outstanding obligation of PhP549,029.69 as of October 15, 2016. The spouses, however, claimed they had already paid a total of PhP1,175,638.12 and thus asked for a recomputation, but were ignored by MCC.
MCC then proceeded with the extrajudicial foreclosure of the real estate mortgage, prompting Spouses Viroomal to file a complaint with the RTC for the declaration of nullity of real estate mortgage as well as of the interest rate and other charges for being unconscionable, iniquitous, and immoral. The spouses argued that their loan obligation was already fully paid, had they not been burdened with the 36% per annum effective interest rate (EIR) and other charges which they claim were surreptitiously imposed by MCC.
RTC Decision
The RTC subsequently rendered a Decision in favor of Spouses Viroomal, declaring void PN 8351 and the interests compounded by MCC in PN 7155 for being grossly excessive. The spouses were thus allowed to recover from MCC overpayment in the amount of PhP417,859.58. The RTC also ordered the title in the name of MCC canceled, and Ramon’s title reinstated.
CA Decision
The RTC was affirmed by the CA, hence the recourse of MCC to the Court.
It held that MCC imposed 36% per annum, equivalent to 3% per month effective interest rate (EIR) on respondents’ outstanding balance upon delay. The EIR was charged on top of the 1/10 of 1% of interest for each day it remains overdue, 1.5% per month penalty charge, and Php 100.00 collection fee, in addition to the stipulated 23.36% interest per annum on the principal amount. In total, MCC charged 77.46% interest per annum, which must be equitably reduced for being exorbitant and unconscionable.
Issue
Whether the stipulated interests, penalty charges, and the compounding of interests are valid as these were clearly expressed in the contract, which has the force of law between the parties.
Ruling
The Court cannot sustain the imposition of the compounded 3% monthly ElR. The evidence shows that the EIR was not indicated in PN No. 7155. MCC unilaterally imposed the EIR by simply inserting it in the disclosure statement. This is not valid and does not bind the respondents as it violates the mutuality of contracts under Article 1308 of the Civil Code, which states that the validity or compliance to the contract cannot be left to the will of one of the parties.
Reiterating its 2021 ruling in Megalopolis Properties, Inc. v. D’Nhew Lending Corporation, the Court held that while there is no “numerical limit on conscionability, the rate of 3% per month or 36% per annum is three times more than the 12% legal interest rate, and therefore excessive and unconscionable.”
The Court added that the “willingness of the debtor in assuming an unconscionable rate of interest is inconsequential to its validity.”
When MCC and the respondents executed PN No. 7155 in September 2009, the legal interest rate was fixed at l2% per annum. This rate was considered the reasonable compensation for forbearance of money. As held in Spouses Abella v. Spouses Abella, while the contracting parties may depart from the legal interest rate, any deviation therefrom must be reasonable and fair. If the stipulated interest for a loan is more than twice the prevailing legal rate of interest, it is for the creditor to prove that this rate is justified under the prevailing market conditions. No justification was offered by MCC in this case.
Further, under Article 1409 of the Civil Code, such contracts contrary to morals are inexistent and void from the beginning.
In loan agreements, in particular, while the contracting parties may depart from the legal interest rate, any deviation therefrom must be reasonable and fair. “If the stipulated interest for a loan is more than twice the prevailing legal rate of interest, it is for the creditor to prove that this rate is justified under the prevailing market conditions,” held the Court.
Note however that only the EIR and stipulated interest rates and penalties are declared void for being unconscionable. The very nature of the parties’ contract of loan entitles MCC to recover not only the principal amount, but also the payment of monetary interest from the respondents, as compensation for the use of the borrowed amount. Based on Article 1420 of the Civil Code, respondents’ obligation to pay the principal and the interest subsists as this can be separated from the void interests rates and charges.
For PN No. 7155, respondents have a total overpayment of Php 203,532.47.
For PN No. 8351, it is void for lack of consideration as it was only executed by respondents to cover the supposed “unpaid balance” in PN No. 7155.