BAP backs tighter rule on loan interest

BAP backs tighter rule on loan interest
 
Published : Saturday, August 13, 2011 00:00 Article Views : 513 Written by : Lailany P. Gomez, Reporter
 
THE Bankers’ Association of the Philippines (BAP) supports the central bank’s move to tighten the rules of the Truth in Lending Act.
“That is good. I think that’s been happening already in many ways. The only thing that has to be changed, which is fairly easy, is to change the communication,” Aurelio Montinola 3rd, BAP president, said.

According to the Bangko Sentral ng Pilipinas, the use of so-called flat interest rates show contractual rates for loans that substantially differ from the effective interest rate.

The BSP also observed hidden charges and deliberate quoting of lower interest rates with higher up-front charges to enhance loan product marketability. As a result, the public may be misinformed or misguided about the true cost of their borrowings.

“Because what’s happening there, the people know that the interest rates are always based on the remaining principal. That’s been the industry practice for the longest time. What’s happening is that when you communicate to show it’s a little bit lower they’re using the add-on,” Montinola, who is also BPI president, said.

Under the new rules, banks are required to charge interest on the outstanding balance only of a loan at the beginning of an interest period.

This rule “effectively prohibits” charging “flat” interest rates and other methods that mislead lower contractual interest rate than the EIR.

The EIR is defined in accordance with the Philippine Accounting Standards as the rate that exactly discounts estimated future cash flows through the life of the loan to the net amount of loan proceeds.

This EIR, whether quoted annually or monthly, shall be the only rate quoted in all loan documents including the marketing materials, the BSP said.

The new rules likewise define finance charges to include interest, fees, service charges, discounts, and such other charges incident to the extension of credit and that require a uniform way of disclosing such information.

The new transparency rule will take effect on July 1, 2012 or a year after publication to allow mounting of a comprehensive information campaign and facilitate smooth implementation.

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