The Supreme Court reiterated that while lenders can acquire properties used as loan collateral, ownership cannot automatically transfer to them.

The SC explained that pactum commissorium occurs when (1) a property is used as collateral for a loan; and (2) the loan agreement includes a provision automatically transferring ownership of the collateral to the lender if the borrower fails to pay.

The SC emphasized that pactum commissorium is prohibited to protect borrowers from losing properties that may be worth more than their debt. Ownership can only be transferred through foreclosure and a public auction.

However, the SC clarified that this prohibition only applies to automatic transfers of ownership. Borrowers are free to voluntarily sell their collateral to lenders as repayment.

In this case, the realty corporation willingly entered into a separate agreement to sell its properties to the lenders as payment for the loan. The SC ruled that this was not an automatic transfer and, therefore, did not violate the prohibition against pactum commissorium.

The Decision is from the SC First Division, penned by Chief Justice Alexander G. Gesmundo.

Read the full text of the press release at:
https://t.co/EGHaSqh0PL

Read the full text of the Decision at:
https://t.co/oqNaJh7BRn

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