4.5 · Private lending: being the bank

ExpertDuration ~50 min read + ~17 min videoTools Your 3.4/3.6 property-valuation skills (they price the collateral), A lawyer for any real note — this lesson makes you the informed client

Why this lesson

At the ₱10M+ band, deal flow reverses direction: instead of you hunting assets, people with deals start hunting your capital — the contractor who needs bridge money, the reseller who needs inventory financing, the kumpare buying a foreclosure who’s ₱800k short. Level 3 taught you to pay for money; this lesson teaches the other chair. PH private lending prices at 18–36%/yr (1.5–3%/month), documented and secured — and by now your reflexes should twitch: nothing pays 2–3× the RTB rate without a reason. The reason is that collection is the job. The interest rate is not a yield; it’s a wage for underwriting, documentation, and the willingness to foreclose on someone you probably know.

Hence the practitioner’s rule this module is built around, and the only one that makes the sleeve survivable: lend only against collateral you would be happy to own at the loan amount — or don’t lend. Priced that way, default is an inconvenient acquisition, not a loss. Priced any other way, you’re running a charity with paperwork. And because even well-secured lending concentrates PH-specific legal risk, the sleeve stays capped at 10–15% of the portfolio, full stop.

Distinguish this cleanly from what it is not: the SEC’s online-lending world (Moratorium on new online-lending-platform registrations since Nov 2021; only ~200+ pre-moratorium platforms hold a Certificate of Authority — 2.5’s scam-adjacent territory), and the informal “5-6” street-lending trade (~20% per month, unsecured, collection-by-persistence — historically associated with informal lenders, economically a different business built on daily-visit enforcement, not collateral). What you’re learning is the documented, secured, court-enforceable version: the same instrument banks use, at private scale.

Watch

Two US mechanics sources — chosen because the structure they teach is exactly PH law’s structure, even though every office and statute name needs translation (this lesson does the translating below).

Watch for: 03:29 onward — the two-document structure: the promissory NOTE (the promise to pay: parties, amount, rate, schedule, default terms) is one document; the SECURITY instrument tying that promise to a specific asset is a second, separate document. His is California's deed of trust; yours is the PH REM or chattel mortgage. Lenders who merge the two in their heads write unenforceable loans.

Watch for:

• 09:53 — the recording requirement: an unrecorded security instrument leaves you an unsecured creditor with nice stationery. PH translation below — Registry of Deeds for REM, chattel registry/LTO for movables.
• 12:14 — his closing advice, adopted verbatim by this course: independent legal counsel drafts or reviews every note, because drafting errors surface “years down the road at a crucial moment” — i.e., at default, the only moment the document exists for.
• His trustee/power-of-sale foreclosure mechanics are the CA-specific part — the PH path is different (below) and slower, which must be priced.

Watch for: 01:32–02:15 — the usury warning: a rate above the legal maximum can void the lender's interest entirely. The PH twist is stranger and MORE dangerous for the careless: our usury ceilings are suspended — there is no bright-line cap — but courts strike down 'unconscionable' rates case by case, and they have done it repeatedly.

The PH legal stack, translated

The two-document structure, localized — this is the explainer-led core the videos can’t give you:

1. The promissory note — the promise itself: parties (with IDs and TINs), principal, interest rate stated as a period rate and an annual rate, payment schedule, default and acceleration clauses (miss two payments → whole balance due), late charges, venue. Notarize it. A notarized note is a public document — presumed authentic, far stronger in court, and a prerequisite for the fast lanes below. Unnotarized loan paper is where PH collection cases go to die.

2. The security instrument — one of:

• REM (real estate mortgage) — 3.2’s term, other chair: the borrower mortgages titled property to you. Executed in a public instrument (notarized deed), then registered with the Registry of Deeds so it annotates the title (3.8’s memorandum of encumbrances — you are now the annotation you were taught to fear). Unregistered, an REM binds the parties but not third parties — the borrower can sell or re-mortgage to someone who registers first and beats you. Registration is not paperwork; it is the security.
• Chattel mortgage — the same idea over movables (vehicles, machinery, inventory), under the Chattel Mortgage Law: notarized deed with the statutory affidavit of good faith, registered with the Registry of Deeds chattel registry (and the LTO for vehicles, so the encumbrance rides the OR/CR and blocks clean transfer).
• The first lien question, always: pull the title/CR yourself (3.8’s discipline) and confirm you’re the first registered encumbrance. A second mortgage stands behind the first lender’s entire claim — second-lien private lending at retail scale is how sophisticated people donate money.

3. The collection path, priced before lending. On default, PH law gives the secured lender: extrajudicial foreclosure of the REM (Act 3135, the same machinery from 3.6 — auction via sheriff/notary, but note the borrower’s redemption period, typically one year from registration of the sale for individuals, during which your capital sits in limbo), or judicial foreclosure/collection suit (years, honestly). Chattel: replevin or extrajudicial sale under the chattel mortgage. Every leg is slower than the US trustee sale in the video — which is precisely why PH private rates are 18–36% while US hard money runs 9–13%. The rate premium is the collection-friction premium; underwrite as if you will use the path, because across a portfolio of notes, you eventually will.

Pricing inside the unconscionability line

The Usury Law’s ceilings have been suspended since 1983 — parties may agree on any rate — but the Supreme Court has repeatedly voided or cut rates it found unconscionable, with a long case line treating ~3%/month (36%/yr) and above as presumptively suspect, and egregious rates (5.5%/month, 6%/month) struck down outright. When a rate is voided, courts typically substitute the legal interest rate (6%/yr) — meaning an unconscionable note can end up yielding less than an RTB, after years of litigation. The practitioner’s pricing discipline follows:

• Stay at or under ~2–3%/month (24–36%/yr), documented, with the rate justified by the loan’s term, LTV, and purpose — bridge loans on hard collateral at 60% LTV justify more than a two-year term loan.
• Charge honestly: one clean interest rate beats a lawyer-bait stack of rate + “penalty interest” + “liquidated damages” + fees that a court reads as disguised 60%.
• Never compound silently. Interest-on-interest needs express written stipulation; surprise compounding is a classic ground for judicial rate-cutting.

The full underwriting sequence, assembled from parts you already own: value the collateral yourself with 3.4/3.6 skills (its quick-sale value, not the owner’s opinion — the same haircut logic banks applied to you at ~50–70% of appraised value); lend at 50–70% LTV of that conservative number; verify the title stack per 3.8 (fake titles are a lender’s problem too); confirm the borrower’s cash-flow story (a loan the borrower can’t service isn’t a yield, it’s a foreclosure with extra steps); document, notarize, register; and only then release funds — through bank transfer, never cash, so the paper trail matches the paper.

The sleeve, sized honestly

Why 10–15% maximum, even done perfectly:

• Concentration: each note is chunky (₱500k–2M), so three notes can be a quarter of a ₱20M portfolio — one messy default and your year’s return is a court docket.
• Illiquidity: no secondary market. Your exit is repayment, refinancing, or foreclosure — the 1.8 liquidity spectrum’s far end, without even a building to show for it unless things go wrong (at which point you have a building, which was the plan).
• It’s a business, not an allocation: sourcing, underwriting, documenting, and collecting are hours — priced hours (4.1’s discipline). At small scale the wage-per-hour is fine; as a portfolio core it would be a job you can’t resign from.
• The correlation trap: PH private-credit demand booms exactly when banks tighten — meaning your deal flow is best when collateral values are most fragile. The sleeve cap is the pre-commitment (2.8’s tool) against yield-chasing at the top.

Where it fits: this sleeve is the portfolio’s bridge between paper yield and hard assets — RTB-beating income, collateral-backed, feeding on the deal flow your Level 3/4 skills already generate. MP2 at 7.12% remains the effortless benchmark every note must beat after pricing your hours and expected defaults, not before.

Do it

Underwrite one hypothetical note end-to-end — paper only:

1. Take a real listed property (a ₱3–4M provincial house from your 3.6 hunting grounds). Compute its quick-sale value (your honest 3.4 valuation minus a 20–30% fire-sale haircut), then the maximum you’d lend at 60% LTV of that.
2. Draft the term sheet: principal, rate (justify it in one sentence against the unconscionability discussion), term, schedule, default/acceleration terms, and the two documents you’d execute — note + REM — with the registration steps and their actual offices named.
3. Price the downside path: sketch the extrajudicial foreclosure timeline (demand → filing → auction → redemption period → possession), assign months to each leg, and compute your IRR in the scenario where you foreclose and resell at quick-sale value. If that IRR is negative, your LTV or rate is wrong — fix and rerun.
4. Write the happy-to-own sentence: “If this borrower never pays another peso, I own ___ at ₱___, which I would / would not be happy about” — and let that sentence, not the 30% headline rate, make the final call.
5. Size the sleeve: at your current portfolio, write the peso cap (10–15%) and how many notes that allows. If the answer is “one, barely” — the honest conclusion is that this sleeve waits a band or two, which is exactly what the capital ladder said.

Level 4–5 workbook — private-lending checklistL4-L5-workbook.pdf926 KBSelf-made for this course

Terms introduced in this lesson

• Promissory note
• REM
• Chattel mortgage
• First lien
• Unconscionability
• Collection
• Sleeve cap
• Redemption period

Each term links to the glossary, where it is defined by the way you just used it.

Check

Check yourself

1. The module's non-negotiable lending rule:

   Only lend to people you know personallyOnly lend through SEC-registered platformsOnly lend against collateral you'd be happy to OWN at the loan amount — then default becomes an inconvenient acquisition instead of a lossOnly lend at 36% or above to cover defaults

2. The two-document structure means:

   A contract plus a post-dated checkTwo copies of the loan agreement, one per partyThe promissory note (the promise to pay) and the security instrument (REM/chattel mortgage tying the promise to an asset) are separate documents with separate jobs — and the security must be registered to bind third partiesA note plus the borrower's income tax return

3. An REM that is notarized but never registered with the Registry of Deeds:

   Is void entirelyBinds the parties but not third parties — the borrower can sell or re-mortgage to someone who registers first and takes priority over youConverts automatically to a chattel mortgageIs fine — notarization is what matters

4. PH usury ceilings are suspended, yet pricing discipline still matters because:

   Borrowers can report lenders to the SECCourts strike down 'unconscionable' rates case by case — often substituting the 6%/yr legal rate — so a greedy note can end up yielding less than an RTB after years in courtBSP caps private rates at 24%High rates attract BIR audits

5. PH private rates (18–36%) run far above US hard money (9–13%) mainly because:

   PH collection friction is much higher — judicial timelines, redemption periods, slower foreclosure — and the rate premium IS the collection-friction premiumThe peso depreciatesPH borrowers are riskier peopleThere's less competition among PH lenders

6. Lending at 60% LTV of QUICK-SALE value (not market value) matters because:

   Quick-sale value is easier to computeBanks require it of private lendersYour exit in default is a foreclosure auction and resale under time pressure — the same haircut logic banks applied to your own collateral in 3.2It reduces the DST on the mortgage

7. The sleeve is capped at 10–15% even when every note is well-secured because:

   The yield isn't worth more allocationSEC regulations limit private lending exposureNotes mature too quickly to manageChunky note sizes concentrate risk, there's no secondary market, collection is unpaid work until priced, and deal flow peaks exactly when collateral values are most fragile

Check answers

You can move on when… one paper note is underwritten with a quick-sale-based LTV, a justified rate, both documents and their registration offices named, a foreclosure-path IRR computed, the happy-to-own sentence answered honestly, and your sleeve cap written in pesos.

Mark this lesson complete

Go deeper

Primary sources: Act 3135 (extrajudicial foreclosure — you read it in 3.6 as a bidder; reread it as a mortgagee), the Chattel Mortgage Law (Act 1508), and the Supreme Court’s unconscionable-interest case line (start with the widely-cited Medel v. CA doctrine and its progeny — any PH obligations-and-contracts commentary summarizes it). Jay Castillo’s foreclosure material from 3.6 doubles as your collection-path manual. For any live deal: a lawyer drafts, you underwrite — this lesson bought you the right questions, not a law license.

Next: 4.6 · Structures & estate: keeping it — the portfolio now has businesses, buildings, and notes; time to decide what owns them, and what happens to all of it on the worst day. Holdco timing, the OPC, the 6% estate tax, and the freeze that catches undeclared assets.

This course teaches evaluation, not recommendations. Figures carry as-of dates and drift; verify current rates before acting. Nothing here is personalized financial, legal, or tax advice — for binding decisions (large loans, estate structuring, tax elections), engage a licensed PH professional.