Shameful online lending practices

In October 2019, the National Privacy Commission (NPC) summoned 67 online lenders for debt-shaming their clients. A month earlier, three online lending companies were charged by NPC with similar violations, and the Securities and Exchange Commission (SEC) eventually revoked the licenses of two of them for failure to submit reportorial requirements. Fast forward to 2023 and the same problem remains. Many companies continue to put up online lending apps, charge exorbitant rates and then use the personal information of their borrowers to threaten them to settle their debts, usually by engaging in public shaming over unpaid loans of as little as a few hundred pesos.

Sen. Sherwin Gatchalian last week warned the public from falling prey to these online lending apps that provide personal loans almost in an instant, saying such a system was more prone to fraudulent schemes. Gatchalian, chair of the Senate ways and means committee, said the Senate would launch an investigation into the resurgence of complaints against internet-based lenders that had been threatening borrowers who failed to pay their loans on time. More than three years since this issue attracted national attention and yet hapless Filipinos continue to fall prey to them. This is another case of failed regulation.

The attraction of online lenders is brought by the fact that bank loans are difficult to get, given the tedious process and paperwork needed. On the other hand, small loan apps provide convenience, with the entire process done online and a loan processed in as fast as a day. Add to this the little eligibility and documentary requirements that are at times limited to identity and proof of income. Such ease of borrowing from them has made people in urgent need of money overlook the risks. For instance, many of these apps are not registered with the SEC and could be hard to track once complaints are lodged against them. In 2019, the NPC had to summon the 67 online lenders through advertisements in newspapers precisely because their addresses and owners could not be traced.

Aside from this, the two other huge risks that consumers fail to consider are the high-interest rates and hidden charges, as well as the onerous terms and conditions, specifically that which grant the apps access to a borrower’s personal information such as phone number and address, contact list of friends and relatives, and other data that have no bearing in a credit process. Faced with extortionate interest rates of as high as 100 percent, many of these borrowers will eventually fail to settle their debts. And the consequence is what the issue is about. These lending apps will now engage in illegal and unethical collection methods, such as harassment, abusive phone calls, and public shaming usually in social media wherein a borrower’s friends and relatives are contacted by the lending app to pressure them to talk to the debtor to pay up. Funeral wreaths were even sent to a borrower’s residence. To have an idea of the extent of this menace, the SEC reported that as of 2022, it had canceled the registrations of 2,081 companies and secured the conviction of 76 individuals involved in eight cases of abusive and illegal lending. It also issued cease-and-desist orders against 73 online lending apps and revoked the licenses of 36 erring financing firms.

There is simply no way to make traditional banks cater to the needs of these borrowers, who all have difficulty producing the documents—and the collateral—required by those financial institutions that are bound to follow stringent Bangko Sentral ng Pilipinas (BSP) rules on lending. The only way to check this problem is to effectively regulate them. But since existing regulations governing this type of financing are fragmented and most likely outdated, Congress needs to immediately craft a law specifically for the online lending sector. The SEC should collaborate with the NPC, the Department of Trade and Industry, the BSP, and law enforcers such as the Philippine National Police’s anticybercrime group on this.

The law must also provide an effective monitoring system for the sector. This can be patterned after the BSP’s set-up in checking on the players in the financial system, where complaints such as those hurled against online lending apps are very few. Of paramount importance, however, are privacy and security safeguards in the law, the violations of which are the subject of the complaints lodged with the SEC and the NPC. In the meantime, government agencies need to collaborate on a sustained crackdown on unregistered and abusive collection practices of online lending apps. Perhaps the biggest deterrent is for regulators to vigorously pursue the conviction of those people it had charged earlier. Prosecution has not instilled fear in the owners and employees of these dubious lending apps. Conviction by the courts and sending those guilty to prison will be a more effective way of discouraging others from engaging in such shameful lending practices.