"Ruling
The Petition has no merit. By virtue of their contract of loan, MCC agreed to lend money to respondents, who, in turn, bound themselves to return the principal obligation plus pay monetary interest, which is the compensation for the use or forbearance of money.28 Under the principle of autonomy of contracts, parties to an agreement are allowed to establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided that these are not contrary to law, morals, good customs, public order, or public policy.29
Here, MCC and respondents agreed on 23.36% per annum as monetary interest for the PHP 467,600.00 loan under the first promissory note, PN No. 7155. The stipulated interests were computed for the five-year duration of the loan as they formed part of the PHP 16,895.77 monthly amortization to be paid by respondents. PN No. 7155 also provided for the payment of "an interest of 1/10th of 1% for every day" the loan obligation remains unpaid, plus "penalty of 1.5% per month" and "collection fee of P100.00 added, all of which, if left unpaid, shall be compounded monthly on due date to become part of the total outstanding obligation."30
In this case, however, the RTC found that MCC imposed an additional 3% monthly interest, referred to as the EIR. During trial, MCC admitted that it was their company policy to charge 3% per month EIR for every delay. The EIR is on top of the stipulated 23.36% per annum monetary interest and the penalties of 1/10 of 1% per day and 1.5% per month penalty, all of which were compounded monthly as part of the outstanding balance.
Clearly, the Court cannot sustain the imposition of the compounded 3% monthly EIR. The evidence shows that the EIR was not indicated in PN No. 7155. MCC unilaterally imposed the EIR by simply inserting it in the disclosure statement. This is not valid and does not bind the respondents as it violates the mutuality of contracts under Article 1308 of the Civil Code, which states that the validity or compliance to the contract cannot be left to the will of one of the parties.31
The Court likewise rejects MCC's argument that the 3% monthly EIR may not be invalidated because the reduction of interest rates only apply to loans with open-ended terms, citing De la Paz v. L & J Development Company, Inc.32 Further, MCC cannot validly insist that respondents may not question the interest rates after agreeing to and benefiting from the proceeds of the loan.1aшphi1
In Megalopolis Properties, Inc. v. D 'Nhew Lending Corporation,33 the Court ruled that although there is no numerical limit on conscionability, the rate of 3% per month or 36% per annum is three times more than the 12% legal interest rate, and therefore, excessive and unconscionable. The rate of 36% per annum is also far greater than those previously upheld by the Court.34 Moreover, contrary to MCC's argument, we stressed in Megalopolis that the ruling in De la Paz did not in any way shield loan agreements with definite terms from scrutiny on conscionability. In De la Paz, the Court disallowed the creditor's claim for payment of monetary interests because of the absence of a written stipulation on interests as required under Article 195635 of the Civil Code. The fact that an interest of 6% per month was imposed on an open-ended loan wherein the period is unspecified only served to aggravate the outrageous amount being charged. At any rate, jurisprudence is settled that the willingness of the debtor in assuming an unconscionable rate of interest is inconsequential to its validity.36
When MCC and the respondents executed PN No. 7155 in September 2009, the legal interest rate was fixed at 12% per annum.37 This rate was considered the reasonable compensation for forbearance of money. As held in Spouses Abella v. Spouses Abella,38 while the contracting parties may depart from the legal interest rate, any deviation therefrom must be reasonable and fair. If the stipulated interest for a loan is more than twice the prevailing legal rate of interest, it is for the creditor to prove that this rate is justified under the prevailing market conditions.39 No justification was offered by MCC in this case.
In Chua v. Timan,40 the Court declared that stipulated interest rates ranging from 3% per month and higher are excessive, unconscionable, and void for being contrary to morals, if not against the law.41 Although Central Bank of the Philippines Circular No. 905-82 has effectively removed the interest ceilings prescribed under the Usury Law, still, lenders may not impose interest rates that would enslave the borrowers or hemorrhage their assets.42 Following these standards, the 3% per month or 36% per annum EIR cannot pass as reasonable. It is unacceptable particularly in this case where the EIR was charged on top of the stipulated 23.36% per annum monetary interest and the penalties of 1/10 of 1% per day and 1.5% per month, compounded monthly. As correctly pointed out by the trial court, MCC's scheme exponentially bloated the principal loan amount of PHP 467,600.00. It misled respondents into continuously paying on the belief that their balance was increasing because of several delayed payments.43
Likewise, the Court denies MCC's prayer to maintain the stipulated interest and charges in PN No. 7155 and hereby affirms the RTC and the CA's judgment equitably reducing the stipulated interest rate to the applicable 12% per annum legal interest. Even if we disregard the 3% per month or 36% per annum EIR, the Court sees that the stipulated interest rate of 23.36% per annum and the additional interest of 1/10 of 1% per day and 1.5% per month penalty, all compounded monthly, or roughly 42% per annum, is still excessive. Stipulations authorizing the imposition of iniquitous or unconscionable interest are contrary to morals, if not against the law. Under Article 140944 of the Civil Code, these contracts are inexistent and void from the beginning. They cannot be ratified nor the right to set up their illegality as a defense be waived. The unconscionable interest rate is therefore, nullified and is deemed not written in the contract of loan. For these reasons, and given the span of years counted from 2009 that are covered by the computation of interests, the reduction of the stipulated interest rates and penalties to the applicable 12% per annum legal interest is more equitable. This prevents the outstanding balance from increasing to an amount which disproportionately exceeds the PHP 467,600.00 principal debt.45 The Court is empowered to equitably reduce the penalties charged especially in respondents' case because of their substantial payments.46
Note however that only the EIR and stipulated interest rates and penalties are declared void for being unconscionable. The very nature of the parties' contract of loan entitles MCC to recover not only the principal amount, but also the payment of monetary interest from the respondents, as compensation for the use of the borrowed amount.47 Based on Article 142048 of the Civil Code, respondents' obligation to pay the principal and the interest subsists as this can be separated from the void interests rates and charges.
Now, in order to determine whether the RTC and the CA were correct in ruling that the entire principal obligation of PHP 467,600.00 under the first promissory note, PN 7155, has been fully paid by respondents, we apply the legal rate of 12% per annum, as monetary interest reckoned from the date of the contract, September 2009.49 We also deduct respondents' payments made until January 2014 amounting to a total of PHP 757,778.54,50 computed as follows:
X x x.
As can be seen from the foregoing, the RTC and the CA correctly ruled that respondents had fully paid the entire obligation. The Court finds that the obligation was fully paid as early as August 2012 and there was even an overpayment of PHP 11,532.47 for that month. Since respondents continued the payments until January 2014, they have a total overpayment of PHP 203,532.47 for PN No. 7155.
Relative to this, the Court sustains the RTC and the CA's declaration that the second promissory note, PN No. 8351, is void for lack of consideration as it was only executed by respondents to cover the supposed "unpaid balance" in PN No. 7155. In this regard, we need to modify the RTC and the CA's judgment in order to reflect the correct amount of overpayment to be refunded to respondents. The total amount to be refunded to respondents must cover not only the payments made in PN No. 8351 in the amount of PHP 417,859.58,51 as awarded by the RTC and the CA, but also the overpayment in PN No. 7155 amounting to PHP 203,532.47, as shown in the computation above, plus legal interest of 6% per annum from the date of the filing of respondents' Complaint until finality, following Nacar v. Gallery Frames.52 All monetary awards will earn interest at the rate of 6% per annum from finality of this Decision until full payment.53
Finally, the Court affirms the CA's ruling that the foreclosure proceedings are void. Generally, the nullity of the unconscionable interests and charges does not affect the terms of the real estate mortgage. The creditor's right to foreclose the mortgage remains, and such right can be exercised upon the failure of the debtors to pay the debt due.54 In this case however, the principal loan obligation was extinguished by the full payment of the respondents. This act automatically terminates the real estate mortgage. Being a mere accessory contract, the mortgage cannot exist independently of the principal obligation.55 Considering that the mortgage ceased to exist, the new title, TCT No. 010-201900129856 of the Registry of Deeds for Parañaque City, issued in the name of MCC as a result of the foreclosure, is void. The title registered in the name of respondent Ramon, TCT No. 72248,57 was properly reinstated by the RTC and the CA.
ACCORDINGLY, the Petition is DENIED. The Decision dated July 6, 2021 and the Resolution dated December 22, 2021 of the Court of Appeals in CA-G.R. CV No. 115157 are AFFIRMED with MODIFICATION in that petitioner Manila Credit Corporation is further ordered to refund to respondents Ramon S. Viroomal and Anita S. Viroomal the overpayment in the amount of PHP 203,532.47 for PN No. 7155, in addition to the amount of PHP 417,859.58 for PN No. 8351, with legal interest of 6% per annum from the date of the filing of respondents' Complaint until finality. Legal interest at the rate of 6% per annum is likewise imposed on all the monetary awards, from the finality of this Decision until full payment.
SO ORDERED."
https://lawphil.net/judjuris/juri2023/jan2023/gr_258526_2023.html
SECOND DIVISION
[ G.R. No. 258526, January 11, 2023 ]
MANILA CREDIT CORPORATION, PETITIONER, VS. RAMON S. VIROOMAL AND ANITA S. VIROOMAL, OFFICE OF THE CLERK OF COURT AND EX-OFFICIO SHERIFF OF THE REGIONAL TRIAL COURT OF PARAÑAQUE CITY, AS REPRESENTED BY ATTY. JERRY R. TOLEDO AND SHERIFF ALEJANDRO P. ABREMATEA, AND THE REGISTER OF DEEDS OF PARAÑAQUE CITY, RESPONDENTS.
D E C I S I O N
LOPEZ, M., J.:
