Revised Rules and Regulations to Implement the Provisions of Republic Act No. 5980

January 20, 1986

REVISED RULES AND REGULATIONS TO IMPLEMENT THE PROVISIONS OF REPUBLIC ACT NO. 5980 (THE FINANCING COMPANY ACT), AS AMENDED

To effectively carry out the provisions of Republic Act No. 5980 (The Financing Company Act), as amended, the Securities and Exchange Commission, pursuant to the powers vested in it under said Act, Republic Act No. 1143 and Presidential Decree No. 902-A, as amended, and the Central Bank of the Philippines, pursuant to the powers vested in it under Republic Act No. 337, as amended, hereby jointly promulgate the following rules and regulations: cdlex

SECTION 1. Definition of Terms. — The following definition of terms shall apply for purposes of these Rules:

a. "FINANCING COMPANIES" are corporations or partnerships, except those supervised by the Central Bank of the Philippines, Office of the Insurance Commissioner and the Bureau of Cooperatives Development, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises by discounting or factoring commercial papers or accounts receivable; by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness; or by leasing of motor vehicles, heavy equipment and industrial machinery, business and office machines and equipment, appliances and other movable property.

b. "PRIMARILY ORGANIZED" shall mean organized for the primary purpose of operating as a financing company and that more than 50% of its funds shall be used or invested in financing company activities.

c. "COMMISSION" shall mean the Securities and Exchange Commission.

d. "CREDIT" shall mean any loan, mortgage, deed of trust, advance or discount, any conditional sales contract, any contract to sell, or sale or contract of sale of property or service, either for present or future delivery, under which, part or all of the price is payable subsequent to the making of such sale or contract, any rental-purchase contract, any option, demand, lien, pledge, or other claim against, or for the delivery of, property or money, any purchase, or other acquisition of or any credit upon the security of any obligation or claim arising out of the foregoing; and any transaction or series of transactions having a similar purpose or effect.

e. "PURCHASE DISCOUNT" is the difference between the value of the receivables purchased or credit assigned, and the net amount paid by the finance company for such purchase or assignment, exclusive of fees, service charges, interest and other charges incident to the extension of credit.

f. "RECEIVABLES FINANCING" is a mode of extending credit through the purchase by, or assignment to, a financing company of evidences of indebtedness or open accounts by discounting or factoring.

g. "DISCOUNTING" is a type of receivables financing whereby evidences of indebtedness of a third party, such as installment contracts, promissory notes, and similar instruments, are purchased by, or assigned to, a financing company in an amount or for a consideration less than their face value.

h. "FACTORING" is a type of receivables financing whereby open accounts, not evidenced by a written promise to pay supported by documents such as but not limited to invoices of manufacturers and suppliers, delivery receipts and similar documents, are purchased by, or assigned to, a financing company in an amount or for a consideration less than the outstanding balance of the open accounts.

i. "LEASING" shall refer to financial leasing which is a mode of extending credit through a non-cancellable contract under which the lessor purchases or acquires at the instance of the lessee heavy equipment, motor vehicles, industrial machinery, appliances, business and office machines, and other movable property in consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least 70% of the purchase price or acquisition cost, including any incidental expenses and a margin of profit, over the lease period. The contract shall extend over an obligatory period during which the lessee has the right to hold and use the leased property and shall bear the cost of repairs, maintenance, insurance and preservation thereof, but with no obligation or option on the part of the lessee to purchase the leased property at the end of the lease contract.

j. "PAID-UP CAPITAL" refers to the amount paid for the subscription of stock in a corporation including the amount paid in excess of par value, net of treasury stock, or to the total capital contributions of the partners in a partnership.

k. "NETWORTH" is the excess of assets over liabilities, net of appraisal surplus.

l. "STOCKHOLDERS" as used in Section 9 and 15 herein, shall refer to juridical or natural persons, individually and/or with his spouse, relative within the first degree of consanguinity or affinity or relative by legal adoption, owning in the aggregate at least ten (10%) percent of the total subscribed capital stock of the financing company.

SECTION 2. Form of Organization. —

Financing companies shall be organized in the form of stock corporations in accordance with the provisions of the Corporation Code of the Philippines (Batas Pambansa Blg. 68) or general partnerships pursuant to the provisions of the Civil Code of the Philippines and subject to the following:

a. At least sixty percentum (60%) of the outstanding capital stock of the corporation and in case of a partnership, at least sixty percentum (60%) of the total capital contributions of the partners, must be owned by citizens of the Philippines.

b. A minimum paid-up capital, in case of corporations, and capital contribution in case of partnerships, that shall maintain their principal offices in the areas hereunder specified, shall be made in cash of at least:

1) P10,000,000.00 — Metro Manila Area

2) P5,000,000.00 — First class cities outside Metro Manila

3) P2,500,000.00 — Second class cities and first class municipalities llcd

4) P1,000,000.00 — Third class cities and second class municipalities

5) P500,000.00 — Fourth class cities, third class municipalities and below

In case the area where the principal office of a financing company is located has been upgraded, the corresponding increase in capitalization requirement within such period as the Commission shall fix, shall be undertaken.

Existing financing companies need not comply with the foregoing capital requirement, provided the following conditions are met:

1. The financing company must be in operation and must have a valid and subsisting Certificate of Authority to Operate as a Financing Company as of the date of the effectivity of these Rules;

2. The exemption from the above paid-up capital requirement shall apply only to its principal office: Provided, further, That any existing and/or new branch, agency, extension office or unit may operate subject to the provisions of Section 6 hereof; and

3. Its present paid-up capital shall remain unimpaired.

c. At least two-thirds of all the members of the board of directors in the case of a corporation and all the managing partners in case of a partnership shall be citizens and residents of the Philippines.

Any change in the membership in, or composition of, the boards of directors or in the managing partners, as the case may be, shall be reported to the Commission within seven (7) working days thereafter, and the requirements prescribed under Section 3.a.4 and 7) hereof, shall be submitted within thirty (30) working days from date of the aforesaid change.

d. The corporate/partnership name of financing companies shall contain the term "financing company", "finance company" or "finance and investment company" or other title or word(s) descriptive of its operations and activities as a financing company.

SECTION 3. Requirements for Registration

a. Registration papers to be submitted to the Commission. — Any corporation or partnership may be registered as a financing company by filing with the Commission in five (5) copies an application to operate as a financing company under R.A. No. 5980, as amended, signed under oath by its President/Managing Partner, together with the following documents in the prescribed forms:

1. All documents required for registration as a corporation or partnership;

2. By-Laws;

3. Information Sheet of registrant company;

4. Personal Information Sheet of each of the directors or managing partners;

5. Answers to the questionnaire of the Commission;

6. Projected balance sheet, income statement and cash flow statement for three (3) years, together with a schedule of discounting, factoring, leasing or interest rate and other charges to be imposed;

7. Documents required of each director, officer to be appointed from the rank of VP or its equivalent, or managing partner such as of the following:

a) Police clearance from local police of the city or municipality of which he is a resident;

b) NBI clearance;

c) Certificate of good moral character to be executed under oath by at least two (2) reputable and disinterested persons in the community;

d) Bank credit information to be issued by his depository or creditor bank(s), if any; and

8. Such other documents as may be required by the Commission whenever it deems necessary.

b. Publication and Posting of Notice and Order for Registration. — Upon receipt of the above registration papers of a proposed financing company, the Commission shall cause the Notice and Order for registration to be published by the applicant company at its expense in a newspaper of general circulation in the Philippines once a week for two (2) consecutive weeks, and the notice shall simultaneously be posted in a public and conspicuous place where the principal office of the company will be located and in the Office of the Commission for the same period.

The notice shall state, among others, the name of the proposed financing company, the capital structure in case of a corporation or the total capital contribution in case of a partnership, and the names and residences of its directors or managing partners.

c. Opposition to Registration, if any. — Any interested party may oppose the registration of a financing company in writing, personally or through counsel, within two (2) weeks after the last date of the publication of the notice. If after the hearing, the Commission finds that the requirements of R.A. No. 5980, as amended, its implementing rules and regulations and other pertinent laws have been complied with and that no valid reason or reasons exist for the disapproval of the application, the Commission shall take appropriate action on said application. LexLib

SECTION 4. Issuance of Certificate of Filing of Articles of Incorporation and By-Laws; Certificate of Authority; Conditions for Commencement of Operations. —

a. The Commission, in consultation with the Central Bank, shall register the articles of incorporation and by-laws or articles of partnership of, and issue the Certificate of Authority to Operate to, any proposed financing company if it is satisfied that the establishment of such company will promote public interest and convenience, and on the basis of the documents and/or evidences submitted, that:

1. All the requirements of R.A. No. 5980, as amended, other existing laws, and applicable rules and regulations to engage in the business for which the applicant is proposed to be incorporated, or organized, have been complied with;

2. The organization, direction and administration of the applicant, as well as the integrity and responsibility of the organizers and administrators, reasonably assure the protection of the interest of the general public; and

3. Proof of the publication and posting of the notice and order for registration is in accordance with Sec. 3.b. hereof.

b. Financing companies shall register with the Central Bank within thirty (30) days from start of operations by submitting a copy of its articles of incorporation, by-laws, and other documents as may be required.

c. A corporation or partnership which has been duly registered, and granted a Certificate of Authority to Operate as a financing company in accordance with law and these Rules, shall commence operations within ninety (90) days from date of grant of such certificate. Failure to operate within the prescribed ninety (90) days period shall subject the financing company to a fine of not less than One Thousand (P1,000.00) Pesos unless its non-operation is reasonably justified, as determined by the Commission.

d. The financing company may be granted a grace period of another ninety (90) days from the expiry date of the first ninety (90) days within which to commence operations notwithstanding its failure to operate as aforestated. Failure to operate within the extended period shall empower the Commission, after notice and hearing, to revoke its Certificate of Authority.

The certificate of authority issued in accordance herewith shall be valid for a period of one (1) year from date of issue.

SECTION 5. Renewal of Certificate of Authority; Conditions for the Grant of Renewal

a. The Certificate of Authority shall be renewed annually by filing an application for the purpose, signed under oath by the President or Managing Partner, and submitted to, and accepted by, the Commission not later than forty-five (45) days before the anniversary date of issuance of the Certificate of Authority, together with the following documents;

1. Documents required under Sec. 3.a.7 except (c) Certificate of good moral character to be executed under oath by at least two (2) reputable and disinterested persons in the community, which shall be updated once every five (5) years;

2. A report under oath of the operations of the applicant company for the year immediately preceding, indicating that more than 50% of its funds have actually been used or invested in financing company activities, although in the computation thereof temporary investment in government securities may be considered;

3. The latest audited financial statements, income statement and balance sheet and, should the same be more than three (3) months prior to the anniversary date of the certificate of authority, the unaudited financial statements covering the immediately preceding month; Provided, however, That such unaudited financial statements shall be certified under oath by the accountant and the senior financial officer of the applicant duly authorized for the purpose and substituted with audited financial statements within one hundred twenty (120) days after the end of the applicant's fiscal year;

4. Schedule on aging of receivables, of payables, and off-balance sheet items indicating maturity patterns of existing receivables and liabilities (under six (6) months; six (6) months to one (1) year; over one (1) year and past due accounts).

b. The Commission, in consultation with the Central Bank, shall, if it finds such application to be in order and after proper verification of its financial condition, issue, within forty-five (45) days from the date of acceptance of application by the Commission, the corresponding renewal certificate which shall be valid for one (1) year unless sooner revoked or cancelled for cause by the Commission.

c. An application for renewal of a certificate of authority shall not be approved where the applicant has not been in operation during the year immediately preceding the date of such application, unless its non-operation is found by the Commission to be based on justifiable reasons, and the applicant is able to show its capability to resume active operations. LexLib

d. Failure to file within the prescribed period an application for renewal acceptable to the Commission, shall subject the erring financing company to a fine of not less than P200.00 for each day of default.

e. Non-filing of an application for renewal or non-acceptance thereof by the expiry date shall ipso facto result in the delisting of the company concerned as of the expiry date of the Certificate of Authority from the list of registered financing companies authorized to engage in financing business without prejudice to the filing of a new application to operate as a financing company under the applicable provisions of Sections 2, 3 and 4 of these Rules.

SECTION 6. Branches, Agencies, Extension Offices or Units. —

a. Certificate of Authority. — No financing company shall establish or operate a branch, agency, extension office or unit without a prior certificate of authority to be issued by the Commission in consultation with the Central Bank. The application for authority filed under this section shall be accompanied by the following documents:

1. Information sheet of the proposed branch;

2. Answers to SEC questionnaire;

3. Police clearance of the manager, cashier, and administrative officer from the local police of the city or municipality where they reside;

4. NBI clearance of the branch manager, cashier and administrative officer of the proposed branch;

5. Copy of the proposed personnel chart; and

6. Such other documents as may be required by the Commission whenever it deems necessary.

The above application shall be published in accordance with the provisions of Sec. 3.b of these Rules.

b. Evaluation Guideposts. — The number of branches, agencies extension offices or units to be established shall depend upon the capacity of the company to conduct expanded operations and/or upon the capacity of the area wherein the proposed branch, extension office, agency or unit will be established, to absorb new entities engaged in financing, as may be determined by the Commission.

c. Additional Capital Requirement. — A financing company may be required to put up additional capital for branches, agencies, extension offices or units in an amount to be determined by the Commission.

d. Prescribed Period to Operate. — Such branch, agency, extension office or unit shall operate within ninety (90) days from the issuance of the certificate of authority and failure to operate within such period shall subject said branch, agency, extension office or unit to a fine of not less than one thousand (P1,000) pesos or revocation of the certificate of authority, after due hearing at the discretion of the Commission, unless its non-operation is reasonably justified as determined by the Commission.

e. Term of Authority to Operate. — The certificate of authority to operate a branch, agency, extension office or unit shall be co-terminus with that of the head office.

SECTION 7. Applicability of Central Bank Regulations. — Financing companies duly licensed to operate as such, their branches, agencies, extension offices or units shall also be subject to applicable Central Bank regulations.

SECTION 8. Licencing Fees. — A fee of 1/10 of 1% of the minimum paid-up capital required under Section 2.b. but in no case less than P600.00 shall be charged for the issuance and renewal of the Certificate of Authority to Operate as a financing company.

A fee of 1/20 of 1% of the additional required capital under Sec. 6.c but in no case less than P250.00 shall be charged likewise for the issuance and annual renewal of the Certificate of Authority of each branch, agency, extension office or unit of such financing company.

SECTION 9. Loans/Credit Accommodations to Directors, Officers, Stockholders/Partners and Related Interests

a. Dealings of a financing company with any of its directors, officers or stockholders/partners and related interests shall be in the regular course of business and upon terms not less favorable to the financing company than those offered to others.

b. Credit accommodations, loans to, borrowings of, or other similar transactions with the following related interests shall be considered indirect borrowings of directors, officers and stockholders/partners:

1. Spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption of a director, officer or stockholder/partner of the financing company.

2. Partnership where a director, officer or stockholder/partner of the financing company or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, is a general partner.

3. Co-owner with the director, officer, stockholder/partner or his spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of the property or interest or right mortgaged, pledged or assigned to secure the loans or credit accommodations, except when the mortgage, pledge or assignment covers only the said co-owner's undivided interest. cdll

4. Entity in which a director, officer or stockholder/partner or his spouse or relative within the first degree of consanguinity or affinity or relative by legal adoption holds or owns more than twenty percent (20%) of the subscribed capital stock/capital contribution of such entity.

5. Similar cases of borrowings shall be resolved by the Commission on a case to case basis.

c. Any loan, borrowing, credit accommodation, or any other transaction, both direct and indirect, by a financing company to its directors, officers and stockholders/partners shall be subject to the following limitations:

1. Individual Ceiling — The outstanding direct credit accommodations to each director, officer or stockholder/partner, excluding those granted under officers' fringe benefit plans, shall not exceed, at any time, the total amount equivalent to his outstanding loans to, and placement with, the financing company which are not encumbered in any manner and book value of his paid-in capital contribution therein: Provided, that unsecured direct credit accommodations to each director, officer or stockholder/partner shall not exceed thirty percent (30%) of his total credit accommodations.

2. Aggregate Ceiling; Ceiling on Unsecured Loans. — The total outstanding borrowings of all directors, officers, or stockholders/partners, whether direct or indirect, not exceed one hundred percent (100%) of net worth, net of such unbooked valuation reserve and capital adjustments as may be required by the Commission or the Central Bank: Provided, That in no case shall the total unsecured direct and indirect borrowings of directors, officers and stockholders/partners exceed thirty percent (30%) of such aggregate ceiling or their total outstanding direct and indirect loans, whichever is lower.

The following shall be excluded in determining compliance with the aggregate ceiling:

a) Those secured by evidence of indebtedness of the national and local government or the Central Bank of the Philippines and by assignment of unencumbered placements with, or loans to, the lending entity.

b) Those granted under officers' fringe benefit plans, the aggregate outstanding amount of which shall not exceed thirty percent (30%) of net worth.

d. Credit accommodations to directors, officers, stockholders/partners and related interests of financing companies authorized by the Central Bank to engage in quasi-banking functions shall be governed further by applicable Central Bank rules and regulations.

SECTION 10. Loans and Investments. —

a. Financing companies may engage in direct lending if authorized by the secondary purposes in its articles of incorporation and in accordance with Section 42 of the Corporation Code of the Philippines (B.P. 68): Provided, however, That they shall be subject to applicable rules and regulations promulgated by the Commission and the Central Bank.

b. Unless otherwise authorized by the Commission, the total investment in real estate and in shares of stock in a real estate development corporation and other real estate based projects shall not at any time exceed twenty-five (25%) percent of the net worth of the investing financing company.

SECTION 11. Single Borrower's Limit. — The total liabilities of any person, company, corporation or firm, excluding the government and its instrumentalities or agencies, to a financing company for money borrowed shall at no time exceed thirty percent (30%) of the unimpaired net worth or unimpaired combined capital accounts of the financing company.

Existing liabilities of any person, company, corporation or firm which as of effectivity of these regulations exceed the ceiling prescribed in this Section, shall be allowed up to maturity in accordance with their respective contracts: Provided, however, That the amount exceeding the ceiling of existing liabilities which are maturing within four (4) years, may be renewed or extended to the same borrower, in an amount reduced by at least 25% of the excess every year, from effectivity of these regulations. Provided, further, That liabilities once reduced shall not thereafter be increased beyond the ceiling.

SECTION 12. Conveyance of Evidences of Indebtedness and Financed Receivables. —

a. The negotiation, sale or assignment by financing companies of evidences of indebtedness shall be in accordance with the rules of the Commission on registration of commercial papers.

b. Accounts which have been factored or discounted by, the lease receivables of, and other evidences of indebtedness (not covered in item a. above) issued or negotiated to, a financing company shall not be sold, assigned or transferred in any manner except to a bank, an investment house or another financing company.

SECTION 13. Other Activities. —

a. Financing companies not duly authorized to perform quasi-banking functions shall not act as dealers in commercial papers but may act as dealers in other securities provided they are duly licensed by the Commission as such.

b. Financing companies shall not act as dealers of certificates of time deposit.

c. Except in cases of issuances to primary institutional lenders, financing companies without quasi-banking license shall not issue instruments other than promissory notes, to cover placements with, or borrowings by them.

SECTION 14. Purchase Discount/Fees/Service and Other Charges. — The purchase discount, fees, service and other charges of financing companies on assignments of credit, purchases of installment papers, accounts receivable and other evidences of indebtedness, factoring of accounts receivable or other evidences of indebtedness, or leasing transactions shall be in accordance with the rules prescribed by the Monetary Board, in consultation with the Commission, pursuant to the provisions of Section 5 of R.A. No. 5980, as amended by P.D. No. 1454.

SECTION 15. Capital Adequacy for Operating Financing Companies. — The paid-up capital of an operating financing company, net of: (a) deficit, (b) reciprocal equity investments in subsidiaries and affiliates, (c) unsecured credit accommodations to directors, officers, stockholders/partners and their related interests (DOSRI), (d) any unbooked valuation reserves and other capital adjustments, as may be required by the Commission or the Central Bank, shall be maintained at an amount not less than that required under Section 2.b and Section 6.c hereof; Provided, however, That the above items (b), (c) and (d) need not be deducted if fully covered by retained earnings. Any appraisal surplus and appreciation or increase in book value of assets may not be used to cover up the resulting capital deficiency contemplated under this Section.

SECTION 16. Financial Ratios. — The Monetary Board, in consultation with the Commission, may prescribe financial ratios such as debt to equity ratios or risk assets to capital ratios to be maintained by financing companies.

SECTION 17. Prohibitions

a. No corporation shall be allowed to include financing activities as herein defined as one of its secondary purposes.

b. No person, association, partnership or corporation shall do or hold itself out as doing business as a financing company or finance and investment company or under any other title or name tending to give the public the impression that it is a financing company unless so authorized under R.A. No. 5980, as amended.

SECTION 18. Periodic Reports. — Every financing company shall file with the Commission the same reports filed with the Central Bank and such other reports as may be further required by the Commission itself. These reports shall be signed under oath by the company's authorized officer(s) pursuant to its Board Resolution previously filed with the Commission.

SECTION 19. Administrative Sanctions. — If the Commission finds that there is a violation of these Rules and Regulations and their implementing circulars or any of the terms and conditions of the Certificate of Authority to operate as a financing company, or any Commission order, decision or ruling, the Commission shall, in its discretion, impose any or all of the following sanctions:

a. Suspension, or revocation after proper notice and hearing, of the certificate of authority to operate as a financing company;

b. A fine in accordance with the guidelines that the Commission shall issue from time to time;

c. Other sanctions within the power of the Commission and the Central Bank under existing laws.

The imposition of the foregoing administrative sanctions shall not preclude the institution of appropriate action against the officers and directors of the financing company or any person who might have participated therein, directly or indirectly, in violation of R.A. No. 5980, as amended and these Rules and Regulations.

SECTION 20. Cease and Desist Order. — The Commission may, on its own motion or upon verified complaint of any aggrieved party, issue a Cease and Desist Order ex-parte, if the violation(s) mentioned in the preceding sections may cause grave or irreparable injury to the public or may amount to culpable fraud or violation of these Rules and Regulations, implementing circulars, certificates of authority issued by the Commission, or of any order, decision or ruling thereof.

The issuance of such Cease and Desist Order automatically suspends the authority to operate as a financing company.

Immediately upon the issuance of an ex-parte Cease and Desist Order, the Commission shall notify the parties involved and schedule a hearing on whether to lift such order or to impose the administrative sanctions provided for in Section 19 not later than fifteen (15) days after service of notice.

SECTION 21. Transitory Provision. — Any corporation/partnership which at the time of the effectivity of these Rules has been registered and licensed by the Commission to operate as a financing company, shall be considered as registered and licensed under the provisions of these Rules, subject to the terms and conditions of the license, and shall be governed by the provisions hereof; Provided, That where such corporation/partnership is affected by the new provisions hereof, said corporation/partnership shall, unless otherwise herein provided, be given a period of not more than one (1) year from the effectivity of these Rules within which to comply with the same.

SECTION 22. Effectivity. — These Rules and Regulations shall take effect fifteen (15) days after publication in two (2) newspapers of general circulation in the Philippines.

JOSE B. FERNANDEZ, JR.ChairmanSecurities and Exchange Commission

MANUEL G. ABELLOActing ChairmanMonetary Board of the CentralBank of the Philippines

Approved:

CESAR E.A. VIRATAMinisterMinistry of Finance

ATTACHMENT

CIRCULAR

September 25, 1981

TO : All Financing Companies

For purposes of uniformity, Financial statements to be submitted by all financing companies to the Securities and Exchange Commission, aside from being certifies by an independent Certified Public Accountant, shall be in accordance with the Manual of Accounts issued by the Central Bank of the Philippines per Circular Letter dated June 29, 1976.

Please be guided accordingly.

MANUEL G. ABELLOChairman