Monday, August 01, 2011

Unfair credit card debt collection practices and their sanctions under BSP Circular No. 702, Series of 2010

The Supreme Court ruled in Macalinao vs. BPI (2009) and numerous cases dating as far back as 1996 that 3% monthly or 36% yearly interest is excessive, iniquitous, unconscionable, and exorbitant.
Some tactics used by credit card companies or their agents in trying to collect are:

[1] sending a photocopy of the complaint for collection or “sum of money” prepared by the company’s lawyer, and making the card holder think that a case has already been filed in court; or

[2] in situations where the credit card holder is a teacher, calling up the school principal or department head about the teacher’s delinquent account; or

[3] calling up, verbally abusing and humiliating the card holder.

Unfair collection practices

The Bangko Sentral ng Pilipinas “Manual of Regulations for Non-Bank Financial Institutions” (MORNBFI, Subsections 4320Q.14, page 136, and 4301N.14, page 810) classifies the following as u
nfair collection practices:
  1. The use or threat of violence or other criminal means to harm the physical person, reputation, or property of any person;
  2. The use of obscenities, insults, or profane language which amount to a criminal act or offense under applicable laws;
  3. Disclosure of the names of credit cardholders who allegedly refuse to pay debts;
  4. Threat to take any action that cannot legally be taken;
  5. Communicating or threat to communicate to any person credit information which is known to be false, including failure to communicate that a debt is being disputed;
  6. Any false representation or deceptive means to collect or attempt to collect any debt or to obtain information concerning a cardholder; and
  7. Making contact at unreasonable/inconvenient times or hours which shall be defined as contact before 6:00 A.M. or after 10:00 P.M., unless the account is past due for more than sixty (60) days or the cardholder has given express permission or said times are the only reasonable or convenient opportunities for contact.
If you are a school principal or department head and you receive a telephone call from collection agents about your teacher’s alleged delinquency, tell them that (1) they are violating the BSP regulation, and (2) you will encourage the teacher to file a complaint against them for unfair collection practices.

If you are the card holder and you were verbally abused by the card company’s staff or its collecting agent, you should file a complaint with the BSP’s Financial Consumer Affairs Group.

Additional protection for credit card holders under BSP Circular No. 702, Series of 2010

Section 4 of this circular released on December 15, 2010 amended the Manual of Regulations of Banks (Subsection X320.14) and MORNBFI, (Subsections 4320Q.14 and 4301N.14). The circular applies to all credit operations of banks and other BSP-supervised financial institutions to better protect all financial consumers, including credit card holders.

Sections 3 and 4 of the circular require credit card companies to:

[1] notify the card holder in writing of the endorsement of the collection to an agency at least seven days before the actual endorsement;

[2] give the defaulting credit card holder the name of the agent assigned to the account once they have endorsed the collection to a third-party;

[3] change all disclosure documents and marketing materials so that they are printed in plain language and in bold black letters against a white background using the Arial font and a minimum 12 point font size.
These new requirements protect the credit card holders:
  • by giving them enough time to consider what actions to take,
  • from being harassed by an unscrupulous collection agent who might use aliases or pseudonyms in order to avoid the sanctions for using unfair practices; and
  • by providing them with easily understood documents from the credit card companies.
Sanctions for credit card companies or their collection agents

The sanctions for unfair collection practices under Section 6 of the circular are:
First offense: Reprimand for the directors/officers responsible for the violation.

Second offense: Disqualification of the bank concerned from the credit facilities of the BSP except as may be allowed under Section 84 of R.A. No. 7653 (“New Central Bank Act”).

Subsequent offenses:
  • Prohibition on the bank concerned from the extension of additional credit accommodation against personal security; and
  • Penalties and sanctions under Sections 36 and 37 of RA 7653
Where to file the complaint for unfair collection practices

For further clarification and inquiries, please contact the
Financial Consumer Affairs Group, Supervision and Examination Sector, Bangko Sentral Ng Pilipinas, 5th Floor, Multi-Storey Building, BSP Complex, A. Mabini St., Malate, Manila; e-mail address: consumeraffairs@bsp.gov.ph; Tel. Nos.: Direct Line: (+632)523-3631; Trunkline (+632)524-7011 local 2584

Practical and legal problems with BSP Circular No. 702, Series of 2010

[1] Shrewd and unscrupulous collection agents won’t use their office phone to call up the card holder or the school principal. Having caller ID
won’t matter then. The agents can also say that it wasn't them who called up.

[2] Section 4 provides that the credit card company must notify the card holder in writing of the endorsement of the collection to an agency at least seven days before the actual endorsement. Does it mean sending the written notice by ordinary mail, registered mail, or personal service on the card holder? To prevent any circumvention or confusion, the circular should have provided instead that the notification must be made by registered mail at least seven days before the actual endorsement. Or, to really provide protection to the card holder, the circular should have required sending the notice by express registered mail.

[3] Section 6 states that “violations shall be subject to any or all of the following sanctions depending upon their severity”. The phrase “any or all of the following sanctions” is legally incorrect since the circular provides that the sanctions are to be imposed on a successive basis (first offense, second offense, subsequent offense). For example, the sanction of “Prohibition on the bank concerned from the extension of additional credit accommodation against personal security” cannot be imposed if the violation is only a first offense.

The phrase “depending on their severity” is a misplaced modifier. Does “depending on their severity” refer to the sanctions or to the violations? If the phrase refers to the violations, then the sentence should be edited to read “Depending on their severity, violations shall be subject to any or all of the following sanctions”.

Also, the phrase “depending upon their severity” creates a legal problem. Does it mean, for example, that “making contact at unreasonable/inconvenient times or hours” less severe than the “use or threat of violence or other criminal means to harm the physical person, reputation, or property of any person”?

Consider this situation: A credit card company has committed a third offense of unfair collection practice. The penalty prescribed by the circular is “Prohibition on the bank concerned from the extension of additional credit accommodation against personal security”. But if the violation, for example, is the less severe “making contact at unreasonable/inconvenient times or hours”, does this mean the BSP has the discretion to impose the lighter penalty of reprimand even if it is already a third offense?

[4] Section 3 of the circular requires that the table of fees, penalties and interest rates, and reminder to the cardholder in disclosure documents and marketing materials must be “printed in plain language and in bold black letters against a white background using the Arial font and a minimum 12 point font size”. But aside from the required typography, the circular does not discuss what “plain language” is or provide guidelines for the credit card companies to follow. (The circular itself is not written in plain language; I have posted my Plain Language before and after comparisons of this circular.)
Please read my posts:

[1]
Plain English, Plain Language or Plain Writing for government offices and private companies in the Philippines

[2]
BSP Circular No. 702, Series of 2010 (Plain English / Plain Language revisions)

Note: In the Flesch ease of reading scale, the higher the score, the more understandable the text is. A score between 30 to 40 means a text is “very difficult” to understand; between 40 to 50 (“difficult”); between 50 to 60 (“fairly difficult”); between 60 to 70 (“standard”); and between 70 to 80 (“fairly easy”). You can use MS Word’s Spelling and Grammar tool to check the Flesch readability score of any document.

To learn how the Flesch reading ease test score is calculated manually, please read paragraph (5) of the Florida Readable Language In Insurance Policies Law (Florida Stat. Ann. § 627.4145).


The only BSP document with a description of “plain language” is MORB Volume 2, Appendix 13 (page 229). The description isn’t from the BSP but from a Securities and Exchange Commission document titled “New Rules on the Registration of Long-Term Commercial Papers”. In the section on “Sales and Marketing Guidelines for Derivatives”, the SEC states:
For non-sophisticated clients, a bank should adopt a suitability statement explaining simply and clearly why the product offered is viewed suitable, considering the client’s needs and preferences. To ensure the statement will be effective, a bank should consider the following features:

Simple and plain language: when technical terms need to be incorporated, they should be explained if the client is unlikely to understand their meaning; and

Concise and clear messages: lengthy explanations and extensive statements are likely to reduce the effectiveness of the statement and make the client less likely to read the statement properly.
But this description is so lacking in detail; it is also merely a recommendation. What “simple and plain language” is varies from person to person, and Circular No. 702 does not provide a way of measuring if the credit card companies are complying with the plain language requirement. What’s needed is an objective criterion of what constitutes “plain language” in order to protect the card holders.

We can learn from the experience of US states like Colorado, Nevada, Montana, New Mexico, Nebraska, North Carolina, New Jersey, and Rhode Island.
These states require that insurance policies (auto, life, health) and legal documents in general must have a minimum Flesch reading ease test score of 50. Colorado laws on the use of plain language are:
Beginning in August 2010, Rhode Island requires for all health insurance policies a Flesch reading ease test score of 65, the highest in the US.

Other US laws that provide subjective and objective criteria to ensure that consumers are protected are:
  • Connecticut Plain Language Law (Conn. Gen. Stat. § 42-152, promulgated in 1980) mandates that every consumer contract entered into after June 30, 1980, must be written in plain language. A contract is written plainly if it meets either the plain language test (subsection b) or an alternative objective test (subsection c).

  • Pennsylvania Plain Language Consumer Contract Act (Pa. Stat. Ann. tit. 73, § 2201, promulgated in 1993) provides a general rule, language guidelines, and visual guidelines to ensure that consumer contracts are easy to read and understand.
The BSP should consider adopting a criterion for readability based on these laws.

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