Fast little loans
Every month, Old Mutual receives notice of about 1 000 cessions against unit trust investments and life and investment policies held by its clients. This is according to Piet Spreeuwenberg, manager of client services at Old Mutual.
What this in effect means is that every month approximately 1 000 Old Mutual clients are giving up their rights to their savings in order to secure a loan for themselves or someone they know.
The case of a 62-year-old domestic worker who recently lost R77 300 – her life’s savings for a house – is a case in point. The cession she signed was open-ended and made her liable for further loans granted to the borrower without her knowledge or consent.
The Ombudsman for Banking Services has warned against such dangerous sureties and says the banks should stop using them (see “Banks should scrap universal suretyships – ombud”, below).
Peter Dempsey, deputy chief executive officer of the Association for Savings & Investment SA (Asisa), says Asisa cautions consumers against signing surety.
“Consumers should avoid if at all possible signing as surety for someone else’s debt.”
Very often, people sign surety on the basis of an emotional obligation to a relative or friend, Dempsey says. “That’s a dangerous thing to do. For example, your child is starting a business and you agree to sign surety for his overdraft. Years later, the overdraft is tens of thousands of rands; your child dies and you’re liable for the debt.”
Sureties are not bad per se, Dempsey says. They are one way for credit providers to mitigate risk and to bring down the cost of lending. But it is crucial that you realise the risks you take when signing surety, and understand fully what you’re liable for and for how long, he says.
Many sureties are open-ended, which means they are not limited to a particular debt, nor do they lapse after the debt has been repaid.
Dempsey says it is easy to forget that you signed a cession or suretyship. The consequences of this can be dire. Once the original loan has been repaid, the borrower could incur debt years later, and if the cession or suretyship has not been cancelled, it stands as security for the new debt, he says.
People assume the cession applies to the capital sum only, but often it includes the interest and all amounts owing, Dempsey says.
“Always make sure that the cession is for one loan and applies to a set rand amount over a set loan term,” he advises.
With most cessions, Dempsey says, if the borrower goes into default, the credit provider can pursue whomever it wants: the borrower or the person who stands surety – also known as the co-principal debtor; it depends on the terms of the cession.
The common law position in respect of suretyship is that the creditor must first proceed against the surety – unless the surety waives his or her right in this regard.
There are two types of cessions:
* An out-and-out, or an outright, cession, in terms of which the rights (to the asset) are transferred completely by the cedent to the cessionary; and
* A cession in securitatem debiti – or a security cession – in terms of which the cedent retains a reversionary interest in the ceded right. A reversionary interest is any right to ownership at a future date.
With an outright cession, the cessionary becomes the new holder of the right – in essence, the owner. With a security cession, if the debt is repaid, the ceded right reverts to the cedent.
According to Life Insurance in South Africa: A Compendium from the Ombudsman’s Office by Judge PM Nienaber and Professor MFB Reinecke, a security cession may be said to resemble a pledge of goods.
For example, a policyholder borrows money from a bank. As security for the loan, the policyholder, instead of leaving pledged goods in the hands of the bank until the debt has been fully repaid (failing which the goods can be sold and the proceeds used to meet the debt), cedes to the bank his or her right to the policy benefit.
“The primary intention of the cedent and the cessionary is not that the cessionary will claim the proceeds from the insurer when the time comes to do so, but that he would hold the ceded right for the time being. The loan debt thus becomes a secured debt.”
The authors note that until the debt is repaid, “matters are in limbo”. “The policyholder, while remaining the owner of the policy document, cannot claim on it. But neither can the cessionary realise his security. By the same token, the insurer will be at risk if it wrongly makes payment to either the cedent or the cessionary once it has been notified of the security cession.”
Cessions are governed by standard law of contract, rather than an Act. The common law allows the cessionary to claim the proceeds – or “realise the security” – without first obtaining the consent of the cedent or a judgment from a court.
Nienaber and Reinecke recognise this as “an issue” and suggest that the cessionary may do so as long as the right of the cedent is not compromised, as in the case of a policy that is sold for a sum covering the debt but for much less than the realistic value of the policy.
Cession: The formal giving up of rights, property or territory. To cede is to relinquish your right. The right is transferred from the cedent to the cessionary. The cedent is the person who transfers or gives up his or her right to an asset. The cessionary is the person who receives transfer or cession from the cedent. A security cession or cession in security transfers the right to claim against an asset that was used to secure a loan.
Security: Something of value that a creditor or bank can convert to cash if the borrower reneges on a debt. Instead of relying solely on a surety’s signature and promise to cover the debt, a credit provider or bank will often require that the surety provides some form of security – for example, an insurance policy ceded to the credit provider or bank, or a fixed deposit. The credit provider or bank will lay claim to the security if it cannot recover the money from the borrower.
Surety: A commitment whereby one person assumes liability for another person’s debt. The surety (the person who takes on the liability) undertakes to pay the debts of the other person (the borrower) should that person fail to meet his or her obligation to a lender, such as a credit provider or bank. If a surety fails to meet his or her obligation when called upon to do so, the lender has the right to sue the surety for the money.
WHAT HAPPENS WHEN YOU SIGN A SECURITY CESSION
There is no set legal process that a bank, life assurance company or any financial institution must follow when dealing with a cession, Piet Spreeuwenberg, manager of client services at Old Mutual, says.
However, this is what usually happens when you offer an investment or a policy as a security cession for your own or someone else’s debt:
* The cessionary notifies the financial institution of its interest in your investment or policy. The cessionary does this to lay claim to the security (your investment), to prevent you from disinvesting.
* The financial institution merely “notes” – in other words, makes a note of – the cessionary’s interest in your investment. The institution does not – and is not required to – register the cession, obtain a hard copy of it or check its validity.
* The financial institution may – and usually will – inform you that it has received a security cession against your investment or savings, but it is not legally obliged to do so.
* Should the borrower fail to pay back the debt, the cessionary calls in the security.
* It is only at this point that the cession itself becomes relevant, and the financial institution may only call for the actual cession document before making payment, Spreeuwenberg says. There is no need for the institution that notes the cession to be aware of the terms and conditions of the agreement when the cession is noted, he says.
* The company that holds your investment or policy is legally bound to abide by the security cession.
BANKS SHOULD SCRAP UNIVERSAL SURETYSHIPS – OMBUD
Banks should scrap universal suretyship agreements, Ombudsman for Banking Services Clive Pillay says. But his repeated calls to the banks to do so have fallen on deaf ears.
The banks’ failure to scrap universal suretyships was a “squandered opportunity” to demonstrate their undertaking in the Code of Banking Practice to “act fairly and reasonably”, Pillay says.
Although complaints relating to suretyship agreements account for a small proportion of the annual workload of the banking ombudsman’s office, Pillay says his office sees the “devastating consequences” of suretyships.
“Universal (unlimited) suretyship agreements are often signed by a consumer as a matter of course, with the consumer not realising that these agreements entitle the bank to hold him or her (the surety) liable for any of the debts of the person for whom they stand as surety in the event of that person’s default, no matter how or when the debts were incurred,” the ombudsman says.
Pillay says his office is “strongly opposed” to universal (or unlimited) suretyships, and it has made written and oral submissions to the Banking Association urging that they be discontinued. “The banks have not accepted our recommendation that the use of universal/unlimited suretyship contracts be scrapped from the Code of Banking Practice.”
The new code, which came into effect in January, covers a bank’s obligations to you when you stand surety for someone or when someone stands surety for you.
In terms of the code, the banks undertake to advise you:
* To obtain independent legal advice to make sure you understand the commitment that results from, and the potential consequences of, such a decision;
* That by giving suretyship, you, instead of, or in addition to, the person whose debt is secured, may become liable for the debt; and
* Whether the suretyship is limited or unlimited – and to explain the implications of an unlimited suretyship.
But Pillay says unlimited or open-ended suretyship agreements are, by implication, prohibited in terms of the National Credit Act (NCA).
“Mercifully, the NCA accords sureties or credit guarantors the same status and protection as it does credit consumers (debtors or borrowers). Sureties or guarantors are protected against over-indebtedness, as well as reckless credit, so much so that the Act enables a court to set aside a consumer’s obligations under a reckless credit agreement and to restructure that consumer’s obligations.
“The regulations promulgated under the NCA require that the total value of a credit facility be disclosed to the consumer and the credit guarantor. Accordingly, an open-ended liability (unlimited/universal suretyship) would thus not be permissible,” Pillay says.
CREDIT ACT DOESN’T ALWAYS PROTECT YOU WHEN YOU STAND SURETY
The National Credit Act (NCA) will not always protect you when you stand surety for another person’s debt, a lawyer who specialises in the Act says.
Dawid de Villiers, senior associate at Webber Wentzel, says although the Act provides for a credit guarantee – such as a suretyship – to constitute a credit agreement in principle, this does not mean you can rely on all the protections in the Act.
De Villiers points out that the Act applies only if, in terms of that agreement (the suretyship), “a person undertakes or promises to satisfy upon demand any obligation of another consumer in terms of a credit facility or a credit transaction to which the NCA applies”.
“To which the NCA applies” is the operative clause. In other words, the Act does not apply to you if you stand surety in relation to a credit agreement not covered by the Act. An example of such an agreement is one entered into before the full implementation of the NCA. Although the Act does apply to pre-existing credit agreements, De Villiers says this provision needs to be qualified. “In essence, certain provisions apply absolutely, others partially, and some not at all,” he says.
Another example is an agreement in respect of an entity, such as company, that is a juristic person with an asset value or annual turnover in excess of R1 million.
Referring to a 2009 judgment in the High Court case of FirstRand Bank versus Carl Beck Estates, De Villiers says that standing surety does not automatically make you a consumer of credit.
In this case, Carl Beck stood surety for the debts of Carl Beck Estates. He argued that the bank had not complied with section 129(1) of the NCA, because no notice had been given of its intention to proceed against him. (Before taking legal action, a credit provider is obliged to advise a consumer of the default and to propose that the consumer seeks the help of an ombudsman, a consumer court, a debt counsellor or an alternative dispute resolution agent.) But the court held that the NCA did not apply, because the consumer was a juristic person with an asset value or annual turnover in excess of R1 million.
The court also held that the fact that a person binds himself as surety and co-principal debtor for the debts of another does not automatically render his contract a credit agreement and therefore make it subject to the Act. If credit was not granted to him but to the person for whom he stands surety, the fact that he binds himself as a co-principal debtor does not entitle him to rely on the NCA’s protection.
De Villiers says the extent to which the NCA applies to suretyships has not been tested, and for that reason consumers who sign suretyship should not expect blanket protection under the Act.
The NCA may not be “a model of legal clarity”, but it does specifically make it unlawful for you to waive certain common law rights, he says.
Regardless of what the surety agreement says, the NCA says you cannot be made to sign away your right to a defence that:
* The amount claimed has been incorrectly calculated;
* The moneys claimed were never advanced to, or received by or on behalf of the debtor; and
* There is no basis to claim the debt.
De Villiers says it is important to know and understand the rights that you can be asked to waive when you sign a surety agreement.
The NCA does not make it unlawful for a consumer to renounce the benefits of certain safeguards. When signing surety, the contract may oblige you to forfeit your rights to the benefits of:
* Excussion, which allows you (the surety) to compel the bank or credit provider to take legal steps against the borrower first, and recover all it can from the borrower before pursuing you.
* Division, which applies when you share suretyship with one or more people. Division allows you, as a co-surety, to demand that the debt is divided between all sureties and that you be held responsible only for your share of the debt.
* Cession of actions, which allows you, if you have to pay the debt on the borrower’s behalf, to demand that the bank or credit provider cedes its rights and any securities held against the borrower to you.
This gives you the option to sue the borrower for the money or lay claim to any securities that were lodged with the bank. If the bank or credit provider fails to cede these rights, securities and sureties to you, you are released from the liability of the person’s debt for whom you signed surety.
* De duobus vel pluribus reis debendi, which means the right of a co-debtor to claim that all the other co-debtors be joined in any action. A waiver of this benefit by a co-debtor or surety entitles the creditor to recover the full debt from the co-debtor’s surety without first requiring payment from the other debtor or principal debtor. If this benefit is not renounced, the co-debtor or surety can insist that the creditor exercises its rights against the principal debtor first before having recourse against the surety for any balance that may not be recoverable from the principal debtor.
WHO CAN HELP?
The National Credit Regulator is responsible for enforcing the National Credit Act.
Sharecall: 0860 627 627
Telephone: 011 554 2600
Fax: 011 554 2860
Post: PO Box 209, Halfway House, 1685
Email: email@example.com or firstname.lastname@example.org