Supreme Court nullifies foreclosure, rules bank interest unfair

MANILA, Philippines — The Supreme Court has nullified the foreclosure of several properties belonging to two borrowers, ruling that the interest rate charged on a bank loan was unfair and imposed without the borrowers’ consent.

In a nine-page decision promulgated on March 3, 2025, penned by Associate Justice Ricardo Rosario, the high court’s Special Third Division granted the motion for reconsideration filed by Editha Ang and Violeta Fernandez over their properties had been foreclosed by United Coconut Planters Bank (UCPB) after they defaulted on a P16 million loan.

The case stemmed from the loan agreement, which allowed UCPB the sole power to adjust the interest rate every quarter based on market conditions. When the Ang and Fernandez failed to settle the total loan amount, UCPB initiated extrajudicial foreclosure proceedings to recover the unpaid debt.

The pair challenged the foreclosure sale in the Regional Trial Court (RTC), claiming the bank’s ability to unilaterally set and increase the interest rate was unfair and invalid.

While the RTC agreed that the interest rate provisions were invalid because they were left entirely to the bank’s discretion, it initially upheld the foreclosure sale.

This position was later reversed by the Court of Appeals, which ruled that both the interest rate and the subsequent foreclosure sale were void.

Ruling. Initially, the Supreme Court had agreed that the interest rate itself was invalid but still upheld the foreclosure, maintaining that the borrowers remained in default.

However, upon reconsideration, the Supreme Court ruled that if the interest rate is unconscionable or imposed unilaterally by the lender, then any foreclosure that follows is also invalid.

Citing the Civil Code, the high court said that contracts must be fair and mutually agreed upon, stating that a contract depending only on one party’s will is void.

“In the instant case, not only was there a finding, both by this Court and also by the courts below, that the interest rates being imposed were unilaterally imposed by petitioner, thus making it potestative or entirely dependent on petitioner’s will,” the high court’s ruling read.

“Being potestative, the principle of mutuality of contracts, found in Articles 1308 and 1309 of the Civil Code, could not have been present, making the provisions on interest void,” it added.

Since the interest rate in this case was solely determined by UCPB, the high court concluded that the rate was invalid, which meant the loan was not yet legally due.

“Being void, the subsequent foreclosure proceedings could not have been held validly,” it said.

The high court also said that the borrowers must now be given a fair chance to pay the loan at an interest rate agreed upon by both parties.

“The mortgagor should be given a chance to pay their indebtedness at an interest rate clearly agreed upon by the parties; otherwise, they shall be at the mercy of their creditor, sending to loss their property without being afforded a fair opportunity to settle their indebtedness,” it said.