In a previous decision made by the Supreme Court in UCPB v. Ang G.R. No. 222448(2021) the court ruled that a foreclosure proceeding due to non-payment of the loan may be held valid even if it is proved that the interest rates imposed by the lender were improper and unlawful. The court rationed that regardless of the interest rate imposed, the foreclosure remained valid as the debtor was in default. However, since that original decision, the court has now reversed its ruling in UCPB v. Ang G.R. No. 222448 (2025) when the parties to the original case filed their motion for reconsideration.
In the original decision, debtors Ang and Fernandez obtained several loans from UCPB and secured it with real estate mortgages. However, they eventually defaulted on payments, leading UCPB to initiate extrajudicial foreclosure. The borrowers filed a petition to nullify the foreclosure, arguing that the interest rates, which were unilaterally determined by the bank, violate the principle of mutuality of contracts (Articles 1308 and 1309 of the Civil Code) and were therefore void. However, they eventually lost the case as the court stated that, that regardless of unconscionable interest rates, the subsequent nullity of the stipulation does not affect the lender’s right to recover the principal of a loan or the other terms of the contract, including the right to foreclose the mortgage. The debt is considered due without the void interest, and legal interest is applied instead. The foreclosure is deemed valid with respect to the correct amount of the obligation.
Currently with the present motion for reconsideration, the court has now chosen to rule that, in a situation wherein a debtor was not given an opportunity to settle their debt at the correct amount, by reason of an unconscionable interest rate, no foreclosure proceedings may be instituted.
Their main basis for reversing the decision is based on fair play against unconscionable interest rate. Justice Rosario rationed with a string of cases that, when interest rates are unconscionable and unilateral, they are considered potestative, thus making the interest void. They are void as the principle of mutuality of contracts, found in Articles 1308 and 1309 of the Civil Code, could not have been present. Thus, being a void interest, the subsequent foreclosure proceeding could not be considered a valid act and no valid transfer occurred. The court believes debtors should be given an equal opportunity to pay their loan as this is more attuned to our civil laws and more in keeping with the spirit of fair play and justice.
Therefore in sum, unconscionable interest is considered void and cannot be a basis on any subsequent right to foreclose secured properties. Those who are currently who are subject to this stipulations, must be given an equal opportunity to pay their loans prior to being declared in default.
This guide provides a general overview of the above transactions at the time of writing only and is not intended to be a comprehensive legal advice. This should also not be taken as an opinion on the topic. For more details and information, you may coordinate with any GVES Law Partner regarding the matter.