Ban on unfair debt collection Practices of Financing ang Lending Companies and Lending Companies

The Securities and Exchange Commission has just issued new rules prohibiting several controversial abusive means to collect debts.

As access to credit increases, so do the amount of controversies associated with the collection of debts. In recent months, the Securities and Exchange Commission (SEC) has reported numerous complaints against financing and lending companies, as well as their outsourced collection agents, who allegedly had been employing harassing tactics against debtors. Some of these tactics include using barangay officials or men in uniform to force a borrower to pay, calling the debtor’s employer to smear their name, bombarding the debtor with text messages, and making false representations such as claiming that a hold departure order has been issued against the debtor.

As far back as 2004, the Bangko Sentral ng Pilipinas had already issued Circular No. 454, which among others, prohibits unfair collection practices by banks, subsidiary/affiliate credit card companies and their agents (such as collection agencies). Financing and lending companies though are under the supervision and regulation of the SEC[1]. In response to these complaints, the SEC has now issued its own regulatory circular, Memorandum Circular No. 18 (Series of 2019), which prohibits several unfair debt collection practices of financing and lending companies.

What is prohibited?

Financing and lending companies, as well as their third-party service providers, are allowed to exert “reasonable and legally permissible means”[2] to collect on debts, provided they observe “good faith and reasonable conduct and refrain from engaging in unscrupulous and untoward acts.”[3] To ensure that the covered companies adhere to this limitation, the SEC has enumerated which activities constitute prohibited unfair collection practices:

• Notwithstanding the borrower’s consent, contacting persons in the borrower’s contact list other than the guarantors or co-makers of the loan,
• Use or threat of use of violence or other criminal means to harm the physical person, reputation, or property of any person
• Use of threats to take any action that cannot be legally taken
• Use of obscenities, insults, or profane language to abuse the borrower and/or which use constitutes a criminal act or offense under applicable laws
• Use of false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a borrower
• Communicating or threatening to communicate to any person loan information, which is known or which should be known to be false. The failure to communicate that the debt is being disputed is deemed as included in this prohibition.
• Making contact at unreasonable/inconvenient times or hours (i.e., before 6am or after 10pm), unless the account is past due for more than 15 days, or if the borrower had previously consented to be contacted at such hours.

Privacy and Confidentiality

The SEC Memorandum Circular refers to the applicability of the Data Privacy Act (among other laws) and imposes a general rule that financing and lending companies, for purposes of collection, shall keep strictly confidential the data on the borrower. There are however prescribed exceptions in Section 2 of the Circular when the companies may disclose such information:

• Where the disclosure of information is with the written or recorded consent of the borrower
• The release, submission or exchange of customer information with other financial institutions, credit information bureaus, lenders (potential or actual), their agents and/or their representatives
• Upon orders of a court of competent jurisdiction or any government office or agency authorized by law
• Disclosures to agents of the companies such as collection agencies and counsels, in order to enforce the companies’ rights against the borrower
• Disclosures to third party service providers solely for the purpose of assisting or rendering services to the companies in the administration of its lending or financing business
• Disclosure to third parties such as insurance companies, solely for the purpose of insuring the companies against borrower default or other credit loss, and the borrower from fraud or unauthorized charges.

Penalties

The penalties imposed on financing and lending companies are prescribed in Section 5, and are potentially steeped. Fines are imposed on the first and second offenses, but a third offense may lead, upon the discretion of the SEC, to the temporary suspension of lending and financing activities, if not the revocation of the license to operate of the company.

[1] See Sec. 11, Republic Act No. 9474 and Sec. 4, Republic Act No. 5980, as amended by Republic Act No. 8556.

[2] Sec. 1, SEC M.C. No. 18 (2019)

[3] Sec. 1, SEC M.C. No. 18 (2019)