The Supreme Court strikes at interest rates – again!

What is deemed a reasonable rate of interest for loans? The question was considered – again –in the 2003 case of Corazon G. Ruiz vs. Court of Appeals, et al., G.R. No. 146942, April 22, 2003. Briefly, Ruiz borrowed on several occasions from Consuelo Torres in 1995. Ruiz executed four promissory notes in favor of Torres, the payment of which was secured by a real estate mortgage over a lot situated in Quezon City. The four unpaid promissory notes executed by Ruiz in favor of Torres are in the following amounts and maturity dates:

(1) P750,000, dated March 22, 1995 matured on April 21, 1996;

(2) P100,000, dated April 21, 1995 matured on Aug. 21, 1995;

(3) P100,000, dated May 23, 1995 matured on Nov. 23, 1995; and

(4) P100,000, dated Dec. 21, 1995 matured on March 1, 1996.

All the promissory notes uniformly stipulated a three percent per month, or 36 percent per annum, interest rates.

Ruiz failed to pay the promissory notes on their respective maturity dates. When Torres was about to foreclose the mortgage, Ruiz filed a case with the Regional Trial Court of Quezon City (RTC). After trial, the RTC rendered a judgment which, among others, upheld as valid the three percent per month interest rates stipulated in the promissory notes. On appeal, the Court of Appeals affirmed this portion of the RTC decision.

Among the issues that were brought up to the Supreme Court was the validity of the three percent per month interest rates agreed upon in the promissory notes in question.

The Supreme Court struck down as invalid the three percent monthly interest or 36 percent annual interest stipulated in the four promissory notes. It equitably reduced the interest rates to one percent per month or 12 percent per annum interest. In reducing the stipulated interest rates, the High Court noted that the reduced rates of interests are in accord with Medel vs. Court of Appeals (299 SCRA 481 [1998]), Garcia vs. Court Appeals (167 SCRA 815 [1988]), Bautista vs. Pilar Development Corp. (312 SCRA 611 [1999]), and the recent case of Spouses Solangon vs. Salazar (G.R. No. 125944, June 29, 2001). The High Court ruled that the 36 percent annual interest stipulated by Ruiz and Torres was still substantially greater than those upheld by it in Bautista and Garcia cases.

The Court invalidated a stipulated 5.5 percent per month or 66 percent per annum interest on a P500,000 loan in Medel and a six percent per month or 72 percent per annum interest on a P60,000 loan in Solangon for being excessive, iniquitous, unconscionable and exorbitant. In both cases, the Supreme Court reduced the interest rates to 12 percent per annum. It held that while the Usury Law has been suspended by Central Bank Circular No. 905, s. 1982, effective Jan. 1, 1983, and parties to a loan agreement have been given wide latitude to agree on any interest rate, still stipulated interest rates are illegal if they are unconscionable. According to the Court, there is nothing in the Circular which grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrhaging of their assets.

On the other hand, in Bautista vs. Pilar Development Corp., the Court upheld the validity of a 21 percent per annum interest on a P142,236.43 loan, and in Garcia vs. Court of Appeals, sustained the agreement of the parties to a 24 percent per annum interest on an P8,649,250 loan.

So this question lingers: what is the reasonable rate of interest that can be charged by private lenders for a loan? Note that in Bautista, the Court upheld the validity of a 21 percent per annum interest on a P142,236.43 loan. Likewise, in Garcia, the High Court sustained the agreement of the parties to a 24 percent per annum interest on an P8,649,250 loan. Yet, in Ruiz, the Supreme Court still found the 36 percent per annum interest rate stipulated by the parties to be substantially greater than those upheld by this Court in the two aforecited cases. Can a 2.5 percent monthly interest or 30 percent annual interest (which is between the 24 percent interest upheld in Garcia and the 36 percent interest struck down in Ruiz) be considered valid? What if instead of a private individual as a lender, the lender is a financial institution like a bank? Is a 24 percent interest rate upheld in Garcia considered valid? Or will the Supreme Court prescribe a lower or higher rate of interest for these institutional lenders? What if, unlike in the Ruiz and Medel cases, the loan is not secured by a real estate mortgage? Will there be a different rule? Well, no one knows the answers until the issues are brought up to the Supreme Court.

(The author is the co-managing partner and a senior partner of the Angara Abello Concepcion Regala & Cruz Law Offices or ACCRALAW. He can be contacted through [email protected])