The Supreme Court (SC) on Monday said banks are not permitted to unreasonably refuse payment by borrowers, who risk facing higher interest and additional charges.
In the case of Premiere Development Bank vs. Spouses Castaneda, the SC Third Division ruled that lenders cannot be allowed to unreasonably refuse payment as this unfairly burdens borrowers with higher interest fees and other charges.
The Court reminded the bank of its duty to act in good faith and uphold the high standards of integrity and diligence expected of financial institutions.
By unreasonably refusing to apply the P2.6-million payment exclusively to the spouses’ personal loan to fully settle their debt, the Bank acted in bad faith, the SC said.
It added this allowed the personal loan to remain outstanding, accruing interest and additional charges, effectively holding it hostage until the corporate loans of the companies were fully paid.
The High Tribunal likewise ruled that the bank incorrectly treated the spouses and the companies as a single borrower, combining payments for separate personal and corporate loans.
The spouses and the companies are different entities such that the loans of the spouses and the companies cannot be combined, the SC explained.
The Court cited Article 1252 of the Civil Code, which provides that “when a borrower has multiple loans with the same lender, the borrower has the right to choose how to allocate their payments
among the different loans.”
“If the borrower does not exercise this right, the lender may determine the allocation,” it added.
However, the SC clarified that this only applies to multiple loans held by the same borrower.