For financing and lending companies in the Philippines, some specific rules and requirements prohibit certain activities when seeking to collect borrowers' debts.

In a previous article, we outlined the compliance requirements for registering a financing or lending Company in the Philippines.

However, in this article, we explore what the SEC means by ‘unfair debt collection practices and what financing and lending companies can do to ensure compliance and avoid violations and penalties!

SEC Memorandum Circular No.  18, Series of 2019

In August 2019, the SEC issued Memorandum Circular No. 18, Series of 2019, entitled “Prohibition on Unfair Debt Collection Practices of Financing Companies (FC) and Lending Companies (LC)”.

M.C. 18 of 2019 is directed at all financing and lending companies in the Philippines!

M.C. 18 of 2019 seeks to prevent financing companies and lending companies from harassing borrowers and engaging in unethical, abusive, and/or unfair practices when seeking to collect debts.

This prohibition applies whether the company seeks to collect the debts itself or via a third-party service provider.

Why did the SEC release a Memorandum on Unfair Debt Collection Practices? 

M.C. 18 of 2019 identifies two main reasons why the SEC believes it necessary to issue rules and prohibitions on certain debt collection practices:

1. At the time, the SEC had been receiving various complaints which alleged that certain lending and financing Companies had been harassing customers or “borrowers” and engaging in abusive, unethical, and unfair acts when seeking to collect their debts;
   
   
2. The SEC also referred to its own understanding that Financing and Lending Companies were using third-party debt collection service providers in an attempt to avoid any liability for harassment that the Financing and Lending Companies might incur as a result of its debt collection practices. 

In light of the above, M.C. 18 of 2019 was issued by the SEC in August 2019 and took effect very shortly after.

What is an ‘Unfair Collection Practice’? 

First of all, it’s important to note that the SEC is not preventing financing or lending companies (or. Indeed, their third-party debt collection providers) from collecting debts from borrowers who are properly due and owing to them under the original loan agreement.

This is provided that the companies seek to collect debts in a reasonable and legally permissible manner.

However, the SEC wants to ensure that all such debt collection practices observe the principle of good faith and reasonable conduct! In particular, the SEC seeks to prevent companies from engaging in debt collection practices that amount to “unscrupulous and untoward acts.” 

In light of this, the SEC lists out some examples of what will constitute an “Unfair Collection Practice”, as outlined below:

• Use or threat of use of violence or other criminal means to physically harm a person or harm their reputation or property;
• Threatening to take any form of illegal action;
• Using insults or profane language which results in the abuse of a borrower and/or which amounts to a criminal offense or act under the law;
• Public disclosure or publication of the name or other personal information of a borrower who is allegedly refusing to pay a debt (see list of exceptions below);
• Communicating or threatening to communicate to any personal information about a loan which is known to be false or should have been known to be wrong (see list of exceptions below);
• Using false representation or deceptive means to collect a debt or obtain information that relates to a borrower;
• Contacting a borrower at unreasonable times, such as before 6 am or after 10 pm. The exceptions to this are where debt is more than 15 days overdue or the borrower has consented (which must be written, electronic, or recorded) to being contacted at such unreasonable times. 
• Contacting a borrower’s contact list other than those named guarantors or co-makers for the loan(s). 

The SEC states that this list is not meant to be limited or exhaustive. With that in mind, Financing and Lending Companies must ensure at all times that their debt collection practices are conducted in good faith, with reasonable conduct, and must refrain from engaging in unscrupulous and/or untoward acts!

Keep borrower information confidential!

From the perspective of debt collection, M.C. 18 of 2019 requires that lending and financing companies must keep all customer information strictly confidential!

However, M.C. 18 of 2019 does outline several exceptions to that confidentiality requirement. Customer information can be disclosed where:

• The written or recorded consent of the borrower has been provided;
• It is a release, submission, or exchange of information with other financial institutions, credit information bureaus, lenders, their agents, or other representatives;
• It is required by a Court Order or government agency authorized by law;
• The information is disclosed to an agent of the Financing or Lending Company to enforce their rights against a borrower;
• The information is disclosed to a third-party service provider to assist or provide services to the Financing or Lending Company to help it administer its financing/lending operations; 
• The disclosure is to an insurance company provided it is to insure against the borrower’s default or other credit loss and the borrower from fraud or unauthorized charges.

Outsourcing of debt collection services 

M.C. 18 of 2019 does not prohibit the outsourcing of debt collection to a third party! The Memorandum merely outlines where the ultimate responsibility rests if a third-party debt collection agency is engaged.

So, outsourcing of debt collection practices is still allowed. Any third-party debt collection service provider engaged by a Financing or Lending Company will be deemed an “agent” of the company.

As such, the ultimate responsibility for compliance with proper debt collection practices (and in particular, M.C. 18 of 2019) will always remain with the Financing or Lending Company.  

Mandatory Policies and Procedures for Handling Customers/Borrowers! 

M.C. 18 of 2019 requires Financing and Lending Companies to adopt policies and procedures for any personnel required to handle the collection of debts to disclose their full name and true identity to the relevant borrower. 

The above requirement relates to both in-house collectors and third-party provider collection agencies. 

Financing and Lending Companies are also required to establish a Customer Service function responsible for promptly addressing borrower queries, concerns, and complaints. 

Importantly, M.C. 18 of 2019 requires that the President or CEO and the Compliance Officer of a Financing and Lending Company sign and submit a sworn certificate stating that they have complied with these specific requirements! 

For further information on the compliance requirements relating to this sworn certificate, you can check out a recently issued clarification by the SEC here – SEC Clarifies Compliance Requirements for Newly Registered Financing and Lending Companies in the Philippines.

Penalties under M.C. 18 of 2019

The SEC has also outlined the relevant penalties for violation of M.C. 18 of 2019, as outlined below. Violations will be determined on a “per loan transaction per complainant” basis.

1. First Violation – PHP25,000 for Lending Companies. PHP50,000 for Financing Companies. 
2. Second Violation – PHP50,000 for Lending Companies. PHP100,000 for Financing Companies. 
3. Third Violation – At its discretion, the SEC can impose a financial penalty of not less than twice the penalty for the Second Violation (see above) but not more than PHP1,000,000. The SEC can also suspend the lending or financing activities of a company for up to 60 days. Finally, the SEC also has the power to revoke the Certificate of Authority to Operate as a Financing or Lending Company. 

Finally, Financing and Lending Companies should be aware that the above penalties' imposition does not prevent the SEC from imposing additional penalties under any other form of legislation that might apply to Financing or Lending Companies or their directors or officers. For example, penalties and sanctions might also be imposed under the Philippines' Revised Corporation Code, depending on the specific circumstances.

CloudCfo – digital accounting and bookkeeping services in Metro Manila and the Philippines

CloudCfo works with financing companies and lending companies across the Philippines!

For business models based on high-volume/low-value transactions daily, we are experts at helping companies develop process-driven and output-focused practices to ensure that their Loan Management System (LMS) aligns and works efficiently with their bank-end finance function!  

Contact us directly via enquire@cloudcfo.ph or visit www.cloudcfo.ph  Find out all you need to know about CloudCfo’s accounting and bookkeeping services for startups and small businesses in the Philippines! 

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NOTE: This article is strictly for general information purposes only. Nothing in this article constitutes or intends to constitute financial, accounting, regulatory or legal advice and must not be used as a substitute for professional advice. It is still necessary to consult your relevant professional adviser regarding any specific matter referenced above.

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