An unresponsive government department, a regulator beset with problems, the unintended consequences of the National Credit Act (NCA), and predatory practices and pricing by unscrupulous credit providers are all contributing to the over-indebtedness of consumers.

Half of South Africa’s consumers who use credit have impaired credit records and every month about 6 000 consumers apply for debt counselling. Over the past year, there has been a 53-percent growth in unsecured lending.

After it was widely reported last week that the Registrar of Banks is to launch an investigation into unsecured lending by the banks, Hlengani Mathebula, head of communications at the South African Reserve Bank (SARB), this week said the SARB “is not investigating unsecured lending”.

“We have made it a specific focus area that we would like the banks to report on, due to the higher growth rate of the category.”

At least two credit experts agree that numerous problems with the NCA and with the enforcement of the Act render you, the consumer, vulnerable to reckless lending.

Dr Penelope Hawkins, managing director of Feasibility, an economic policy research company, says reckless lending continues because consumers are distressed, and distressed consumers are willing to borrow at any price.

“Incentives on both sides encourage credit to be taken even where it may be unaffordable. It’s the old demand (distressed borrower) and supply (reckless lender) story.”

The National Credit Regulator (NCR) needs to tighten up the enforcement of the Act in terms of the affordability assessments of consumers, Hawkins says.

Consumers are mostly asked by credit providers what their expenses are, “but not in adequate detail”, she says. “This is partly because there appears to be little concern that the reckless lending provisions in the Act will actually be enforced,” Hawkins says.

‘Inadequate’ assessments

Attorney Stephen Logan, who is a credit law expert and an authority on the NCA, says credit providers are under no obligation to check what consumers disclose.

“If a consumer lies to a credit provider (by not disclosing all expenses and/or debts), then the provisions protecting the consumer fall away.

“Many credit providers are only too happy to grant credit and charge a fortune in interest, because they know they can collect (the money), thanks to robust collections mechanisms in South Africa. They have little incentive to do an accurate affordability assessment.”

The Department of Trade and Industry (DTI) and the NCR have failed consumers by failing to issue guidelines on how affordability testing should be conducted, he says.

In his book The Credit Guide, Logan writes: “The NCA does not provide an affordability formula, but it is clear that, after a consumer deducts his actual expenses from his actual income, the balance must be sufficient to pay all his monthly debt instalments.”

The Act intended affordability assessments to be done in name and substance, but clearly the affordability provisions in the Act are not being properly policed, Logan says. And credit providers have shirked their moral responsibility, he says.

Hawkins says there is space for the NCR to issue a guideline that says credit providers should take note of living standards measures, which are sensitive to the number of people in a household, as well as income and expenses.

“There are no guidelines as to what constitutes reckless lending, as there is no guidance from the regulator. The reliance on debt counsellors to identify reckless lending is unrealistic. Debt counsellors are unlikely to move to try to get a reckless lender out of the system when there is no incentive to do so. My understanding is that even when reckless lending cases have been identified, the parties settle before getting to court,” Hawkins says.

no National register

When the NCA was introduced, there was much hype about the establishment of a national register of credit agreements. But five years on, it has yet to be established.

The Act requires that credit providers record information about all credit agreements on the national register. This is supposed to help credit providers assess your level of indebtedness accurately, and prevent reckless lending.

Logan is scathing of the regulator’s failure to establish the register and the DTI’s failure to address the unintended consequences of and problems with the Act. He says the NCR and other key stakeholders have made detailed and repeated submissions to the DTI, but it has failed to act on them.

“When 50 percent of consumers have an impaired credit record, you can’t say that the NCA is working or that the NCR is doing its job well.”

Pricing review ‘overdue’

Despite the maximum interest rates introduced by the NCA in 2007, the cost of credit is still high, Logan says. A review of pricing – of both fees and interest rates – is long overdue, Logan says.

The NCA prescribes the maximum interest rates and fees that credit providers can charge you, based on the repo rate (the rate at which the SARB lends money to the commercial banks).

Even with the repo rate having come down (to 5.5 percent), Logan says the question is: what is it appropriate to charge now? What is usurious or exorbitant now?

Logan echoes the call of former SARB governor Tito Mboweni for a review of the three-percentage-point pricing gap between the repo rate and the prime lending rate.

“The NCR should have taken Mboweni’s cue and done a detailed study,” he says.

It is the NCR’s job to make sure that pricing is fair for consumers and to reduce predatory pricing, Logan says. Surely the regulator’s role is to review pricing on an ongoing basis, he says.

What more is needed

According to Hawkins, there is also a need for:

u Consumers to be educated about the rights that they have been granted by the NCA.

u Consumers to be informed properly at the point of sale and to be able to obtain quotations prior to the transaction.

u Stricter disclosure requirements in respect of the terms and conditions of a credit agreement and the total cost of credit over the term of the contract.

u Simplified contracts. She says contracts are too long and are in legalese. Everything the consumer needs to know – rates, fees, total cost, repayment period, penalty interest and the costs of defaulting – can be put on one page.

u Greater clarity of the consequences of defaulting.

u Mandatory disclosure of credit life assurance in the agreement. - Personal Finance