Harmful

The road to hell, according to an old Persian saying, is paved with good intentions.

When the Department of Education issued an order implementing a net take-home pay of P5,000 for schoolteachers, it had the best of intentions. Some schoolteachers incur such unmanageable debt they end up with no money on payday.

The DepEd wants to make sure they are left with at least P5,000 in their payroll accounts. That sounds good at first blush. But it will probably cause more harm to the teachers by raising the risks on their borrowing (therefore raising interest rates). For debts already incurred on the premise of automatic payroll deductions, the limit on debt servicing might be outright illegal.

An analogy here is our policy on automatic allocation for servicing our national debt. If we did not have such a policy, we would have been charged a crippling interest rate commensurate to the risks surrounding repayment. Financing government operations would be very expensive. In the worst imaginable case, the costs of financing might be so crippling we are forced into default.

To continue the analogy, private lending institutions entered into a memorandum of agreement (MOA) with the DepEd to help ease the financing needs of our teachers. That MOA provided for Automatic Payroll Deductions based on the minimum monthly take-home pay of the teacher-borrowers. Interest rates were computed on the basis of the lower risks of automatic payroll deductions.

Furthermore, the MOA between DepEd and the banks explicitly provided for a “First In-First Served” queuing system in managing the order of salary deductions. That means that the first loan taken will be the first paid. That protects the claim of the lender in the event deductions cannot be made due to insufficient take-home pay.

Item 3 of DepEd Order No. 5 is particularly problematic in this regard. That item reads: “GSIS and Home Development Mutual Fund (HDMF) shall be accorded first order of preference in deductions from their salaries.” That item further states: “This order of preference shall apply to both existing and new obligations.”

The application of the order to existing obligations is most problematic.

Bankers argue that the provision constitutes: a) Breach of DepEd’s contractual undertaking to private lending institutions, which is a legal obligation on their part; b) Impairment of the obligations of contracts; and, c) Violation of the prospective application of law or policy.

The legal issue here involves something more than a mere nuance in legal interpretation. It is clear to all lawyers that a special law or legislative act or order or circular cannot override, change, amend or repeal a constitutional provision, especially an executory provision such as the Bill of Rights. Our Bill of Rights protects against impairment of contracts.

On compelling legal grounds, the banks that lent money to schoolteachers in good faith may take the matter to court. The DepEd is vulnerable on several counts.

But even if the banks do not go to court out of respect for a venerable government institution, there are several actions they may take in response to the DepEd order. Those actions will be harmful to the teachers.

In response to the changes in the queuing for salary deductions, the banks will have to charge accrual of additional interests and financing charges. This will increase the financing burden of teachers to acquired loans in a more benevolent interest rate context.

The beneficial effect to teachers of the old automatic payroll deductions on a strictly First In-First Served basis will be negated. It will now be more difficult and more expensive for teachers to borrow from the banks when emergencies arise.

Although only a small minority of teachers mishandles their finances, all teachers will now receive the equivalent of a credit ratings downgrade. They will be subjected to the inconvenience of a more rigorous credit investigation. It will not only be more expensive but also require more time to obtain credit.

With the automatic payroll deduction now effectively negated by the recent DepEd order, teachers will now have to individually apply for loans and physically settle their monthly obligations. That will distract them from their work as educators.

The old system worked well for the teachers. It brought down their risks as borrowers and enabled them to borrow conveniently by using the MOA between the DepEd and the banks. The new order torpedoes the existing MOA. It will make life hell for the teachers.

The DepEd, through this order, was trying to address a problem that afflicts only a small minority of teachers. Now the majority of teachers, those who prudently manage their personal finances, will be adversely affected by the DepEd order. It is like addressing rat infestation by burning down the whole house.

The old queuing system worked perfectly well in regulating those with a propensity to borrow more than they can afford. Banks who find the queue in the payroll account of an individual borrower too long such that the borrowing cannot be serviced immediately could decline lending any further.

The private lending institutions also have rights. Those rights deserve equal protection. The DepEd order does not observe these. It has broken the goodwill that took years to build between the agency and the banks, goodwill that served the teachers above all else.

This order has diminished the transparency and consistency of the lending environment for small borrowers such as the teachers. Since this order, non-performing loans of small borrowers sharply increased.

The DepEd ought to take this order back to the drawing board.