Truth in Lending Act

What is the Truth in Lending Act (Republic Act No. 3765)?

TILA is a law which requires creditors to make a full disclosure of the credit cost to the person to whom the credit is extended.

What is the policy of the State in passing the law?

To protect the people from lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed use of credit to the detriment of the national economy

What entity shall take charge of implementing the Truth in Lending Act?

The Bangko Sentral ng Pilipinas through its Monetary Board

What are the PURPOSES of the TILA

1.  To protect debtors from the effects of misrepresentation and concealment;

2.  To permit them to fully appreciate and evaluate the true cost of their borrowing.

Who are covered under the Truth in Lending Act?

The law covers any CREDITOR, which is defined as any person engaged in the business of extending credit (including any person who as a regular business practice make loans or sells or rents property or services on a time, credit, or installment basis, either as principal or as agent) who requires as an incident to the extension of credit, the payment of a finance charge.

What are the obligations of the creditor?

A creditor or lender shall furnish the debtor or borrower, prior to the consummation/perfection of the sale or loan, written statement containing the following:

1.  cash price or amount of money received by the debtor;

2.  amount credited as down payment;

3   balance of the cash price;

4.  non-finance charges advanced by the creditor or lender;

5.  total amount to be financed;

6.  finance charges in pesos;

7.  percentage of finance charge to the total amount to be financed

What transactions are covered by the TILA?

1. Loans of money;

2. Sale on installment of property and allied transactions.

Credit transactions within the scope of TILA

For the purpose of Truth in Lending Act, what does the term credit include?

The term credit includes and/or means:

1. Any loan, mortgage, deed of trust, advance or discount;

2. Conditional sales contract;

3. Any contract to sell, or sale or contract of sale of property of services, either for present or future delivery, under which part or all of the price is payable subsequent to the making of such sale or contract;

4. Any rental-purchase contract;

5. Any contract or arrangement for the hire, bailment or leasing of property;

6. Any option, demand, lien, pledge or other claim against or for delivery of property or money;

7. Any purchase or other acquisition of, or any credit upon the security of, any obligation or claim arising out of any of the foregoing and any transaction or series of transactions having a similar purpose or effect.

Credit transactions outside the scope of TILA

1. Those that do not involve the payment of any finance charge

2. Those which the debtor is the one specifying a definite and fixed set of credit terms such as bank deposits, insurance contracts, sale of bonds, etc.

Finance Charges – amounts to be paid by the debtor incident to the extension of credit such as interest, discounts, collection fees, credit investigation fees and attorney’s fees

Non-finance Charges – amounts advanced by the creditor for items normally associated with the ownership of property of the availment of the services purchased which are not incident to the extension of credit. For example, when a debtor purchases a car on credit, the creditor may advance the insurance premium as well as the registration fee for the account of the debtor.

What are the consequences of non-compliance with obligation?

1. Non-compliance with law does not affect the validity or enforceability of the contract itself.

2. Would authorize the debtor to recover any interest payment made.

3. Makes the creditor liable for double finance charges plus attorney’s fees.

What are the remedies of debtor in case of violation?

1.  Debtor could refuse payment of finance charges

2. If charges have already been paid, he could sue to recover the penalty prescribed by law, i.e., P100 or an amount equal to twice the finance charge required by the creditor in connection with such transaction, whichever is greater, except that such penalty shall not exceed P2,000.00 on any credit transaction.

3. Debtor may initiate criminal proceedings against the creditor.

Prescription

Civil action must be brought within 1 year from the date of the occurrence of violation

What are the penalties in case of violation?

1. Any creditor who violates the law is liable in the amount of P100 or in an amount equal to twice the finance charged required by such creditor in connection with such transaction, whichever is the greater, except that such liability shall not exceed P2,000 on any credit transaction. The action must be brought within one year from the date of the occurrence of the violation.

2. The creditor is also liable for reasonable attorney’s fees and court costs as determined by the court.

3. Any person who willfully violates any provision of this law or any regulation issued thereunder shall be fined by not less than P1,00 or more than P5,000 or imprisonment of not less than 6 months, nor more than one year or both.

However, no punishment or penalty under this law shall apply to the Philippine Government or any agency or any political subdivision thereof.

Are banking institutions covered by the disclo­sure requirement of the Truth in Lending Act?

Yes. Banks and non-bank financial intermediaries authorized to engage in quasi-banking functions are required to strictly adhere to the provisions of the "Truth in Lending Act" and shall make the true and effective cost of borrowing an integral part of every loan contract." However, this disclosure require­ment is not applicable to bank deposits and insurance contracts.

SC RULING:

While banks are authorized by Central Bank Circular No. 504 to collect handling charges on loans, the same Circular requires banks to adhere strictly to the provisions of the Truth in Lending Act such that if the promissory note signed by the borrower does not contain a stipulation on the payment of handling charges, the bank cannot charge and collect such handling charges from the borrower [Consolidated Bank vs. CA, 246 SCRA 193, (1995)]

BAR QUESTION:

Q: Dana Gianina purchased on a 36-month install­ment basis the latest model of the Nissan Sentra sedan car from the Jobel Cars, Inc. In addition to the advertised selling price, the latter imposed finance charges consisting of inter­ests, fees and service charges. It did not, however, submit to Dana a written statement setting forth therein the information required by the Truth in Lending Act (RA No. 3765). Neverthe­less, the conditional deed of sale which the parties executed mentioned that the total amount indicated therein included such finance charges. 

(a) Has there been substantial compli­ance of the aforesaid act? 

(b) If your answer in the foregoing question is in the negative, what is the effect of the violation of the contract? 

(c) In the event of violation of the Act, what remedies may be availed of by Dana? (BAR Q.-1991).

Answer:

A. There is no substantial compliance of the law be­cause the disclosure requirements must be made in writing speci­fying the matters mentioned in Sec. 4, RA No. 3765. The amount reflected in the deed of sale is never considered the statement required under that law.

B. Non-compliance of that written disclosure does not however affect the validity of sale.

C. Because of that violation Dana may avail the following remedies: (1) A civil action may be instituted by Dana against Jobel Cars Inc. for its failure to make a disclosure and such car corporation is liable in the amount of P100.00 or in an amount equal to twice the finance - charge required by the creditor, whichever is greater, but the liability should not be in excess of P2,000.00. Dana may also collect attorney's fees and cost. (2) A criminal action may be instituted. In case of conviction, the creditor shall be fined not less than P1,000.00 nor more than P5,000.00 or imprisoned for not less than six months nor more than one year or both.