THE TRUTH IN LENDING ACT (TLA)

RA NO. 3765

THE NATURE AND PURPOSE OF RA 3765 [THE TRUTH IN LENDING ACT

(TLA)]
The purpose of the TLA is the full disclosure to the borrower of the true cost of credit as
well as other finance charges (Sec. 2, TLA).

The Truth in Lending Act was enacted to protect citizens from a lack of awareness of
the true cost of credit to the user by using a full disclosure of such cost with a view of
preventing the uninformed use of credit to the detriment of the national economy ( Silos
v. PNB, 728 SCRA 617, 2 July 2014). Its rationale is to protect the users of credit from a
lack of awareness of the true cost thereof, proceeding from the experience that banks
are able to conceal such true cost by hidden charges, uncertainty of interest rates,
deduction of interests from the loaned amount, and the like. The law thereby seeks to
protect debtors by permitting them to fully appreciate the true cost of the loan, to
enable them to give full consent to the contract, and to properly evaluate their options
in arriving at business decisions ( UCPB v. Sps. Beluso, GR. No. 159912, August 17,
2007).

Hence, any creditor* is required to furnish to each person to whom credit is extended,
prior to the consummation of the transaction, a clear statement in writing setting forth,
to the extent applicable and in accordance with the rules and regulations prescribed by
the Monetary Board (MB), the following information:
(1) the cash price or delivered price of the property or service to be acquired;
(2) the amounts, if any, to be credited as down payment and/or trade-in;
(3) the difference between the amounts set forth under clauses (1) and (2);
(4) the charges, individually itemized, which are paid or to be paid by such person in
connection with the transaction but which are not incident to the extension of
credit;
(5) the total amount to be financed;
(6) the finance charge** expressed in terms of pesos and centavos; and
(7) the percentage that the finance charge bears to the total amount to be financed
expressed as simple annual rate on the outstanding unpaid balance of the
obligation (Sec. 4, TLA).
*Creditor means person engaged in the business of extending
credit (including any person who as a regular business practice makes
loans or sells or rents property or services on a time, credit, or installment
basis, either as a principal or as agent) who requires as an incident to the

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 extension of credit the payment of a finance charge (Section 3, par. 4,
TLA).

**Finance charge includes interest, fees, service charges,

discounts, and such other charges incident to the extension of credit as
the Monetary Board may be regulation prescribe (Section 3, TLA).

APPLICABILITY TO BANK TRANSACTIONS

A bank is one of the creditors contemplated under the Truth in Lending Act.

WHEN APPLICABLE TO BANKS

The Truth in Lending Act applies to the following transactions of banks:
(1) Any loan, mortgage, deed of trust, advance and discount;
(2) Any conditional sales contract, any contract to sell, or contract of sale of property or
services, 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;
(3) Any rental-purchase contract;
(4) Any contract or arrangement for the hire, bailment or leasing of property;
(5) Any option or demand, lien, pledge, or other claim against, or for the delivery of,
property or money;
(6) Any purchase, or other acquisition of or any credit upon security of any obligation or
claim arising out of any of the foregoing; and
(7) Any transaction or series of transactions having a similar purpose or effect. (X307,
MORB)

WHEN NOT APPLICABLE TO BANKS

The following categories of credit transactions are outside the scope of the Truth in
Lending Act:
(1) Credit transactions which do not involve payment of any finance charge by the
debtor; and
(2) Credit transactions in which the debtor is the one specifying a definite and fixed set
of credit terms such as bank deposits, insurance contracts, sale of bonds, etc.
(X307, MORB)

2000 BAR QUESTION

Embassy Appliance sells home theater components that are designed and
customized as entertainment centers for consumers within the medium-to-
high price bracket. Most, if not all, of these packages are sold on installment

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basis, usually by means of credit cards allowing a maximum of 36 equal
monthly payments. Preferred credit cards of this type are those issued by
banks, which regularly hold mall-wide sales blitzes participated in by
appliance retailers like Embassy Appliances. The sales clerk who is attending
to you simply swipes your credit card on the electronic approval machine
(which momentarily prints out your charge slip since you have unlimited
credit), tears the slip from the machine, hands the same over to you for your
signature, and without more, proceeds to arrange the delivery and
installation of your new home theatre system. You know you will receive a
statement on your credit card purchases from the bank containing an option
to pay only a minimum amount, which is usually 1/36 of the total price you
were charged for your purchase. Did Embassy Appliance comply with the
provisions of the Truth in Lending Act?

SUGGESTED ANSWER:

There is no need for Embassy Appliances to comply with the Truth in Lending Act. The
transaction is not a sale on installment basis. Embassy Appliances is a seller on cash
basis. It is the credit card company which allows the buyer to enjoy the privilege of
paying the price on installment basis.

THE EFFECT OF FAILURE TO COMPLY WITH THE PROVISIONS OF THE TLA

Failure to comply Shall pay a fine of P100.00 or double the amount of
the finance charge but in no case shall it exceed
P2000.00 (Sec. 6a, TLA).
Willful violation of the TLA Shall pay a fine shall not be less than P1,000.00 nor
more than P5,000.00 or imprisonment for not less than
6 months, nor more than one year or both (Sec. 6b,
TLA).

THE VIOLATION OR NON-COMPLIANCE WITH THE PROVISIONS OF THE TLA

WILL NOT AFFECT THE VALIDITY OR ENFORCEABILITY OF THE CONTRACT
Nothing contained in the provisions of the TLA or any regulation thereunder shall affect
the validity or enforceability of any contract or transaction (Sec. 6b, TLA).

PRESCRIPTIVE PERIOD
An action to recover penalty may be brought within one (1) year* from the date of
the violation before any court of competent jurisdiction (Sec. 6, TLA). *One (1) year is

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reckoned from the date of the date of demand and not from the date of execution of
the promissory note.

SUBSEQUENT COMPLIANCE
Subsequent compliance with the disclosure requirement cannot be deemed in
substantial compliance with the Truth in Lending Act ( UCPB v. Sps. Beluso).

1991 BAR QUESTION

Dana Gianina purchase on a 36-month installment basis the latest model of

the NISSAN Sentra Sedan car from the Jobel Cars, Inc. In addition to the
advertised selling price, the latter imposed finance charges consisting of
interests, fees and service charges. It did not, however, submit to Dana a
written statement setting forth therein the information required by the Truth
in Lending Act (RA No. 3765).
Nevertheless, the conditional deed of sale which the parties executed
mentioned that the total amount indicated therein included such finance
charges.

A. Has there been substantial compliance of the aforesaid Act?

SUGGESTED ANSWER:

No. there was no substantial compliance with the Truth in Lending Act. The law
provides that the creditor must make a full disclosure of the credit cost. The statement
that the total amount due includes the principal and the financial charges, without
specifying the amounts due on each portion thereof would be insufficient and
unacceptable.

B. If your answer to the foregoing question is in the negative, what is the

effect of the violation on the contract?
SUGGESTED ANSWER:
A violation of the Truth in Lending Act will not adversely affect the validity of the
contract itself.

C. In the event of a violation of the Act, what remedies may be availed of by

Dana?
SUGGESTED ANSWER:
Dana may avail of the following remedies:

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 1) File a civil action against Jobel Cars, Inc. with a court of competent jurisdiction
within one-year from date of the transaction to recover a penalty of P100.00
or the amount equal to twice the finance charge, whichever is greater, but
shall not exceed P2,000.00, plus attorney’s fees and costs;
2) File a criminal action against the responsible officers of Jobel Cars, Inc., who
may be fined the amount of not less than P1,000.00 but not more than
P5,000.00 or imprisonment of not less than six (6) months but not more than
one (1) year, or both (Sec 6a & 6c, TLA).

2009 BAR QUESTION

TRUE or FALSE. A loan agreement which provides that the debtor shall pay
interest at the rate determined by the bank’s branch manager violates the
disclosure requirement of the Truth in Lending Act.
SUGGESTED ANSWER:
True. This is contrary to the duty of the creditor to disclose in detail the interests,
charges and other figures indicating in detail the cost of the credit granted to the
debtor.

2012 BAR QUESTION

XYZ Corporation bought 10 units of Honda Civic from CCC Corporation. ABC
Bank granted a loan to XYC Corporation which executed a financing
agreement which provided for the principal amount, the installment
payments, the interest rates and the due dates. On due dates of the
installment payments, XYZ Corporation was asked to pay for some handling
charges and other fees which were not mentioned in the financing
Agreement. Can XYC Corporation refuse to pay the same?
a. No, because handling charges and other fees are usual in certain banking
transactions;
b. Yes, because ABC Bank is required to provide XYZ Corporation not only the
amount of the monthly installments but also the details of the finance
charges as required by the Truth in Lending Act;
c. No, because the Financing Agreement is a valid document to establish the
existence of the obligation;
d. Yes, because legally, finance charges are never allowed in any banking
transaction.

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SUGGESTED ANSWER:
b) Yes, because ABC Bank is required to provide XYZ Corporation not only the amount
of the monthly installments but also the details of the finance charges as required by
the Truth in Lending Act.

PROBLEM

X pledged his gold ring at RST Pawnshop. His ring was appraised and X was
granted a loan for P10,000 less advance interest for one (1) month at 5% per
month. At the expiration of one (1) month, X went to redeem his pawned
ring bringing with him P10,000. To his surprise, the cashier demanded from
him the sum of P10,120 consisting of the principal (P10,000), 1% finance
charge (P100) and fixed service charge of P20. An examination of the pawn
ticket revealed that the 5% interest rate is written in readable size at the
front, but the finance and service charges are vaguely written by paragraphs
in very small print at the back of the pawn ticket.
Do you think RST Pawnshop violated any law? Explain briefly. (Co Untian Jr.,
C., Mercantile Law Digest 2016, p.434)

SUGGESTED ANSWER:
RST Pawnshop has violated the Truth in Lending Act that categorically requires
creditors to furnish a clear statement in writing to the debtor about the charges
imposed in the transaction. The very small and vague printed stipulations on finance
and service charges may have deprived X from actually knowing how much his
obligation is when the loan matures.