Lenders beware: The crackdown on illegal online cash companies

“Quick and Easy Online Loan,” “Fast, Easy, Loan Online,” “Quick Cash Online” — these are only a few of the marketing and advertising slogans of online lending companies which have emerged among the online community. Oblivious of the consequences, these online loans became popular among the mass of Filipino people who, in some way or other, needed the “quick and easy” cash.

These online lending companies operate through their respective mobile platforms. According to an investigation by the Securities and Exchange Commission (SEC), before a person can apply for this “quick and easy” online loan, all he has to do is download and install the online lending application on his mobile phone. By downloading and installing the application, the online lending operators already gain access to the personal information contained in the mobile phone of the prospective borrower which includes contact numbers, Facebook accounts, e-mail addresses of all persons saved/stored therein. This personal information may then be utilized by the online lending operators to exact payments from their borrowers by simply sending a text blast to the persons contained in the borrowers’ mobile phones informing all his contacts that the person concerned obtained a loan from them but refuses to pay the amount due.

Not long after, the SEC and the National Privacy Commission (NPC) received several complaints from borrowers who felt an invasion of their privacy and a disruption of their peace.

In response, the NPC summoned more than 60 online lending operators for a summary hearing. Meanwhile, the SEC released cease and desist orders, wave after wave of them, to shut down illegal online lending companies. As of Oct. 29, 48 online lending companies have been ordered to desist from their operations for violation of the Lending Company Regulation Act of 2007 and SEC Memorandum Circular No. 18, Series of 2019.

As the agency tasked to regulate and supervise the operations and activities of lending companies in the country, the SEC responded to the complaints by: 1.) shutting down the operations of illegal online lending companies; 2.) prohibiting unfair debt collection practices of financing/lending companies; and, 3.) imposing disclosure requirements for the advertisements of financing/lending companies and requiring the reporting of online legal platforms.

CLOSURE OF ILLEGAL ONLINE LENDING COMPANIES
The SEC closed online lending companies for violations of Republic Act No. 9474, or the Lending Company Regulation Act of 2007, which prohibits any person from engaging or carrying out a lending business without the Certificate of Authority to Operate from the SEC. Section 4 thereof provides:

“SEC. 4. Form of Organization. — A lending company shall be established only as a corporation: Provided that existing lending investors organized as single proprietorships or partnerships shall be disallowed from engaging in the business of granting loans to the public one year after the date of effectivity of this Act.

“No lending company shall conduct business unless granted an authority to operate by the SEC.”

As stated in its declaration of policy, the Lending Company Regulation Act of 2007 was enacted to prevent and mitigate, as far as practicable, practices prejudicial to public interest and to lay down the minimum requirements and standards under which lending/financial companies may be established and do business. Thus, as emphasized by the SEC, without a Certificate of Authority to Operate as Lending Companies or Financing Companies, as required by Section 4 of the Lending Company Regulation Act of 2007, these online lending operators cannot offer and provide loans to the public. Violators of the act face payment of a fine not less than P10,000 and not more than P50,000, or imprisonment of not less than six months but not more than 10 years, or both, at the discretion of the court.

ISSUANCE OF MEMORANDUM CIRCULAR NOS. 18 AND 19, SERIES OF 2019.
Answering this growing need to protect the public, especially the poor and the underprivileged who became the target of the illegal online lending operators, the SEC issued Memorandum Circular No. 18, Series of 2019, entitled as “Prohibition on Unfair Debt Collection Practices of Financing Companies and Lending Companies.” This circular enumerated the unfair collection practices, which include, among others, the disclosure or publication of the names and other personal information of borrowers who allegedly refuse to pay debts, subject to certain exceptions including consent of the borrower. However, despite consent of the borrower, contacting the persons in the borrower’s contact list other than those who were named as guarantors or co-makers shall also constitute unfair debt collection practice.

The SEC likewise enacted Memorandum Circular No. 19, entitled “Disclosure Requirements on Advertisements of Financing and Lending Companies and Reporting of Online Lending Platforms,” which provides the requirement of fully disclosing in their advertisements the Corporate Name, SEC Registration Number, and Certificate of Authority to Operate a Financial/Lending Company. The circular likewise directs the online lending companies to advise prospective borrowers to study the terms and conditions in the Disclosure Statement before proceeding with the loan transaction.

The practice of the illegal online lending operations of sending out text blasts to the entire contact list of the borrower — informing them that the person involved is delinquent and might face legal action — is likewise violative of the Data Privacy Act of 2012.

As defined by the Data Privacy Act, information about any proceeding for any offense committed or alleged to have been committed by a person is considered as “sensitive personal information” which cannot be processed without the consent of the person and all other parties to the exchange prior to processing. Thus:

“SEC. 13. Sensitive Personal Information and Privileged Information. — The processing of sensitive personal information and privileged information shall be prohibited, except in the following cases:

(a) The data subject has given his or her consent, specific to the purpose prior to the processing, or in the case of privileged information, all parties to the exchange have given their consent prior to processing; […]”

Aligned with the Data Privacy Act, SEC Memorandum Circular No. 18, Series of 2019, strengthened the privacy of the borrowers by providing for specific unlawful conducts of debt collection. The SEC Memorandum Circular No. 18, Series of 2019, provides that even if there is consent, it is prohibited to contact the persons in the borrower’s contact list other than those who were named as guarantors or co-makers.

In retrospect, while getting these loans may be quick and easy, it pays to be vigilant to the nitty-gritty details to avoid ending in regret. After all, one’s reputation is an intangible, fragile little thing that can take a lifetime to redeem.

Jesselie A. Sunga is an Associate in the Litigation and Dispute Resolution Department of ACCRALAW.

9020 8830-8000

jasunga@accrelaw.com