BSP warns lenders vs flat-interest rates

BSP warns lenders vs flat-interest rates

SUNDAY, 07 AUGUST 2011 18:59     JUN VALLECERA / REPORTER  

THE Bangko Sentral ng Pilipinas (BSP) is scandalized that quite a number of credit providers still get away with interest extractions that have since been identified as irregular when borrowers are charged with so-called flat interest rates for loans and credit accommodations.
The seven-member Monetary Board, the policy-making body at BSP, has passed a resolution mandating the banks initially to make it clear to clients that loan charges are based on the effective interest rate rather than on a flat-rate charge that gives the impression a particular loan was cheaper than it actually was.

The practice of charging flat-interest rates or one that continues to charge borrowers the full interest on a loan no matter that repayments have been made on the original amount has since been banned and still the practice persists.

While the mandate covers only the banks at the initial stages, the ban on flat-interest charges should cover all credit providers eventually.

Deputy BSP Gov. Nestor A. Espenilla Jr. stressed this point in a group interview on Friday, saying current lending practices do not tell the whole unvarnished truth and often mislead the more unsophisticated borrowers.

At present, borrowers are often told of interest charges computed on the basis of a flat-charge method which effectively doubles the amount actually charged on the borrower.

Other credit providers, however, charge interest based on the outstanding balance. These lenders, Espenilla said, have the respect of the monetary authorities since they do not prey on the unsophistication of their borrowers.

He said Monetary Board Resolution 1018 dated July 7, 2011 approved the updated rules implementing the Truth in Lending Act aimed at enhancing loan-price transparency and improving disclosure practices for better consumer protection down the line.

Under the resolution, there should only be one method of computing interest charges which must be based on the outstanding loan balance rather than on the original loan amount.

Other more advanced jurisdictions have since banned the use of flat-rate charges on credit but local-credit providers have persisted by presenting loan rates in a manner that make it look cheaper than they actually are.

So-called voodoo math by banks and other credit providers often presents hapless borrowers with monthly interest charges that on the surface, seem cheaper than the competition that extends the same credit on the basis of the outstanding balance.

What the unsophisticated often do not appreciate is that they pay more with flat-interest charges but do not realize this because regulations did not fix the problem of how such things should be computed and presented in the past.

In about a year, however, such charges will no longer be allowed and punitive sanctions await those that break it, Espenilla said.

“Right now, there is an adjustment and training period. Credit providers should now start pilot testing and explaining to their customers the changes. This is a long-standing practice so people need to prepare,” he said.

He also stressed it is not just the banks that must refrain from flat-rate charging but all other lending units including financing companies and even pawnshops.

“We will also request the Securities and Exchange Commission and the Insurance Commission as well to issue the same set of rules for their regulated entities. The idea is all credit providers, whether bank or non-banks, will be covered,” Espenilla said.

He also said there are monetary-penalty provisions spelled out in the Truth In Lending Act and that the BSP may impose administrative sanctions against violators down the line such as suspending one’s capacity to extend credit guarantees as these and similar measures are finalized.

“We are not trying to emphasize the fear factor. We are encouraging banks and non-banks to do it because it is the right thing to do,” Espenilla said.

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