The Supreme Court held that excessively high interest rates on loans are against public morals and, therefore, unenforceable. It also affirmed that a waiver of the right of redemption in a real estate mortgage, especially when written in fine print in a contract of adhesion, is invalid. This decision protects borrowers from oppressive lending practices and ensures they retain their legal rights, particularly the right to reclaim their property after foreclosure.

Loan Sharks Beware: When is a Mortgage Waiver Not Really a Waiver?

In Asian Cathay Finance and Leasing Corporation v. Spouses Gravador, the central issue revolved around the validity of interest rates and a waiver of the right to redemption in a loan agreement. The respondents, Spouses Cesario Gravador and Norma de Vera, along with Spouses Emma Concepcion G. Dumigpi and Federico L. Dumigpi as co-makers, obtained a loan from Asian Cathay Finance and Leasing Corporation (ACFLC). When the respondents defaulted, ACFLC demanded an exorbitant amount, leading the respondents to file a suit to annul the real estate mortgage.

The Regional Trial Court (RTC) initially ruled in favor of ACFLC, upholding the validity of the loan documents. However, the Court of Appeals (CA) reversed the RTC’s decision, reducing the interest rate and invalidating the waiver of the right to redemption. This prompted ACFLC to elevate the case to the Supreme Court, questioning the CA’s decision.

One of the primary arguments raised by ACFLC was that the respondents, being educated individuals, knowingly entered into the loan agreement and should be bound by its terms. ACFLC contended that the stipulated interest rates and the waiver of the right of redemption were voluntarily agreed upon and, therefore, should be enforced. However, the Supreme Court sided with the respondents, emphasizing the importance of protecting borrowers from unconscionable lending practices. The Court reiterated that while parties are generally free to stipulate on interest rates, such rates cannot be excessively high or against public morals.

The Supreme Court addressed the issue of unconscionable interest rates. While Central Bank Circular No. 905 removed the ceiling on interest rates, the Court clarified that this did not give lenders carte blanche to impose any rate they wished. Citing previous cases, the Court emphasized that interest rates could be equitably reduced or invalidated if found to be excessive, iniquitous, or unconscionable.

In this case, the Court found that the amount demanded by ACFLC, which more than doubled the principal loan within a few months, was indeed unconscionable. ACFLC failed to provide a clear computation of the interest and penalties charged, further supporting the Court’s conclusion. The Supreme Court quoted Spouses Isagani and Diosdada Castro v. Angelina de Leon Tan, stating:

The imposition of an unconscionable rate of interest on a money debt, even if knowingly and voluntarily assumed, is immoral and unjust. It is tantamount to a repugnant spoliation and an iniquitous deprivation of property, repulsive to the common sense of man. It has no support in law, in principles of justice, or in the human conscience nor is there any reason whatsoever which may justify such imposition as righteous and as one that may be sustained within the sphere of public or private morals.

The Court further explained that stipulations authorizing iniquitous or unconscionable interest are contrary to morals and void from the beginning under Article 1409 of the Civil Code. This nullity, however, does not affect the lender’s right to recover the principal of the loan, but the excessive interest is replaced with a legal interest of 12% per annum.

The Court then turned to the issue of the waiver of the right of redemption. ACFLC argued that the right of redemption is a privilege that the respondents could validly waive. However, the Supreme Court emphasized that for a waiver to be valid, it must be couched in clear and unequivocal terms, leaving no doubt as to the intention to relinquish the right. Furthermore, the intention to waive the right must be shown clearly and convincingly. Here, the waiver was contained in fine print within the real estate mortgage, a contract of adhesion prepared by ACFLC. The Court noted that doubts in interpreting stipulations in contracts of adhesion should be resolved against the party that prepared them. This principle applies especially to waivers, which are not presumed and must be clearly demonstrated.

The Court cited the CA’s observation that:

The supposed waiver by the mortgagors was contained in a statement made in fine print in the REM. It was made in the form and language prepared by [petitioner]ACFLC while the [respondents] merely affixed their signatures or adhesion thereto. It thus partakes of the nature of a contract of adhesion. It is settled that doubts in the interpretation of stipulations in contracts of adhesion should be resolved against the party that prepared them. This principle especially holds true with regard to waivers, which are not presumed, but which must be clearly and convincingly shown. [Petitioner] ACFLC presented no evidence hence it failed to show the efficacy of this waiver.

The Supreme Court agreed with the CA, stating that allowing the waiver of the right of redemption through fine print in a mortgage contract would essentially place the foreclosed property at the mortgagee’s absolute disposal, rendering the mortgagor’s right of redemption practically useless. This would be subversive to public policy, as the law aims to aid rather than defeat the right of redemption when the redemptioner chooses to exercise it.

Finally, the Court dismissed ACFLC’s claim that the respondents’ complaint for annulment of mortgage constituted a collateral attack on its certificate of title. The Court clarified that the complaint was filed long before ACFLC consolidated its title over the property, and while the title was still under the respondent’s name, hence, the title remained subject to the outcome of the case.

FAQs

What was the key issue in this case?	The central issue was whether the interest rates imposed by Asian Cathay Finance and Leasing Corporation (ACFLC) were unconscionable and whether the waiver of the right of redemption in the real estate mortgage was valid.
What is an unconscionable interest rate?	An unconscionable interest rate is one that is excessively high and unfair, violating public morals and principles of justice. While the Usury Law ceiling on interest rates has been lifted, courts can still invalidate or reduce interest rates they deem unconscionable.
What is a contract of adhesion?	A contract of adhesion is a contract where one party (usually a large business) sets all or most of the terms, and the other party (usually an individual consumer) has little or no ability to negotiate them. Such contracts are construed strictly against the party that prepared them.
What is the right of redemption?	The right of redemption is the right of a mortgagor (borrower) to reclaim their property after it has been foreclosed by paying the outstanding debt, interest, and costs. This right is generally protected by law to give borrowers a chance to recover their property.
When is a waiver of the right of redemption valid?	A waiver of the right of redemption must be clear, express, and made voluntarily. It should not be hidden in fine print in a contract of adhesion, and the borrower must fully understand the implications of waiving this right.
What happens if an interest rate is deemed unconscionable?	If a court determines that an interest rate is unconscionable, the excessive portion of the interest is deemed void, and the lender can only recover the principal amount of the loan plus a legal interest rate (typically 12% per annum).
What is the significance of the Truth in Lending Act in loan agreements?	The Truth in Lending Act requires lenders to disclose all relevant information about the loan, including the interest rate, fees, and other charges, to the borrower before the loan is consummated. Failure to comply with this Act can affect the enforceability of the loan agreement.
How does this case protect borrowers?	This case reinforces the principle that borrowers are protected from oppressive lending practices, such as unconscionable interest rates and hidden waivers of important rights. It ensures that contracts are fair and that borrowers are not taken advantage of by lenders with superior bargaining power.

In conclusion, the Supreme Court’s decision in Asian Cathay Finance and Leasing Corporation v. Spouses Gravador serves as a significant safeguard for borrowers against predatory lending practices. By invalidating unconscionable interest rates and strictly scrutinizing waivers of the right of redemption, the Court reaffirmed the importance of fairness and equity in loan agreements.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Asian Cathay Finance and Leasing Corporation v. Spouses Gravador, G.R. No. 186550, July 05, 2010