Cleansing your credit record: good or bad?
It’s a well-known fact that almost half of all credit-active consumers in South Africa have impaired credit records. In other words, about nine million consumers are in arrears (by three or more months) on at least one account, or have a debt judgment or administration order to their names. The call for a credit information amnesty aims to address this situation by erasing some of the adverse information from the credit reports of these consumers – but not their debts.
Last year, the select committee on trade and international relations, which is part of the National Council of Provinces, asked the Department of Trade and Industry (DTI) to explore the merits of an amnesty. The DTI, in turn, gave the National Credit Regulator (NCR), one of its agencies, the task of consulting with the credit industry.
The consultation process with the credit industry is complete, a report has been finalised and it will be submitted to Parliament for consideration late this month or early in April, Lesiba Mashapa, company secretary at the NCR, says.
One option in an early draft of the proposal was that the amnesty would apply to people with a monthly income of less than R10 000 and with debts of less than R15 000.
The regulator says the proposed amnesty aims to:
* Assist credit-impaired consumers to access credit and pay less for credit;
* Increase access to capital and stimulate consumer demand, which will lead to economic growth;
* Assist consumers who are unable to get a job because of their impaired credit records;
* Reduce the cost of repairing impaired records; and
* Remedy the defects of the first credit information amnesty.
Before the National Credit Act (NCA) became fully effective in June 2007, a credit information amnesty was granted in terms of which credit bureaus expunged adverse information from the credit records of about eight million South Africans. It had similar aims to the latest proposed amnesty.
But the 2007 amnesty failed to have the desired impact – and there were unintended consequences: 74 percent of consumers who benefited from the amnesty now have impaired credit records.
Frank Lenisa, a representative of the Credit Bureau Association, says information received from one of the banks showed that, following the 2007 amnesty, consumers were two or three times more likely to end up with a bad credit record than before the amnesty.
Lenisa says South Africa is ranked fourth in the world in terms of the ease with which people can access credit, based on the strength of legal rights and the depth of credit information.
Magauta Mphahlele, chief executive of the National Debt Mediation Association, says it is premature to comment on the NCR’s proposed amnesty, considering that a final proposal has yet to be put on the table. However, judging from the initial indications, the amnesty seeks to assist about two million consumers. Mphahlele says consideration needs to be given to the remaining seven million consumers who have impaired credit records.
She says “a coordinated and holistic proposal” is needed to address the rehabilitation of consumers over the long term.
“This will entail a review of the NCA, the Magistrates’ Courts Act and our bankruptcy laws to ensure that consumers who suffer financial hardship have a cheap and simple mechanism to rehabilitate themselves within a reasonable time,” Mphahlele says.
“Currently, none of the existing mechanisms in various laws give consumers the opportunity for a fresh start. If we do not address this issue, the country will still be faced with the same problem in five years’ time,” she says.
THE CASE FOR THE AMNESTY
The removal of data from the credit records of consumers is just one component of the proposed amnesty, Lesiba Mashapa, company secretary at the National Credit Regulator (NCR), says. Other components include:
* The introduction of affordability assessment guidelines;
* A prohibition on the collection of prescribed debt (debt for which the debtor is no longer liable);
* A focus on the timeous submission of data by credit providers to credit bureaus;
* The amendment of legislation to make it easy and inexpensive for paid-up judgments to be rescinded and removed from credit bureau records; and
* A campaign to educate consumers about the healthy use of credit.
He says all of this is intended to address the underlying problems that have resulted in consumer over-indebtedness and a high level of impaired credit records.
“The purpose of the amnesty is not to enable consumers who cannot afford further credit to access it; it is rather to help those who can afford credit to access it at a reasonable cost. The consumer’s ability to afford further credit remains a key requirement,” Mashapa says.
People the amnesty will target are those who are “unable to access further credit even when they can afford it. It is also difficult for them to obtain employment and, in some cases, rental accommodation.” It will also benefit those who can’t afford to rescind civil judgments for debts that have been settled.
He says the amnesty proposal has sought to strike a balance between the interests of consumers and credit providers. “It is for this reason that the NCR has proposed that payment profile information should not be removed. This information, together with other types of credit information that will not qualify for removal, will be available to credit providers when they make credit-granting decisions.”
In response to the claim by credit providers that an amnesty will push up the price of credit, Mashapa says the cost of credit for many consumers is already high. He says credit, particularly in the form of unsecured loans, is being granted to consumers at very high interest rates by credit providers across the board. Fees, such as service and initiation fees, are being charged at the maximum rates.
Consumers do not use credit only for consumption; they also use it for education and housing, he says.
The first amnesty was not successful because it had stringent requirements, Mashapa says. “Many consumers, such as those who had more than two civil judgments on their records, did not qualify to have their listings removed.”
He says some of the beneficiaries of the previous amnesty now have impaired records through no fault of their own and because of factors such as the 2007/8 global financial crisis, which resulted in massive job losses.
He says an impact assessment of the amnesty proposal has been conducted to ensure that there is a better understanding and appreciation of how it would affect consumers and credit providers.
THE CASE AGAINST THE AMNESTY
There has been a chorus of opposition to the call for a credit information amnesty. From credit providers to debt counsellors, the big banks and the Credit Ombud, there is broad agreement that the amnesty will only aggravate the problem of over-indebtedness.
Alf Lees, a Democratic Alliance Member of Parliament and former member of the select committee on trade and international relations, says the call for an amnesty is a popular one that is gaining traction in the run-up to next year’s general election.
“Our point of view is that this needs to be approached with a great deal of caution and the full consequences understood, because this is dangerous ground,” Lees says.
During a meeting in Parliament last month, hosted by the portfolio committee on trade and industry and attended by the National Credit Regulator and the Banking Association of South Africa (Basa), Cas Coovadia, the managing director of Basa, said an amnesty was incorrect in principle and “encourages an inappropriate culture”.
The previous amnesty was not a success, Coovadia said. “We can’t give out the message that says, ‘People, get into trouble and every five years we’ll call an amnesty’.”
Coovadia said Basa disagrees with the call for a credit information amnesty because:
* Expunging negative credit information from the records of consumers will only enable them to get more credit, which is counter-intuitive; and
* It will make lending more risky, and the banks will have to price for that risk or pull back on lending.
“We believe the impact will be fewer loans or more expensive loans,” Coovadia said.
More interaction and engagement between the regulator and credit providers would be more productive than an amnesty, he said.
Manie van Schalkwyk, the Credit Ombud (who is not a statutory ombud), says the previous amnesty had a clean-up effect and was called for, but another amnesty five years later is “dangerous”. He says: “Most of those who benefited from the previous amnesty were in default within two years.”
The call for another amnesty “doesn’t make sense. It sounds great – like the government is giving consumers another chance – but it will provide artificial relief. You may take the negative information away, but the debt remains. And without the negative information, the consumer is able to qualify for more debt,” Van Schalkwyk says.
He says the global economic meltdown was a result of credit being extended to people who couldn’t afford it. “We’re creating an environment where this could happen again.”
Paul Slot, president of the Debt Counsellors Association of South Africa, says wiping consumers’ records clean doesn’t resolve the problem of over-indebtedness.
“It will just make the problem worse for those consumers who qualify for the amnesty. People have the impression that their debts get expunged, but it’s only the negative information that gets expunged,” Slot says.
Michael Lawrence, the executive director of the National Clothing Retail Federation (NCRF), says the only people who will score from a credit information amnesty are irresponsible borrowers and irresponsible lenders, “because in the absence of good information they can justify irresponsible lending”.
Lawrence says the NCRF supports the comments made by Basa, “and if there are problems with the recording of the data, then they should be ironed out, which is why the NCRF has committed to participating in work groups [to resolve this issue]”.
BUREAU ISSUES ‘NEED URGENT ATTENTION’
There are issues that need to be addressed immediately about credit bureau information – and you don’t need to call an amnesty to do so, Magauta Mphahlele, chief executive of the National Debt Mediation Association (NDMA), says. These issues include:
* The use of a person’s credit bureau status to determine employment suitability. “This has become a practice used indiscriminately across industries, and it prejudices those consumers who have fallen on hard times and need to get back on their feet,” Mphahlele says. The underlying assumption is that consumers who get into financial trouble are dishonest, which is not always true, she says. “The National Credit Act (NCA) meant for this criterion to be applied only in specific circumstances.”
* Problems with the removal of information that has reached the limits of the retention periods outlined in the NCA. For example, if you have a judgment against you, this stays on your record for five years. Mphahlele says that sometimes the information is not removed and this prejudices consumers. Although judgment information stays on your credit record for five years, it can be removed sooner if you can get the judgment rescinded by a court or abandoned by credit providers in terms of the Magistrates’ Courts Act. This process is, however, costly for the consumer.
* Loading information onto a credit profile that is not supposed to be loaded, such as prescribed debts and multiple listings of the same debt.
* The low take-up by consumers of their annual free report from each of the credit bureaus.
* Debt review status and other information relating to loans not being loaded on time or at all, allowing credit access to consumers who should not be accessing credit. This leads to over-indebtedness and, later, a negative credit bureau status, Mphahlele says.
* Education about credit bureau information – for example, consumers need to be taught how to read the reports and made aware of the options available to rehabilitate themselves.
Mphahlele says consumers seek help from the NDMA mainly for two reasons: a change in circumstances and unplanned expenses. A change in circumstances may include maternity leave; the death of a breadwinner; the loss of a job; divorce or a broken relationship, where one partner is left at a financial disadvantage; and retirement (a social old-age grant is insufficient both to cover living expenses and service debt). Unplanned expenses include medical costs; a death in the family and the need to pay towards a funeral; the birth of a child; and increases in electricity and transport costs, which affect the cost of all basic needs.