Frequently Asked Questions (FAQs) on SEC Memorandum Circular No. 3, Series of 2022, Implementing BSP Circular No. 1133, Series of 2021

2022 SEC NOTICE FREQUENTLY ASKED QUESTIONS (FAQs) ON SEC MEMORANDUM CIR CU LAR NO. 3, SERIES OF 2022, IMPLEMENTING BSP CIR CU LAR NO. 1133, SERIES OF 2021 To help facilitate the enforcement of Securities and Exchange Commission Memorandum Circular No. 3, Series of 2022 (SEC MC 3), which provides for the Implementation of Bangko Sentral ng Pilipinas (BSP) Circular No. 1133, Series of 2021 on the Ceiling/s on Interest Rates and Other Fees Charged by Lending Companies (LCs), Financing Companies (FCs), and their Online Lending Platforms (OLPs), the answers to the following FAQs are hereby issued: I. Overview of BSP Circular No. 1133 and SEC MC 3 1. What is the difference between BSP Circular No. 1133 and SEC MC 3? BSP Circular No. 1133 SEC MC 3 Prescribes the ceilings for interest rates and fees for specific loans offered by lending companies, financing companies, and their OLPs Prescribes the rules and regulations in implementing the provisions of the BSP Circular No. 1133 II. Coverage of SEC MC 3 1. What are the institutions covered by the SEC MC 3? SEC MC 3 covers LCs, FCs, and their OLPs. OLPs refer to mobile lending applications, websites, and other financial technology-enabled programs or systems where the services and products of FCs and LCs are made available. 2. What are the loans covered by the ceilings under SEC MC 3? The loans covered by SEC MC 3 are those loans that satisfy all of the following criteria: a. Unsecured, general-purpose loans offered by FCs, LCs, and their OLPs; b. That do not exceed the amount of P10,000; c. With loan tenor of up to four (4) months; and d. That are entered into, restructured, or renewed beginning 03 March 2022, the date of effectivity of SEC MC 3. It should be stressed that all criteria should be satisfied concurrently for a loan to be subjected to the caps. If one of the four components is not satisfied, the caps will not apply to the loan product. It shall cover both traditional loans and loans obtained from OLPs, as long as the loan falls under and satisfies all of the above-mentioned criteria. For this purpose, loans are considered on a per contract basis. 3. What is the structure of the cap/s on interest rates and fees on loans offered by LCs, FCs, and their OLPs? The caps, which are set to strike a balance between protecting consumers and allowing LCs and FCs to price in credit risks and remain viable, have the following structure: Interest Rate/Penalties/ Total Cost Ceiling/Cap 1 Nominal Interest Rate Six percent (6%) per month (~0.2 percent per day) 2 Effective Interest Rate (EIR) Fifteen percent (15%) per month (~0.5 percent per day), which shall include the nominal interest rate along with all other applicable fees and charges ( i.e. , processing fees, service fees, notarial fees, handling fees and verification fees, among others), but excluding fees and penalties for late payment or non-payment 3 Penalties for Late Payment or Non-Payment Five percent (5%) per month on outstanding scheduled amount due 4 Total Cost One hundred percent (100%) of total amount borrowed (applying to all interest, other fees and charges, and penalties) regardless of time the loan has been outstanding III. Imposition of the Cap on Interest Rates and Fees/Charges 1. What prompted the BSP and SEC to study the imposition of caps on interest rates and fees/charges on loans offered by LCs, FCs, and their OLPs? The SEC, in response to the numerous complaints relating to predatory lending practices, especially with consumer and payday loans offered by LCs and FCs, requested that the BSP consider prescribing interest rate ceilings for loans extended by LCs, FCs, and their OLPs. As it is under the BSP's power to prescribe such ceilings, 1 only if warranted by prevailing economic and social conditions, a study was conducted to determine if such a policy should be implemented. Prior to the pandemic, the SEC observed that some LCs and FCs had been charging high borrowing rates for payday and personal loans. For LCs, in particular, the highest nominal interest rate recorded, increased significantly from 60 percent per annum (5 percent per month) for the period 2014-2015 to 360 percent per annum (30 percent per month) for the period 2016-2019. In 2020, these rates rose further to 504 percent per annum (42 percent per month), based on a survey conducted by the BSP and SEC. The SEC also received a large number of complaints (4,363 letters) regarding high interest rates and penalties imposed by FCs and LCs during the period from January 2020 to 21 May 2021, which coincided with the COVID-19 pandemic. These complaints, along with the observed increase in borrowing rates charged by some LCs and FCs, prompted the SEC to seek the BSP's help in prescribing interest rate ceilings on loans offered by LCs and FCs. 2. Is the BSP authorized to set a cap on interest rates and other fees/charges on loans offered by LCs, FCs and their OLPs? Yes, the BSP is authorized to set a cap on interest rates and other fees/charges on loans offered by LCs, FCs, and their OLPs in view of Republic Act (RA) No. 9474, or the Lending Company Regulation Act of 2007 (LCRA), and RA No. 8556, or the Financing Company Act of 1998 (FCA). Section 7 of the LCRA and Section 5 of the FCA empower the Monetary Board of the BSP to prescribe maximum interest rates that could be charged by LCs and FCs, in consultation with the SEC and the industry, if warranted by prevailing economic and social conditions. The BSP, in particular, handles the policy formulation of the ceilings on interest rates and other fees/charges while the enforcement and implementation of such policy is under the SEC's jurisdiction. 3. What is the responsibility of the SEC relative to this cap? The SEC shall be responsible for ensuring compliance by FCs, LCs, and their OLPs with the provisions of BSP Circular No. 1133 and SEC MC 3, and for imposing the appropriate penalties and/or taking the necessary actions for violations thereof. 4. What was the BSP's approach in designing the structure of the interest rate ceilings? In determining the appropriate interest rate cap for LCs and FCs, the BSP and SEC considered a balanced approach on the possible impact to the borrowers and lenders. On the borrower's side, the policy aims to protect borrowers of short-term, small-value general-purpose loans from predatory lending, excessive charges, and the possibility of falling into a debt trap, in view of the challenging economic environment brought about by the global health crisis. On the lender's side, the goal is to provide an enabling environment where the businesses of LCs, FCs, and their OLPs will continue to be viable. To provide the basis and evidence on the appropriate design and structure on the proposed interest rate cap, the following pieces of information were carefully assessed: cross-country experiences relating to interest rate caps; data on comparative interest rates for unsecured loans offered by different lending institutions in the country; data from SEC and BSP surveys related to lending by LCs/FCs; feedback/proposals from industry consultations; studies and research conducted by multilateral institutions [ e.g. , the World Bank, International Monetary Fund (IMF), and Asian Development Bank (ADB)]; and use of SEC and BSP statistics. 5. What were the economic and social factors that the BSP considered in deciding to impose an interest rate cap on loans extended by LCs, FCs, and their OLPs? The BSP recognizes that the economic disruption brought about by the COVID-19 pandemic could dampen the debt-servicing capacity and credit rating of borrowers amid the potential losses in labor income due to job displacements. With the absence of a steady source of income, alongside the decline in borrower's credit rating, borrowers could tend to depend more on less formal or unregulated financial service providers like payday lenders. 2 In the case of the Philippines, borrowers take advantage of payday loans being offered by LCs, FCs, and their OLPs that are outside the regulatory perimeter of the BSP, some of whom at present can charge predatory lending rates. Further, the BSP is of the view that, due to the pandemic, borrowers could tend to resort to negative coping strategies such as distress sale of assets and taking out of loans from informal moneylenders, sometimes at exploitative interest rates, to pay for their daily essential needs. 3 The deterioration in the debt-servicing capacity of households due to the loss of income during the pandemic could easily make small loans balloon very significantly in a short amount of time, which could further lead some borrowers to resort to taking out another loan, thereby leading to a significant buildup in household indebtedness. 6. What were the main considerations of the BSP in prescribing the aforementioned interest rate ceilings? The following are the main considerations of the BSP in prescribing the aforementioned interest rate ceilings: The prescribed interest rate ceilings provide balance where only those firms with excessive rates will be affected by the cap and majority of the industry would still be able to operate at a reasonable rate, while protecting vulnerable borrowers from excessive interest rates. The prescribed rates enable the continuity of access to credit of this segment of population, since these also consider viability of the business operations of the concerned lenders. The prescribed caps are commensurate with the perceived riskiness of the loan product offered by LCs, FCs and their OLPs, which cater to the low-income, high-risk segment of the market. 7. Is the prescription of the cap a permanent policy by the BSP? No, the prescription of the cap is not a permanent policy. It is time-bound (based on prevailing economic conditions) and shall be subject to periodic review by the BSP. The prescribed ceilings on the interest rates and fees are targeted and temporary, aimed at protecting low-income borrowers availing of short-term, small-value general-purpose loans from excessive charges due to the pandemic. The BSP will periodically review the policy in consultation with the SEC and the industry, within one (1) year from 03 March 2022, the effectivity date of SEC MC 3, and every year thereafter. As part of its review, the BSP shall take into consideration the SEC's report on the compliance of LCs, FCs, and their OLPs, along with a comprehensive impact evaluation report on the effectiveness of the interest rate caps. 8. Are the BSP and SEC pursuing other measures to keep credit accessible and affordable to the public? Along with the implementation of interest rate ceilings, the BSP and SEC will continue to pursue long-term measures to keep credit accessible and affordable to the public by: Intensifying financial literacy campaigns to educate and make borrowers more aware of exploitative loan conditions and to help protect them from predatory lending; Encouraging greater competition in the credit market to reduce lending rates through the entry of more market players and the use of more efficient lending technology ( i.e. , fintech); 4 Promoting greater price discovery and market transparency by strictly enforcing the Truth in Lending Act. 5 This may include posting of all interest rates applied by LCs, FCs, and their OLPs in the SEC's website to allow consumers to choose which lender offer the best rates; and Promoting the use of credit information bureau to address risk premia and information asymmetry ( e.g. , credit scoring). 9. What are the differences between the interest rate ceiling on credit card loans and the ceiling on interest rates and other fees charged by FCs, LCs, and their OLPs? Interest rate ceiling on credit card loans Ceiling on interest rates and other fees charged by FCs, LCs, and their OLPs Policy Review This is subject to review every six (6) months. The ceilings on credit card loans may be changed/amended as a result of this review process. This is subject to review every year by the BSP in consultation with the SEC, which shall take into consideration, among others, the compliance of LCs, FCs, and their OLPs and the effectiveness of the interest rate caps. Covered loan Credit card loans Unsecured, general-purpose loans offered by FCs, LCs, and their OLPs, that do not exceed the amount of P10,000 and with a loan tenor of up to four (4) months that are entered into, restructured, or renewed beginning 03 March 2022. Ceiling Credit card companies may charge interest or finance charge up to a maximum of 24 percent annually or a monthly interest rate of up to 2 percent on all credit card transactions. A separate ceiling is also imposed on the interest that is charged for credit card installment loans. The monthly add-on rate which is used to derive interest on credit card installment loans should not exceed 1 percent per month. Only the upfront processing fees charged upon availment of credit card cash advances is subject to a cap of P200 per transaction. No other upfront fees may be imposed or collected upon the availment of credit card cash advances apart from this processing fee. A nominal interest rate ceiling equivalent to 6 percent per month (~0.2 percent per day). An effective interest rate ceiling equivalent to 15 percent per month (~0.5 percent per day), which shall include the nominal interest rate along with all other applicable fees and charges ( i.e. , processing fees, service fees, notarial fees, handling fees and verification fees, among others), but excluding fees and penalties for late payment or non-payment. A cap on penalties for late payment or non-payment at 5 percent per month on outstanding scheduled amount due. A total cost cap of 100 percent of total amount borrowed (applying to all interest, other fees and charges, and penalties) regardless of time the loan has been outstanding. BSP Circular Circular No. 1098, Series of 2020 Circular No. 1133, Series of 2021 IV. Penalties Imposed for SEC MC 3 Violation 1. When is the effectivity of SEC MC 3? SEC MC 3 became effective on 03 March 2022. 2. Will penalties be imposed on LCs and FCs that will violate the Circular upon its effectivity? Noncompliance with SEC MC 3 upon its effectivity shall subject the erring FC and LC to the following penalties under Section 6 thereof: Noncompliance with Section 3 (Applicable Ceiling/s on Interest Rates and Other Fees for Specific Loans Offered by LCs, FCs, and their OLPs) Frequency FCs LCs First Offense P50,000.00 P25,000.00 Second Offense P100,000.00 P50,000.00 Third Offense Subject to the facts, circumstances and gravity of the offense, the SEC, at its discretion, may impose the following penalties, as appropriate for each circumstance: 1. Fine of not less than twice the penalty for the second offense but not more than One Million Pesos (P1,000,000.00); and/or 2. Suspension of financing and lending activities for a period of sixty (60) days; and/or 3. Revocation of the Certificate of Authority (CA) to Operate as a Financing/Lending Company; and/or 4. Suspension or revocation of the company's primary registration. Noncompliance with Section 4 (Impact Evaluation Report) Frequency FCs LCs First Offense P10,000.00 plus P200.00 daily penalty P10,000.00 plus P100.00 daily penalty Second Offense Suspension of CA Third Offense Revocation of CA FCs and LCs who fail to submit the Impact Evaluation Report within the prescribed time, but who do not offer loans covered by the ceiling Subject to monetary penalties equivalent to the First Offense above-stated Noncompliance with Section 5 (Other Requirements) Violation FCs LCs Late submission of Business Plan P10,000.00 plus P200.00 daily penalty P10,000.00 plus P100.00 daily penalty Non-submission of Business Plan Implementing Amended Business Plan without prior approval of the SEC Suspension or Revocation of CA V. Submission of the Business Plan or SEC Form BP-FCLC 1. How shall FCs and LCs, which are currently applying interest rates beyond the approved cap, amend their rates in order to comply with BSP Circular No. 1133 and SEC MC 3? FCs and LCs shall amend their rates through the submission of their Business Plan, or SEC Form BP-FCLC 6 under Section 5 of SEC MC 3. Note that the SEC requires all LCs and FCs, whether or not offering loans covered by the ceiling, to submit a Business Plan on or before 05 May 2022 indicating the company's loan products and services, as well as the applicable pricing parameters, which must be compliant with Section 3 of SEC MC 3. The Business Plan to be submitted shall supersede the initial Business Plan or Plan of Operation stated in the Company Information Sheet submitted to the SEC prior to the issuance of the CA of the LC/FC. As for FCs and LCs, which will be incorporated after 03 March 2022, they shall submit the Business Plan within sixty (60) days from the date of issuance of their CA. 2. Will there be a prescribed format for the Business Plan to be submitted by FCs and LCs under Section 5 of SEC MC 3? Yes, there is a prescribed format for the Business Plan, or SEC Form BP-FCLC. The form is available on the SEC website: FCs Reportorial Requirements https://www.sec.gov.ph/reportorial-requirements/corporations-with-secondary-licenses/financing-companies/ LCs Reportorial Requirements https://www.sec.gov.ph/reportorial-requirements/corporations-with-secondary-licenses/lending-companies/ FCs and LCs may provide the required information in the fields provided in the SEC Form BP-FCLC. Please note that submissions, which are not in accordance with the prescribed format, shall be deemed NOT FILED. 3. How will FCs and LCs submit the Business Plan? The Business Plan shall be submitted to the SEC in two (2) formats: a. Multi-Page Portable Document Format (PDF) with Text Layer of the accomplished but unsigned form; and b. Multi-Page PDF High Resolution Scan (at least 100 x 100 dpi) of the document with the Signatories Page and the Notarization Page. These documents shall be submitted through email to [emailprotected], copy furnished the SEC Corporate Governance and Finance Department through [emailprotected], with the following subject line: CGFD_Complete Name of the Company_SEC Form BP-FCLC_Date Submitted. 4. Can FCs and LCs amend their Business Plan? Yes, FCs and LCs can amend their Business Plan by submitting an amended SEC Form BP-FCLC, underlining the changes therein. For purposes of determining the company's initial filing of the Business Plan under Section 5 of SEC MC 3, the SEC will consider the company's latest SEC Form BP-FCLC submitted on or before 05 May 2022 . For FCs and LCs, which will be incorporated subsequent to 03 March 2022, the SEC will consider the latest SEC Form BP-FCLC submitted on or before the 60th day from the date of issuance of their CA . During these periods, FCs and LCs may amend their initial Business Plan without securing prior approval of the SEC. However, any amendment subsequent to said periods shall require prior approval of the SEC before FCs and LCs can implement the material change to the Business Plan. VI. Restructured/Renewed Loans and Advance Payment 1. For restructured and renewed loans covered by SEC MC 3, which amount of the loan will be relevant in applying the ceilings on interest rates and other fees? Is it the original loan amount or the restructured/renewed amount? In applying the ceilings to restructured and renewed loans, the relevant amount would depend on the terms and conditions of the restructured or renewed contract of loan between the borrower and the FC/LC, which shall be considered as a new contract for purposes of SEC MC 3. It is the stipulations in the contract that will determine whether or not the loan is covered by BSP Circular No. 1133, as implemented by SEC MC 3. Please refer to Sample Illustration 8 provided below. 2. Will there be any discount on the interest/amount of the loan in case the borrower makes advance payment of the loan? There is currently no law or rule that requires an FC/LC to provide a borrower with a discounted interest/amount in case of full or early payment of a loan. Borrowers are advised to check their loan agreement with the company to verify all details of the contract and confirm if they have an option for this kind of payment arrangement. VII. Effective Interest Rate (EIR) 1. How do you compute the EIR of the loan? Can you provide some sample computations? The EIR refers to the total nominal interest paid plus other fees and charges, excluding penalty and late payment fees, expressed as the rate that exactly discounts estimated future cash flows throughout the life of the loan to the net amount of loan proceeds. It shall follow the calculation models implemented in the Truth in Lending Act. 7 It is the rate that exactly discounts estimated future cash flows throughout the life of the loan to the net amount of loan proceeds. It is founded on the established principles of discounted cash flow analysis, similar to the calculation models shown in the Truth in Lending Act. LCs, FCs, and OLPs shall be solely responsible for the propriety and accuracy of their EIR calculation model. The sample calculations 8 follow. Sample Illustration 1: 14-day loan with backend fee 9 Borrower X applied for a 14-day loan amounting to P10,000.00. The nominal interest rate of the said loan as indicated in the contract is 4.29% per month with fees and other charges amounting to P500.00 payable upon termination of the loan. The Effective Interest Rate (EIR) is computed using the IRR function. 10 Since other fees and charges shall be paid at the end of the 14th day, the borrower shall receive the full amount loan of P10,000 and the outstanding amount payable will be P10,700.20 . Hence, considering the cash flow, the EIR that will be computed using the IRR function is 7.00% for the 14-day loan. The monthly EIR is 15% per month (~0.50% per day) which is the 14-day EIR multiplied by 30 days divided by the loan term (14 days). 0 A B C D E F G 1 Tenor (days) 14 2 No. of repayments 1 3 Principal amount 10,000.00 Net Proceeds 10,000.00 4 Nominal Interest rate (per month) 4.29% 5 Nominal Interest rate (per day) 0.14% 6 Other fees and charges 500 7 (% Share of Principal Amount) 5.00% 8 9 Breakdown 10 Repayment Period Gross Loan Cash Flow Principal Repayment Nominal Interest Other Fees Outstanding Balance ** 11 0 10,000.00 10,000.00 - - - 10,000.00 12 1 (10,700.20) 10,000.00 200.20 500.00 - 13 Total N.A 10,000.00 200.20 500.00 N.A. 14 15 Summary 16 Effective interest rate (14 days) IRR(C11:12) = 7.00% 17 (using IRR function) 18 19 Monthly Effective Interest Rate (MEIR) IRR(C11:C12)*30 days/14 days = 15.00% per month 20 (using IRR function) 0.50% per day 21 Total Amount paid by the borrower by the end of the term = P10,700.20 ** The outstanding balance is simply the loan amount less from the total principal repayments up to the given period . Sample Illustration 2: 14-day loan with frontend fee 11 Borrower X applied for a 14-day loan amounting to P10,000.00 . As stated in the contract, the nominal interest rate of the said loan is 4.50% per month , with other fees and charges amounting to P450.00 payable upfront. To compute the EIR, determine the cash flows starting from the amount of loan disbursed to Borrower X to the amount of repayment at the end of the 14-day period. In this case, since the other fees and charges shall be paid upfront, Borrower X receives the amount of P9,550.00 ( i.e. , P10,000.00 loan amount minus P450.00 upfront fee) and the total repayment at the end of the 14-day period shall be P10,210.00 , representing the principal loan amount with interest ( i.e. , P210). Considering the cash flows and using the IRR function, the EIR for the 14-day period is 6.91%. The monthly EIR computed as the 14-day EIR multiplied by 30 days divided by the loan term (14 days) is 14.81% per month (~0.49% per day) . 0 A B C D E F G 1 Tenor (days) 14 2 No. of repayments 1 3 Principal amount 10,000.00 Net Proceeds 9,550.00 4 Nominal Interest rate (per month) 4.50% 5 Nominal Interest rate (per day) 0.15% 6 Other fees and charges 450 7 (% Share of Principal Amount) 4.50% 8 9 Breakdown 10 Repayment Period Gross Loan Cash Flow Principal Repayment Nominal Interest Other Fees Outstanding Balance ** 11 0 10,000.00 9,550.00 - - 450.00 10,000.00 12 1 (10,210.00) 10,000.00 210.00 - - 13 Total N.A. 10,000.00 210.00 450.00 N.A. 14 15 Summary 16 Effective interest rate (14 days) IRR(C11:12) = 6.91% 17 (using IRR function) 18 19 Monthly Effective Interest Rate (MEIR) IRR(C11:C12)*30 days/14 days = 14.81% per month 20 (using IRR function) 0.49% per day 21 Total Amount paid by the borrower by the end of the term = P10,210.00 ** The outstanding balance is simply the loan amount less from the total principal repayments up to the given period . Sample Illustration 3: 120-day loan with distributed fee 12 Borrower X applied for a loan amounting to P10,000.00 . As indicated in the loan contract, the loan is payable monthly with a nominal interest rate of 6% per month and a loan term of 120 days (4 months) . Further, the borrower shall be charged with P500.00 in total for fees and other charges on top of the nominal interest rate. Considering that the fees and charges are distributed equally across the four (4)-month repayment period, Borrower X shall receive the principal loan amount of P10,000.00 . The monthly payment will be P3,225.00 per month which includes the monthly principal repayment (P2,500.00), the monthly interest (P600.00), and fee (P125.00). At the end of 120 days (4 months), the total amount of loan paid by the borrower is P12,900.00 . Considering the cash flows, the monthly EIR that will be computed using the IRR function is 11.03% per month (~0.37% per day) . 0 A B C D E F G 1 Tenor (days) 120 2 No. of repayments 4 3 Principal amount 10,000.00 Net Proceeds P10,000.00 4 Nominal Interest rate (per month) 6.00% 5 Nominal Interest rate (per day) 0.20% 6 Other fees and charges 500 7 (% Share of Principal Amount) 5.00% 8 9 Breakdown 10 Repayment Period Gross Loan Cash Flow Principal Repayment Nominal Interest Other Fees Outstanding Balance ** 11 0 10,000.00 10,000.00 - - - 10,000.00 12 1 (3,225.00) 2,500.00 600.00 125.00 7,500.00 13 2 (3,225.00) 2,500.00 600.00 125.00 5,000.00 14 3 (3,225.00) 2,500.00 600.00 125.00 2,500.00 15 4 (3,225.00) 2,500.00 600.00 125.00 - 16 Total N.A. 10,000.00 2,400.00 500.00 N.A. 17 18 Summary 19 Effective interest rate (14 days) IRR(C11:15) = 11.03% per month 20 (using IRR function) 21 22 Monthly Effective Interest Rate (MEIR) IRR(C11:C15)/30 days = 0.37% per day 23 (using IRR function) 24 Total Amount paid by the borrower by the end of the term = P12,900.00 ** The outstanding balance is simply the loan amount less from the total principal repayments up to the given period . Sample Illustration 4: 120-day loan with bullet payment on interest and other fees only 13 Borrower X applied for a loan amounting to P10,000.00 . As stated in the loan contract, the principal amount is payable monthly, with nominal interest rate of 6.0% per month and a loan term of 120 days (4 months) . Further, the borrower shall be charged with P500.00 in total for fees and other charges on top of the nominal interest rate. Based on the contract, the said nominal interest rate and fees and charges shall be paid at the end of the loan term. Considering that all fees and interest shall be paid at the last/4th payment, Borrower X shall receive a principal loan amount of P10,000. For the first three months, the monthly repayment is (P2,500.00). On the last/4th month, Borrower X will have to pay P5,400.00 which comprises the monthly principal repayment (P2,500.00), the nominal interest (P2,400.00), and fees and charges (P500.00). Hence, the total amount of loan paid by the borrower at the end of the 4th month is P12,900.00 . Considering the cash flow, the monthly EIR computed using the IRR function is 9.61% per month (~0.32% per day) . 0 A B C D E F G 1 Tenor (days) 120 2 No. of repayments 4 3 Principal amount 10,000.00 Net Proceeds P10,000.00 4 Nominal Interest rate (per month) 6.00% 5 Nominal Interest rate (per day) 0.20% 6 Other fees and charges 500 7 (% Share of Principal Amount) 5.00% 8 9 Breakdown 10 Repayment Period Gross Loan Cash Flow Principal Repayment Nominal Interest Other Fees Outstanding Balance ** 11 0 10,000.00 10,000.00 - - - 10,000.00 12 1 (2,500.00) 2,500.00 - - 7,500.00 13 2 (2,500.00) 2,500.00 - - 5,000.00 14 3 (2,500.00) 2,500.00 - - 2,500.00 15 4 (5,400.00) 2,500.00 2,400.00 500.00 - 16 Total N.A. 10,000.00 2,400.00 500.00 N.A. 17 18 Summary 19 Effective interest rate (14 days) IRR(C11:15) = 9.61% per month 20 (using IRR function) 21 22 Monthly Effective Interest Rate (MEIR) IRR(C11:C15)/30 days = 0.32% per day 23 (using IRR function) 24 Total Amount paid by the borrower by the end of the term = P12,900.00 ** The outstanding balance is simply the loan amount less from the total principal repayments up to the given period . Sample Illustration 5: 120-day loan with front-end fee 14 Borrower X applied for a loan amounting to P10,000.00 . As indicated in the loan contract, the loan is payable monthly, with a nominal interest rate of 6% per month and a loan term of 120 days (4 months) . Further, the borrower shall be charged with P500.00 in total for fees and other charges on top of the nominal interest rate. The contract states that said fees and other charges shall be deducted before the disbursement of the funds to the borrower. How can the EIR be computed? Considering that the fees and charges shall be deducted before the disbursement of funds, Borrower X shall receive an amount of P9,500.00 ( i.e. , P10,000 loan amount minus P500.00 upfront fee). The computation of the monthly payment shall still be based on the principal amount of P10,000.00. Thus, the monthly payment would be P3,100.00, which includes the monthly principal repayment (P2,500.00) and the monthly interest (P600.00). The total amount paid by the borrower at the end of the 4th month is P12,900.00 . Considering the cash flow, the monthly EIR computed using the IRR is 11.58% per month (~0.39% per day) . 0 A B C D E F G 1 Tenor (days) 120 2 No. of repayments 4 3 Principal amount 10,000.00 Net Proceeds P9,500.00 4 Nominal Interest rate (per month) 6.00% 5 Nominal Interest rate (per day) 0.20% 6 Other fees and charges 500 7 (% Share of Principal Amount) 5.00% 8 9 Breakdown 10 Repayment Period Gross Loan Cash Flow Principal Repayment Nominal Interest Other Fees Outstanding Balance ** 11 0 10,000.00 9,500.00 - - 500 10,000.00 12 1 (3,100.00) 2,500.00 600 - 7,500.00 13 2 (3,100.00) 2,500.00 600 - 5,000.00 14 3 (3,100.00) 2,500.00 600 - 2,500.00 15 4 (3,100.00) 2,500.00 600 - - 16 Total N.A. 10,000.00 2,400.00 500.00 N.A. 17 18 Summary 19 Effective interest rate (14 days) IRR(C11:15) = 11.58% per month 20 (using IRR function) 21 22 Monthly Effective Interest Rate (MEIR) IRR(C11:C15)/30 days = 0.39% per day 23 (using IRR function) 24 Total Amount paid by the borrower by the end of the term = P12,900.00 ** The outstanding balance is simply the loan amount less from the total principal repayments up to the given period . Sample Illustration 6: 120-day loan with frontend fee 15 at maximum allowable nominal interest and other charges Borrower X applied for a loan amounting to P10,000.00 . As indicated in the loan contract, the loan is payable monthly, with a nominal interest rate of 6.00% per month and a loan term of 120 days (4 months) . Further, the borrower shall be charged with P1,150.00 in total for fees and other charges on top of the nominal interest rate. The contract states that said fees and other charges shall be deducted before the disbursement of the funds to the borrower. How can the EIR be computed? Considering that the fees and charges shall be deducted before the disbursement of funds, Borrower X shall receive an amount of P8,850.00 ( i.e. , P10,000.00 minus P1,150.00 other fees). However, the computation of the monthly payment shall still be based on the principal amount of P10,000.00. Thus, the monthly payment would be P3,100.00, which includes the monthly principal (P2,500.00) and the monthly interest (P600.00). The total amount of loan paid by the borrower at the end of the 4 months is P12,900.00 . Considering the cash flows from the disbursement up to the repayment of the loan at the end of the 4th month, the monthly EIR that will be computed using the IRR function is 15% . 0 A B C D E F G 1 Tenor (days) 120 2 No. of repayments 4 3 Principal amount 10,000.00 Net Proceeds P8,850.00 4 Nominal Interest rate (per month) 6.00% 5 Nominal Interest rate (per day) 0.20% 6 Other fees and charges 1,150.00 7 (% Share of Principal Amount) 11.50% 8 9 Breakdown 10 Repayment Period Gross Loan Cash Flow Principal Repayment Nominal Interest Other Fees Outstanding Balance ** 11 0 10,000.00 8,850.00 - - 1,150.00 10,000.00 12 1 (3,100.00) 2,500.00 600 - 7,500.00 13 2 (3,100.00) 2,500.00 600 - 5,000.00 14 3 (3,100.00) 2,500.00 600 - 2,500.00 15 4 (3,100.00) 2,500.00 600 - - 16 Total N.A. 10,000.00 2,400.00 1,150.00 N.A. 17 18 Summary 19 Effective interest rate (14 days) IRR(C11:15) = 15.00% per month 20 (using IRR function) 21 22 Monthly Effective Interest Rate (MEIR) IRR(C11:C15)/30 days = 0.50% per day 23 (using IRR function) 24 Total Amount paid by the borrower by the end of the term = P12,900.00 ** The outstanding balance is simply the loan amount less from the total principal repayments up to the given period . Sample Illustration 7: 120-day loan with frontend fee 16 at zero nominal interest but maximum other charges Borrower X applied for a 120-day (4 months) loan amounting to P10,000.00 . As indicated in the contract, the loan has no interest , however, it has fees and other charges amounting to P2,862.00 which is 28.62% of the principal amount. The said fees shall be deducted in full from the principal amount before the disbursement of funds to the borrower. Considering that the fees and charges shall be deducted before the disbursement of funds, Borrower X shall receive an amount of P7,138.00 . However, the computation of the monthly payment shall still be based on the principal amount of P10,000.00. Thus, given that the nominal interest rate is zero, the monthly payment shall only include the principal amount of P2,500.00 which will be paid for four (4) months. Considering the cash flows from the disbursement up to the repayment of the loan at the end of the 4th month, the monthly EIR that will be computed using the IRR function is 15% . Further, at the end of the loan period, the borrower paid a total amount of P10,000.00 . 0 A B C D E F G 1 Tenor (days) 120 2 No. of repayments 4 3 Principal amount 10,000.00 Net Proceeds P7,138.00 4 Nominal Interest rate (per month) 0.00% 5 Nominal Interest rate (per day) 0.00% 6 Other fees and charges 2,862.00 7 (% Share of Principal Amount) 28.62% 8 9 Breakdown 10 Repayment Period Gross Loan Cash Flow Principal Repayment Nominal Interest Other Fees Outstanding Balance ** 11 0 10,000.00 7,138.00 - - 2,862.00 10,000.00 12 1 (2,500.00) 2,500.00 - - 7,500.00 13 2 (2,500.00) 2,500.00 - - 5,000.00 14 3 (2,500.00) 2,500.00 - - 2,500.00 15 4 (2,500.00) 2,500.00 - - - 16 Total N.A. 10,000.00 0.00 2,862.00 N.A. 17 18 Summary 19 Effective interest rate (14 days) IRR(C11:15) = 15.00% per month 20 (using IRR function) 21 22 Monthly Effective Interest Rate (MEIR) IRR(C11:C15)/30 days = 0.50% per day 23 (using IRR function) 24 Total Amount paid by the borrower by the end of the term = P10,000.00 ** The outstanding balance is simply the loan amount less from the total principal repayments up to the given period. Sample Illustration 8: 180-day loan with frontend fee, 17 restructured after 2 installments On 28 December 2021, Borrower X applied for a 180-day (6 months) loan amounting to P15,000.00 . As indicated in the contract, the loan is payable monthly, has 10% monthly nominal interest , and fees and other charges amounting to P1,000.00 . The said fees shall be deducted in full from the principal amount before the disbursement of funds to the borrower. Considering the details of the loan agreement, the loan will not be covered by SEC MC 3. Borrower X will need to pay in the following payment schedule (see A. Original loan payment schedule). A. Original loan payment schedule 0 A B C D E F G 1 Tenor (days) 180 2 No. of repayments 6 3 Principal amount 15,000.00 Net Proceeds P14,000.00 4 Nominal Interest rate (per month) 10.00% 5 Nominal Interest rate (per day) 0.33% 6 Other fees and charges 1,000.00 7 (% Share of Principal Amount) 6.67% 8 9 Breakdown 10 Repayment Period Gross Loan Cash Flow Principal Repayment Nominal Interest Other Fees Outstanding Balance ** 11 0 15,000.00 14,000.00 - - 1,000.00 15,000.00 12 1 (4,000.00) 2,500.00 1,500.00 - 12,500.00 13 2 (4,000.00) 2,500.00 1,500.00 - 10,000.00 14 3 (4,000.00) 2,500.00 1,500.00 - 7,500.00 15 4 (4,000.00) 2,500.00 1,500.00 - 5,000.00 16 5 (4,000.00) 2,500.00 1,500.00 - 2,500.00 17 6 (4,000.00) 2,500.00 1,500.00 - - 18 Total N.A. 15,000.00 9,000.00 1,000.00 N.A. 19 20 Summary 21 Effective interest rate (14 days) IRR(C11:15) = 17.97% per month 20 n (using IRR function) 21 22 Monthly Effective Interest Rate (MEIR) IRR(C11:C15)/30 days = 0.60% per day 23 (using IRR function) 24 Total Amount paid by the borrower by the end of the term = P24,000.00 ** The outstanding balance is simply the loan amount less from the total principal repayments up to the given period. Note: Grey cells indicate that the payment schedule will be discontinued as Borrower X plans to apply to a loan restructuring subject for the approval of the lender. Borrower X paid until the 2nd installment due date, 28 February 2022. Thereafter, Borrower X assessed that he will not be able to commit to pay the remaining monthly repayments and asked the lender for a restructuring of his loan. B. Calculation of the Outstanding Balance Loan 1: Total amount paid by Borrower X after the 3rd month 8,000.00 Principal amount repaid 5,000.00 Interest (from 0 to 2 months) 3,000.00 Other fees deducted upfront 1,000.00 Outstanding balance (to Principal Loan Amount), see Cell G13 10,000.00 The lender agreed and on 3 March 2022, the parties entered into a restructuring agreement for Borrower X to repay his outstanding balance of P10,000.00 . The loan restructuring agreement contains the restructured amount of P10,000.00 payable monthly for 120 days (4 months), with nominal interest of 6.00% per month, and P500.00 in total for fees and other charges deducted upfront. The restructured loan will now be covered by SEC MC 3 and Borrower X will be guided by the following payment schedule (C. Restructured loan payment schedule). 0 A B C D E F G 1 Tenor (days) 120 2 No. of repayments 4 3 Principal amount 10,000.00 4 Nominal Interest rate (per month) 6.00% 5 Nominal Interest rate (per day) 0.20% 6 Other fees and charges 500.00 7 (% Share of Principal Amount) 5.00% 8 9 Breakdown 10 Repayment Period Gross Loan Cash Flow Principal Repayment Nominal Interest Other Fees Outstanding Balance 11 0 10,000.00 9,500.00 - - 500.00 10,000.00 12 1 (3,100.00) 2,500.00 600.00 - 7,500.00 13 2 (3,100.00) 2,500.00 600.00 - 5,000.00 14 3 (3,100.00) 2,500.00 600.00 - 2,500.00 15 4 (3,100.00) 2,500.00 600.00 - - 16 Total N.A. 10,000.00 2,400.00 500.00 N.A. 17 18 Summary 19 Effective interest rate (14 days) IRR(C11:15) = 12.21% per month 20 (using IRR function) 21 22 Monthly Effective Interest Rate (MEIR) IRR(C11:C15)/30 days = 0.41% per day 23 (using IRR function) 24 Total Amount paid by the borrower by the end of the term = P12,900.00 Thus, through the Restructured loan, Borrower X obtained a manageable repayment schedule with a total of P21,900.00 (which includes the 2-month of loan 1 and the restructured loan) instead of the original P25,000.00 from the original loan 1 contract. Loan 1 (6-month loan tenor) Loan 1 (paid up to 2 months) Restructured Total amount paid under borrower under Loan 1 and Restructured loan A B C D = B + C Total Payable at the end of the loan period 25,000.00 9,000.00 12,900.00 21,900.00 Principal repayment 15,000.00 5,000.00 10,000.00 15,000.00 Interest 9,000.00 3,000.00 2,400.00 5,400.00 Fees and Other Charges 1,000.00 1,000.00 500.00 1,500.00 Footnotes 1. See item III (2) on the provisions that empower the BSP to prescribe maximum interest rates that could be charged by LCs, FCs, and their OLPs. 2. Consultative Group to Assist the Poor (CGAP), Relief for Informal Workers: Falling through the Cracks in COVID-19 (August 2020), available at https://www.cgap.org/sites/default/files/publications/2020.COVID_Briefing_Informal_Workers.pdf. 3. "[I]n the absence of health coverage, responses to health shocks by people in or near poverty typically include distress sales of assets and taking out loans from informal moneylenders, sometimes at exploitative interest rates." Food and Agriculture Organization (FAO) of the United Nations, Impact of COVID-19 on informal workers (April 7, 2020), at 2, n. 2, available at https://www.fao.org/3/ca8560en/CA8560EN.pdf 4. Fintech refers to the integration of technology into offerings by financial services companies to improve their use and delivery to consumers. SEC Memorandum Circular No. 10, Series of 2021. Moratorium on New Online Lending Platforms. 5. Rep. Act No. 3765, also known as Truth in Lending Act, is a policy to protect Filipinos from lack of awareness of the true cost of borrowing by assuring full disclosure of such cost. 6. Please see item 2 below for the links where the BP-FCLC form may be downloaded. 7. Republic Act No. 3765, also known as Truth in Lending Act, is a policy to protect Filipinos from lack of awareness of the true cost of borrowing by assuring full disclosure of such cost. The calculation model, for guidance, was provided by the BSP in Memorandum No. 2011-040 relative to the implementation of Circular No. 730 dated 20 July 2011 on Updating Rules Implementing the Truth in Lending Act to Enhance Loan Transaction Transparency. 8. For purposes of computing monthly equivalent, all sample calculations use 30 days as the assumed base. In practice, the number of days used to compute the monthly equivalent would vary depending on the terms and conditions of the loan contract. 9. Fees are paid only at the end of the loan schedule. 10. To compute for the EIR, users are advised to use any IRR function from Microsoft Excel or other financial packages/programs. 11. Other fees are paid upfront, which is deducted from the principal loan amount before disbursement of funds to the borrower. 12. Total fees are distributed equally into the repayment periods of the loan. 13. All fees and interest accumulated are paid only at the end of the repayment schedule. 14. Other fees are paid upfront which is deducted from the principal loan amount before disbursement of funds to the borrower. 15. Other fees are paid upfront which is deducted from the principal loan amount before disbursement of funds to the borrower. 16. Other fees are paid upfront which is deducted from the principal loan amount before disbursement of funds to the borrower. 17. Other fees are paid upfront which is deducted from the principal loan amount before disbursement of funds to the borrower. n Note from the Publisher: Copied verbatim from the official document. Irregular numerical sequence.