Truth In Lending Act (Republic Act No. 3765) PDF

TRUTH IN LENDING ACT (Republic Act No. 3765) (1) Designation of the Law and Date of Approval - Numerically designated as REPUBLIC ACT NO. 3765, it was approved on June 22, 1963. - AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE CHARGES IN CONNECTION WITH EXTENSIONS OF CREDIT. (2)...

TRUTH IN LENDING ACT (Republic Act No. 3765) (1) Designation of the Law and Date of Approval - Numerically designated as REPUBLIC ACT NO. 3765, it was approved on June 22, 1963. - AN ACT TO REQUIRE THE DISCLOSURE OF FINANCE CHARGES IN CONNECTION WITH EXTENSIONS OF CREDIT. (2) Purpose of the Law The opening provision of the Law states: “Section 2. Declaration of Policy. It is hereby declared to be the policy of the State to protect its citizens from a 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.”  The minimum required information to be disclosed to the borrower. The following are the required information to be included in the disclosure form that are most relevant and useful to the borrower for purposes of informed decision making: a) Loan amount; b) Upfront charges/deductions collected; c) Net proceeds of the loan; d) Schedule of payments; e) EIR; and f) Conditional charges, if any. The credit provider may also expand the The importance of the EFFECTIVE INTEREST RATE (EIR) EIR is the rate that exactly discounts estimated future cash flows through the life of the loan to the net amount of loan proceeds. It is the rate that best measures the true cost of credit. The derived EIR formula includes all charges incident to the extension of credit. The formula used for the EIR calculation models. The BSP adopts the universally accepted EIR formula of: Annual Effective Interest Rate (EIR) = (1 + i)ⁿ - 1 Where: i = periodic interest rate n = number of periods in a year The term “periodic” in “periodic interest rate” refers to the time between installments (daily, weekly, semi-monthly, monthly, etc.), while the “number of periods in a year” will depend on the mode of payment or payment term of the loan (daily, weekly, semi-monthly, monthly, etc.). Upfront charges and grace period have a material impact in the computation of the EIR. As such, Internal Rate of Return (IRR) of future estimated cash flows over the term of the loan should be determined to get the periodic interest rate. The nominal rate, which is the contractual rate, shall be the main basis for The charges included in the EIR computation a) Interest; b) Service charge/processing fees; and c) Other charges/fees incidental to the extension of credit (e.g. documentary stamps, notarial fees, appraiser’s fee, etc.) Imposable charges/fees should be identified and clearly explained by the entities to their clients. Fees incidental to the extension of credit are those that are collected exclusively because of the loan. As a general rule, taxes should be borne by the credit providing entity and should not be passed on to consumers. In case any of these are paid by the borrower, these should be indicated in the Disclosure Statement and included in the computation of EIR. Further, owing to the independent benefits an insurance coverage brings to the client and his/her heirs, even if offered side by side with a loan, premiums should not be considered in the EIR computation. The terms and conditions of the insurance coverage should, however, be clearly explained to the borrower. More so, savings is a separate product/service with its own benefit and value Entities are not allowed to charge add-on interest to the principal. Add-on interest and straight-line methods are prohibited. Interest and service charge directly attributable to the granting of credit shall be amortized using the effective interest method. The entity is allowed to deduct advanced interest on the date of the loan grant. There templates that financial institutions can use that will automatically reflect the schedule of amortization. The EIR calculation models as illustrated in Memo No. M-2011-040, are mere guides for financial institutions to demonstrate the underlying principles of discounted cash flow analysis which is the basis of EIR calculation. The entity would have a unique calculation depending on its specific loan terms. It is encouraged to develop a program to automatically calculate EIR for a given loan. What are the sanctions in case of non-compliance with the required disclosure statement? Non-compliance by BSP regulated entities of the required disclosures shall be covered by sanctions provided under Section 6 of R.A. No. 3765 (Truth in Lending Act). Additionally, non-compliance with the MORB provisions shall be covered by Sections 36 and 37 of R.A. No. 7653 (New Central Bank Act). Similar sanctions are likewise provided by other regulators on their regulated entities “Section 6. (a) Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of this Act or any regulation issued thereunder shall be liable to such person 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. Action to recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. In any action under this subsection in which any person is entitled to a recovery, the creditor shall be liable for reasonable attorney's fees and court costs  (b) Except as specified in subsection (a) of this section, nothing contained in this Act or any regulation contained in this Act or any regulation thereunder shall affect the validity or enforceability of any contract or transactions. (c) Any person who willfully violates any provision of this Act or any regulation issued thereunder shall be fined by not less than P1,00 or more than P5,000 or imprisonment for not less than 6 months, nor more than one year or both. (d) No punishment or penalty provided by this Act shall apply to the Philippine Government or any agency or any political subdivision thereof. (e) A final judgment hereafter rendered in any criminal proceeding under this Act to the effect that a defendant has willfully violated this Act shall be prima facie evidence against such defendant in an action or proceeding brought by any other party against such defendant under this Act as to all matters respecting which said judgment would be an estoppel as between the parties thereto.