Lending firms may avoid mandatory conversion

Lending firms may not be obliged to convert into financing companies after all as the Lower House is poised to pass the Lending Company Regulation Act by June 6.

The bill, once signed into law, will lay down the minimum requirements and standards for the creation of lending firms.

Authored by Bacolod City Rep. Monico Puentevella, the bill seeks to regulate the establishment and operations of lending companies to protect the public against deceptive schemes and fly-by-night operators.

Justina Callangan, head of the Securities and Exchange Commission’s Corporation Finance Department, said the June 6 deadline imposed by the Commission for lending investors or institutions to register as financing companies may prove futile since Congress has committed to pass the bill around the same time.

Callangan said once the bill is passed, lending investors will fall under the jurisdiction of the Department of Trade and Industry.

As of May 16, Callangan said only 118 out of the country’s roughly 10,000 lending firms applied for conversion into financing companies. Of the 118, only 40 applications had been cleared by the SEC while the balance are still pending approval.

Under the proposed measure, lending corporations will be required to register as a corporation and mandated to file with the DTI a schedule of liabilities, identifying debtors and indicating the maturity pattern of transactions, as well as other reports that the DTI may require. These reports shall be signed under oath by the company’s principal executive officer and principal financial officer.

The proposed law also provides stiffer penalties for erring lending firms. Violators would be fined not less than P10,000, or maximum imprisonment of 10 years, both at the discretion of the courts.

Fuentevella said while there are special laws such as the Financing Company Act that govern most non-bank financial companies, there is no specific law that covers lending firms.

Lending firms have been adamant in complying with the SEC directive since this would entail additional capital. Those operating in Metro Manila will have to raise their capitalization to P10 million while those in the provinces should have at least P2.5 million in capital.

A group of lending investors earlier urged the SEC to temporarily hold the implementation of this directive as this would result in the closure of small lending firms.

The group said that requiring lending investors to convert to financing companies is against the nature of micro-lending which caters to small borrowers often denied credit by banks and bigger lenders.

The SEC said while it recognizes the role of micro-finance in the fight against poverty, it could not close its eyes to the dangers of thousands of unregulated lending investors who are deriving their funding requirements from the investing public.

The SEC has been receiving reports that several lending and/or financing companies have gone beyond their required business activity by soliciting funds from the public with the promise of high yielding returns.

Lending companies grant direct loans from their own funds and are engaged in microfinance.

The SEC, however, admitted that it is helpless in regulating the activities of the existing 200 finance companies and about 10,000 lending corporations in the country.

Under existing rules, the SEC Commission can only investigate lending investors "on a general basis" as a corporation.