Fast little loans
A pilot project to test the much-vaunted voluntary debt mediation service (VDMS) being developed by credit providers has been declared unlawful by the National Credit Regulator (NCR).
Lesiba Mashapa, company secretary at the NCR, says following an investigation into the legality of the VDMS pilot, the regulator has found that it will undermine the statutory debt counselling process and contravene the National Credit Act (NCA).
The NCR’s investigation was prompted by complaints lodged by debt counsellors, including Cape Town-based debt counsellor Deborah Solomon, and labour federation Cosatu.
VDMS is being driven by the National Debt Mediation Association (NDMA), a body formed and funded by credit providers. The NDMA says statutory debt counselling isn’t working for you, the consumer, or for credit providers and that a voluntary industry-led process is needed.
In terms of the terminated VDMS pilot, debt counsellors would have been appointed by the NDMA and consumers handpicked by credit providers. Chosen consumers would receive a free service and the debt counsellors’ fees would be paid by credit providers.
Mashapa says the regulator’s investigation revealed that the VDMS pilot is “basically debt counselling” and creates a conflict of interest for debt counsellors.
“Although debt counsellors are regarded as debt mediators in VDMS, the function they are performing is debt counselling,” Mashapa says. “And the use of debt counsellors in the VDMS pilot contravenes the Act and the conditions of debt counsellors’ registration, which prohibits them from working for credit providers.”
In order to assess over-indebtedness and to identify reckless lending objectively, a debt counsellor needs to be independent and impartial. Debt counsellors participating in the VDMS pilot are conflicted because they are guaranteed work and income from credit providers.
“The Act, together with the conditions of registration of a debt counsellor, doesn’t allow for debt counsellors to receive a fee or commission from a credit provider. This is to safeguard their independence,” Mashapa says.
Another problem the regulator has with VDMS is that the debt rearrangement proposals would not be presented to the National Consumer Tribunal (NCT) or a magistrate’s court for consent orders – in other words, there is no confirmation of the rearrangement proposal by the NCT or a court, he says.
Mashapa says judicial oversight of debt restructuring is essential because the judicial officer must be satisfied that the proposal is affordable and the interest rates are calculated properly.
Also, if a debt counsellor identifies reckless lending, he or she must make a recommendation to the magistrate to declare a credit agreement reckless.
“If you have a consumer who is over-indebted with 10 credit agreements, surely somewhere there was reckless lending. But if your debt counsellor is being paid by the NDMA or a credit provider – as is the case with the VDMS pilot – you are expecting the debt counsellor to bite the hand that feeds. This will result in the concealment of reckless lending, as there is no incentive to expose it.”
Mashapa also says the NCA only allows consumers in debt counselling, but not those in mediation, to be listed with credit bureaus. The VDMS pilot included the listing of consumers in mediation.
The VDMS pilot envisages the use of payment distribution agencies (PDAs) to collect and distribute the payments of consumers under debt mediation, but PDAs have signed service level agreements with the NCR that preclude them from doing business with any other entity.
In terms of the VDMS pilot, debt counsellors and PDAs would be paid “after-care” fees identical to those charged for debt counselling.
Mashapa says the regulator has instructed the NDMA not to implement the pilot and to cease all VDMS-related work by Tuesday.
“We have also issued instruction letters to the debt counsellors and PDAs involved to withdraw their participation.
“It is important that the credit provider industry supports debt counselling and should not be seeking to establish a parallel process that undermines it,” he says.
Solomon says VDMS is an attempt to hoodwink consumers into giving up the rights afforded to them by the NCA, and that the NDMA is “nothing more than an organisation formed by credit providers for credit providers”.
Solomon says allowing credit providers to do debt counselling creates an obvious conflict of interest and is like putting Dracula in charge of the blood bank.
“The Act is very clear that a debt counsellor cannot work for a credit provider and a credit provider cannot perform the role of a debt counsellor. A debt counsellor has a fiduciary responsibility to protect the interests of the consumer,” Solomon says.
A key safeguard open to consumers who are in statutory debt counselling is the “in duplum” rule, which states that at the time of default, a creditor may not claim from you costs – including unpaid interest – in excess of the outstanding capital owed. Solomon says this effectively puts a cap on costs that would otherwise mount up.
Credit providers are eager to sidestep this limit, Solomon says.
“The in duplum provision in the NCA is a major source of relief for indebted consumers that despair of ever getting out the debt trap and it is only available under statutory debt counselling,” she says.
Some debt counsellors have said that if credit providers can work with them within VDMS, there is no reason the same co-operation cannot occur in the statutory process, too.
But Solomon says some credit providers can’t be trusted. “Unfortunately, the banks don’t always operate in the spirit of the Act,” she says.
SYSTEM ‘NOT GIVEN A CHANCE’
Cas Coovadia, chairman of the National Credit Industry Steering Committee and managing director of the Banking Association of SA, says the credit industry is “totally flabbergasted” by the decision of the National Credit Regulator (NCR) to halt the voluntary debt mediation service (VDMS) pilot.
“At no stage [during engagement with the regulator] did the NCR indicate to us that the VDMS is contrary to the Act. Legal advice we have taken throughout this process indicates we are well within the law,” Coovadia says.
He says VDMS presented a “win” for consumers. “Over indebted borrowers, who would otherwise be sequestered, [would] have the opportunity to be restructured on terms they can manage. Credit providers, although at a cost, [would] stand a good chance of recovering their principal without resorting to repossessions or such action. The government can track the process and, if it works, bless it because we can then take through the legal process only those borrowers who are so over-indebted that they can’t be restructured.
“The direction from the NCR to stop the pilot flies in the face of an initiative that has got to be good for our country!”
Coovadia says the committee will take further legal advice and engage robustly with the NCR.
Paul Slot, president of the Debt Counsellors Association of South Africa, says it would be “bad news” for consumers if VDMS wasn’t given a chance.
“The aim of the pilot is to find additional ways to help consumers without any contravention of the NCA. Debt counsellors are independent and qualified to conduct independent assessments and to find the best solution. No consumer will have a problem paying for this service. Millions of consumers need help and statutory debt counselling is only one of the possible solutions.”
He says none of the issues raised cannot be resolved with a discussion involving all parties.