Advocates for Truth in Lending, Inc. vs. Bangko Sentral Monetary Board

CB Circular No. 905 validly suspended the effectivity of the Usury Law, and the Bangko Sentral ng Pilipinas Monetary Board retains authority to enforce it, but stipulations imposing unconscionable, iniquitous, or excessive interest rates remain void ab initio under Article 1409 of the Civil Code.

Petitioner Advocates for Truth in Lending, Inc. (AFTIL) is a non-profit, non-stock corporation organized on July 9, 2010, to engage in pro bono activities relating to money lending issues; it was joined by its founder and president, Eduardo B. Olaguer, suing as a taxpayer and citizen. The legal framework at issue traces to R.A. No. 265 (1948), which created the Central Bank and empowered its Monetary Board to fix maximum interest rates within Usury Law limits; P.D. No. 1684 (1980), which amended the Usury Law (Act No. 2655) to authorize the Monetary Board to prescribe and change maximum interest rates; CB Circular No. 905 (1982), which removed all interest rate ceilings; and R.A. No. 7653 (1993), which replaced the Central Bank with the Bangko Sentral ng Pilipinas and contained a repealing clause.

The Central Bank of the Philippines was created on June 15, 1948, by R.A. No. 265, which empowered the Central Bank Monetary Board (CB-MB) to fix maximum interest rates that banks may charge for loans and credit operations, within limits prescribed by the Usury Law (Act No. 2655). On March 17, 1980, P.D. No. 1684 amended the Usury Law by adding Section 1-a, authorizing the Monetary Board to prescribe the maximum rate or rates of interest for loans or forbearance of any money, goods, or credits, and to change such rates whenever warranted by prevailing economic and social conditions, provided that changes were effected gradually on scheduled dates announced in advance. The amendment also authorized the Board to prescribe higher maximum rates for low-priority loans such as consumer loans and loans by pawnshops, finance companies, and similar credit institutions.

On December 3, 1982, the CB-MB issued Resolution No. 2224, promulgating CB Circular No. 905, Series of 1982, effective January 1, 1983. Section 1 of the Circular removed all ceilings on interest rates on loans or forbearance of any money, goods, or credits, providing that the rate of interest, including commissions, premiums, fees, and other charges, shall not be subject to any ceiling prescribed under or pursuant to the Usury Law, as amended. The Circular also amended Books I to IV of the Central Bank's Manual of Regulations for Banks and Other Financial Intermediaries by removing the applicable interest rate ceilings for commercial banks, thrift banks, rural banks, and non-bank financial intermediaries. Petitioners asserted that shortly after the Circular's issuance, the benchmark 91-day Treasury bills—then known as "Jobo" bills—shot up to 40% per annum, and banks re-priced their loans to even higher rates.

On June 14, 1993, R.A. No. 7653 was enacted, establishing the Bangko Sentral ng Pilipinas (BSP) to replace the Central Bank. Section 135 of R.A. No. 7653 contained a repealing clause providing that R.A. No. 265, as amended, and any rules or regulations issued pursuant thereto that were inconsistent with the new Act were repealed. R.A. No. 7653 did not reenact a provision similar to Section 109 of R.A. No. 265, which had empowered the CB-MB to fix maximum interest rates within Usury Law limits.

Petitioner AFTIL was incorporated on July 9, 2010, and a month later filed the instant petition, joined by its founder and president Eduardo B. Olaguer, suing as a taxpayer and citizen. Petitioners attached to the petition copies of several Senate Bills and Resolutions from the 10th Congress (1995–1998) calling for investigations into alleged unconscionable commercial interest rates, as well as news clippings showing that in February 1998, banks' prime lending rates ranged from 26% to 31%. They contended that the CB-MB exceeded its authority under Section 1-a of Act No. 2655, as amended by P.D. No. 1684, when it issued CB Circular No. 905, because the amendment authorized only the prescription and gradual changing of maximum rates, not the lifting or suspension of all interest ceilings. They further argued that R.A. No. 7653's repealing clause stripped the BSP-MB of any power to enforce CB Circular No. 905. For its part, the BSP-MB maintained that the Circular was a policy response to the global economic downturn of the early 1980s, aimed at establishing a market-oriented interest rate structure.

• Statutory Authority of CB-MB: Petitioners argued that under Section 1-a of Act No. 2655, as amended by P.D. No. 1684, the CB-MB was authorized only to prescribe or set maximum rates of interest and to change such rates gradually on scheduled dates announced in advance, and that nothing in P.D. No. 1684 authorized the CB-MB to lift or suspend all interest ceilings on credit transactions when it issued CB Circular No. 905.
• Limits Under R.A. No. 265: Petitioners maintained that under Section 109 of R.A. No. 265, the CB-MB's authority was limited to fixing banks' maximum rates of interest, but always within the limits prescribed by the Usury Law.
• Void for Violation of Mandatory Law: Petitioners contended that CB Circular No. 905, promulgated without prior public hearing, was void because it violated Article 5 of the New Civil Code, which provides that acts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity.
• Unconstitutionality on Due Process and Equal Protection Grounds: Petitioners asserted that CB Circular No. 905 was unconstitutional under Section 1 of the Bill of Rights, which prohibits deprivation of life, liberty, or property without due process of law and denies equal protection of the laws.
• Loss of BSP-MB Authority Under R.A. No. 7653: Petitioners pointed out that R.A. No. 7653 did not reenact a provision similar to Section 109 of R.A. No. 265, and that in view of the repealing clause in Section 135, the BSP-MB was stripped of the power to prescribe maximum interest rates, suspend the Usury Law, or continue enforcing CB Circular No. 905.
• Transcendental Importance: Petitioners contended that the transcendental importance of the issues justified their bypassing the hierarchy of courts and filing directly with the Supreme Court.

• Executive Function, Not Quasi-Judicial: The BSP-MB maintained that the allegations of constitutional and statutory violations were really challenges to the wisdom of CB Circular No. 905 rather than to its validity.
• Economic Policy Justification: The BSP-MB explained that in view of the global economic downturn in the early 1980s, the executive department through the CB-MB had to formulate policies to achieve economic recovery, and among these was the establishment of a market-oriented interest rate structure requiring the removal of government-imposed interest rate ceilings.

• Propriety of Certiorari: Whether a petition for certiorari under Rule 65 lies against the Monetary Board's issuance of CB Circular No. 905, which was an exercise of executive rather than judicial or quasi-judicial functions.
• Locus Standi: Whether petitioners have standing to file the petition, given their failure to allege any personal injury sustained from the issuance of CB Circular No. 905.
• Transcendental Importance: Whether the issues raised are of transcendental importance sufficient to justify direct resort to the Supreme Court and waiver of the standing requirement.
• Validity of CB Circular No. 905: Whether the CB-MB exceeded its statutory authority under R.A. No. 265 and P.D. No. 1684 when it issued CB Circular No. 905, which removed all interest ceilings and effectively suspended the Usury Law.
• BSP-MB's Continuing Authority: Whether under R.A. No. 7653, the BSP-MB may continue to enforce CB Circular No. 905, notwithstanding the repealing clause in Section 135 and the absence of a reenacted provision similar to Section 109 of R.A. No. 265.
• Effect on Unconscionable Interest: Whether the lifting of interest rate ceilings under CB Circular No. 905 authorizes stipulations charging excessive, unconscionable, and iniquitous interest.

• Propriety of Certiorari: No. Certiorari under Rule 65 lies only against a tribunal exercising judicial or quasi-judicial functions; the CB-MB (now BSP-MB) performs executive functions, and the issuance of CB Circular No. 905 was an executive act.
• Locus Standi: No. Petitioners alleged no personal or direct injury from CB Circular No. 905, nor any misuse of public funds in its enforcement, failing the "direct injury" test required even in public interest cases.
• Transcendental Importance: No. The determinants of transcendental importance were absent—no misuse of public funds, no actual affected borrowers joined, and the 15-year delay rendered the issues moot given the dramatically changed interest rate environment.
• Validity of CB Circular No. 905: No, the CB-MB did not exceed its authority. CB Circular No. 905 did not repeal or amend the Usury Law but merely suspended its effectivity, consistent with the authority granted by P.D. No. 1684 and recognized in prior jurisprudence.
• BSP-MB's Continuing Authority: Yes. R.A. No. 7653 did not impliedly repeal Section 1-a of Act No. 2655, which is broader in scope and covers all lenders; implied repeals are not favored, and no irreconcilable conflict exists between the two laws.
• Effect on Unconscionable Interest: No. CB Circular No. 905 does not grant lenders carte blanche authority to impose unconscionable interest rates; stipulations authorizing iniquitous or unconscionable interest are void ab initio under Article 1409 of the Civil Code, though the lender's right to recover the principal and to foreclose on the mortgage subsists.

• Propriety of Certiorari: A writ of certiorari under Section 1 of Rule 65 is directed against a tribunal, board, or officer exercising judicial or quasi-judicial functions. Judicial functions involve determining what the law is and what the legal rights of the parties are; quasi-judicial functions involve investigating facts, holding hearings, and drawing conclusions as a basis for official action. The CB-MB (now BSP-MB) was created to perform executive functions with respect to the establishment, operation, or liquidation of banking and credit institutions. The issuance of CB Circular No. 905 was done in the exercise of an executive function, not a judicial or quasi-judicial one. Certiorari therefore does not lie.

• Locus Standi: Locus standi is a right of appearance in a court of justice on a given question. Even in public interest cases, the Court has adopted the "direct injury" test, requiring that the person impugning the validity of a statute or governmental act must have a personal and substantial interest such that he has sustained or will sustain direct injury. Petitioners did not allege any personal injury from CB Circular No. 905, nor did they claim that public funds were being misused in its enforcement. Citing Kilosbayan, Inc. vs. Morato, the Court held that the status of a people's organization does not confer the requisite personality to maintain an action without showing a particularized interest.

• Transcendental Importance: The Court applied the determinants set out in CREBA vs. ERC: (1) the character of the funds or assets involved; (2) the presence of a clear case of disregard of a constitutional or statutory prohibition; and (3) the lack of any other party with a more direct and specific interest. None were present: there was no allegation of misuse of public funds, no actually affected borrowers were joined, and no disregard of a constitutional or statutory prohibition was shown. Moreover, the petition adverted to interest rate conditions obtaining 15 to 29 years prior, while current rates had dropped dramatically—bank lending rates averaged 5.91% in early 2012, and T-bill rates had reached record lows. The 15-year delay in filing rendered the issues moot and academic.

• Validity of CB Circular No. 905: The power of the CB to effectively suspend the Usury Law pursuant to P.D. No. 1684 has long been recognized. Citing Medel vs. CA, the Court explained that CB Circular No. 905 "did not repeal nor in any way amend the Usury Law but simply suspended the latter's effectivity," and that "a CB Circular cannot repeal a law, [for] only a law can repeal another law." By lifting the interest ceiling, the Circular merely upheld the parties' freedom of contract under Article 1306 of the New Civil Code to agree freely on the rate of interest. In PNB vs. Court of Appeals, the Court held that P.D. No. 1684 and CB Circular No. 905 "no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate."

• BSP-MB's Continuing Authority: Section 109 of R.A. No. 265 covered only loans extended by banks, whereas Section 1-a of the Usury Law, as amended, is much broader, authorizing the prescription of maximum rates for all loans or forbearance of money, goods, or credits, including consumer loans, pawnshops, finance companies, and similar credit institutions. R.A. No. 7653 merely supplemented Act No. 2655 as it concerns loans by banks and other financial institutions. Had R.A. No. 7653 intended to repeal Section 1-a of Act No. 2655, it would have so stated in unequivocal terms. Repeals by implication are not favored; an implied repeal requires an irreconcilable inconsistency and repugnancy between the new and old laws, and no such conflict was found.

• Effect on Unconscionable Interest: Nothing in CB Circular No. 905 grants lenders carte blanche authority to raise interest rates to levels that would enslave borrowers or hemorrhage their assets. Citing Castro vs. Tan, the Court held that the imposition of an unconscionable rate of interest is immoral and unjust, tantamount to a repugnant spoliation and an iniquitous deprivation of property. Stipulations authorizing iniquitous or unconscionable interest are void under Article 1409 of the Civil Code as inexistent and void ab initio. However, the nullity of the usurious stipulation does not affect the lender's right to recover the principal, nor the right to foreclose on the mortgage. In place of the excessive interest, a legal interest of 12% per annum applies, following the guidelines in Eastern Shipping Lines, Inc. vs. Court of Appeals.

• Suspension vs. Repeal of the Usury Law — CB Circular No. 905 did not repeal or amend the Usury Law but merely suspended its effectivity. A Central Bank Circular cannot repeal a law; only a law can repeal another law. By virtue of CB Circular No. 905, the Usury Law was rendered ineffective, and usury became legally non-existent in the jurisdiction, allowing parties to freely stipulate on interest rates subject to the limitation that unconscionable rates remain void.

• Freedom of Contract Under CB Circular No. 905 — The lifting of interest ceilings upheld the parties' freedom of contract under Article 1306 of the New Civil Code, permitting contracting parties to establish such stipulations, clauses, terms, and conditions as they deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. P.D. No. 1684 and CB Circular No. 905 allow parties to stipulate freely regarding adjustments in interest rates, upward or downward.

• Unconscionable Interest Rates Remain Void — Despite the suspension of the Usury Law, stipulations imposing unconscionable, iniquitous, or excessive interest rates are void ab initio under Article 1409 of the Civil Code and cannot be ratified. The nullity of the usurious stipulation does not affect the lender's right to recover the principal or to foreclose on the mortgage; in place of the excessive interest, legal interest of 12% per annum applies, following Eastern Shipping Lines, Inc. vs. Court of Appeals.

• Doctrine Against Implied Repeals — Repeals by implication are not favored, as laws are presumed to be passed with deliberation and full knowledge of all existing laws on the subject. An implied repeal is predicated on a substantial conflict or repugnancy between the new and prior laws; absent an express repeal, a subsequent law cannot be construed as repealing a prior law unless an irreconcilable inconsistency and repugnancy exists.

• Direct Injury Test for Locus Standi — Even in public interest cases, a person who impugns the validity of a statute or governmental act must have a personal and substantial interest in the case such that he has sustained or will sustain direct injury. The status of an organization as a people's organization does not confer standing without a showing of particularized interest.

• Certiorari Does Not Lie Against Executive Acts — A writ of certiorari under Rule 65 is directed only against a tribunal, board, or officer exercising judicial or quasi-judicial functions. The Monetary Board performs executive functions in issuing circulars and regulations; certiorari does not lie against such acts.

• "Central Bank Circular No. 905 did not repeal nor in any way amend the Usury Law but simply suspended the latter's effectivity. The illegality of usury is wholly the creature of legislation. A Central Bank Circular cannot repeal a law. Only a law can repeal another law." — This passage, quoted from First Metro Investment Corp. vs. Este Del Sol Mountain Reserve, Inc., articulates the canonical formulation distinguishing suspension from repeal, which is the central legal proposition sustaining CB Circular No. 905's validity.

• "The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man." — Quoted from Castro vs. Tan, this passage defines the doctrinal limit on freedom of contract in interest rate stipulations, establishing that the lifting of ceilings does not authorize unconscionable rates.

• "P.D. No. 1684 and C.B. Circular No. 905 no more than allow contracting parties to stipulate freely regarding any subsequent adjustment in the interest rate that shall accrue on a loan or forbearance of money, goods or credits." — From PNB vs. Court of Appeals, this formulation clarifies the scope and effect of the deregulation of interest rates, framing it as an affirmation of contractual freedom rather than an abrogation of all limits.

• Medel vs. CA, 359 Phil. 820 (1998) — Controlling precedent holding that CB Circular No. 905 merely suspended the Usury Law's effectivity rather than repealing it; cited extensively for the proposition that a CB Circular cannot repeal a law.

• First Metro Investment Corp. vs. Este Del Sol Mountain Reserve, Inc., 420 Phil. 902 (2001) — Followed and cited for the same proposition that CB Circular No. 905 suspended rather than repealed the Usury Law, and that the nullity of a usurious stipulation does not affect the lender's right to recover the principal.

• PNB vs. Court of Appeals, G.R. No. 107569, November 8, 1994, 238 SCRA 20 — Followed; held that P.D. No. 1684 and CB Circular No. 905 merely allow contracting parties to stipulate freely on interest rate adjustments, and that unilateral escalation clauses imposing unconscionable rates may be invalidated.

• Eastern Shipping Lines, Inc. vs. Court of Appeals, G.R. No. 97412, July 12, 1994, 234 SCRA 78 — Landmark case cited for the guidelines on computing legal interest, particularly the 12% per annum rate applicable to loans or forbearance of money and the 6% rate for other obligations, applied here as the substitute rate when excessive interest is struck down.

• Castro vs. Tan, G.R. No. 168940, November 24, 2009, 605 SCRA 231 — Followed for the doctrine that unconscionable interest rates are immoral, unjust, and void, even if knowingly and voluntarily assumed.

• Kilosbayan, Inc. vs. Morato, 320 Phil. 171 (1995) — Applied on locus standi; held that the status of a people's organization does not confer standing without a showing of particularized interest.

• CREBA vs. ERC, G.R. No. 174697, July 8, 2010, 624 SCRA 556 — Applied for the determinants of transcendental importance: character of funds, disregard of constitutional or statutory prohibition, and lack of a more directly interested party.

• Prof. David vs. Pres. Macapagal-Arroyo, 522 Phil. 705 (2006) — Followed for the requirements before taxpayers, voters, concerned citizens, and legislators may be accorded standing to sue.

• Section 109, R.A. No. 265 — Empowered the CB-MB to fix maximum interest rates that banks may charge for loans and credit operations, within limits prescribed by the Usury Law. The Court noted this provision covered only loans extended by banks, distinguishing it from the broader scope of Section 1-a of Act No. 2655.

• Section 1-a, Act No. 2655 (Usury Law), as amended by P.D. No. 1684 — Authorized the Monetary Board to prescribe and change the maximum rate or rates of interest for all loans or forbearance of money, goods, or credits, including consumer loans and loans by pawnshops and finance companies. The Court held this provision was not impliedly repealed by R.A. No. 7653 and remains the statutory basis for the BSP-MB's authority.

• Section 1, CB Circular No. 905, Series of 1982 — Removed all ceilings on interest rates on loans or forbearance of any money, goods, or credits, providing that such rates shall not be subject to any ceiling prescribed under or pursuant to the Usury Law. The Court upheld this as a valid suspension of the Usury Law, not a repeal.

• Section 135, R.A. No. 7653 — Repealing clause providing that R.A. No. 265, as amended, and any rules or regulations issued pursuant thereto inconsistent with R.A. No. 7653 were repealed. The Court found no irreconcilable conflict with Section 1-a of Act No. 2655, and thus no implied repeal.

• Article 5, New Civil Code — Provides that acts executed against the provisions of mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity. Petitioners invoked this to argue CB Circular No. 905 was void; the Court rejected the argument on other grounds.

• Article 1306, New Civil Code — Permits contracting parties to establish such stipulations, clauses, terms, and conditions as they deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. The Court cited this as the basis for freedom of contract in interest rate stipulations following the lifting of ceilings.

• Article 1409, New Civil Code — Declares contracts with inexistent or void stipulations void ab initio, including those contrary to law, morals, good customs, public order, or public policy. The Court applied this to hold that stipulations imposing unconscionable interest are void and cannot be ratified.

• Section 1, Rule 65, 1997 Rules of Court — Provides that certiorari lies against a tribunal, board, or officer exercising judicial or quasi-judicial functions. The Court held this provision inapplicable because the Monetary Board's issuance of CB Circular No. 905 was an executive act.

Chief Justice Maria Lourdes P. A. Sereno, Associate Justice Antonio T. Carpio, Associate Justice Presbitero J. Velasco, Jr., Associate Justice Teresita J. Leonardo-De Castro, Associate Justice Arturo D. Brion (on leave), Associate Justice Diosdado M. Peralta, Associate Justice Lucas P. Bersamin, Associate Justice Mariano C. Del Castillo, Associate Justice Roberto A. Abad, Associate Justice Martin S. Villarama, Jr., Associate Justice Jose Portugal Perez, Associate Justice Jose Catral Mendoza, Associate Justice Estela M. Perlas-Bernabe, and Associate Justice Marvic Mario Victor F. Leonen. No separate concurring opinions were noted.