G.R. No. 161397 & 161426; June 30, 2005
Development Bank of the Philippines vs. Felipe P. Arcilla, Jr.

FACTS

Atty. Felipe P. Arcilla, Jr., an employee of the Development Bank of the Philippines (DBP), entered into a Deed of Conditional Sale for a house and lot in 1983, financed by a DBP loan payable in 25 years via salary deduction. Upon his resignation in 1986, the loan was converted into a regular housing loan as per the deed’s terms, and he executed new promissory notes. The agreement contained a provision allowing DBP to unilaterally adjust interest rates and impose various charges.
Arcilla subsequently defaulted. After rescinding the deed in 1990, DBP offered him a chance to repurchase the property, which he failed to do. Arcilla then filed a complaint before the Regional Trial Court (RTC), alleging DBP’s failure to provide a disclosure statement under Republic Act No. 3765 (Truth in Lending Act) and that the imposed interest and charges were excessive and unconscionable. The RTC ruled in favor of DBP, but the Court of Appeals reversed, declaring the interest rate escalation clause void and ordering a recomputation of the obligation using the original 9% rate.

ISSUE

The core issue is whether the stipulation allowing DBP to unilaterally increase interest rates and charges is valid, and whether DBP’s failure to provide a disclosure statement under R.A. No. 3765 renders the entire loan agreement void.

RULING

The Supreme Court affirmed the Court of Appeals with modification. The Court held that the contractual provision granting DBP the sole prerogative to adjust interest rates is void for being potestative and violative of the principle of mutuality of contracts under Article 1308 of the Civil Code. A valid escalation clause must specify clear benchmarks (e.g., prevailing market rates, Central Bank directives) and require mutual agreement; it cannot be left to the uncontrolled will of one party. Consequently, the original stipulated interest rate of 9% per annum must govern the loan.
Regarding the Truth in Lending Act violation, the Court ruled that DBP’s failure to furnish the required disclosure statement does not nullify the loan agreement itself. The law prescribes a criminal penalty for non-compliance and grants the debtor a right to recover statutory damages, but it does not provide for the contract’s voidance. Therefore, the loan remains valid and enforceable, but DBP is liable to pay Arcilla the statutory penalty for its omission. The case was remanded to the trial court for a definitive recomputation of Arcilla’s total obligation using the 9% interest rate.