Blog

Author Atty. Rosalia S. Bartolome-Alejo, Atty. Erika B. Paulino, Atty. Mary Elizabeth M. Belmonte

Authors’ Note: This article was originally published on April 6, 2020 and has been updated in view of subsequent regulatory issuances on the subject.

The “Bayanihan to Heal As One Act” (Republic Act No. 11469) came into immediate effect upon its publication on March 25, 2020. One of the provisions of the law that became the subject of much interest is Section 4(aa).  It essentially provides that the President is authorized to exercise temporary powers necessary and proper to carry out the declared national policy and to respond to the crisis brought by the Covid-19 pandemic, including to:

“(aa) Direct all banks, quasi-banks, financing companies, lending companies, and other financial institutions, public and private, including the Government Service Insurance System, Social Security System and Pag-IBIG Fund to implement a grace period of at least thirty (30) days for the payment of all loans, including, but not limited to salary, personal, housing and motor vehicle loans, as well as credit card payments, falling due within the period of the enhanced community quarantine, without incurring interests, penalties and fees, or other charges. Persons with multiple loans shall likewise be given the grace period of at least thirty (30) days for every loan”.

Confusion immediately arose as to the extent or scope of the loans covered by the grace period and the implementation thereof until the Department of Finance (DOF) issued the “Implementing Rules and Regulations on Section 4(aa) of Republic Act No. 11469, Otherwise Known as the ‘Bayanihan to Heal as One Act’” last April 1, 2020.
 
The DOF-IRR
 
Below are frequently asked questions regarding Section 4(aa) and the DOF-IRR:

       Which loans are covered by the 30-day grace period?
 
       All loans extended by Covered Institutions are covered by the grace period under the Bayanihan to Heal as One Act.
 
       What do you mean by “all loans” and “Covered Institutions”?

Loans refer to all loans extended by Covered Institutions to individuals, households, micro, small and medium enterprises (MSMEs), corporate borrowers and other counterparties. Based on this definition, loans include consumer loans, personal loans, salary loans, home mortgage loans,  motor vehicle loans, credit card loans and credit card payments, corporate loans, and various type of bank credit facilities.
 

Covered Institutions refer to all lenders, including but not limited to, banks, quasi-banks, non-stock savings and loan associations, credit card issuers, trust departments/corporations, pawnshops, and other credit-granting financial institutions (whether public or private) under the supervision of the Bangko Sentral ng Pilipinas (BSP), the Securities and Exchange Commission (SEC), and the Cooperative Development Authority (CDA), including the Government Service Insurance System, the Social Security System  and the Pag-IBIG Fund. This would, thus, include financing companies, lending companies, and lending cooperatives.

Does the law apply only to the Luzon region placed under Enhanced Community Quarantine (ECQ) pursuant to Presidential Proclamation No. 929, s. 2020?

No. The Bayanihan to Heal as One Act is a national law and applies uniformly to all Covered Institutions within the Philippines.

When does the 30-day grace period start?

The mandatory 30-day grace period commences from the due date of a principal or interest payment falling due within the Enhanced Community Quarantine (ECQ) period (March 17, 2020 to April 12, 2020).  For example, if an interest payment is due on April 6, 2020, then the borrower shall be entitled to a grace period of 30 days from April 6, 2020.

Is there a possibility that the 30-day grace period be extended?
 
The initial 30-day grace period may be extended if the ECQ is extended beyond April 12, 2020. As of the date of this article, the ECQ period has been extended until April 30, 2020. It is, however, unclear from the DOF-IRR how this extension is to be interpreted.

Granted that a loan repayment is extended, can there be additional interest or penalty imposed?

No. A Covered Institution is prohibited from imposingany interest on interest, fees and charges during the 30-day grace period.

Can a Covered Institution refuse to extend the 30-day grace period? Can a Covered Institution ask for a waiver?

The 30-day grace period is mandatory and no Covered Institution may refuse the extension thereof. Covered Institutions are prohibited from requiring their clients to waive the application of the provisions of the Bayanihan to Heal as One Act, and any previously issued waiver is deemed invalid.

If a borrower (individual or corporate) has multiple loans, does the grace period apply only to one loan?

No. The grace period applies to multiple loans of any individual or corporate borrower whose payment of interest or principal will fall due during the ECQ period.

How will interest accrued during the 30-day grace period be treated? Is this subject to immediate repayment on the extended due date following the lifting of the ECQ?
 
The accrued interest for the 30-day grace period may be paid by the borrower on staggered basis over the remaining life of the loan. In respect of BSP supervised Covered Institutions, please refer to the discussion below.

If a loan matures and falls due during the ECQ period, and a Covered Institution requires the loan to be renewed or restructured, is the borrower liable to pay Documentary stamp tax (DST)?

No. DST under Sections 179, 195, and 198 of the Tax Code shall not be imposed on any credit extension, renewal or restructuring during the ECQ period.

What are the penalties imposable on Covered Institutions for a violation of Section 4(aa), or any provision of the DOF-IRR?

The DOF-IRR refers to the appropriate penalties set forth in the Bayanihan to Heal as One Act as imposable penalties for any violation of the provisions of the DOF-IRR. Note, however, that only the refusal to provide the 30-day grace period is punishable under the Bayanihan to Heal as One Act with imprisonment of two months or a fine ranging from Php10,000 to Php1 million, or both.

Tax Treatment of Credit Extensions, Renewals or Restructurings during the ECQ Period

The DOF-IRR provided for the DST exemption of any credit extension, renewal or restructuring during the ECQ Period. Implementing the DST exemption, the Bureau of Internal Revenue (BIR) issued Revenue Regulation No. 8-2020 and Revenue Memorandum Circular No. 36-2020.

Further BIR guidance on the DST exemption follows:

       What credit extensions are exempt from DST?

       Credit extensions of pre-existing loans falling due during the ECQ Period where interest is paid but the principal is    
       converted into a new loan with a new maturity date are covered by the exemption. Thus, the new loan principal and 
       the renewal or extension of the loan’s mortgage, pledge or deed of trust (collateral documentation) shall be exempt
       from DST.

       However, credit extensions of pre-existing loans where interest is paid but the principal is rolled-over or renewed as 
       a new loan principal in accordance with a pre-agreed roll-over arrangement and collateral documentation thereof    
       prior to the COVID-19 situation shall remain subject to DST.

       What credit restructurings are exempt from DST?

       The following credit restructurings are exempt from DST:

          a.    Those pertaining to pre-existing loans where both the principal and interests are not paid but are consolidated 
                 and converted into a new loan principal with a new maturity date and the renewal or extension of the loan’s 
                 mortgage, pledge or deed of trust (collateral documentation); and

          b.    Those pertaining to pre-existing loans where there is payment of interest and partial payment of principal on 
                 maturity while the remaining unpaid principal is converted into a new loan principal with a new maturity date 
                 and the renewal or extension of the loan’s mortgage, pledge or deed of trust (collateral documentation).
 
Are the extensions of payment and/or maturity periods of salary, personal, housing, and motor vehicle loans also exempt from DST?

Yes. All extensions of payment and/or maturity periods of salary, personal, housing, and motor vehicle loans and all other pre-existing loans falling due within the ECQ period, including the extension of maturity periods that may result from the grant of grace periods for these payments, whether or not such maturity periods originally fall due within the ECQ period are exempt from DST.

Are fresh loan availments, top-up to existing loans, and new loan drawdowns during the ECQ period and its collateral documentation also exempt from DST?

No. Fresh loan availments, top-up to existing loans, and new loan drawdowns during the ECQ period and its collateral documentation remain subject to DST, as applicable.

Do Covered Institutions have additional reportorial requirements to the BIR due to the exemption of credit extension, renewal or restructuring during the ECQ period from DST?

Yes. Covered Institutions shall submit a summary listing of all pre-existing loans, pledges, and other instruments as of March 17, 2020 which were granted extension of payment and/or maturity periods to the BIR office where they are registered within 60 days from lifting of the ECQ. Otherwise, the Covered Institutions shall be liable for the additional DST that should have been imposed on the instrument during the ECQ period, plus administrative penalties.

BSP Implementation of Section 4(aa) and the DOF-IRR

On April 6, 2020, the BSP issued Memorandum No. M-2020-018 (the “BSP Memorandum”) to provide additional guidance and clarification on the BSP’s implementation of the DOF-IRR. Note, however, that the BSP Memorandum covers only BSP-supervised financial institutions (BSFIs) with lending operations. These include banks, quasi-banks, non-stock savings and loan associations, credit card issuers, trust departments/corporations, pawnshops, and other credit granting entities under the supervision of the BSP.
 
The BSP Memorandum addressed the following:

       Are past-due loans entitled to the 30-day grace period?

       Yes. The DOF-IRR covers all accounts regardless of whether these are current or past due.

       Are loan accounts covered by automatic payment arrangements (such as auto-debit) or by post-dated checks (PDCs) 
       covered by the 30-day grace period?

       Yes. Unless the borrower agrees to proceed with the automatic payment arrangement, upon coordination by the 
       BSFI, the latter may not proceed with the automatic payment. The BSFIs shall also coordinate with their clients if
       they wish to reverse checks cleared or payments debited/deducted prior to the enactment of the Bayanihan to Heal 
       as One Act. The reversal shall be done without corresponding fees and charges.

       Are loans that are not amortized monthly (i.e., quarterly or semesterly) entitled to the 30-day grace period?

       Yes. The grace period will apply to all loans regardless of its amortization schedule, as long as the due date falls
       within the ECQ period. BSFIs will add 30 days to the due date falling within the ECQ period to determine the new
       due date.

       Are fees/charges related to loans extended or credit lines granted (e.g. credit card renewal fees) scheduled to be paid 
       during the ECQ period covered by the 30-day grace period?
 

Yes.
Will the principal amount payable during the grace period be added to the principal amount due in the next payment due date or will the final due date of the entire loan move by 30 days?

The last payment due date will move by 30 days.

How will interest accrued during the 30-day grace period be treated? Is this subject to immediate repayment on the extended due date following the lifting of the ECQ?

Interest accrued during the 30-day grace period may be paid in lump sum on the new date or on a staggered basis over the remaining term of the loan.

Illustration: A 5-year loan with remaining maturity life of 4 years. If the monthly amortization of the loan due on April 2, 2020 is P10,500.00 (P10,000.00 applied to the principal and P500.00 applied to the monthly interest.

–  Applying the 30-day grace period, the new due date will be May 2, 2020.
–  On May 2, 2020, the borrower will either pay:

       1. Principal for 1 month, plus interest for 2 months, computed as follows: 
                                           P10,000.00 + P500.00 + P500.00 =  P11,000.00
       2. Principal for 1 month, plus interest for 1 month, plus a portion of the 1-month interest, computed as follows:
                                           P10,000.00 + P500.00 + [P500.00 / (4 years x 12 months)]  = Php10,510.42

Will amortizations be rescheduled in line with the 30-day grace period (i.e., plus one period for monthly amortizations)? Do BSFIs need to issue new Promissory Notes/Disclosure statements for the new amortization schedule?

Yes, the amortizations will be effectively rescheduled. However, there is no need to issue new Promissory Notes/Disclosure statements.

For credit card revolvers or borrowers who do not pay in full every payment period, will interest on their outstanding balances continue to accrue during the 30-day grace period?

Yes, interest will continue to accrue and will be payable on the next due date, either in lump sum or on staggered basis.

For credit card transactors, will interest accrue on the outstanding balance during the 30-day grace period?

No interest will accrue if the credit card transactors pay the total outstanding balance on or before the new due date.
 

Compliance by Covered Institutions
 

Following the publication of the DOF-IRR and the BSP Memorandum, banks have released public advisories on the terms and conditions of the grace period, which cover, among others: the application of the grace period (some banks limiting application only to loans of borrowers residing or working in areas declared under ECQ), the extent of the grace period granted (some banks granting as long as 60 days grace period), the application of finance charges (waiver applicable only on a case-to-case basis), and the treatment of accrued interest (some requiring payment to be made on the next payment due date on top of the then current amortization due, while some banks implementing an automatic extension of the term of the loan).

The government’s credit-granting institutions have likewise implemented the moratorium under Section 4(aa).
 

•    –   The Pag-IBIG Fund has offered a three-month moratorium to all its member Pag-IBIG Fund Housing Loan, Multi-Purpose Loan, and Calamity Loan borrowers with payments due on March 16, 2020 until June 15, 2020. Presently, only those residing in Luzon and in the National Capital Region can avail of the offer.

•    –   The Social Security System approved a program for the moratorium of loan payments of members in the entire Philippines. The moratorium will be for the applicable months of February to April 2020, resulting in the extension of the loan payment term by a maximum of three months. To be eligible for the moratorium, the members’ salary, calamity, or emergency loan must have been granted within the period from January 1, 2018 to March 16, 2020; while the members’ loan under a restructuring program or educational assistance loan must be currently amortizing.

•     –  Under Resolution No. 42-2020, the Government Service Insurance System (GSIS) approved the moratorium on all loan payments of GSIS members and pensioners, including housing loan amortizations. Collection of loan payments due for the months of March, April and May 2020 shall be deferred, and shall resume on June 1, 2020 without penalty or additional interest. All loan terms shall be effectively extended by three months.

No single standard implementation approach will be observed, in particular, with respect to Covered Institutions that are not BSFIs. While the BSP Memorandum provided clarity on a number of matters which were unclear under the DOF-IRR, the BSP issuance does not cover financing companies, lending companies, and credit cooperatives under the supervision of the SEC and the CDA. No supplemental issuances have been issued by the DOF, SEC, or the CDA as of the date of this writing.

In the absence of such clarificatory issuances, however, Section 1.03 (Interpretation Clause) of the DOF-IRR may not be disregarded. In the event of doubt in the interpretation of its provisions, the rules shall be liberally construed to ensure the fulfillment of the policy objectives of Section 4(aa) – to “undertake a program for recovery and rehabilitation, including a social amelioration program and provision of safety nets to all affected sectors”, “partner with the private sector and other stakeholders to deliver these measures and programs quickly and efficiently”, and “promote and protect the collective interests of all Filipinos in these challenging times”.