The common practice of advertising services through television, social media, websites, radio and the like, as well as the use of online lending platforms are becoming tools of fraud, leading to the increased number of borrowers falling prey to unlawful acts of lending and financing companies. Thus, the Securities and Exchange Commission found the need to impose additional regulatory measures on lending and financing companies to safeguard the public through the issuance of Memorandum Circular No. 19 (“MC No. 19”) dated Sept. 17, imposing disclosure and reportorial requirements.

Interestingly, a week prior to the issuance of MC No. 19, the Commission, upon motion by the Enforcement and Investor Protection Department, issued Cease and Desist Orders against 19 companies for violations of the Lending Company Regulation Act.

The cases started with complaints from the public regarding unreasonable and abusive lending and collection practices by online lending companies. Upon investigation, it was gathered that Online Lending Operators advertise and promote their lending businesses on Facebook and offer loans to the public through their respective online applications/platforms. These Lending Operators require the installation of their online lending application as a prerequisite to apply for a loan. The act of downloading the application, however, gives the Lending Operators access to personal information in the mobile phones of the downloader, including his contact numbers, Facebook accounts, and e-mail addresses, to which the Lending Operators will eventually forward text blasts or send messages informing recipients about the debtor’s refusal to pay, with statements that such information will be referred to barangay officials or posted on social media, as a way to exact prompt payment.

Further, these Operators were found not to have the required permit from the Commission, in violation of the Lending Company Regulation Act, particularly Section 4 which states that no lending company shall conduct business unless granted an authority to operate by the Securities and Exchange Commission (SEC). Section 12 of the Act penalizes by a fine of P10,000 to P50,000, or imprisonment of six months to 10 years, or both, at the discretion of the court, any person who engages in the business of a lending company without a validly subsisting authority to operate from the SEC. The same penalty applies to the president, treasurer, managing officer, and other officers of a corporation who knowingly and willingly take part in the corporation’s act of engaging in the business of a lending company without the SEC’s authority to operate or the act of holding out to be a lending company, either through advertisement or through other representations without authority.

Days after the issuance, another set of orders to cease and desist from operating, engaging in, carrying out and/or promoting lending/financing business were issued to 11 companies based on the same grounds.

Online lending- related fraud is no longer new. As long ago as Aug. 17, 2017, the SEC released a warning against lending activities by unregistered companies. As explained in the advisory, the lending scheme commonly utilized by unregistered lending companies was to operate through social media such as Facebook, Twitter, LinkedIn, and other similar platforms, where they asked borrowers to give general and personal information and required the deposit of a certain amount as the “processing fee.” After getting hold of the money, all communication threads were blocked off and the borrower could no longer recover the amount deposited. However, being a mere advisory, the SEC’s solution back then was simply to urge the public to always check with the Commission whether the company they were dealing with was registered with the SEC and to verify if it had a Certificate of Authority to operate as a lending company.

The recently issued memorandum circular offers a better way of protecting the public. MC No. 19 requires lending and financing companies to fully disclose in a conspicuous portion of their ads and Online Lending Platforms their corporate name and their SEC Registration Number and Certificate of Authority to Operate a Financing/Lending Company Number, and reflect an advisory for their prospective borrowers to study the terms and conditions in the Disclosure Statement before proceeding with the loan transaction.

The Circular likewise requires the submission to SEC’s Corporate Governance and Finance Department of an Affidavit of Compliance containing a report on Online Lending Platforms, applicable to existing platforms and those that are yet to be developed. Such reports must contain vital information, including but not limited to, the following: name of the Online Lending Platform, proof of compliance with the requirement under SEC M.C. No. 13-19 that the lending and financing companies must register their Online Lending Platforms as business names, images of the Online Lending Platforms as they appear to the public, and illustrations of the Online Lending Platforms showing how the required Disclosure and Advisory are displayed.

With the issuance of MC No. 19, it is expected that the SEC can deter and better detect the unlawful act of engaging in lending or financing activities without securing a Certificate of Authority from the SEC, and ultimately minimize the number of victims of lending fraud.