We are starting to see cases of reckless lending being brought before the courts, but the process will remain slow unless the National Credit Regulator provides support
Despite many court rulings charging credit providers with reckless lending, the practice appears to continue unabated.
The recent high-profile case of African Bank, who could face a fine of R300 million for reckless lending, will not necessarily change the behaviour of many credit providers. The African Bank case pertained to a specific fraud incident within one of their branches where consultants were allegedly issuing loans in return for a bribe. For the many individual cases that end up before the magistrates’ courts, the credit providers receive nothing more than a slap on the wrist.
In October last year debt counselling firm Octogen successfully brought reckless lending charges against 14 major credit providers. The Vryheid Magistrate court ruled that the providers had lent the money knowing that the consumer could not repay the loan and declared 25 agreements with a total value of R575 243 as reckless which means that these consumers are no longer required to repay the debt.
In addition the magistrate ruled that a further six credit agreements should be suspended and payment deferred to a future point in time when the consumer is in a position to resume payments. During this period the consumer is not required to make any payment required under the credit agreement and no interest, fees or other charges may be charged to the consumer.
Among the credit providers ordered to set aside the loans where some of South Africa’s top banks including FNB, Nedbank, Absa, Capitec and African Bank. Major retailers such as Foschini, Lewis and Russels were also found guilty of reckless lending. Nedbank says while it welcomes the ruling by the court “it is not in agreement with the judgement of reckless lending against the bank. Nedbank has appointed legal counsel to set the record straight”.
The National Credit Regular declined to comment stating only that “we don’t comment on matters under investigation”. The NCR did not clarify whether or not it was investigating the cases further.
Octogen is busy with around 127 reckless credit investigations and some have progress to court already. In a more recent case in the Belville Magistrates court two credit agreements between Direct Axis and the consumer was found reckless and set aside in full. Octogen is still awaiting the outcome of a case against Bayport Financial Services and Nedbank which should be finalised on 2 April 2013.
Although a victory for the debt counsellor and his clients, these cases remain few and far between simply because debt counsellors do not have the manpower or funds to fully investigate cases. Currently the National Credit Act lays the onus on debt counsellors to prove cases of reckless lending which have to be argued in court. Under the Act a debt counsellor has a statutory obligation to check for reckless credit.
Paul Slot, CEO of debt counselling firm Octogen says the company has invested many hours on the “reckless process” over the last 12 months. “We are starting to see progress. More applications are in the pipeline,” says Slot who adds however that the time spent on these cases is onerous. “On a current case we have spent more than 70 hours, with no compensation. In this case the affidavits consume two A4 files and the matter has been set down for 2 days”.
Not all debt counseling firms are large enough to dedicate resources to reckless lending investigations and smaller firms have stated that it is virtually impossible for smaller debt counseling businesses to bring applications of reckless lending due to time constraints and lack of funds.
Other debt counselors have also raised the point that there is a conflict of interest in raising reckless lending cases. The counselors are working on behalf of many clients whose financial difficulties have nothing to do with reckless lending. The counselor has to negotiate favorable terms for these clients which require a good relationship with the various credit providers.
Randall Adamns, deputy chairman of The Black Debt Counselors Forum (BDCF) says in order to bring reckless credit applications forward, “a debt counselor requires the support from the respective credit provider in terms of ensuring the supporting documents are provided”. The BDCF added that “the NCR is currently engaging the Department of Justice to consider specialised courts for debt counselling cases, we are awaiting the outcome”.
Slot says it is fairly easy to identify possible reckless lending as it can be based on the percentage of income used by the consumer to repay debt. “If the total amount used to repay debt is higher than a defined percentage then alarm bells should ring and more investigation is required. If it is below this percentage, as a general rule, you can accept that is unlikely that reckless lending took place and you can inform the Court accordingly,” says Slot.
While reckless lending may be easy to identify, it still has to be investigated and submitted to court. Slot says most credit providers raise technical point, such as jurisdiction of the Court, Interpretations of sections of the NCA, assessment methodology and many more technical points to delay the actual reckless hearing. “The reason it is so difficulty is that the debt counselor needs to obtain the cooperation of the credit provider to provide the correct information for the investigation and once this is done the matter must be referred to Court for a hearing. This legal process can take months to complete. This is a costly process.”
A case of reckless lending is also difficult to prove if the consumer lied about their income or expenses. Nevertheless it is also irrational to believe someone can live on 20% of their income, irrespective of what the consumer claims there expenses are. Slot says some credit providers allow consumers to use up to 80% of income to repay debt and consider this to be responsible lending.
“How can consumer be expected to buy food, transport, insurance, electricity and water, education and all other necessary household expenses with 20% of his or her income? Sadly some credit providers think this is not reckless,” says Slot.
In many of the reckless lending cases brought before the courts, the amount of income required to repay the loan exceeded 100% of the individual’s income (see page X Profile of a reckless lending case). Slot says in terms of the cases before the Vryheid magistrate’s court last year, the individual consumer’s commitment to repay debt was between 79% and 160% of monthly income. The seven consumers had 82 credit agreements between them with the lowest being 7 and the highest 17.
Slot says the reckless court process is not defined in the National Credit Act which has made the process extremely difficult, however investigating charges of reckless lending is not only in the interests of the consumer but also credit providers who are not undertaking reckless lending practises. If a Magistrate court writes off the reckless lending debts, it allows the consumer to settle the debts to the credit providers who lent sensibly.
WHEN IS A CREDIT AGREEMENT RECKLESS?
- Credit provider failed to conduct an assessment. The credit provider is obliged to use all information available including checks with the credit bureaus.
- If the credit provider conducted an assessment but consumer did not understand risk, costs or obligations
- If entering into that agreement would make the consumer over-indebted.
- If the credit provider entered into a credit agreement when the customer applied for debt re-arrangement. This could potentially affect any credit provider who offers a consolidation loan when the customer is struggling to meet their repayments.