Home loans and debt counselling
Placing a debtor’s primary residence under debt review is a problem, because it assumes that servicing the mortgage bond on your home is “not essential”, Dr Penelope Hawkins told a recent debt summit co-hosted by the Credit Ombud and the National Debt Mediation Association.
Hawkins is managing director of Feasibility, an economic policy research company that has conducted extensive research on behalf of the National Credit Regulator into credit extension and into the outcomes of the National Credit Act.
She recommends that the inclusion of a debtor’s home loan in debt counselling should be reconsidered.
When you are over-indebted and undergoing debt counselling, your debt counsellor works out how much money you can afford to spend on servicing your debt – after allowing for all of your essential living expenses. These expenses include accommodation, food, water and electricity, transport and school fees.
“If you assume that servicing a bond is not essential and that the debtor can substitute their home with another living arrangement, then you’ve made a lot of assumptions,” Hawkins says.
“If you say a consumer is paying too much on a bond or for rental, it means that consumer is obliged to move elsewhere.
“But as soon as you go under debt counselling, your profile is flagged at the credit bureaus, and when you start looking for accommodation to rent, a prospective landlord will run a credit check on you and see that you’re in debt review, which is likely to disqualify you as a tenant.”
If you go under debt counselling in the United Kingdom, for example, your primary residence is considered an essential expense – which is common sense, Hawkins says.
“Think about what secured lending does: it’s a long repayment term to enable you to acquire an asset. If the repayment of that asset is placed under debt review, it disrupts your potential for acquisition of the asset,” she says.
It is time that some of the assumptions underlying debt counselling in South Africa were reconsidered, she says.
“We’ve developed a rule system where we acknowledge that the debtor needs to eat and pay water and lights and so on, but do not accept that relocating a family has a number of consequences.
“So you get a consumer in debt counselling who is serving the debt on his television but has nowhere to live. I’m not sure that this is to the benefit of society – certainly not the consumer.
“The practical implications of giving up your home may affect where your children go to school, transport arrangements, and the like. While the mortgage on a holiday home or rental property may well be included in debt restructuring, not all mortgages are equal,” she says.
Hawkins acknowledges that debt counselling is not for everyone. “There will be those who play the system, who borrow recklessly, but I don’t know that you want to create rules that deal with extreme cases and apply it to all others.
“We know that there are people under debt counselling who want to pay three cents in the rand to service their debt and will be doing so in perpetuity. These are people who can’t be helped via debt counselling. Their matters will never ‘solve’, because their situations are so extreme,” Hawkins says.
‘REVIEW PROCESS IS FOR ALL YOUR DEBT’
The Debt Counsellors’ Association of South Africa (Dcasa) does not support the proposal to exclude home loans from debt review, Paul Slot, president of Dcasa, says.
“The inclusion of the home loan under debt review was introduced by the National Credit Act (NCA) and has enabled many consumers to keep their homes,” Slot says.
These consumers had to sacrifice their standard of living to keep their homes, and debt review, in their view, was part of the solution, he says.
“Currently, the NCA requires that all debt (credit agreements) be included in debt review, and this is working well.”
Slot says that in terms of affordability rules, as set out in the Industry Task Team Agreement, accommodation is an essential expense. It is always in the budget, regardless of whether or not the consumer has a bond.
He also takes issue with Penelope Hawkins’s view that some consumers are paying, or are proposing to pay, three cents in the rand to service their debt. “This is not a reflection of current reality,” he says.
“It is a requirement that any application for debt review is subject to a responsible repayment plan that balances the rights of the consumer and the credit provider. This means that not every consumer will qualify for debt review.”
Slot says Dcasa does not support the proposal to exclude home loans from debt review because:
* Excluding the home loan from debt review would result in over-indebted consumers having to forsake some of the protections afforded them under the NCA. This includes certain protection from legal action, court sanction of the repayment plan and the in duplum provision in the NCA, which limits the interest and costs payable if the credit agreement is in default.
Slot says that in the absence of a debt counsellor, the enforcement of the in duplum rule may never happen.
If the consumer is in arrears, this means the credit provider can proceed with legal action. But if the consumer is in debt review, the credit provider cannot terminate debt review (or proceed with legal action) for 60 business days, during which time a repayment plan is negotiated.
“In terms of the NCA and case law, responsible repayment plans have to be considered by credit providers, and based on our experience, this is happening. This is the purpose of debt review,” he says.
Keeping your bond out of debt review increases the likelihood of repossession, Slot says.
If, under debt review, you service your bond at the expense of other debt, the effect is less or no payment to other credit providers, which may prompt them to terminate the debt review process, Slot says.
* To prevent legal action by credit providers, you are required to pay all arrears and maintain the contractual payment. The effect of this is that less money is available for unsecured lenders, who are then prejudiced by the exclusion of home loans and the full repayment of the bond amount.
* If your house is repossessed and the property is sold, you are liable for the shortfall between the bond amount and the sale amount. This shortfall can very often be between 30 and 40 percent of the home loan debt, and this must be paid on top of rent and other repayments to credit providers, Slot says.
EXCLUDING HOME LOANS ‘NOT THE ANSWER’
Excluding your home loan from debt review is not the answer to prevent you from losing your home if you’re over-indebted, Paul Slot, president of the Debt Counsellors’ Association of South Africa (Dcasa), says.
Slot says that, instead, consideration should be given to:
* Reducing the interest rate and other costs payable on all debts until unsecured debt has been repaid and you can afford to resume normal home loan payments.
* Defined requirements for home loan repayments for consumers under debt review. Slot says the repayment should be equal to or no more than, say, 80 percent of the contractual repayment.
“This would extend the home loan period by 20 percent, and any court would accept this as a reasonable repayment,” Slot says.
* Active enforcement of the law regarding reckless lending. Where credit has been extended recklessly, a court can be approached to declare the debt “reckless” and set aside the repayment of that debt, putting you in a better position to repay other debt. Slot says that until now, this has not been actively pursued by debt counsellors or the courts, but this is changing.
* Active review of your standard of living to ensure the maximum possible amount is made available for debt review. Slot says this function is performed by debt counsellors, who review your budget annually.
“This helps you restructure your budget and gives credit providers peace of mind that the maximum amount is being made available for repayments.”
Slot says if all of these proposals were implemented by all parties involved, it would result in a “win-win” for both consumers and credit providers and offer a solution that does not jeopardise the rights of other credit providers to be repaid.
‘BALANCE NEEDS OF SECURED AND UNSECURED LENDERS’
Magauta Mphahlele, the chief executive of the National Debt Mediation Association (NDMA), says although the proposal to exclude home loans from debt review has not been discussed by the credit industry, some mortgage lenders favour it, whereas other credit providers argue that it will jeopardise their rights to act on the security – in other words, to exercise their right to sell your house so that the proceeds can be used to cover other debt.
The NDMA represents the credit provider industry, including the banks.
“The challenge is to balance the needs of unsecured and secured lenders, while also making sure that the consumer has a sustainable solution and is allowed to rehabilitate within a reasonable time period,” Mphahlele says. “Currently, the National Credit Act (NCA) includes both secured and unsecured credit agreements under debt review, and largely treats them the same.
“There is also a view that housing is a basic need and should be viewed as a living expense (primary residence only), and thus treating it differently would allow consumers to retain their primary residence while servicing their unsecured debt,” she says.
However, creditors who provide unsecured loans argue that this will prejudice them, because treating a mortgage as an essential living expense will substantially reduce your ability to service your unsecured debts, because the mortgage is usually your largest debt, Mphahlele says.
“Those in favour also argue that excluding primary residence mortgages would allow consumers to rehabilitate much quicker than the present situation, where consumers with mortgage agreements under debt review can be stuck in the process for more than 20 years. The only way to get out [of debt review] earlier would be by voluntarily withdrawing after they have settled all their unsecured loans.
“Where there is a court order, it would require rescinding the court order by the debt counsellor, and this process is not clearly defined in the NCA and therefore not a real option for consumers, or alternatively a very expensive one.
“In terms of the NCA, the debt counsellor can only issue a clearance certificate once a consumer has met all his or her obligations in terms of the accepted proposal as confirmed by the courts,” Mphahlele says.