SILOS v.
PNB
Interest Rates and Escalation Clauses
time depending on whatever policy it may
Courts have the authority to strike down adopt in the future.”
or to modify provisions in promissory “With interest thereon at the rate of 12%
notes that grant lenders unrestrained per annum until paid, which interest rate
power to increase interest rates, penalties the Bank may at any time without notice,
and other charges at the latter’s sole raise within the limits allowed by law.”
discretion and without giving prior notice “The bank has the right to charge interest
to and securing the consent of the rates prescribed under its policies.”
borrowers. The unilateral authority is the “The rate of interest charged shall be
anathema to the mutuality of contracts subject during the life of this contract to
and enable lenders to take undue such an increase within the rate allowed
advantage of borrowers. by law, as the Board of Directors of the
Excessive interests, penalties and other Mortgagee may prescribe for its debtors.”
charges not revealed in disclosure “PNB is authorized to increase the
statements issued by banks, even if stipulated interest per annum within the
stipulated in the promissory notes, cannot limits allowed by law at any time
be given effect under the Truth and depending on whatever policy PNB may
Lending Act. adopt in the future; Provided, that the
See Sec. 4 of Truth and Lending Act. The interest rate on this note shall be
rationale of this provision is to protect correspondingly decreased in the event
users of credit from a lack of awareness of that the applicable maximum interest rate
the true cost thereof, proceeding from the is reduced by law or by the Monetary
experience that banks are able to conceal Board.”
such true cost by hidden charges, “The Bank may modify the interest rate in
uncertainty of interest rates, deduction of the Loan depending on whatever policy
interests from the loaned amount, and the
the Bank may adopt in the future; the
like. The law thereby seeks to protect
Borrower hereby agrees that the Bank
debtors by permitting them to fully
may, without need of notice to the
appreciate the true cost of their loan, to
enable them to give full consent to the Borrower, increase or decrease its spread
contract, and to properly evaluate their over the floating interest rate at any time
options in arriving at business decisions. depending on whatever policy it may
Upholding UCPB’s claim of substantial adopt in the future.”
compliance would defeat these purposes
of the Truth in Lending Act. The belated
discovery of the true cost of credit will too
often not be able to reverse the ill effects
of an already consummated business
decision.
Loan and credit arrangements may be
enticing by, or sweetened with offers of
low initial interest rates, but actually
accompanied by provisions written in fine
print that allow lenders to later on increase
or decrease interest rates unilaterally,
without the consent of the borrower,
depending on complex and subjective
factors.
EXAMPLES OF ESCALATION CLAUSES:
In a number of decided cases, the Court
struck down provisions in credit
documents issued to PNB to, or required
of, its borrowers which allow the bank to
increase or decrease interest rates
“within the limits allowed by law at any
