CREDIT TRANSACTIONSINTRODUCTION

Meaning and Scope of Credit Transaction Credit Transactions include all transactions involving the

purchase or loan of goods, services or money in the present with a promise to pay or deliver in the future.

Bailment contracts, together with the contracts of guaranty and suretyship, mortgage, antichresis and concurrence and preference of credits make up “credit transactions”

Credit transactions are really contracts of security.1. Pledge - by placing the movable property in the poss of the creditor2. Chattel mortgage - by the execution of the corresponding deed

substantially in the form prescribed by law3. Real estate mortgage - by the execution of a public instrument

encumbering the real property covered thereby4. Antichresis - by a written instrument granting to the creditor the right to

receive the fruits of an immovable property with the obligation to apply such fruits to the payment of the interest and principal obligation

Two Types of Credit Transactions1. Secured transactions (Contracts of Real Security) Supported by a collateral or an encumbrance of property2. Unsecured transactions (Contracts of Personal Security) Those the fulfillment of which by the principal debtor is secured

or supported only by a promise to pay or the personal commitment of another such as a guarantor or surety.

Meaning and Kinds of Security “Security” is given, deposited, or serving as a means to ensure

the fulfillment or enforcement of an obligation or of protecting some interest in property.

A secured creditor is one who holds a security from his debtor for payment of the latter’s debts.

1. Personal security - as when an individual becomes a surety or guarantor.

2. Real security - as when a mortgage, pledge, antichresis, charge or lien or other device used to have property held, out of which the person to be made secure can be compensated for loss.

Meaning of bailment “Bailer”- French for “to deliver” It may be defined as the delivery of property of one person to

another in trust for a specific purpose, with a contract, express or implied, that the trust shall be faithfully executed and the property returned or duly accounted for when the special purpose is accomplished or kept until the bailor reclaims it.

It does not mean that an agreement is always necessary to create bailment. It may be created by operation of law.

Patries in Bailment1. Bailor (commodatario) - the giver; the party who delivers the

possession or custody of the thing bailed.2. Bailee (comodante) - the recepient; the party who receives the

possession or custody of the thing thus delivered.

Kinds of Contractual Bailment In every bailment, there is an obligation on the part of the bailee

to restore the subject of the bailment in the same or in altered form or to account therefor.

Gratuitous Bailments, there is no consideration for they are considered as a favor by on party to the other party benefited; but the law imposes definite obli upon both bailor & bailee

1. Those for the sole benefit of the bailor (Gratuitous bailments) a. Gratuitous depositb. Mandatum

The latter is a bailment of goods without recompense where the mandatory or person to whom the property is delivered undertakes to do some act with respect to the same; as simply to carry it, or to keep it, or otherwise to do something with respect to it gratuitously

2. Those for the sole benefit of the bailee(Gratuitous bailments) a. Commodatumb. Gratuitous Simple Loan/Mutuum

3. Those for the benefit of both parties(Mutual-Benefit Bailments) Results from bailments involving business transactions

a. Deposit for a Compensationb. Involuntary Depositc. Bailments for hire

Kinds of Bailment for Hire

Bailment for hire (Locatio et Conductio) arises when goods are left with the bailee for some use or service by him and is always for some compensation.

1. Hire of things (Locatio Rei) Where goods are delivered for the temporary use of the hirer

(lease)2. Hire of service (Locatio Operis Faciendi) Where goods are delivered for some work or labor upon it by

the bailee (contract for a piece of work)3. Hire of carriage of goods (Locatio Operis Mercium Vehendarum) Where goods are delivered either to a common carrier/ private

person for the purpose of being carried from place to place4. Hire of Custody (Locatio Custodiae) Where goods are delivered for storage

LOAN

GENERAL PROVISIONS

#1933Characteristics of the Contract1. Real Because the delivery of the thing loaned is necessary for the

perfection of the contract2. Unilateral Because once the subject matter has been delivered, it creates

obligations on the part of only one of the parties (borrower)

Cause or Consideration in a Contract of Loan1. As to the Borrower - the acquisition of the thing2. As to the Lender- the right to demand its return or its equivalent

Kinds of loan1. Commodatum Where the bailor (lender) delivers to the bailee (borrower) a

non-consumable thing so that the latter may use it for a certain time and return the identical thing

2. Simple Loan or Mutuum Where the lender delivers to the borrower money or other

consumable thing upon the condition that the latter shall pay the same amount of the same kind and wuality.

(It is consumed when used in a manner appropriate to its nature)

Loan distinguished from Credit The credit of an individual means his ability to borrow money or

things by vitrue of the confidence or trust reposed by a lender that he will pay what he may promise within a specified period

A loan (Mutuum) means the delivery by one party (lender/creditor) and the receipt by the other party (borrower/debtor) who become the owner, of a given sum of money or other consumable thing upon an agreement, express or implied, to repay the same amount of the same kind and quality, with or without interest,

The concession of a credit necessarily involves the granting of “loans” up to the limit of the amount fixed in the “credit”.

Meaning of Credit as Opposed to Debt The term “credit” is a sum credited on the books of a company

to a person who appears to be entitled to it, It presupposes a creditor-debtor relationship, and may be said to imply ability, by reason of property or estates, to make a promised paymeny. It is the correlative to debt or indebtedness, and that which is due to any person as distinguished from that which he owes.

It is a debt considered from the creditor’s standpoint. It may consist of money, goods, or services.

Loan Distinguished from Discounting of Paper (read pg.8)

Loan DiscountInterest is usually take at the expiration of a credit

Interest is deducted in advane

Generally, on a single-name paper

Always on a double-name paper

Commodatum and Mutuum (Simple Loan) Distinguished

Commodatum MutuumInvolves something consumable The subject matter is money or

other consumable thingOwnership of the thing loaned is retained by the lender

The ownership is transferred to the borrower

Is essentially gratuitous May be gratuitous or it may be onerous, that is, with stipulation to pay interest

The borrower must return the same thing loaned

The borrower need only pay the same amount of the same kind and quality

Real or personal property Personal propertyIs a loan for use of temporary possession

Is a loan for consumption

The bailor may demand the return of the thing loaned before the expiration of the term in case of urgent need

The lender may not demand its return before the lapse of the term agreed upon

The loss of the subject matter is suffered by the bailor since he is the owner

The borrower suffers the loss even if caused exclusively by a fortuitous event and he is not, therefore, discharged from his duty to pay

Personal Not

Kinds of Commodatum1. Ordinary Commodatum2. Precarium- one whereby the bailor may demand the thing

loaned at will.

#1934Delivery essential to perfection of loan Commodatum and mutuum are real contracts which rewuire the

delivery of the subject matter thereof for their perfection. Delivery is necessary in view of the purpose of the contract

which is to transfer either the use or ownership of the thing loaned.

Binding effect of accepted promise to lend It does not mean that a promise to lend would be without

efficacy and judicial value. An accepted promise to make a future loan is a consensual contract and, thereforem binding upon the parties but it is only after delivery, will the real contract of loan arise.

In reciprocal obligations, the promise of each party is the consideration for that of the other, and when one party has performed or is ready and willing to perform his part of the contract, the other party who has not performed or is not ready and willing to perform incurs in delay.

CHAPTER 1-COMMODATUM

SECTION 1-NATURE OF COMMODATUM

#1935Commodatum is essentially gratuitous The contract ceases to be a commodatum if any compensation is

to be paid by the borrower who acquires the use. In such a case, there arises a lease contract,

If the consideration is the rendering of some service, an innominate contract will result, which shall be regulated by the stipulations of the parties (Read pg.13)

Contract Similar to Donation In that it confers a benefit to the recepient. The presumption is

that the bailor has loaned the thing for having no need therefor

Extent of Bailee’s Right of Use The right to use is limited to the thing loaned but not to its fruits

unless there is a stipulation to the contrary. As owner of the thing loaned, the bailor is naturally entitled to its fuits.

Purpose of the Contract The purpose of the contract of commodatum must be the

temporary use of the thing loaned. If the bailee is not entitled to the use of the thing, the contract may be a deposit not a commodatum.

It is an essential feature of the contract of commodatum that the use of the property shall be “for a certain time”.

#1936-1937Subject Matter of the Contract THe subject matter is generally non-consummable things,

whether real or personal. The bailee cannot use and return something which is consumed when used. However, if the purpose of the contract is not the consumption of the object as when it is merely for exhibition, consumable goods may be the subject of the commodatum and not a mutuum (read pg.15)

#1938Bailor Need Not be Owner In commodatum, the bailor need not be the owner of the thing

loaned since by the loan, ownership does not pass to the borrower. Hence, a mere lessee of the thing or the usufructuary may lend but the borrower or bailee himself may not lend nor lease the thing loaned to him to a third person.

It is sufficient if the bailor has such possessory interest in the subject matter or right to its use which he may assert against the bailee and the right to its use which he may assert against the bailee and the third persons although not against the rightful owner.

Thus the lessee may sublet the thing leased, when there is no express prohibition in the contract of lease. If the lessee, by a contract of sublease, may transfer to another the enjoyment of the thing leased for a consideration, there is no reason why he should be unable to cede gratuitously its use by commodatum.

#1939Commodatum, Purely Personal in Character This article constitutes an exception to the general rule that all

rights acquired in virtue of an obligation are transmissible. Unlike mutuum, commodatum is a purely personal contract, the

lender having in view the character, credit, and conduct of the borrower.

Hence, the death of either party terminates the contract unless by stipulation, the commodatum is transmitted to the heirs of either or both parties.

Such stipulation is valid for paragraph 1 presupposes the absence of any contrary stipulation. If there are two or more borrowers, the death of one does not extinguish the contract in the absence of stipulation to the contrary.

Right of Bailee to Lend Thing Loaned to Third Persons The bailee can neither lend nor lease the object of the contract

to a third person, in the absence of some understanding or agreement to that effect.

However the use of the thing loaned may extend to the members of the bailee’s household (who are not, therefore, considered third persons) except in two cases:

1. There is a stipulation to the contrary2. The nature of the thing forbids such use.

#1940Contrary Stipulation as to Fruits The bailee is entitled only to the use of the thing loaned and not

to its fruits. The right to use a thing is distinct from the right to enjoy the fuits since, as a rule, the fruits pertain to the owner of the thing producing the fruits.

Thus, where an animal is the thing loaned, its young subsequently born is not included in the contract. However, the parties may stipulate that the bailee may also make use of the fruits of the thing. Such stipulation cannot be presumed.

The enjoyment of the fuits must only be incidental to the use of the thing itself for if its the main cause, the contract may be one of usufruct.

SECTION 2-OBLIGATIONS OF THE BAILEE

#1941Liability for Ordinary Expenses It is logical that the borrower should defray the expenses for the

use and preservation of the thing loaned for after all, he aquires the use of the same, and he is supposed to return the identical thing.

#1942Liability for Loss of Thing Loaned The bailee must excercise proper diligence with regard to the

care and preservation of the thing loaned for he must return the thing after its use.

As a general rule, the bailee is not liable for loss or damage due to a fortuitous event. The reason is that the bailor retains the ownership of the thing loaned.

This article specifies the instances when the bailee is liable even for a loss due to a fortuitous event.

It would seem that the purpose of the law is to punish the bailee for his improper acts although they may not be the proximate cause of the loss. Rationale:

1. Is that the bailee acts in bad faith2. He incurs in delay3. The law presumes that the parties intended that the borrower

shall be liable for the loss of the thing even if it is due to a fortuitous event for otherwise they would not have appraised the thing

4. Commodatum is purely personal5. The bailee shows his ingratitude after the thing is gratuitously

loaned to him.

#1943Liabilty for Deterioration of Thing Loaned The parties to the contract know that the thing borrowed cannot

be used without deterioration due to ordinary wear and tear. Hence, in the absence of agreement to the contrary, the depreciation caused by the reasonable and natural use of the thing is born by the bailor.

The bailee is liable if he is guilty of fault or negligence or if he devotes the thing to any purpose different from that for which it has been loaned.

#1944Obligation to Return Thing Loaned Except for a claim for damages suffered because of the flaws of

the thing loaned, the borrower has no right to retain the thing loaned as security for claims he has against the lender, even though they may be by reason of extraordinary expenses.

1. Ownership remains in bailor The borrower acquires only the use of the thing the ownership

of which remains in the lender. It would be extremely harsh if the bailor, after benefitting the bailee, and the use having been accomplished, should be deprived of its enjoyment on the excuse of the expenses more or less certain or just.

2. Only temporary use given to bailee The bailee would be violating the bailor’s trust in him to return

the thing as soon as the period stipulated expires or the purpose has been accomplished. Therefore, the law imposes upon him the obligation to return the same.

Effect of Retention or Adverse Claim by Bailee The mere failure of the bailee to return the subject matter of

commodatum to the bailor does not constitute adverse possession on the part of the bailee who holds the same in trust.

Right of Retention for Damages The exception in Article 1951 is of evident justice. However, the

bailee’s right extends no further than to the retention of the thing loaned until he is reimbursed for the damages suffered by him. He cannot lawfully sell the thing to satisfy said damages.

In case of pledge, the creditor has the right to retain the thing pledged until he shall have been fully paid.

#1945Liability when there are two or more bailees

The reason for imposing solidary liability where there are two or more borrowers is to safeguard effectively the rights of the lender. THe law presumes that the bailor takes into account the personal aintegrity and responsibility of all the bailees and that, therefore, he would not have constituted the commodatum if there were only one bailee.

This is an exception by express provision of law to the general rule that the concurrence of two or more parties in the same obligation gives rise only to a joint obligation (Arts 1207-1208)

SECTION 3-OBLIGATIONS OF THE BAILOR

#1946Obligation to respect duration of loan The primary obligation of the bailor is to allow the bailee the use

of the thing loaned for the duration of the period stipulated or until the accomplishment of the purpose for which the commodatum was constituted.

The reason is that the bailor is bound by the terms of the contract of commodatum which is “for a certain time”

However, if he should have an urgent need of the thing, or if the borrower commits an act of ingratitude, he may demand its return or temporary use. This right of the bailor is based on the fact that commodatum is essentially gratuitous.

Under this article, the return may be only temporary or it may be permanent because the law uses “its return” (meaning permanent) or “temporary use”.

In case of temporary use of the thing by the bailor, the rights and duties of the parties are likewise temporarily suspended.

#1947Precarium defined Precarium is a kind of commodatum where the bailor may

demand the thing at will. It is a contract by which the owner of a thing, at the request of

another person, gives the latter the thing for use as long as the owner shall please.

Cases when contract is precarium In either of the cases, it is presumed that the use of the thing

has been granted subject to revocation by the bailor at any time, WON the use for which the thing has been loaned has been accomplished.

In ordinary commodatum, the possession of the bailee is more secure for he has the right to retain the thing loaned until the expiration of the period agreed upon, or the accomplishment of the use for which the commodatum has been constituted.

The use of the word “owner” in Article 1947 is inaccurate. Article 1938 is very clear that the bailor need not be the owner of the thing loaned.

#1948Right of bailor to demand return of thing for Acts of Ingratitude. Article 765 is applicable because like a donation, commodatum

is essentially gratuitous. The bailee who commits any of the acts of ingratitude makes

himself unworthy of the trust reposed on him by the bailor. Hence, the right given to the bailor to demand the immediate return of the thing.

Under this article, the contractual relation between the parties is that of the ordinary commodatum. In the case of precarium, the bailor can always demand the thing loaned at will.

#1949Obligation to Refund Extraordinary Expenses1. Extraordinary expenses for the preservation of the thing loaned Such expenses shall be borne by the bailor. Reason: it is the

bailor who profits by said expenses. If they are incurred by the bailee, the bailor must refund them

provided the bailee brings the same to the knowledge of the bailor before incurring them. As a rulem notice is required because it is possible that the bailor may not want to incur the extraordinary expenses at all. He should be given discretion as to what must be done with his property.

An exception, lies where they are so urgent that the reply to the notification cannot be waived without danger.

The right of the bailee to reimbursement is subject to the provision of the 2nd paragraph.

2. Extraordinary expenses arising from actual use of the thing loaned.

Such expenses, caused by fortuitous event, shall be borne by the bailor and bailee alike on a 50-50 basis.

It is an equitable solution. The bailee pays one half because of the benefit derived from the use of the thing loaned to him and the bailor pays the other half because he is the woner and the thing will be returned to him.

The parties, however, may by stipulation, provide for a different apportionment of such expenses, or that they shall be borne by the bailee or bailor only.

#1951Liability to Pay Damages for Known Hidden Flaws The bailor is made liable for his bad faith. The bailee is given the

right of retention until he is paid damages. The same responsibility of a bailor in a commodatum is imposed on a pledgor.

Requisites, which must concur for the application of this article1. There is flaw or defect in the thing loaned.2. The flaw or defect is hidden.3. The bailor is aware thereof.4. He does not advise the bailee of the same, and5. The bailee suffers damages by reason of said flaw or defect.

Where Flaw Unknown to Bailor He is not liable because commodatum is gratuitous. The rule is different in sale and lease for in these contracts,

valuable consideration is received by the vendor and the lessor.

#1952No Right of Abandonment for Expenses and Damages Reason: is that the expenses and/or damages may exceed the

value of the thing loaned, and it would, therefore, be unfair to allow the bailor to just abandon the thing instead of paying for said expenses and/or damages.

CHAPTER 2-SIMPLE LOAN OR MUTUUM

#1953Simple Loan or Mutuum Defined Simple loan or mutuum is a contract where one of the parties

delivers to another money or other consumable thing with the understanding that the same amount of the same kind and quality shall be paid.

It involves the return of the equivalent only and not the identical thing because the borrower acquires ownership thereof.

A loan of money however, may be payable in kind.

Obligation of borrower is to Pay The law uses the word “pay” and not the word “return” because

the consumption of the thing loaned is the distinguishing character of the contract of mutiim from that of commodatum.

This obligation “to pay” may include the accessory duty to pay interest.

The promise of the borrower to pay is the consideration for the obligation of the lender to furnish the loan. A loan is thus a bilateral contract.

No Criminal Liability for Failure to Pay In a simple loan or mutuum, as contrasted to commodatum, the

borrower acquires ownership of the money, goods, or personal property borrowed.

Being the owner, the borrower can dispose of the thing borrowed and his act will not be considered misappropriation thereof.

No estafa is committed by a person who refuses to pay his debt or denies its existence.

Simple Loan Distinguished from Contract of RentLOAN RENT

Signifies the delivery of Is a contract by which one of the parties

money or some other consumable thing to another with a promise to repay an equivalent amount of the same kind and quality, but not a promise to return the same thing loaned which becomes the property of the obligor

delivers to another some non-consumable thing in order that the latter may use it during a certain period and return it to the former.The owner or lessor of the property does not lose his ownership. He simply loses his control over the property rented during the period of the contract

The relation between the parties is that of obligor and obligee

The relation is that of landlord and tenant

The creditor receives “payment” for his loan

The owner of the property rented receives “compensation” or “price” either in money, provisions, chattels, or labor from the occupant thereof in return for its use.

Simple Loan Distinguished from Trust Receipt (Read pg 33)

Meaning of Fungible Things Fungible things are those which are usually dealt with by

number, weight, or measure such as rice, oil, sugar, etc. so that any given unit or portion is treated as the equivalent of any other unit or portion.

For example, one can of rice of a particular quality is the same as any other portion of the same kind, quality, and quantity. (pg 35)

Distinction between Fungible and Consumable Things Whether a thing is consumable or not depends upon its nature

and whether it is fungible or not depends upon the intention of the parties. Thus, while wine is consumable by its nature, it is non-fungible if the intention is merely for display or exhibition because the same wine is return.

Mutuum and Commodatum Distinguished from Barter By the contract of barter or exchange, onr of the parties binds

himself to give one thing in consideration of the other’s promise to give another thing.

MUTUUM BARTERThe subject matter is money or any other fungible things

It is non-fungible or non-consumable things

The bailee is bound to return the identical thing borrowed when the time has expired or the purpose has been served

The equivalent thing is given in return for what has been received.

Mutuum MAY be gratuitous and commodatum is ALWAYS gratuitous

It is an onerous contract. It is really a mutual sale.

#1955Form of Payment The object of simple loan may be either money or consumable

or fungible things.1. Loan of money - If the thing loaned is money, payment must be

made in the currency stipulated, if it is possible to deliver such currency; otherwise, it is payable in the currency which is legal tender in the Philippines and in case of extraordinary inflation or deflation, the basis of payment shall be the value of the currency at the time of the creation of the obligation.

2. Notes and coins issued by BSP are legal tender in the Philippines for all debts, both public or private. A check is not a legal tender and, cannot constitute valid tender of payment. (read pg. 36)

#1956Requisites for Recovery of Interest1. The payment of interest must be expressly stipulated.2. The agreement must be in writing.3. The interest must be lawful. Interest may be paid either as compensation for the use of

money (monetary interest) or imposed by law or by courts as penalty for indemnity for damages (compensatory interest).

Unilateral impositions of interest do not suffice as proof of an agreement to pay interest.

Existence of Sipulation to Pay Interest (read pg 37)

Liability for Interest even in the Absence of Stipulation

Article 1956 is subject to two exceptions:1. Indemnity for damages The debtor in delay is liable to pay legal interest (6% or 12%) as

indemnity for damages even in the absence of stipulation for the payment of interest. (read pg 41)

2. Interest accruing from unpaid interest Interest due shall earn interest from the time it is judicially

demanded although the obligation may be silent upon this point Both Article 2212 of the Civil Code and Section 5 of the Usury

Law are applicable only where interest has been stipulated by the parties.

Article 1212 contemplates the presence of stipulated or conventional interest which has accrued when demand was judicially mdae.

In cases where no interest had been stipulated by the parties, no accrued conventional interest could further earn interest upon judicial demand.

Where the court’s judgement which did not provide for the payment of interest has already become final, no interest may be awarded. What remains is the ministerial execution of the judgement (read pg 42)

Liability for Surcharges and Penalties Subcharges and penalties agreed to be paid by the debtor in

case of default partake of the nature of liquidated damages, covered by Article 2227, which states that, liquidated damages whether intended as an indemnity shall be equitably reduced if they are iniquitous and unconscionable, the circumstances of which shall be determined by the Court.

Interest separate and distinct from Surcharges and Penalties The essence or rationale for the payment of interest often

referred to as “cost of money” is separate and distinct from that of subcharges and penalties.

A penaltty stipulation is not necessarily preclusive of interest, if there is an agreement to that effect, the two being distinct concepts which may separately be demanded.

What may justify a court in not allowing the creditor to impose full surcharges and penalties, despite an express stipulation therefor in a valid agreement, may not equally justify non-payment or reduction of interest.

The charging of interest for loans forms a very essential and fundamental element of the banking business, which may truly be considered to be at the very core of its existence or being. It is inconceivable for a bank to grant loans for which it will not charge any interest at all.

#1957Usurious Contracts Declared Void1. Form of contract not conclusive -This provision is deemed necessary to defeat the cunning devices of usurers. The form of the contract is not conclusive. Parol evidence is admissible to show that a written document though legal in form was in fact a device to cover usury if from a construction of the whole transaction it becomes apparent there exists a corrupt intention to violate the laws on usury.2. Contract void only as to interest involved -A usurious contract should not be considered void in its entirety but only as to the interest involved. It is only the stipulation on usurious interest which should be treated as void so that the loan becomes without stipulation to pay interest.-In a simple loan with stipulation of usurious interest, the prestation of the debtor to pay the principal debt which is the cause of the contract.-The nullity of the stipulation on the usurious interest does not affect the lender’s right to receive back the principal amount of the loan.3. Right of debtor-With respect to the debtor, the amount paid as interest under a usurious agreement is recoverable by him, since the payment is deemed to have been made under restraint, rather than voluntarily.Interest rates are no longer subject to any ceiling. The rate will dpend on the agreement of the parties.-Interest rates are no longer subject to any ceiling. The rate will dpend on the agreement of the parties.Instances of Contracts Disguised to Cover Usurious Loans1. Credit sale of property at exorbitant price to loan applicant When a credit sale of property is made to an applicant for a loan

at an exorbitant price to be paid at a future day in order to

enable the purchaser to sell it immediately for cash and thus obtain the money of which he is in need, and the purchaser’s obligation is for a greater sum than the fair value of the property sold and lawful interest and lawful interest. It is however necessary to show actual interest to reserve usurious interest under the guise of excess of price.

2. Purchase of lender’s property at an exorbitant price to be taken from a loan

When the lender curruptly requires of the borrower as a condition for securing the loan, the purchase of the lender’s property at an exorbitant price to be taken out of the loan, or payable at a subsequent date and takes the borrower’s obligation for the sum loaned, or for both the loan and purchase price; or as a condition for extending time in which to pay a debt, the purchase of the lender’s property at an exorbitant price.

In such case, the principal debt is the amount of the loan plusthe fair value of the property at the time of the receipt by the buyer. All in excess of that sum is usury.

But if the evidence does not disclose a guilty intent, such a contract will be upheld even though the collateral sale is made at a price higher than the market value of the property sold.

3. Price of sale with right to repurchase clearly inadeuate When a vendor sells a property at a clearly inadequate price,

reserving an option to repurchase at a price greater than the original price greater than the original proce with lawful interest as such contract is in effect to be a mortgage to secure a usurious loan

4. Pretended lease by borrower at usurious rental Where the borrower wiches to borrow money to enable him to

purchase property and the lender furnishes the money taking title in himself and puts the borrower in possession under a pretended lease at a usurious rental.

5. Rent free by lender of borrower’s property in addition to interest on loans

Where the lender, in addition to interest on the sum loaned, is to have the privilege of occupying rent-freem certain property of the borrower. Where other circumstances are present, showing that the purchase and lease are bona fide and not colorable, the transaction will, of course, be perfectly valid.

6. Date for repayment of loan with interest ante-dates actual transaction.

Where an obligation for the repayment of money bearing interest from its date, ante-dates the actual transaction and receipt of the money loaned to hide a usurious contract. Where however, the circumstances of the loan show good faith on the part of the contracting parties, as where the delay in the receipt of the money is unavoidably incident of the completion of the transaction or is due merely to the failure if the borrower to make earlier demand for it, the contract will not ordinarily be regarded as usurious, even though the actual result may be to give to the lender something more than the lawful rate of interest, if delay is not unreasonable.

7. Payment by borrower for lender’s services as additional compensation for loan

An apparently lawful loan is usurious when it is intended that additional compensation for loan be disguised by an ostensibly unrelated contract providing for payment by the borrower for the lender’s services which are of little value or which are not in fact to be rendered.

#1958Determination of Interest Payable in Kind This article has the same purpose, to make usury harder to

perpetrate (read pg 47)

#1959When Unpaid Interest Earns Interest As a general rule, accrued interest shall not earn interest except

in two instances:1. When judicially demanded as provided for in Article 2212

2. When there is an express stipulation made by the parties to wit: that the interest due an unpaid shall be added to the obligation and the resulting obligation and the resulting total amount shall earn interest. This practice is called compounding interest and it is allowed by the Usury Law if there is express stipulation.

The parties may stipulate on the imposition of both interest and penalty in case of default on the part of the borrower. Under Article 1959, the compounding of not only of the monetary interest but also of the penalty charge, also called penalty or compensatory interest is allowed.

Hence, the borrower may be held liable to pay the interest on the total amount of principal, the monetary interest and the penalty interest.

In view of 1956, the stipulation as to compound interest must be in writing.

#1960Recovery of Unstipulated Interest Paid This articel simply means that if unstipulated interest (it is

therefore, not due) is paid by mistake, the debtor may recover as this would be a case of solutio indebiti or undue payment (Article 2154).

But where the unstipulated interest, or interest stipulated, there being a stipulation but is not in writing, is paid voluntarily because the debtor feels morally obliged to do so, there can be no recovery as in the case of natural obligations.

#1961Usurious Transactions Governed by Special Laws Usury is now legally non-existent. The interest legally chargeable

depends upon the agreement between the lender and the borrower.

The parties are now free to stipulate the interest to be paid on monetary obligations, and absent any evidence of fraud, undue influence, or any vice of consent excercised by one party against the other, the interest rate agreed upon is binding on them. But while the Usury Law ceiling on interest rates was lifted by DB 905, nothing in said circular grants lenders carte blanche authority to raise interest rates to levels which will either enslave their borrowers or lead to a hemorrohaging of their assets. When the agreed rate is found to be iniquitous and unconscionable, the courts may reduce the same as reason and equity demand.