Law on truth in disposit-taking needed

ZOOMING IN

Rudy Romero

03/20/2009

Besieged by complaints from borrowers who believed they were being charged outrageously high interest rates by banking institutions, the Sixth Congress passed the Truth in Lending Act in 1963. An abstract of the act has to be displayed, for the public to see, within the premises of every banking institution in this country.

Among the documents that are furnished by a bank to a borrower to evidence a loan is a sheet indicating (1) the effective rate of interest that the borrower is being charged for the loan and (2) the manner by which the said rate of interest was arrived at. Prior to the passage of the Truth in Lending Act, borrowers had little idea of what charges were tacked on the basic interest rate — the complainants against the banks spoke of “hidden” charges — to arrive at the effective cost of the loan. In the wake of the Act’s passage they now knew exactly what additional charges they are being charged. The banks were now required to be truthful in their lending operations.

The disclosures made by the founder and chief executive officer of the Legacy Group institutions during the Senate investigation suggest that, while the truthfulness-in-lending problem may have been solved, a truthfulness-in-depositing problem exists and waits to be addressed.

I am referring to Celso de los Angeles’ disclosures regarding the arrangements that he offered to get people to make deposits in his rural banks.

De los Angeles told the Senate investigators that his banks offered the public 20 percent per annum interest on their deposits, with 10 percent of the deposit returned to the depositor and 12 quarterly checks representing advance interest on the 90 percent deposit balance given to the depositor on the date of effectivity of the deposit. One does not need a business administration degree to figure out that, for them to be able to operate viably, the Legacy banks would have to earn at least 25 percent on their funds. In the current Philippine economic environment, that is a virtual impossibility.

De los Angeles’ rural banks were able to offer such arrangements to their depositors because, where deposits — that is, the making and acceptance of deposits — are conceived, there is no counterpart to the Truth in Lending Act. In the wake of the Legacy debacle as well as of other bank failures over the years, it is time a Truth in Deposit-taking Act was passed.

A law mandating truthfulness in deposit-taking would require banking institutions to disclose to the government — especially the regulatory agencies — and the public at large the terms upon which they were accepting deposits. More to the point, those institutions would be required to disclose what precise financial inducements they were offering to would-be depositors. As in the case of the Truth in Lending Act, an abstract of a Truth in Deposit-taking Act would be displayed in the main office and the branches of every banking institution.

Had a Truth in Deposit-taking Act been in effect then, the Legacy rural banks would have been required to disclose, under the oaths of their officers, to the public and to the regulatory authorities that they were offering 20 percent per annum interest, kicking back 10 percent of the deposit to the depositor and giving three years’ interest in advance, albeit with postdated checks. Greediness being a common human attribute, some would-be depositors might welcome the information about the generosity of Legacy deposit terms. But others might react to it differently. They might be reduced to wondering why De los Angeles’ rural banks were offering such generous terms and speculating whether banks that maintained such a deposit policy would be able to stay viable.

It is possible — indeed, it is highly probable — that the examiners of the Bangko Sentral ng Pilipinas (BSP) came to know about the generous terms upon which deposits in Legacy banks were obtained. But that information is not shared with the public. It is treated as an internal BSP — especially a Monetary Board — matter. Such information should be shared with the public, so that would-be depositors can make their deposit decision-making with full knowledge of a banking institution’s policies relating to deposit terms.

In the light of the De los Angeles caper/debacle, the time for a laissez-faire attitude on the part of regulators toward banks’ deposit-taking practices has come to an end. The depositing public must be given government protection the way that the borrowing public was afforded government protection in 1963.

What is needed urgently is the passage of a Truth in Deposit-taking Act.

(My e-mail address is rudy_v_romero@yahoo.com)

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