Fast little loans
In an unprecedented move, the National Credit Regulator (NCR) has called for a fine of R300 million to be imposed on African Bank for reckless lending. This is the first time the NCR has referred a bank to the National Consumer Tribunal, and R300 million is the biggest fine the regulator has asked for.
The NCR also wants the branch it says was largely responsible for generating hundreds of reckless loans to be suspended from granting credit for 12 months.
African Bank contests the allegation of reckless lending and has handed the matter to its attorneys.
Nomsa Motshegare, chief executive of the NCR, says the regulator has referred to the National Consumer Tribunal two cases of reckless lending by African Bank following investigations stemming from complaints from consumers.
Motshegare says investigations by the NCR revealed that African Bank granted “at least 700” loans recklessly to consumers.
In addition to calling for a fine and the suspension of the branch that issued most of the reckless loans , the NCR has asked the tribunal to order the bank to:
* Write off loans granted to consumers who could not afford any credit at the time the loans were issued, or to restructure loans where the amount available to the consumer to repay debt was inadequate to cover the loan instalments;
* Clear from the records of the affected consumers any adverse information held by credit bureaus – at the bank’s expense; and
* Rescind any court judgments obtained against consumers who were victims of reckless lending.
“The NCR views reckless lending in a serious light, due to its negative impact on consumers and the current high levels of consumer over-indebtedness in the country,” Motshegare says.
The National Credit Act (NCA) makes provision for the imposition of a fine for reckless lending. It can be up to R1 million or 10 percent of a credit provider’s annual turnover, whichever is greater.
Leon Kirkinis, chief executive of African Bank, says the allegation stems from an “isolated incident” involving the fraudulent behaviour of staff who manipulated the loan origination system at the bank’s branch in Dundee in KwaZulu-Natal. Staff members received illicit payments from certain customers to secure their loans. The capital value of the loans was R15.5 million.
The incident was uncovered by the bank in November 2011. The staff were dismissed, and the loans were written off or rescheduled. But early last year, the NCR, “in a separate and broader investigation, identified some of these fraudulent loans”, Kirkinis says.
In November, the NCR informed African Bank that it would seek a consent order whereby the bank would agree to a charge of reckless lending and accept a fine. The bank denied the allegation, but was notified this week that the NCR has referred the matter to the tribunal.
Hlengani Mathebula, head of communications at the Reserve Bank, says the regulator of the banking sector is aware of the matter between African Bank and the NCR, and “both parties will have a fair opportunity to bring all facts to the tribunal”.
Debt counsellors have long contended that reckless lending is rampant in South Africa and that the biggest credit providers are among the worst offenders.
Late last year, leading banks – Absa, African Bank, Capitec, First National Bank (FNB) and Nedbank – were among a host of credit providers found guilty of reckless lending in seven cases heard in the Vryheid magistrate’s court in KwaZulu-Natal.
The cases were brought by Martin Snyman, a debt counsellor with debt counselling firm Octogen, on behalf of his clients.
Snyman’s seven clients had 82 credit agreements between them. The client with the fewest credit agreements had seven, while the client with the most had 17.
All seven clients had loans with African Bank, and in five of the seven cases, the loans by African Bank were found to be reckless.
The magistrate found that 25 of the 82 credit agreements had been entered into recklessly by credit providers. The 25 agreements had a combined value of R575 000.
One of the aims of the NCA is to prevent reckless lending. The Act makes it mandatory for credit providers to conduct affordability assessments before entering into a credit agreement with a consumer. It also provides for various debt relief remedies for consumers when credit has been extended recklessly.
If a court finds that a credit provider extended credit recklessly to you, the debt is either set aside (you are relieved of that debt in its entirety), or repayment is suspended until you are in a position to resume paying the debt. This would be determined by your debt counsellor, who must review a client’s indebtedness on an annual basis.
Paul Slot, a director at Octogen, says the magistrate ordered that 19 of the 25 credit agreements be set aside and payment be suspended in six of those agreements that were found to be reckless.
“For the period of suspension, the consumer is not required to make any payment under the credit agreement, and no interest, fees or other charges may be charged to the consumer. The credit provider’s rights under such an agreement are unenforceable during the period of the suspension,” Slot says.
In addition to Absa, African Bank, Capitec, FNB and Nedbank, the offending credit providers in Snyman’s cases were SMA Finance, Discount Finance, Motor Finance Corporation (a division of Nedbank), Finchoice, Homechoice, Russells, Lewis and Foschini.
Representatives of the banks found to have lent recklessly declined to comment, except for Capitec’s Charl Nel, who says the bank is applying for a rescission of the judgments against it.
Applications to have a court declare a loan to be reckless are relatively rare, because there is little incentive for debt counsellors to pursue these applications, Slot says.
“There is no financial reward for the debt counsellor. There’s no provision in the fee structure for debt counsellors to charge for this work, so when they do it, it’s at their own expense – because there is no way of recouping the cost of investigating reckless lending and the court application,” he says.
Although debt counsellors do charge a legal fee, it does not cover the cost of bringing an application for reckless lending; it is for a debt review application only, Slot says.
In some of the applications brought by Snyman, the consumers’ repayment commitments amounted to between 79 percent and 160 percent of their monthly income.
Slot says some credit providers allow consumers to use up to 70 percent or 80 percent of their monthly income to repay debt, a practice he describes as not only reckless but “immoral”.
“Most consumers who commit more than 40 or 50 percent of income to monthly debt repayments may find it difficult to service normal household expenses,” Slot says.
ARE YOU A VICTIM OF RECKLESS LENDING?
Before granting you credit, a credit provider must assess whether or not you can afford to take on the debt.
The provider’s affordability assessment must determine:
* Whether you understand the risks and costs of the credit for which you have applied.
* Whether you understand your rights and obligations under the credit agreement.
* Your debt repayment history.
* Your financial means, prospects and obligations. This includes your current and future income and financial commitments.
* Whether or not the credit agreement will result in your becoming over-indebted.
If a credit provider fails to conduct an affordability assessment before granting you credit, the provider could be guilty of reckless lending.
If you do not answer fully and truthfully the questions you are asked during the assessment, you may be guilty of reckless borrowing, in which case you will not have any grounds for bringing a case of reckless lending against the credit provider.