Manual of Regulations for Banks: Stipulation of Interests

Sec. X305 Interest and Other Charges The rate of interest, including commissions,
premiums, fees and other charges, on any loan, or forbearance of any money, goods or
credits regardless of maturity and whether secured or unsecured shall not be subject to any
regulatory ceiling.

X305.1 Rate of interest in the absence of stipulation. The rate of interest for the loan or
forbearance of any money, goods or credits and the rate allowed in judgments, in the
absence of expressed contract as to such rate of interest, shall be twelve percent (12%) per
annum.

X305.2 Escalation clause; when allowable. Parties to an agreement pertaining to a loan or

forbearance of money, goods or credits may stipulate that the rate of interest agreed upon
may be increased in the event that the applicable maximum rate of interest is increased by
the Monetary Board: Provided, That such stipulation shall be valid only if there is also a
stipulation in the agreement that the rate of interest agreed upon shall be reduced in the
event that the applicable maximum rate of interest is reduced by law or by the Monetary
Board: Provided, further, That the adjustment in the rate of interest agreed upon shall take
effect on or after the effectivity of the increase or decrease in the maximum rate of interest.

ESCALATION CLAUSE

It is a stipulation whereby the rate of interest agreed upon may be increased

Parties to an agreement pertaining to a loan or forbearance of money, goods, or credits may

stipulate that the rate of interest agreed upon may be increased in the event that the
applicable maximum rate of interest is increased by the Monetary Board.

Provided, that there is also a stipulation in the agreement that the ROI agreed upon shall
be reduced in the event that the applicable maximum ROI is reduced by LAW r the
Monetary Board.

Usury law Sec 7-a similar provision

Escalation clause are not void per se. But one which grants creditor an unbridled right to
adjust the interest independently and upwardly, completely depriving the debtor of the
right to assent to an important modification in the agreement is void.

Requisites to be valid

There can be an increase in interest if increased by law or by Monetary Board

It must include a provision for reduction of the stipulated interest in the event that the
applicable maximum ROI is reduced by law or by Monetary Board. (De-escalation clause)

The purpose of law in mandating the inclusion of de-escalation clause is to prevent one-
sidedness in favor of the lender which is considered repugnant to the Principle of Mutuality
of Contracts.

Art 1308 of the Civil Code. The contract must bind both contracting parties; its validity or
compliance cannot be left to the will of one of them.

ANNULMENT OF ESCALATION CLAUSE

In case the escalation clause is annulled, the principal amount of the loan is subject to the
original or stipulated rate of interest. Upon maturity, the amount due is subject to legal
interest at the rate of 12% per annum.

Exception:

Even if there is no de-escalation clause, the escalation clause remains valid if the creditor
unilaterally and actually decreased the interest charges whenever the rate of interest is
reduced by law or the Monetary Board.

Llorin v CA GR. No. 103592 (1993)

Promissory note contains an escalation clause, however, no correlative de-escalation clause

was provided.

Petitioner admitted that respondent APEX unilaterally and actually decreased the interest
charges it imposed on the petitioner on three occasions.

The escalation clause remained VALID.

Cessante ratione legis cessat ipsa lex - the reason for a law ceasing, the law itself ceases.

UNILATERAL INCREASE OF RATES

The unilateral determination and imposition of increased rates are void for being violative
of Principle of Mutuality of Contracts. An agreement to be binding between parties to a
contract must be premised on two principles:

1. That obligations from contract have the force of law between contracting parties
2. There must be mutuality between the parties

Example: VOID
Provision in a PN authorizing a bank to increase, decrease or change from time to time the
rate of interest or bank charges without advance notice, where the monthly adjustment of
interest rate is left to the will of the bank.

Central Bank Circular No. 905

Section 1. The rate of interest, including commissions, premiums, fees and other charges, on
a loan or forbearance of any money, goods, or credits, regardless of maturity date and
whether secured or unsecured, that may be charged or collected by any person, whether
natural or judicial, shall not be subject to any ceiling prescribed under or pursuant
to the Usury Law, as amended.

Lifted ceiling interest rates under Usury Law.

However, lenders are not granted carte blanche authority to rate interest rates to enslave
their borrowers.

INIQUITOUS, UNCONSCIONABLE AND EXORBITANT INTERESTS

Are void as if no express contract thereon.

Supreme Court consistently held that Usury has been legally non-existent and that interest
can now be charged as lender and borrower may agree upon.

CB Circular No. 905 (no ceiling rates)

Iniquitous, Unconscionable and Exorbitant Interests must be equitably reduced on the

ground that it is against public policy or morals to charge excessively.

Supreme Court Rulings

Medel v CA

Interest at 5.5% per month or 66% per annum is unconscionable, contra bonos mores and
void. Court shall reduce equitably.

New Sampaguita Builders v PNB

Although interest ranging from 26% to 35% are not usurious (Usury Law nonexistent), the
same must be equitably reduced.

EFFECT OF VOID INTEREST

It is as if there was no express contract thereon

Courts may reduce the interest rate as reason and equity demand.

Pryce Corp. v PAGCOR

Obligations arising from contracts have the force of law between the contracting parties and
should be complied with in good faith. If the terms of the contract clearly express the
intention of the contracting parties, the literal meaning of the stipulations would be
controlling. The court has to enforce the contractual stipulations in the manner that they
have been agreed for as long as they are not unconscionable or contrary to morals and
public policy.