CHAPTER ONE: BANK AND THE BUSINESS OF BANKING

kiCHAPTER ONE: BANK AND THE BUSINESS OF BANKING

I. Declared Policy of the State. Read Section 2 of Republic Act 8791 (General Banking Law of 2000)

II. Definition of Banks.

a. Banks are defined under the GBL as entities engaged in the lending of funds obtained in the form of deposits. (Note: banks may engage in other activities allowed by law)

b. Other definitions: (I only included two out of the four given by Dizon)

i. Moneyed institute founded to facilitate the borrowing, lending and safe-keeping of money and to deal, in notes, bills of exchange, and credits.

ii. An investment company which loans out the money of its customers, collects the interest and charges a commission to both the lender and borrower, is a bank.

III. Nature of the Banking Business.

a. Debtor-Creditor Relationship. Read Article 1980 of the Civil Code of the Philippines. The contract between the bank and its depositor is governed by the provisions of the Civil Code on simple loan. The bank is the debtor and the depositor is the creditor.

b. Fiduciary Duty. Banks are required to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship. The fiduciary nature of banking requires banks to assume a degree of diligence higher than that of a good father of a family. Thus, the banks fiduciary duty imposes upon it a higher level of accountability.

c. Not a Trust Agreement. The fiduciary nature of banking does not convert the contract between the bank and its depositors from a simple loan to a trust agreement, whether expressed or implied. The law simply imposes on the bank a higher standard of integrity and performance in complying with its obligations under the contract of simple loan, beyond those required of non-bank debtors under a similar contract of simple loan. The law allows the banks to offer the lowest possible interest rate to depositors while charging the highest possible interest rate on their own borrowersd. Indispensible Institution. Banks have become an ubiquitous presence among the people, who have come to regard them with respect and even gratitude, and most of all, confidence.e. Impressed with Public Trust. The business of banking is imbued with public interest. The stability of the banks largely depends on the confidence of the people in the honesty and efficiency of banks.f. Degree of Diligence. The law imposes on banks high standards in view of the fiduciary nature of banking more than that of a good father of a family. BUT the same higher degree of diligence is not expected to be exerted by banks in commercial transactions that do not involve their fiduciary relationship with their depositors. (Note: Diligence extends to Financial institutions)g. Treatment of Accounts with Meticulous Care. BUT there is no law mandating banks to call up their clients whenever their representatives withdraw significant amounts from their accounts.h. Duty to Keep Records. A bank has a fiduciary duty to keep efficiently a record of its transactions with its depositors. i. Banks are Not Gratuitous Bailees. Banks are run for gain, and they solicit deposits in order that they can use the money for that very purpose. j. Banks are Not Expected to be Infallible.

k. Dealing with Registered Lands.

i. Banks should exercise more care and prudence in dealing even with registered lands, than private individuals, for their business is one affected with public interest. Absent good faith, banks would be denied the protective mantle of land registration statute.

ii. Banks have access to more facilities in confirming the identity of their judgment debtors. It should act more cautiously, especially if some uncertainty had been reported by the appraiser tasked to make verifications. The uncertainty should not be treated as flimsy matter.

iii. Case 1: The act of X Bank of entrusting to C the owners duplicate certificate entrusted to it by A without even notifying A and absent any prior investigation on the veracity of Cs claim and character is a patent failure to foresee the risk created by the act.

iv. Case 2: A bank which accepted a property as mortgage despite the existence of structures and occupants other than the mortgagor showed the banks negligence.

v. Case 3: Thus, while it is true, x x x that a person dealing with registered lands need not go beyond the certificate of title, it is likewise a well-settled rule that a purchaser or mortgagee cannot close his eyes to facts which should put a reasonable man on his guard, and claim that he acted in good faith under the belief that there was no defect in the title of the vendor or mortgagor.

l. Banks may Exclude Persons in their Premises. Banks may impose reasonable conditions or limitations to access by non-employees to its premises and records, such as the exclusion of non-employees from the working areas for employees, even absent any imminent or actual unlawful aggression on or an invasion of its properties or usurpation thereof, provided that such limitations are not contrary to the law.m. Charging of Interest for Loans. The charging of interest for loans forms a very essential and fundamental element of the banking business. In fact, it may be considered to be the very core of the bankings existence or being.IV. Liability for Acts of Officers and Employees

degree of responsibility, care and trustworthiness expected on banks employees and officials-greater than those ordinary clerks and employees**Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees:

1. exercise high standard of performance and insure that its employees will do likewise.

2. bank is liable for the wrongful acts of its officers done in the interest of the bank or in their dealins as bank representatives but not for the acts outside the scope of their authority.

A. Negligence of a Manager

-bank is liable for the negligence or the misdeed of its branch manager

B. Negligence of Officers

GEN RULE: a banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment

if a corporation knowingly permits its officers, or any other agent, to perform acts within the scope of apparent authority- be estopped from denying such authority.

C. Negligence of Tellers

high degree of diligence in insuring that they return the passbook only to the depositor or his authorized authority. Failure to do so, they will clothe that unauthorized person presumptive ownership of the passbook, facilitating unauthorized withdrawals by that person.

NOTE: appropriation of money by a teller is not estafa since juridical possession remains with the bank; teller only material possession(felony: qualified theft- abuse of confidence)D. Right to Recover from Employees

- banks may recover from its employees for any payments made in view of the latters negligent or criminal acts

E. Liability for Damages

- concurrence of injury to the plaintiff and legal responsibility by the person causing it

- to award tort damages- an individual must be injured in the contemplation of law; thus there must be breach before damages may be awarded and the breach of duty should be the proximate cause of the injury.

1. Actual and Compensatory Damages

a. when the obligation is breached- consists in the payment of a sum of money, i.e. loan or forbearance then the interest due would be that which may have been stipulated in writing. The interest due itself shall earn legal interest from the time it is judicially demanded= 12% per annum to be computed from default.

b. not constituting a loan or forbearance an interest on the amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.

c. when the judgment of the court awarding a sum of money becomes final and executory, the rate of legal interest whether the case falls under (a) or (b), shall be 12% per annum from such finality until satisfaction.

2. Exemplary Damages

- law allows this by way of example for the public good

3. Moral Damages

GEN RULE- corporation (artificial being) is not entitled to moral damages

BUT- for breach of fiduciary duty required of a bank, a corporate client may claim such damages when its good reputation is besmirched by such breach, asn social humiliation results therefrom.

F. Respondeat Superior, Diligence in the Selection and Supervision of Employees

A bank is bound by the negligence of its employees under the principle of respondeat superior or command responsibility. The defense of exercising the required diligence in the selection and supervision of emnployees is NOT a complete defense in culpa contractual, unlike in culpa aquiliana.

1.) Whose authority is needed in order for an entity to engage in banking or quasi-banking functions?

Bangko Sentral

2.) What agency of the government determines whether an entity or person is performing banking or quasi-banking functions without authority from the Bangko Sentral? How?

Monetary Board. The board through the supervision of the BSP examine, inspect, or investigate the books and records of such person or entity.

Note: Existence of a victim actually injured is not necessary in determining whether an entity is engaged in illegal banking.

3.)What is the scope of the authority of the Supervising and Examining Department?

a.) to administer oath to any such person, employee, officer or director of any such entity.

b.) to compel the presentation or production of such books, documents, papers or records that are reasonably necessary to ascertain the facts relative to the true functions and operations of such person or entity.

4.) What is the extension of the examining powers?

The BSP shall also have the authority to examine an enterprise which is wholly or majority-owned or controlled by the bank that is under examination.(this additional authority is available only when the subject is a bank.)

5.) What is the Certificate of Authority to Register?

It is a certificate issued by the Monetary Board, which is an indispensable requirement when registering articles of incorporation with the Securities and Exchange Commission.

6.) What are the requirements for the issuance of such certificate?

Evidence showing that:

1.) all requirement of existing laws and regulations to engage in business are complied with.

2.) the public interest and economic conditions, both general and local justify the authorization

3.) the amount of capital, the financing, organization, direction, and administration, as well as the integrity of the organizers and administrators reasonably assure the safety of deposits and the public interest.

7.)How may summons be served to a bank?

a.) Sec. 11. Service upon domestic private juridical entity.

When the defendant is a corporation, partnership or association organized under the laws of the Philippines with a juridical personality, service may be made on the president, managing partner, general manager, corporate secretary, treasurer, or in-house counsel. (Rule 14, Section 11 of the Rules of Court.)

b.) Sec. 12. Service upon foreign private juridical entity.

When the defendant is a foreign private juridical entity which has transacted business in the Philippines, service may be made on its resident agent designated in accordance with law for that purpose, or, if there be no such agent, on the government official designated by law to that effect, or on any of its officers or agents within the Philippines. (Sec. 12. Rule 14)

8.) Strict compliance is necessary with the mode of service to confer jurisdiction of the court over a corporation. The officer upon whom service is served must be one who is named in the statutes; otherwise, the service is insufficient. What is the purpose of this rule?

To render reasonably certain that the corporation receive will prompt and proper notice in an action against it.

Note: Service of summons on a bank manager is invalid.

A case should not be dismissed simply because an original summons was wrongfully done.

It is not pertinent whether the summons is designated as an original or an alias summon as long as it has adequately served its purpose.

CHAPTER 2: ORGANIZATION MANAGEMENT AND ADMINISTRATION OF BANKS, QUASI-BANKS AND TRUST ENTITIES

(provision halos to kc ganun din un book parang codal)

ORGANIZATION

Conditions: (SPC)

That the entity is a stock corporation

That its funds are obtained from the public , which shall mean 20 or more persons

That the minimum capital requirements prescribed by the monetary board for each category of banks are satisfied

Capabilities:

In terms of financial resources and technical expertise and integrity

Licensing process shall incorporate and accessment of

1. The banks ownership structure

2. Directors and senior management

3. Its operation plan, and

4. Internal controls, as well as

5. Its projected financial condition and capital base

Capital Requirements

Required minimum capital (prescribed by the monetary board)

TYPE OF BANKAMOUNT (Million)

Universal4950

commercial2400

Thrift

Head office in manila325

Head office outside Mla52

Rural

Within Mla26

Cities of cebu and davao13

1st, 2nd, 3rd class cities and 1st class municipalities6.5

4th, 5th, 6th class cities and 2nd, 3rd, 4th class municipalities2.6

At least 25% of the toal authorized capital stock shall be subscribed by the subscribers of the proposed bank, and at least 25% of such subscription shall be paid up, provided that in no case shall the paid-up capital be less than the minimum required capital stated above. ~Sec 13 Corporation Code

Incorporators/ Subscribers

Incorporators /Subscribers & Proposed DirectorsSubscribers

Must be persons of integrity and of good credit standing in the business communityMust have adequate financial strength to pay for their proposed subscription in bank

Must not have been convicted of any crime involving moral turpitude, not officers or employees of government agency charged with supervision of loan

A bank may be organized with not less than 5 nor more than 15 incorporators

In excess of 15, to be listed among original subscribers in Articles of incorporation

Branches

Universal and commercial within ot outside Philippines upon prior approval by BSP

All other banks governed by pertinent laws

A bank authorized to establish branches or other offices shall be responsible for all business conducted in such branches and offices to the same extent and in the same manner as though such business had all been conducted in the head office.

Bank + branches + other offices = 1 unit

STOCKHOLDINGS

Treasury Stocks

GBL provides no bank shall:

1. Purchase or acquire shares of its own capital stock; or

2. Accept its own shares as a security for a loan EXCEPT WHEN AUTHORIZED BY MONETARY BOARD > stock purchased shall be sold within 6 months from time of purchase

At common law, a corporation has no lien upon the shares of stockholders for any indebtedness to the corporation and there is no statute creating such lien.Foreign Stockholdings

GBL provides

Foreign individuals and non-bank corporations may own or control up to 40% of the voting stock of a domestic bank. > apply to Filipino and domestic non-bank corporations

The percentage of foreign-owned voting stocks in a bank shall be determined by the citizenship of the individual stockholders in that bank.

Controlling stockholders individuals holding more than 50% of the voting stock of the corporate stockholders of the bank

Voting stock: commercial 60%; thrift 40%; rural bank fully owned and held by Filipino

Determining nationality of bank control test is applied

Acquisition of Voting Stock in a Domestic Bank

GBL provides:

Sec. 73. Acquisition of Voting Stock in a Domestic Bank. Within seven (7) years from the effectivity of this act and subject to guidelines issued pursuant to the Foreign Banks Liberalization Act, the Monetary Board may authorize a foreign bank to acquire up to one hundred percent (100%) of the voting stock of only one (1) bank organized under the laws of the Republic of the Philippines.

Within the same period, the Monetary Board may authorize any foreign bank, which prior to the effectivity of this Act availed itself of the privilege to acquire up to sixty percent (60%) of the voting stock of a bank under the Foreign Banks Liberalization Act and the Thrift Banks Act, to further acquire voting shares such bank to the extent necessary for it to own one hundred percent (100%) of the voting stock thereof.

In the exercise of the authority, the Monetary Board shall adopt measures as may be necessary to ensure that at all times the control of seventy percent (70%) of the resources or assets of the entire banking system is held by banks which are at least majority-owned by Filipinos.

Any right, privilege or incentive granted to a foreign bank under this Section shall be equally enjoyed by and extended

Family Groups or Related Interest

Sec.12. Stockholdings of Family Groups of Related Interests. Stockholdings of individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or common-law, shall be considered family groups or related interests and must be fully disclosed in all transactions by such corporations or related groups of persons with the bank. .

Sec. 13. Corporate Stockholdings. - Two or more corporations owned or controlled by the same family group or same group of persons shall be considered related interests and must be fully disclosed in all transactions by such corporations or related group of persons with the bank.

BOARD OF DIRECTORSNumber of Directors

There shall be at leasr 5 and maximum of 15 members of board of directors of bank, 2 of whom shall be independent directors

Corporation Code: Sec. 10. Number and qualifications of incorporators. - Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of s stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation. Non- Filipino citizens may become members of the board of directors of a bank to the extent of the foreign participation in the equity of said bank. Independent director a person other than an officer or employee of the bank, it subsidiaries or affiliates or related interests Specific qualifications on independent director (see banking book page 58)Directors of Merged or Consolidated Banks

Number of directors must not exceed 21

Meetings

May be conducted through modern technologies

Within Philippines must be stated in by laws

Sec. 25. Corporate officers, quorum. - Immediately after their election, the directors of a corporation must formally organize by the election of a president, who shall be a director, a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of the Philippines, and such other officers as may be provided for in the by-laws. Any two (2) or more positions may be held concurrently by the same person, except that no one shall act as president and secretary or as president and treasurer at the same time.

The directors or trustees and officers to be elected shall perform the duties enjoined on them by law and the by-laws of the corporation. Unless the articles of incorporation or the by-laws provide for a greater majority, a majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for the transaction of corporate business, and every decision of at least a majority of the directors or trustees present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of officers which shall require the vote of a majority of all the members of the board.

Directors or trustees cannot attend or vote by proxy at board meetings.

Compensation and other Benefits of Directors and Officers

Sec. 18. Compensation and Other Benefits of Directors and Officers. To protect the finds of depositors and creditors the Monetary Board may regulate the payment by the bark to its directors and officers of compensation, allowance, fees, bonuses, stock options, profit sharing and fringe benefits only in exceptional cases and when the circumstances warrant, such as but not limited to the following:

18.1. When a bank is under comptrollership or conservatorship; or 18.2. When a bank is found by the Monetary Board to be conducting business in an unsafe or unsound manner; or 18.3. When a bank is found by the Monetary Board to be in an unsatisfactory financial condition.FIT AND PROPER RULE

Powers of the Monetary Board

Sec. 16. Fit and Proper Rule. - To maintain the quality of bank management and afford better protection to depositors and the public in general the Monetary Board shall prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers and disqualify those found unfit.

After due notice to the board of directors of the bank, the Monetary Board may disqualify, suspend or remove any bank director or officer who commits or omits an act which render him unfit for the position. In determining whether an individual is fit and proper to hold the position of a director or officer of a bank, regard shall be given to his integrity, experience, education, training, and competence.

Disqualifications Circular 513 series of 2006 (see book p 61)

Corporation Code

Sec. 27. Disqualification of directors, trustees or officers. - No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of his election or appointment, shall qualify as a director, trustee or officer of any corporation.

NCBA Provision- Sec 9 and 27 (see book p 65) PIDC law sec 17 (p67) RA 7353 sec 5 (p67) Appendix 38, Manual of Regulations of Banks Sec. 10 (p67)Prohibition on Public Officials (RA 7353)

Sec. 5. All members of the Board of Directors of the rural bank shall be citizens of the Philippines at the time of their assumption to office: Provided, however, That nothing in this Act shall be construed as prohibiting any appointive or elective public official from serving as director, officer, consultant or in any capacity in the bank.

BANKING DAYS AND HOURSSec. 21. Banking Days and Hours. Unless otherwise authorized by the Bangko Sentral in the interest of the banking public, all banks including their branches and offices shall transact business on all working days for at least six (6) hours a day. In addition, banks or any of their branches or offices may open for business on Saturdays, Sundays or holidays for at least three (3) hours a day: Provided, That banks which opt to open on days other than working days shall report to the Bangko Sentral the additional days during which they or their branches or offices shall transact business.

For purposes of this Section, working days shall mean Mondays to Fridays, except if such days are holidays.

Rules and RegulationsCircular 500 (See book page 69)

AUTOMATED TELLER MACHINESOff-site ATMs

Conditions:

1. Submit report to appropriate department of BSP

2. Installed only in center of activity > adequate internal control and security measures shall be adopeted and submitted to BSP

3. Only banks which have shown general compliance

Mobile ATMs

Conditions:

1. Visit only centers of activity confined within Manila

2. Secure insurance coverage or self-insurance scheme

3. Inform BSP of actual date a Mobile ATM becomes operational

Independent Auditor

Sec. 58. Independent Auditor. - The Monetary Board may require a bank, quasi-bank or trust entity to engage the services of an independent auditor to be chosen by the bank, quasi-bank or trust entity concerned from a list of certified public accountants acceptable to the Monetary Board. The term of the engagement shall be as prescribed by the Monetary Board which may either be on a continuing basis where the auditor shall act as resident examiner, or on the basis of special engagements; but in any case, the independent auditor shall be responsible to the banks, quasi-banks or trust entitys board of directors. A copy of the report shall be furnished to the Monetary Board. The Monetary Board may also direct the board of directors of a bank, quasi-bank, trusty entity and/or the individual members thereof; to conduct, either personally or by a committee created by the board, an annual balance sheet audit of the bank, quasi-bank or trust entity to review the internal audit and control system of the bank, quasi-bank or trust entity and to submit a report of such audit

Financial Statements

Sec. 60. Financial Statements. Every bank, quasi-bank or trust entity shall submit to the appropriate supervising and examining department of the Bangko Sentral financial statements in such form and frequency as may be prescribed by the Bangko Sentral. Such statements, which shall be as of a specific date designated by the Bangko Sentral, shall show thee actual financial condition of the institution submitting the statement, and of its branches, offices, subsidiaries and affiliates, including the results of its operations, and shall contain such information as may be required in Bangko Sentral regulations.

SEC 61. Publication of Financial Statements. - Every bank, quasi-bank or trust entity, shall publish a statement of its financial condition, including those of its subsidiaries and affiliates, in such terms understandable to the layman and in such frequency as may be prescribed Bangko Sentral, in English or Filipino, at least once every quarter in a newspaper of general circulation in the city or province where the principal office, in the case of a domestic institution or the principal branch or office in the case of a foreign bank, is located, but if no newspaper is published in the same province, then in a newspaper published in Metro Manila or in the nearest city or province.

The Bangko Sentral may by regulation prescribe the newspaper where the statements prescribed herein shall be published. .

The Monetary Board may allow the posting of the financial statements of a bank, quasi-bank or trust entity in public places it may determine, lieu of the publication required in the preceding paragraph, when warranted by the circumstances.

Additionally, banks shall make available to the public in such form and manner as the Bangko Sentral may prescribe the complete set of its audited financial statements as well as such other relevant information including those on enterprises majority-owned or controlled by the bank, that will inform the public of the true financial condition of a bank as of any given time. .

In periods of national and/or local emergency or of imminent panic which directly threaten monetary and banking stability, the Monetary Board, by a vote of at least five (5) of its members, in special cases and upon application of the bank, quasi-bank or trust entity, may allow such bank, quasi-bank or trust entity to defer for a stated period of time the publication of the statement of financial condition required herein.

Sec. 62. Publication of Capital Stock. A bank, quasi-bank or trust entity incorporated under the laws of the Philippines shall not publish the amount of its authorized or subscribed capital stock without indicating at the same time and with equal prominence, the amount of its capital actually paid up.

No branch of any foreign bank doing business in the Philippines shall in any way announce the amount of the capital and surplus of its head office, or of the bank in its entirety without indicating at the same time and with equal prominence the amount of the capital, if any, definitely assigned to such branch, such fact shall be stated in, and shall form part of the publication.

Sec. 63. Settlement of Disputes. The provisions of any law to the contrary notwithstanding, the Bangko Sentral shall be consulted by other government agencies or instrumentalities in actions or proceedings initiated by or brought before them involving controversies in banks, quasi-banks or trust entities arising out of and involving relations between and among their directors, officers or stockholders, as well as disputes between any or all of them and the bank, quasi-bank or trust entity of which they are directors, officers or stockholders.Sec. 22. Strikes and Lockouts. - The banking industry is hereby declared as indispensable to the national interest and, notwithstanding the provisions of any law to the contrary, any strike or lockout involving banks, if unsettled after seven (7) calendar days shall be reported by the Bangko Sentral to the Secretary of Labor who may assume jurisdiction over the dispute or decide it or certify the same to the National Labor Relations Commission for compulsory arbitration. However, the President of the Philippines may at any time intervene and assume jurisdiction over such labor dispute in order to settle or terminate the same.

Reports of Strikes and Lockouts

Apprise deputy governor of the supervision and examination sector of BSP

Disclose: cause and bank managements position on its legality; and bank operations affected

Laws governing other types of banks

Sec. 71. Other Banking Laws. The organization, the ownership and capital requirements, powers, supervision and general conduct of business of thrift banks, rural banks and cooperative banks shall be governed by the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code, respectively. The organization, ownership and capital requirements, powers, supervision and general conduct of business of Islamic banks shall be governed by special laws.The provisions of this Act, however, insofar as they are not in conflict with the provisions of the Thrift Banks Act, the Rural Banks Act, and the Cooperative Code shall likewise apply to thrift banks, rural banks, and cooperative banks, respectively. However, for purposes of prescribing the minimum ratio which the net worth of a thrift bank must bear to its total risk assets, the provisions of Section 33 of this Act shall govern.Chapter 3: Deposit Functions of Banks

I. Kinds of Deposits.

A. Demand Deposits.

- demand deposits all those liabilities of the BSP and of other banks which are denominated in Philippine currency and are subject to payment in legal tender upon demand by the presentation of depositors checks.

- A Universal and Commercial Bank may accept or create demand deposits subject to withdrawal by check without prior authority from the BSP.

- A Thrift/Rural/Cooperative Bank may accept or create demand deposits upon prior authority from the BSP.

1. Temporary Overdrawings; Drawings against Uncollected Deposits.

- temporary overdrawings against current account shall not be allowed, unless caused by normal bank charges and other fees incidental to handling such accounts.

- technical overdrawings arising from force posting in clearing checks shall be debited by banks under Returned Checks and other Cash Items Not In Process of Collection which is part of other assets. Checks lodged under Returned Checks etc shall either be returned or honored the following day before clearing. The items to be used as cover for the honored checks should be limited to the following:

a. Cash;

b. Cashiers/Managers/Certified Checks;

c. bank drafts;

d. postal money orders;

e. treasury warranties;

f. duly funded on us checks; and

g. fund transfers/credit memos within the same bank representing proceeds of loans granted under existing regulations.

- drawings against uncollected deposits shall be prohibited except when made against uncollected deposits representing managers, cashiers or treasurers checks, treasury warrants, postal money orders and duly funded on us checks which may be permitted at the discretion of each bank.

2. Current Accounts of Bank Officers and Employees

- The following bank officers and employees are prohibited from maintaining demand deposits or current accounts with the banking office in which they are assigned.

a. All officers;

b. employees of the banks cash departments/cash units.

c. other employees who have direct and immediate responsibility in the handling of transactions and/or records pertaining to demand deposits or current accounts.

d. the spouses and relatives within the second degree of consanguinity and affinity of the officers and employees covered by the prohibition.

e. business interests of all the above mentioned wherein they own a majority of the stock.

3. Checks.

- A check is a bill of exchange drawn on a bank, payable on demand. It is a written order addressed to the bank by a person having money in their hands requesting them to pay on presentment, to a person named therein or to bearer or order a named sum of money.

- by virtue of the contract of deposit between banker and depositor, banker agrees to pay checks drawn by the depositor provided that the depositor had money in the hands of the bank.

4. Duty of the Bank to Honor Checks.

- where that bank possesses funds of a depositor, it is bound to honor his checks to the extent of the amount of his deposits.

- failure to do so entitles the drawer to substantial damages without any proof of actual damages.

- a bank is not liable for its refusal to pay a check on account of insufficient funds even if deposit may be made later in the day.

5. Responsibilities of Drawer.

- keep track of his available balance in the bank and not rely on the bank to notify him of the necessity to fund certain checks he previously issued.

6. Duty of Banks to Know Signature

- a bank is bound to know the signatures of its customers and if it pays a forged check, it must be considered as making the payment out of its own funds and cannot ordinarily charge the amount to the account of the depositor whose name was forged.

7. No obligation to make partial payment

- a bank is under no obligation to make a partial payment on a check up to only the amount of the drawers funds, where the check is drawn for an amount larger than what the drawer has on deposit.

8. No duty to make up the deficiency from other accounts.

- where a depositor has two accounts, an open and a savings account, and draws a check upon the open account for more than the account contains, the bank may refuse to pay the check as it has no duty to make up the deficiency from the savings account.

9. Legal Character of Checks representing Demand Deposits.

- they do not have legal tender power and their acceptance is at the option of the creditor, unless such check has been cleared and credited to the account of the creditor, then it shall be equivalent to a delivery to the creditor of cash equal to that credited to his account.

B. Savings Deposits

1. Servicing deposits outside bank premises.

- banks may be authorized to solicit and accept deposits outside their bank premises subject to conditions.

a. financial condition of the bank is sound and the operations and the quality of management could reasonably assure the safety of the funds which may be entrusted to its deposit collectors or solicitors.

b. proposed area is clearly defined

c. confined within a locality where there are no other banks in operation or the deposit potential of the said locality is still untapped.

d. applicant bank shall institute then following minimum safeguards.

1. all deposit solicitors shall be bonded for at least Php 1000 subject to increase approximate to their daily collections.

2. proper identification cards, worn at all times by the deposit solicitors

3. adequate insurance coverage for the funds in transit.

4. deposit slips in booklet form, prenumbered in triplicate copies and in three colors original copy to the depositor, second copy for posting reference and third copy to be retained in the booklet.

5. all collections shall be turned over to the cashier at the end of each day with a a Collection Summary Report.

6. depositors shall always be required to accomplish a signature card when opening an account, which shall be used in checking the authenticity of signatures.

7. transactions shall be recorded by the bookkeeper or any ledger clerk on the same day such are accepted and the passbooks of the depositors shall be returned not later than the following business day.

8. at end of each month, advise depositors in writing of their account balance.

9. places of assignment of bank solicitors shall be rotated at least quarterly.

2. Withdrawals

- banks are prohibited from issuing/accepting withdrawal slips or any other similar instruments designed to effect withdrawals of savings deposits without requiring the presentation of passbooks and accomplishment of the necessary withdrawal slips, except for banks authorized by the BSP to adopt the no passbook withdrawal system.

- no law mandating banks to call their clients when their representatives withdraw from their accounts.

C. Negotiable order of Withdrawal (NOW) Accounts

1. Authority to accept NOW accounts

- NOW Accounts are interest bearing deposit accounts that combine the payable on demand feature of checks and investment feature of savings accounts.

- Universal and Commercial bansk may offer NOW accounts without prior approval of BSP

- Thrift, Rural and Commercial banks may offer the same with need of prior BSP approval

2. Rules on Servicing NOW Accounts.

a. prior or simultaneous with opening of a NOW account, bank shall inform depositor of the terms and conditions.

b. bank shall be responsible for the proper identification of its depositors and require 2 specimen signatures and other pertinent information.

c. deposits shall be covered by deposit slips in duplicate duly validated and initialed by the receiving teller, copy furnished to the depositor

d. NOW accounts shall be kept and maintained separately from the regular savings deposits.

e. Blank NOW forms shall be prenumbered and controlled as in the case of unissued blank checks.

f. bank statement shall be sent to each depositor at end of month for confirmation of balances.

g. banks must use the form prescribed by present rules on NOW accounts.

D. Time Deposits

- one the payment of which cannot be legally required within a specified number of days.

1. Term of time deposits

- shall be issued for a specific period or term

2. Special time deposits.

- authority shall automatically be granted to any accredited bank which may participate in the supervised credit program to accept speciakl time deposits from the Agrarian Reform Fund Comission with interest at a lower rate than those allowed on time deposits.

- exempt from the legal reserve requirements

3. Certficates of Time Deposit

a. Negotiable Certificates of Time Deposit

1. Universal and Commercial bank may issue without prior authority from BSP

2. Thrift, Rural and Cooperative Bank may issue with prior approval of BSP.

b. Non-negotiable Certificates of Time Deposit

- all may issue without need of BSP approval.

E. Deposit Substitute Operations (Quasi-banking functions)

- essential elements of quasi banking

1. Borrowing funds for the borrowers own account.

2. Twenty or more lenders at any one time;

3. methods of borrowing are issuance, endorsement, or acceptance of debt instruments of any kind, other than deposits, such as acceptances, promissory notes, participations, certificates of assignments or similar instruments with recourse, trust certificates, repurchase agreements, and such other instruments as the Monetary Board may determine; and

4. the purpose of which is relending or purchasing receivables or other obligations.

F. Foreign Currency Deposits

1. Authority to deposit foreign currencies

- any person may deposit foreign currency in Philippine banks designated by the BSP for the purpose of such deposits.

- may deposit foreign currencies which are acceptable as part of the international reserve, except those which are required by the BSP to be surrendered.

2. Authority of Banks to accept foreign currency deposits.

1. accept deposits and foreign currencies in trust; numbered accounts for recording and servicing said deposits are allowed.

2. issue certificates to evidence such deposits

3. to discount said certificates.

4. accept said deposits as collateral for loans subject to such rules and regulations

5. to pay interest in foreign currency on such deposits

3. Foreign currency cover requirements

- depositary banks shall

a. maintain at all times a 100% foreign currency cover for their liabilities

b. of which cover at least 15% shall be in the form of foreign currency deposit with the BSP.

c. and the balance in the form of foreign currency loans or securities, which shall be of short term maturities and readily marketable,

d. such foreign currency loans may include loans to domestic enterprises which are export oriented or registered with the Board of Investments, subject to limitations imposed by the Monetary Board.

e. Except as the Monetary Board may otherwise prescribe or allow, the foreign currency cover shall be in the same currency as that of the corresponding foreign currency liability.

f. BSP may pay interest on the foreign currency deposit and if requested shall exchange the foreign currency notes and coins into foreign currency instruments drawn on its depositary banks.

Depositary banks qualified by the Monetary Board for expanded foreign currency deposit are exempt from the 15% cover requirement stated in (b) and may extend foreign currency loans to any domestic enterprise without the limits prescribed regarding maturity and marketability and such loans shall be eligible for purposes of the 100% foreign currency cover prescribed.

4. withdrawability and transferability of Foreign Currency Deposits.

- no restriction on such except those arising from the contract between the depositor and bank.

G. Anonymous and Numbered Accounts.

- anonymous accounts and those under fictitious names should not be allowed or kept. In case where such is allowed, banks/non-bank financial institutions should ensure that the client is identified in an official or other identifying documents.

Revised Penal Code:

Art. 178. Using fictitious name and concealing true name. The penalty of arresto mayor and a fine not to exceed 500 pesos shall be imposed upon any person who shall publicly use a fictitious name for the purpose of concealing a crime, evading the execution of a judgment or causing damage.

Any person who conceals his true name and other personal circumstances shall be punished by arresto menor or a fine not to exceed 200 pesos.

Civil Code:

Art. 379. The employment of pen names or stage names is permitted, provided it is done in good faith and there is no injury to third persons. Pen names and stage names cannot be usurped.

Art. 380. Except as provided in the preceding article, no person shall use different names and surnames.

- Please see also CA 142 as amended by RA 6085.

II. Administration of Deposits

A. Specimen Signatures, ID Photos

All banking institution are required to set a minimum of three (3) specimen signatures to be simultaneously required from each of their depositors and to update the specimen signatures of their depositors every (5) years or sooner, at the discretion of the bank.

BSP Circular No. 564, Series of 2007 provides for the list of valid identification cards as follows:

i. Clients who engage in a financial transaction with the covered institutions for the first time shall be required to present the original and submit a copy of at least two valid photo-bearing identification documents issued and signed by an official authority. Valid IDs include the following

Passport

Drivers license

Professional Regulations Commission (PRC) ID

National Bureau of Investigation(NBI) clearance

Police clearance

Postal ID

Voters ID

Barangay certification

Government Service and Insurance System(GSIS) e-Card

Social Security System(SSS) card

Philhealth card

Senior Citizen Card

Overseas Workers Welfare Administration (OWWA) ID

OFW ID

Seamans Book

Alien Certification of Registration/Immigrant Certificate of Registration

Government office ID [e.g. Armed Forces of the Philippines (AFP), Home Development Mutual Fund (HDMF) IDs]

Certification from the National Council for the Welfare of Disable Persons (NCWDP)

Department of Social Welfare and Development (DSWD) Certification.

Other valid IDs issued by the Government and its instrumentalities

ii. Students who are beneficiaries of an OFW and who are not yet of voting age shall also be required to present two IDs. Other IDs may include birth certificate, library ID, and membership IDs duly issued by any association or organization within the college or university and signed by the pertinent authority issuing the ID.

iii. Banks and non-bank financial institution shall require their clients to submit clear copies of the two valid IDs on a one-time basis only, or at the commencement of a business relationship. They shall require their clients to submit an updated photo and other relevant information whenever the need for it arises.

iv. Financial transactions may include remittances, among others, as falling under the definition of transaction.

B. Minors and Corporations as Depositors

1. Minors

Minors are vested with special capacity and power, in their own right and in their own names, to make savings or time deposits with and withdraw the same as well as receive interest thereon from banking institutions, without the assistance of their parents or guardians, provided the following requirements requisites are met:

1. at least seven years of age,

2. able to read and write,

3. have sufficient discretion, and

4. not otherwise disqualified by any other incapacity.

Parents may nevertheless deposit for their minor children and guardian for their wards.

Deposits in the Thrift Banks

Minors in their own rights and in their own names may make deposits and withdraw the same, and may receive dividends and interest: Provided however, That, if any guardian shall give notice in writing to any thrift bank not to make payments of deposits, dividends, or interest to the minor of whom he is the guardian, then such payment shall be made only to the guardian.

2. Corporations

Corporations may open bank accounts as follows:

(i)Incorporation Stage In case the payment of subscription is in cash, the

Securities and Exchange Commission requires a Bank Certificate of deposit

Of paid-up capital notarized in place where signed.

(ii)Post Incorporation In opening a bank account, the Board of Directors

Issues a resolution authorizing the signatories and specifying the depositary

bank.

C. Time of Payment of Interest on Time Deposits/Deposit Substitutes

Interest or yield on time deposit/deposit substitute may be paid at maturity or upon withdrawal or in advance: Provide, However, The interest or yield paid in advance shall not exceed the interest for one (1) year.

D. Treatment of Matured Time Deposits/Deposit Substitutes.

(i)A time deposit not withdraw or renewed on its due date shall be treated as a saving deposit and shall earn interest from maturity to the date of actual withdrawal or renewal at a rate applicable to saving deposits.

(ii)A deposit substitute instrument no withdrawn or renewed on its maturity date shall from said date become payable on demand and shall earn an interest or yield from maturity to actual withdrawal or renewal at a rate applicable to a deposit substitute with a maturity of fifteen (15) days.

E. Clearing Cut-off Time

As a general rule, all deposits and withdrawals during regular banking hours shall be credited or debited to deposit liability accounts on the date receipt or payment thereof: Provided, however, That a bank may set a clearing cut-off time for its head office not earlier than two (2)hours before the start of clearing at the BSP, and not earlier than three and one half (3-1/2) hours before the start of clearing branches, agencies and extension office doing business in the Philippines, after which time, deposits received shall be booked as hereinafter provided: Provided, further, that banks which are located in areas where there are no BSP regional/clearing arrangements may set a clearing cut-off time not earlier that two (2) hours before the start of their local clearing after which time deposits received shall be booked likewise as hereinafter provided.

F. Booking of Cash Deposits.

Cash deposits received after the selected clearing cut-off time until the close of the regular banking hours shall be booked as deposits on the day of receipt.

G. Booking of Non-cash Deposits

Deposits checks including on us checks, managers/cashiers/treasurers check and demand drafts, which are drawn against the depository bank and all its offices, as well as treasury warrants and postal money orders, received after the selected clearing cut-off time until the close of the regular banking hours, may, at the option of the bank, be booked as deposits on the day of the receipt. H. Booking of Deposits After Regular Banking Hours.

Deposits, whether cash or non-cash, received after the close of the regular banking hours shall be treated as contingent accounts of the day of receipt and shall be booked as deposits the following banking day.

I. Average Daily Balance

i. Banks may impose and collect service charges and/or maintenance fees on savings and demands deposits accounts, whether active or dormant, the fall below the required minimum monthly average daily balance (ADB), subject to the following conditions.

a) the imposition of such charges or fees is clearly stated among the terms and conditions of the deposit;

b) the rate or amount of such charges of fees is properly disclosed among the terms and conditions of the deposits;

c) the deposit account balances have fallen below the required minimum monthly ADB for dormant accounts and for at least two (2) consecutive months for active amounts;

d) the required minimum monthly ADB of deposits are properly disclosed among the terms and conditions of the deposits; and

e) in the case of charges and fees for dormant accounts or dormancy fee, the period of dormancy shall be properly disclosed among the terms and conditions of the deposit, and that the depositors shall be informed by registered mail with return card on his last known address at least (60) days prior to the imposition of dormancy fee.

ii. Any change in the terms and conditions for the imposition of service charges and/or maintenance fee, e.g., increase in the amount of such charges and fees or increase in the required minimum monthly ADB of deposits, shall take effect only after due notice in the depositor; Provided, That information by regular mail, statement of account messages, electronic mail, courier delivery and/or other alternative modes of communication on the depositors last known address at least sixty (60) days prior to implementation shall be considered sufficient notice: Provided, further, That failure of the depositor to manifest or register his objection to the new service charges and maintenance fees or any change in their terms and conditions in writing within thirty (30) days from receipt of written notice of amendment shall be deemed to constitute acceptance of such changes.

iii. Banks shall likewise post said information on their respective websites, automated teller machines (ATM) on screen messages, and in conspicuous places within the bank premises and other places near the banks own ATM at least sixty (60) days prior to implementation.

CHAPTER 4: Investments, Loans, and other Functions of Banks

Powers of a Universal Bank

1. The powers authorized to a commercial bank

2. The powers of an investment house

3. The power to invest in non-allied enterprises

A universal bank may:

Invest in the equities of allied and non-allied enterprises; allied enterprises may be financial or non-financial

Own up to 100% of the equity in a thrift bank, rural bank or any allied financial enterprise

Own up to 100% of the equity in a non-financial allied enterprise

Invest in equities of non-allied enterprise

Invest in equities of quasi-banks

Powers of a Commercial Bank

1. The general powers incident to corporations2. All such powers as may be necessary to carry on the business of commercial banking such as: accepting drafts and issuing letters of credit; discounting and negotiating promissory notes, drafts, bills of exchange, and other evidence of debt; and accepting and creating demand deposits, among others. * Letters of credit: an engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit; it is the engagement of the bank to pay the seller once the draft and the required shipping documents are presented to it.

Generally, there are 3 parties: 1) the buyer, who procures LOC and obliges himself to reimburse the issuing bank; 2) the bank issuing the LOC; and 3) the seller who ships the goods to the buyer.

A commercial bank may:

Invest only in equities of allied enterprises, which may be financial or non-financial Own up to 100% of allied financial enterprises Own up to 100% of allied nonfinancial enterprisesLimit on Loans, Credit Accommodations and Guarantees

Single Borrowers Limit: shall not exceed 20% of the net worth of such bank

Except: - as the Monetary Board may otherwise prescribe

- deposits of rural banks with government owned and controlled financial institutions

Restriction on Bank Exposure to Directors, Officers, Stockholders, and their Related Interests (DOSRI)

Limits of Loans:

1) The Monetary Board may regulate the amount of loans, credit accommodations and guarantees that may be extended by a bank to its DOSRI as well as investments of such bank in the enterprises owned and controlled by its DOSRI

2) The outstanding loans, credit accommodations, and guarantees which a bank may extend to its DOSRI shall be limited to an amount equivalent to their respective unencumbered deposits and book value of their paid-in capital contribution in the bank.

Except with the written approval of the majority of all the directors of the bank, excluding the director concerned, no director or officer of any bank shall:

1. directly or indirectly, borrow from such bank

2. become a guarantor, indorser, surety for loans from such bank to others

3. in any manner be an obligor or incur any contractual liability to the bank

Directors include those: 1) named as such in the articles of incorporation, 2) duly elected in the meetings of stockholders, 3) elected to fill the vacancies in the board of directors.

Officers include those: 1) whose duties are defined by the by-laws or are generally known to be officers of the bank (i.e. president, evp, senior vp, general manager, secretary, treasurer) and 2) who performs functions of management (i.e. chairman, vice-chairman)

Stockholders are any stockholder in the books of the bank, quasi-bank, or trust entity, whose stockholdings in the same, individually or collectively, amount to ONE PERCENT or more of the total subscribed capital stock of the bank, quasi-bank, or trust entity.

their Related Interests

1) spouse or relative within the first degree of consanguinity or affinity, or relative by legal adoption, of a director, officer or stockholder of a bank2) Partnership of which DOSRI is a partner3) Co-owner with DOSRI of the property, interest, or right mortgaged, pledged or assigned to secure the loans or credit accommodations4) Corporations or associations of which DOSRI is also a director or officer5) Corporations, associations or firms of which DOSRI owns at least 20% of the subscribed capital6) Corporations, associations or firms wholly or majority-owned and controlled by DOSRI Grant and Purpose of Loans and Other Credit Accommodations (LOCA)

A. Amount and Purpose of Loans

Banks shall grant only in amounts and for periods of time essential for the effective completion of the operation.

The purpose shall be stated in the contract between the bank and borrower.

If the proceeds were used other than the purpose stated, banks may terminate the LOCA and demand immediate payment of the obligation.

B. Requirements for Grant of Loan

Statement of assets and liabilities

Statement of income and expenditures

Other requirements prescribed by law to ascertain borrowers ability to pay

Microfinancing Loans- small loans granted to basic sectors like the poor and low-income households for their microenterprises and small businesses

C. Reason for Stringent Rules in Granting Loans

The business of a bank is one affected with public interest, for which reason the bank should guard against loss due to negligence or bad faith. From the nature of its business, it is expected to ascertain and verify the identities of the persons it transacts business.

D. Unsecured Loans and Other Credit Accommodations

The Monetary Board (MB) is authorized to issue such regulations as it may deem necessary with respect to unsecured LOCA that may be granted by banks.

E. Other Security Requirements for Bank Cradits

The MB shall, by regulation, prescribe further security requirements and reduce or, in special cases, increase the established maximum ratio.

F. Authority to Prescribe Terms and Conditions of Loans and Other Credit Accommodations

The MB shall prescribe related terms and conditions for various types of bank LOCA, and regulate the interest imposed on microfinance borrowers.

G. Amortization on Loans and Other Credit Accommodations

> Amortization schedule of bank LOCA shall be adapted to the nature of the operation

> In case of LOCA with maturities of more than 5years, provisions shall be made for periodic amortization payments, but the same must be made annually.

> When the borrowed funds are to be used for purposes which do not initially produce revenues adequate for regular amortization payments therefrom, the bank may permit the initial amortization payment to be deferred until revenues are sufficient for such purpose, but in no case shall the initial amortization date be later than 5years from the date on which the LOCA is granted.

> In case of LOCA to microfinance sectors, the schedule of loan amortization shall take into consideration the project cash flow of the borrower and adopt this into the terms and conditions formulated by banks.

H. Escalation Clause; when allowable

> Parties may agree that the rate of the interest agreed upon be increased in the event that the maximum rate of interest is increased by the MB: provided that there is also a stipulation that the interest would be reduced in the event that the maximum rate of interest is reduced. The same shall take effect on or after the date the maximum interest rate is increased or decreased. The de-escalation clause is an indispensable requisite to the validity and enforceability of an escalation clause in the contract. This rule is to prevent the one-sidedness in favor of the lender.

*Exception to the Rule:

> If the creditor unilaterally and actually decreased the interest charges whenever the maximum rate of interest is reduced by law or the MB.

I. Unilateral Increase of Rates

> The unilateral determination and imposition of increased rates is violative of the principle of mutuality of contracts under Article 1308of the Civil Code. One-sided impositions are void.

J. Iniquitous, Unconscionable and Exorbitant Interest

> Notwithstanding the inexistence of the Usury Law, Iniquitous, Unconscionable and Exorbitant Interests are against public policy; hence, void.

> 5.5% per month, 26-35% per annum, are held to be Iniquitous, Unconscionable and Exorbitant.

K. Effect of Void Interest Rate > Since it is void, it is as if there was no express contract thereon. In such case, the court will fix a more reasonable and equitable rate. In most cases, the court reduced it to 12% per annum.

L. Prepayment of LOCA

> The borrower may at anytime prior to the maturity date prepay, in whole or in part, the unpaid balance, subject to the terms and conditions of the contract.

M. Development Assistance Incentives

> The Bangko Sentral shall provide for incentives to banks extending loans to finance educational institutions, cooperatives, hospitals and other medical services, socialized or low-cost housing, local government units and other activities with social content.

N. Renewal or Extension of LOCA

> The MB may, by regulation, prescribe the conditions and limitations extension or renewals of LOCA.

O. Banks cannot extend Peso Loans to Non-Residents

> This is to curb speculation in the foreign exchange market and to further reinforce the memorandum that peso deposits should be funded from inward foreign exchange remittance.

P. Provisions for Losses and Write-Offs

> Debts on which interest is past due and unpaid, unless the same are well-secured and in the process of collection shall be considered bad debts. The MB shall fix the amount of reserves for bad debts or doubtful accounts or other contingencies. Writing off LOCA shall be subject to regulations issued by the MB.

TRUTH IN LENDING

DISCLOSURE: Any creditor shall furnish to each other to whom credit is extended, prior to the consummation of the transaction, a statement in writing setting forth the ff.:

1. The cash price or delivered price of the property or service to be acquired;

2. The amounts, if any, to be credited as down payment and/or trade-in;

3. The difference between the amounts set forth under clauses 1 and 2;

4. The charges, individually itemized , which are paid to or be paid by such person in connection with the transaction but which are not incident to the extension of credit;

5. The total amount to be financed;

6. The finance charge expressed in terms of pesos and centavos;

7. The percentage that the finance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation.

RATIONALE: Protect users from lack of awareness of the true cost thereof, proceeding from the experience that banks are able to conceal such true cost by hidden charges, uncertainty of interest rates, deduction of interest rates from the loaned amount, and the like.

PENALTY: CIVIL= P100 or in the amount equal to twice the finance charged required by such creditor in connection with such transaction, whichever is greater, except that such liability shall not exceed P2000 on any credit transaction.

CRIMINAL= FINE by not less P1K or more than P5K or imprisonment for more than 6 months, nor more than one year or both.

NOTE:

*pursuant to TRUTH LENDING ACT, violation shall not affect the validity or enforceability of any contract or transactions.

*SC held that the lender cannot charge those that are not stipulated in the promissory notes (Consolidated Bank and Trust Co. vs. CA)

*no punishment or penalty shall apply to the Philippine Government or agency or any political subdivision thereof.

* Courts have the authority to strike down or modify provisions in the promissory notes that grant lenders unrestrained power to increase interest rates, penalties and other charges at the latters sole discretion and without giving prior notice to or securing the borrowers consent.

FORECLOSURE OF REAL ESTATE MORTGAGE

Sec, 47 of the GBL provides:

(i) In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the cost and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom.

(ii) However, the purchaser at the auction sale concerned whether in a judicial or extrajudicial foreclosure, shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law.

NOTE:

* the one year period is to be reckoned from the date of the registration of the sale; action for annulment of the mortgage does not toll the running of the period to redeem the foreclosed property

*Real property may be mortgaged to aliens, both individuals and corporations (R.A. No. 133 as amended by R.A. 4882)

*demand before foreclosure is essential; if not, the loans had not yet become due and demandable

* right of redemption may be extended by agreement

* estoppel- the bank consented to the extension of redemption period if it had time to object but did not.

*exercise of the right of redemption, if exercised after the prescriptive period is not really redemption but a repurchase. DISTINCTION: Redemption is by force of law; the purchaser is bound to accept the redemption. No such obligation imposed in repurchase.

QUESTION: Whether an alien-owned bank can acquire ownership of residential lot by virtue of a deed of transfer as settlement of a debt.

Ans: NO. The purpose of the Constitution is to place and keep in the hands of the people the ownership of private lands in order not to endanger the security of the nation. If leased for 50 years, permissible.

*Offer to repurchase is not a waiver to question the sale

* no right to repurchase if the sale is invalid

* preferred status of bank, not impaired in case the borrower is under rehabilitation

* after consolidation title in the buyers name, writ of possession becomes a matter of right and its issuance is merely a ministerial function

Major investments

Banks are reviewed by the Monetary Board (MB) as to their major acquisitions and investments.

A. Ceiling on Investment- The total investment in a real estate and improvements, including bank equipment shall not exceed 50% of combined capital accounts.

What constitutes total investment? 1. All real estate and equipment necessary for the banks immediate use in the transaction of its business (i.e. bank premises, land, buildings, real properties, equipment and other chattels) and 2. Equity investment of the bank in another corporation engaged primarily in real estate

B. Banks can acquire, hold or convey Real estate by way of satisfaction of claims under the following circumstances:

1. Those which shall be mortgaged to it in good faith by way of security of debts.

2. Those which shall be conveyed to it in satisfaction of debts3. Those which the bank shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it, and those which the bank shall purchase to secure debts due it.

Any real property acquired or held under these circumstances must be disposed of within 5 years or as may be prescribed by the MB. Nevertheless, the bank may continue to hold the property subject to the 50% limitation on total investment.

Other Banking Services.

The bank may also act as: (CFCML)

1. Custodian of valuable objects (i.e. documents, funds)

2. Financial agent (buy and sell shares, evidences of indebtedness, securities)

3. Collector of payments

4. Managing agent, adviser, consultant of investment management upon prior

approval of MB

5. Lessor of safety deposit boxes

The funds, securities, and other effects received by a bank as a depository or as an agent shall be separate from the banks assets and liabilities.

The contract for a Safety Deposit Box is a special kind of deposit since the full possession and control over the box is not given to the renter. (Guard key is with the bank; renters key is with the renter). Bank is not liable in case loss attributable to joint renters who each has one renter key. Either one could open it without the other. Since it is a contract, duties may be defined by the parties.

The relation created here is that of a bailor and a bailee, the bailment being for hire and mutual benefit. A customer deposited his collection of stamps and the bank placed them at the lowest level of the safety deposit boxes. The bank knew of a flood and the possibility of it seeping through the deposit boxes. Bank failed to give notice of such event. The stamps deposited were damaged. Is the Bank liable? Yes. The bank failed to exercise reasonable care and prudence expected of a good father of a family.

The Bangko Sentral shall have full authority in the regulation of electronic transactions.

Subject to approval of the MB, banks may outsource all information technology systems and processes except for inherent banking functions. XIV. Banks may also outsource other functions as may be approved by the MB. Refer to our latest assignment on the nature of functions which a bank may outsource.

Credit Card Transactions

A. Definition of terms

Credit card- any card, plate or credit device existing for the purpose of obtaining money, property, labor, or services on credit.

Credit card receivables- total outstanding balance of credit card holders.

Minimum amount due- Minimum amount that the credit card holder needs to pay on or before the payment due date for a particular cycle

Default or delinquency- non-payment of any amount less than the minimum amount due within two cycle dates

Acceleration clause-provision giving the right to the bank to demand the obligation in full in case of default or non-payment

B. There must be a risk management system which shall cover the organizational set-up, records and reports, accounting, policies and procedures and internal control.

C. Minimum Requirements, Basks must ascertain the applicants credit standing, financial capability (i.e. net take home pay, net monthly receipts of a business of the applicant, net worth or cash flow)

D. Some examples on types of information to be disclosed: Non-finance charges, percentage of interest, payment scheme, methods of determining the balance and the interest, and other fees.

E. Finance charges shall refer to interest charged to the cardholder.

F. Banks shall keep strictly confidential the data on the cardholder or consumer except:

1. With consent

2. release, submission or exchange of customer info with other financial institutions

3. upon order of the court

4. disclosure to collection agencies of the bank

5. disclosure to third party service solely for the assistance and service to the bank

6. disclosure to insurance companies solely for the purpose of preventing loss and fraud

G. Offsets- pursuant to Arts. 1278 to 1290 of the NCC, the use of a persons credit card will subject his deposits with the bank to offset any amount due and payable on his credit card which have not yet been paid.

H. Unfair Collection Practices

Banks may resort to all reasonable and legally permissible means to collect amounts due them. The following constitute a violation:

1. use of threat of violence or other criminal means

2. use of obscenities, insults, profane language

3. disclosure of the names

4. threat to take any action which cannot be legally taken

5. communicating a credit info which is false

6. any false representation or deceptive means

7. making contact at inconvenient times (10pm-6am)

I. Additional deposits does not increase credit limit.

J. Contracts between banks and cardholders are contracts of adhesion because their terms are prepared by only one party.

One price tag Requirement

Every retailer is required to display a price tag to indicate the price. It must be written clearly. Must include VAT if vatable.

Practices which must be considered relative to the mode of payment.

1. When the consumer pays in cash, he shall pay only the price indicated in the price tag.

2. when through a credit card, only the price in the tag price.

3. when retailer offers the consumer an option to pay in cash, card, or on instalment, the same is allowed provided the payment options shall be disclosed by way of a separate info but not in the price tag

4. Cash price tag and regular price tag on each product or service is not allowed

5. Cash price tag and card price tag is also not allowed

Surcharging by retailers is not allowed.

Extra charge, or additional charge over and above the price tag

Chapter 5: PROHIBITED TRANSACTIONS AND CESSATION OF BANKING BUSINESS

I. Prohibited Transactions

A. Prohibition to Act as Insurer

-A bank shall not directly engage in insurance business as the insurer. The term doing insurance business or transacting an insurance business,shall include:

a. making or promising to make, as insurer, any insurance contract;

b. making or proposing any contract of suretyship as a vocation

c. doing any kind of business, including a reinsurance business

d. doing or proposing to do any business in substance

B. Prohibited Acts

1. No director, officer, employee or agent of any bank shall

a. Make false entries in any bank report or statement or participate in any fraudulent transaction

b. Without order of a court of competent jurisdiction, disclose to any unauthorized person any information relative to the funds or properties in the custody of the bank

c. Accept gifts, fees or commissions or any other form of remuneration in connection with the approval of a loan, or other credit accommodation from said bank

d. Overvalue or aid in overvaluing any security for the purpose of influencing in any way the actions of the ban or any bank; or

e. Outsource inherent banking functions. (Sec.55, GBL)

2. No borrower of a bank shall

a. Fraudulently overvalue property offered as security for a loan, etc

b. Furnish fake or make misrepresentation of material facts

c. Attempt to defraud the said bank

d. Offer any director, officer, employee or agent of a bank, any gift, fee, commission etc in order to influence such persons in approving loan and the like.

3. No examiner, officer or employee of the BSP shall commit any of the foregoing act or aid in the commission of the same.

4. Consistent with the Banks Secrecy Law, no bank shall employ casual or nonregular personnel or too lengthy probationary personnel in the conduct of its business involving bank deposits.

C. Prohibition Against Outsourcing Certain Banking Function

(Section 55, GBL)

II. Conducting Business In an Unsafe or Unsound Manner

III. Prohibition on Dividend Declaration

-No bank or quasi-bank shall declare dividends greater than its accumulated net profits then on hand, deducting therefrom its losses and bad debts.

Note: (Section 43 of the Corporation Code)

IV. Unauthorized Advertisement or Business Representation

V. Placement Under Conservatorship

A. (Section 67 of the GBL)

B. Grounds for Appointment of Conservator

-Whenever on the basis of a report submitted by the appropriate supervising or examining department, the Monetary Board (MB) finds that a bank or a quasi-bank is in a state of:

1. continuing inability, or

2. unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors,

MB shall appoint a conservator as the MB shall deem necessary to:

1. take charge of the assets, liabilities and management thereof;

2. reorganize management;

3. collect all monies and debts due said institution, and

Exercise all powers necessary to restore its viability.

LIQUIDITY- the ability of an asset to be converted into cash quickly and without any price discount. A corporation is liquid if it has ready access to cash.

SOLVENCY- the condition that exists when liabilities amount to less tan total assets, thus providing the ability to pay debts. The test of insolvency is measured by determining whether the realizable assets of a bank are less than its liabilities.

C. Qualifications of Conservator

-competent

-konowledgeable in bank operations and management

D. Period of Conservatorship

-does not exceed one (1) year

E. Remuneration

F. Expenses of Conservatorship

-shall be borne by the bank or the quasi-bank concerned

G. Terminations of Conservatorship

-MB is satisfied that the institution can continue to operate on its own

-MB shall, on the basis of the report of the C or its own findings, determine that the continuance thereof would involve probable loss to its depositors or creditors

H. Final and Executory

-actions of MB; except on petition for certiorari

I. Exclusive Power to Appoint

-vested exclusively with the MB

J. Not a Precondition

K. Powers of Conservatorship cannot Impair the Obligations of Contracts

VI. Cessation of Banking Business

A. Voluntary Liquidation

-written notice of L shall be sent to MBB before such liquidation is undertaken, and the MB has the right to intervene and take such steps as may be necessary to protect the interests of creditors

-voluntary L may be undertaken by the bank itself through its board of directors, by a trustee appointed by the bank, or by a receiver appointed to the bank upon voluntary dissolution of a bank pursuant to the Corporation Code

-no voluntary dissolution of a bank shall be undertake without prior approval of the MB (accompanied by a L plan, written notice shall be sent to MB before actual L)

B. Receivership and Involuntary Liquidation

(Section 69 of the GBL)

1. Grounds for Receivership and Liquidation

if the MB finds that the institution:

a. is unable to pay its liablities as they become due in the ordinary course of business

b. has insufficient realizable assets, as determined by the BSP, to meet its liabilities

c. cannot continue in business without involving probable losses to its depositors or creditrs, or

d. has willfully violated a cease and desist order that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution.

-For a quasi-bank, any person of recognized competence in banking or finance may be desinated as receiver.

2. Current and Complete Examination Not Necessary-The absence of an examination before the closure of a bank did not mean that there was no basis for the closure order. Needless to say, the decision of the MB and BSP, like any other administrative body, must have something to support itself and its findings of fact must be supported by substantial evidence. But it is clear under R.A. No 7653 that the basis need not arise from an examination as required by the old law. (Rural Bank of San Miguel, Inc. vs. Monetary Board)

3. Procedures-The receiver shall immediately:

a. Gather and take charge of all the assets and liabilities of the institution,

b. Administer the same for the benefit of its creditors, and

c. Exercise the general powers of a receiver under the Revise Rules of Court, but

d. Shall not, with the exception of the administrative expenditures, pay or commit any act that will involve the transfer or disposition of any asset of the institution.

-The receiver may deposit or place the funds of the institution in non-speculative investments.

-The receiver shall determine ASAP but not later than ninety (90) days from take over, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public.

-Any determination for the resumption of business of the institution shall be subject to the approval of the MB.

4. PROHIBITED ACTS:

Any director or officer of bank declared insolvent or plaed under receivership by the Monetary Board shall not commit any of the ff. acts:

a. Refusing to turn over the banks record and assets to the designated receivers;

b. Tampering with bank records;

c. Appropriating for himself or another party, or destroying or causing misappropriation and destruction of the banks assets;

d. Paying out or permitting or causing to be paid out any fund of said bank; and

e. Transferring or permitting or causing to be transferred any securities or property of said bank.

5. WHEN INSTITUTION CANNOT BE REHABILITATED

If the receiver determines that the institution cannot be rehabilitated or permitted to resume business, the Monetory Board shall notify in writing the board of directors of its findings and direct the receiver to proceed with the liquidation of the institution.

The receiver shall:

1. File ex parte with the proper RTC, and without requirement of prior notice or any other action, a petition for assistance in the liquidation plan adopted by the Philippine Deposit Insurance Corp. for general application to all closed banks.

a. In case of quasi banks, the liquidation plan shall be adopted by the Monetory Board.

2. Convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code of the Philippines.

6. FINAL AND EXECUTORYAs in the case of conservatorship:

The actions of the Monetary Board shall be final and executor, and may not be restrained or set aside by the court except on petition for certiorari on the ground that the action taken was in excess of jurisdiction or with such grave abuse of discretion as to amount to lack or excess of jurisdiction.

WHO WILL FILE: Stockholders of record representing the majority of the capital stock within 10 days from the receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship.

7. EXCLUSIVE POWER TO APPOINT vested exclusively with the Monetory Board.

C. CLOSE NOW HEAR LATER SCHEME

The law does not contemplate prior notice and hearing before a bank may be directed to stop operations and placed under receivership.

A previous hearing nor due process demand that the correctness of Monetary Boards Resolution to stop operation and proceed to liquidation of first adjudged before making the resolution effective.

CLOSE NOW HEAR LATER SCHEME is grounded on practical and legal considerations to prevent unwarranted dissipation of the banks assets and as a valid exercise of police power to protect the depositors, creditors, stockholders and the general public.D. EFFECT OF FILING FOR PETITION FOR REVIEW

The banks liquidator is allowed to continue receiving collectibles and receivables or paying offs creditors claims and other transactions pertaining to normal operations of a bank. i.e. prosecution of suits against debtors for collection and for foreclosure of mortgages.

E. REASON BEHIND RECEIVERSHIP AND INVOLUNTARY LIQUIDATION

It is a valid exercise of police power to protect the depositors, creditors, stockholders and the general public. Due to the nature of banks transactions and functions, a fiduciary relationship is created between the banking institutions and their depositors.

F. EFFECTS OF RECEIVERSHIP AND LIQUIDATION

1. Retention of Juridical Personality- which can sue and be sued through its liquidator.

LIMITATION: The prosecution and action must be done through the liquidator.

2. Not liable to Pay interest

- a banking institution has been declared insolvent and subsequently closed by the BSP cannot be held liable to pay interest on bank deposits which accrued during the period when bank is actually closed and non-operational.

3. Assets are deemed under Custodia Legis

- and shall, from the moment of such receivership or liquidation, be exempt from any order or garnishment, levy, attachment or execution.

4. Stay of execution

- is warranted if a bank was placed under receivership. The assets of the insolvent banking institution are held in trust for equal benefit of all creditors, and after its insolvency, one cannot obtain an advantage or a preference over another by an attachment, execution or otherwise.

5. Restriction of Banks Capacity to act

- Restriction in relation to its property.

- The bank would not be able to do NEW BUSINESS, i.e. to grant new loans or to accept new deposits.However, the receiver of the bank is obliged to collect debts owing to the bank which debts form part of the assets of the bank.

6. Exclusive Jurisdiction of Liquidation Court

- pertains only to the adjudication of claims against the bank. It does not cover the reverse situation where it is the bank which files a claim against another person or legal entity.

VII. DISPOSITION AND DISTRIBUTION OF ASSETS

A. Distribution of Assets

In case of liquidation of a bank or quasi-bank, after payment of the cost of proceedings, including a reasonable expenses and fees of the receiver to be allowed by the court, the receiver shall pay debts of such institution, under order of the court, in accordance with the rules on concurrence and preference of credit as provided in the Civil Code.

B. DISPOSITION OF REVENUES AND EARNINGS

All revenues and earnings realized by the receiver in winding up the affairs and administering the assets of any bank or quasi-bank shall be used to pay the costs, expenses mentioned in ITEM A above salaries of such personnel whose employment is rendered necessary in the discharge of the liquidation together with the other additional expenses caused by.

C. DISPOSITION OF BANKING FRANCHISE

The Bangko Sentral may, if public interest so requires, award to an institution, upon such terms and conditions as the Monetary Board may approve, the banking franchise of a bank under liq