Changes to the National Credit Act are necessary to deal with reckless lending, but proposed amendments may have unintended consequences.
The Department of Trade and Industry recently proposed amendments to the National Credit Act to deal with reckless lending.
One of these amendments proposes that the National Credit Regulator be allowed to refer credit agreements to the National Consumer Tribunal to be declared reckless.
Currently the National Credit Act requires that cases of reckless lending be identified by a debt counselor who in turn needs to bring the case before the courts. This has created a significant burden for debt counselors and is cited as one of the reasons why there have been so few charges of reckless lending. The NCR currently can only refer a credit provider to the Tribunal for reckless lending on the basis that the credit provider has engaged in conduct prohibited by the National Credit Act.
The new proposal would see consumers being able to contact the National Credit Regulator directly with credit agreements they believe to have been entered into recklessly. The NCR would investigate and if the claim is believed to be valid, it would refer the case directly to the Tribunal.
While this proposal is aimed at trying to find a more expedient manner in dealing with reckless lending cases, this move would increase the volumes of complaints and the number of investigations handled by the National Credit Regulator.
Lesiba Mashapa, company secretary at the NCR, says the regulator is confident that they have both the call centre and legal capacity to handle individual consumer complaints.
The NCR has also invited comments on its draft affordability assessment guidelines. The guidelines include a proposal that credit providers refrain from lending to the maximum of the consumers’ discretionary income and leave a margin of 25% to cater for unexpected changes in the consumers’ financial circumstances.
This effectively means that individuals will only be able to borrow amounts where the repayment does not exceed 75% of their discretionary income. In this case discretionary income is defined as being that which is left over after you have paid for your taxes and basic living expenses such as rent, electricity and food. The guidelines will also require that reasonable amounts are used to calculate these basic living expenses so that people cannot understate their expenses in order to maximise their affordability. Default amounts would apply and the onus would be on the applicant to prove otherwise. “There are also many instances where credit providers lend to the maximum of the consumers’ discretionary income, leaving no margin for consumers to meet unexpected expenses,” Mashapa says.
The actual definition of discretionary income will be a challenge as it needs to be determined which expenses would be included in the calculation – for example insurance and school fees. While this move may prevent regulated lenders from providing credit to people who cannot afford it, there are concerns that this will not address the issue of over-indebtedness as it could simply see a shift to loan sharks who work outside the system.
Many people borrow money simply to survive and if unable to borrow from a registered lender they may have no option but to opt for more expensive loans from unscrupulous lenders. As loan sharks use tactics such as keeping people’s ATM cards to ensure they are paid first, this could see a knock-on effect of higher default levels for regulated lenders who will be paid last. Mashapa indicates that the NCR is continuing to stamp out these practices and many lenders were arrested by the police and also referred to the Tribunal by the NCR for these abusive practices.
While solutions need to be found to address South Africa’s unsustainable indebtedness levels, there is no act or law that will stop desperate people from accessing loans. The only real solution is economic growth and job creation.