The Supreme Court (SC) has reversed itself and nullified the extrajudicial foreclosure of several properties, ruling that a bank's interest rate, which was unconscionable and imposed solely without the borrower's consent, rendered the underlying loan obligations and subsequent foreclosure void.

Case Background

In a Resolution issued by the SC’s Special Third Division, penned by Associate Justice Ricardo R. Rosario, the Court granted the Motion for Reconsideration filed by Editha Ang and Violeta Fernandez (the borrowers).

Their properties had been foreclosed by United Coconut Planters Bank (UCPB) after they failed to fully settle a PHP 16 million loan. The original loan agreement included a provision that allowed UCPB the power to adjust the interest rate every quarter based on market conditions—a key point of contention.

The Legal Challenge and Shifting Rulings

When the borrowers failed to pay the total amount due, UCPB initiated extrajudicial foreclosure proceedings (the legal process of auctioning properties to recover unpaid debt).

The borrowers challenged the sale before the Regional Trial Court (RTC), arguing that the interest rate provisions were unfair and invalid because they were left entirely to the bank’s unilateral discretion.

• The RTC agreed that the interest rate provisions were invalid but, nonetheless, upheld the foreclosure sale.
• The Court of Appeals later reversed this decision, declaring both the interest rate and the foreclosure sale void.
• Initially, the Supreme Court agreed that the interest rate was invalid but upheld the foreclosure, finding that the borrowers were still considered to be in default on the principal.

The SC’s Final Ruling on Reconsideration

Upon review of the Motion for Reconsideration, the SC adopted a definitive stance: If the interest rate is found to be unconscionable or unilaterally imposed by the lender, any subsequent foreclosure based on a computation using that rate is also invalid and void.

The Court underscored a fundamental principle under the Civil Code: The validity and compliance of a contract cannot be left to the will of only one of the contracting parties. [Article 1308]

Since the interest rate was solely determined by UCPB, the provision was void. Consequently, the SC ruled:

1. The loan was not yet legitimately due and demandable because the correct interest could not be ascertained.
2. The foreclosure of the properties was, therefore, void.

The SC mandated that the borrowers must be given a fair opportunity to pay the loan based on a mutually agreed-upon interest rate. The Court emphasized that allowing the bank to unilaterally set the terms would leave borrowers at the mercy of the lender and violate the principle of mutuality of contracts.

Read More:

Full text of United Coconut Planters Bank, substituted by Land Bank of the Philippines v. Editha F. Ang and Violeta M. Fernandez, G.R. No. 222448, March 3, 2025