This article was first published in the third-quarter 2015 edition of Personal Finance magazine.
Gone are the days when you could get away with claiming that you earned, say, R55 000 a month and spent R1 000 a month on food. And gone are the days when a credit provider could get away with taking you at your word. Exaggerating earnings and understating expenses is a common tactic of reckless borrowers and using a weak affordability assessment is a common ploy of reckless lenders.
Since the National Credit Amendment Act came into effect in the middle of March 2015, credit providers have been obliged to verify what you earn by checking your three most recent payslips and bank statements, and they must apply the “minimum expense norms” to what you declare as your essential monthly expenses.
The amendments to the National Credit Act (NCA) introduced other significant changes that are aimed at tightening up the NCA and promoting both responsible lending and responsible borrowing.
Until now, reckless lending has been “normal business practice for many credit providers”, Nicky Lala-Mohan, the Credit Ombud, says. A reckless credit agreement results in a consumer becoming over-indebted and unable to repay his or her debts or fund his or her basic living expenses. Statistics from the National Credit Regulator (NCR) show that almost half the 23 million credit-active consumers in South Africa have accounts that are three months or more in arrears.
Lala-Mohan says the NCA “clearly did not provide adequate protection” and reckless lending affected millions of consumers. “Consumers who were struggling to pay their existing credit agreements were granted new credit without regard to the real consequences … especially if legal action had to follow.”
The amendments to the NCA herald a higher level of protection for consumers in the credit market, he says. What are these changes, and how to do they enhance your protection?
1. Affordability assessments
Since the NCA came into effect almost 10 years ago, it has been mandatory for credit providers to perform an affordability assessment before extending credit to a consumer, but credit providers were free to design their own assessments. This freedom had unintended consequences, and, in some cases, it was open to abuse. Debt counsellors tell of one bank that used to ask consumers to provide a single figure for their total monthly expenses – instead of a detailed breakdown – and that omitted to ask consumers if they had any dependants.
In terms of the amended Act, consumers are required to provide credit providers with detailed information about their income and expenses. Put differently, providers must obtain more detailed information from you when you apply for credit.
The regulations issued under the amended Act state that, when conducting an affordability assessment, a credit provider must:
* Calculate a consumer’s discretionary income;
* Take into account all a consumer’s monthly debt-repayment obligations in terms of credit agreements, as reflected on the consumer’s credit profile held by a registered credit bureau; and
* Take into account a consumer’s maintenance obligations and other necessary expenses.
The regulations define “discretionary income” as gross income less:
– Statutory deductions, such as income tax and Unemployment Insurance Fund contributions;
– Necessary expenses, which are defined in the regulations; and
– All other payment obligations disclosed by the consumer, including what appears on the applicant’s credit records.
The balance “is the amount available to fund the proposed credit instalment”.
The regulations under the amended Act define “necessary expenses” as “the consumer’s minimum living expenses, including maintenance payments if applicable, but excluding monthly debt-repayment obligations in terms of credit agreements, as reflected on the prospective consumer’s credit profile held by a credit bureau”.
Debt counsellors have long contended that, all too often, there is no evidence that a creditor checked a consumer’s credit report when it granted credit. They say failure to do so constitutes reckless lending.
Your credit report reveals the extent to which you are exposed to credit and whether you are in default on any accounts. The implication of not being in good standing with one of your existing creditors is that you are not eligible to take on more credit.
The amended Act also states that credit providers must take into account your debt-repayment history. This information is recorded on a section of your credit report known as your payment profile, which shows if you have defaulted on any of your credit agreements over the past 24 months.
The credit provider must check your credit report in the seven business days before approving you for credit, or increasing an existing credit limit. In the case of an application for a mortgage bond, the credit provider must check your repayment history 14 business days before approving your loan.
Magauta Mphahlele, the chief executive of the National Debt Mediation Association, says that, in terms of the prescribed affordability guidelines, where a consumer takes out a consolidation loan, credit providers are required to take reasonable steps to ensure that the loan is used to settle other debt and not to finance further spending.
Deborah Solomon, a debt counsellor and the founder of DCI (an online information portal for debt counsellors and consumers), says the prescribed affordability assessment will go a long way towards preventing reckless lending, which begins when the credit provider does not process the application for credit properly.
2. Enhanced powers of the tribunal
Before the Act was amended, if your debt counsellor believed that he or she had evidence that you were a victim of reckless lending, the counsellor had to engage an attorney to apply to a magistrate’s court for an order of reckless lending against your creditor. Although debt counsellors could make the application themselves, most of them preferred not to do so, because they might come up against the credit provider’s attorney.
Consumers in debt counselling pay for legal representation, over and above their debt counselling fees. The legal fee, which is about R3 000, is paid in your second month of debt counselling, from money that would otherwise be used to pay off your debt.
The amended Act gives the National Consumer Tribunal (NCT) the power to deal with cases of reckless lending. Solomon says that this should result in justice being served more swiftly and lower the cost of debt counselling.
Although there will be a fee to refer cases of reckless lending to the tribunal, she says debt counsellors expect it will be small, because it costs only R100 for a debt counsellor to lodge a complaint with the NCT.
3. No more collecting prescribed debt
The amended Act prohibits the sale and collection of prescribed debt. A debt prescribes (lapses) if your creditor does not start legal proceedings to recover it within three years of the last payment you made. Before the Act changed, even a debt that had not been collected for three years could be collected if you signed an acknowledgement of the debt or made a payment towards it after the three-year period. But now it is an offence for a creditor to try to recover debt that has prescribed. Solomon says this is great news for consumers, particularly those in debt counselling. This also has implications where a credit provider sells an old debt to a third party. Solomon says this can create massive problems for a consumer in debt counselling and the debt counsellor, who is bound by the court-sanctioned repayment plan, which reflects the name of the creditor that originally provided the debt. If another entity becomes the owner of the debt, the payment distribution agency (PDA) must be given a new payment instruction (see point 6 for more information about PDAs). But, she says, it is unclear which party must issue the instruction and how the PDA must verify it.
“Second, the original credit provider doesn’t inform the debt counsellor or provide necessary documentation proving that the debt has been legally ceded or sold to another party.”
Solomon says that, when debt is sold, it is not uncommon for the party that bought the debt to harass the consumer for collection costs and additional interest that have not been accounted for in the rearrangement plan or the court order.
She says even consumers who have been issued with clearance certificates (for having paid off all of their debts in terms of the re-arrangement order) have been harassed by third parties attempting to collect on debt that has been paid.
4. Definition of a section 129 notice
A section 129 notice is the formal name for the letter that a credit provider must send to you when you are in default. The letter is known as a section 129 notice because it is issued in terms of section 129 of the NCA. This section of the Act states that a creditor must notify you that you are in default and must simultaneously inform you that you have the right to refer the credit agreement to a debt counsellor, an alternative debt resolution agent, a consumer court or an ombudsman, or you must come to an arrangement with your credit provider to bring your payments up to date.
The letter gives you 10 days to use one of the remedies listed above. It does not constitute the commencement of legal action against you; it is a notice of impending legal action against you. The amendment to the Act has clarified this point.
In the 2011 High Court case of Nedbank and Others v the National Credit Regulator and Another (Juselius), Nedbank successfully argued that a section 129 notice constituted the first step in legal proceedings. The effect of this judgment was that the credit agreement in question could be excluded from debt counselling. Since then, credit providers have used the ruling to do exactly that, which effectively prevented consumers from using the remedies offered to them by the NCA.
Mphahlele says the amendment means that, within 10 days of receiving a section 129 notice, a consumer who contacts a debt counsellor and is found to be over-indebted and eligible for debt counselling can have that debt included in debt counselling, or, if he or she has only a short-term cash-flow problem, can make arrangements to pay the arrears.
Only debts that are subject to legal proceedings can be excluded from debt counselling. In other words, your creditors have issued summons or handed the debt over to debt-collection attorneys, which they are entitled to do if you do not respond to a section 129 notice.
5. Termination of debt counselling
In terms of the amended Act, a credit provider may not terminate debt counselling and take legal action against you once your debt counselling matter has been referred to a court or the consumer tribunal.
Once a debt counsellor has found that you are over-indebted, the debt counsellor notifies all your creditors that you are in debt counselling. The debt counsellor then has 60 business days to negotiate a repayment plan with all your creditors and refer your case to a magistrate’s court (for the court to make the repayment plan a court order).
In an ideal world, all your creditors would consent to the proposed repayment plan and your debt counsellor would obtain a court order from a magistrate’s court within 60 days. But, in reality, it doesn’t work that way, Solomon says.
“Invariably, creditors want more than the consumer is able to pay, so they oppose the application, and some magistrates don’t like to argue the matter in court – they prefer the debt counsellor and credit providers to settle the matter. And there’s a backlog of cases in our courts. All of this means that meeting the 60-day deadline can be a massive challenge for the debt counsellor, who also has to try to work with credit providers that may refuse to give settlement values [the amounts outstanding] and/or take an adversarial approach to debt counsellors.”
Again, as a result of case law (Firstrand Bank v Collett in 2011), the Act has been interpreted to mean that a credit provider has the right to terminate the debt review process after 60 business days, irrespective of whether the matter had been referred to a magistrate’s court for a re-arrangement order. But the amended Act makes it clear that, as long as the matter has been referred to court, the consumer is protected and there can be no legal action against you in respect of the debts that form part of the re-arrangement order, Mphahlele says.
6. Payment distribution agencies
PDAs are companies that collect money from consumers in debt counselling and distribute it to the consumers’ creditors in accordance with the repayment plan. They were established to manage the flow of vast amounts of money from consumers in debt counselling to their creditors. In addition to paying creditors, PDAs pay debt counsellors their monthly fees and deduct fees from consumers’ monthly instalments for the service they provide.
The NCR introduced PDAs because it assumed that over-indebted consumers could not be relied on to pay their creditors. It was also concerned that debt counsellors might be tempted to steal the money.
But the PDA system has not been without problems. PDAs have been accused of misappropriating consumers’ funds, not paying creditors promptly, not issuing consumers with monthly statements and not paying debt counsellors their fees.
The amended Act imposes stringent registration requirements on PDAs and provides for tighter regulation of their activities. They have to comply with reporting requirements to consumers, credit providers, debt counsellors and the regulator, as prescribed by the NCR. Any interest earned on money in a PDA’s bank account does not accrue to the consumer; it is paid to the regulator.
It is not mandatory for a consumer to use a PDA. The amended Act gives consumers the right to select a payment method, Mphahlele says. However, if you opt to use a PDA, you must choose one that has been accredited by the NCR. And you may not allow your debt counsellor to distribute your money, because the amended Act prohibits debt counsellors from collecting and distributing money on behalf of their clients in debt review.
Solomon says that consumers will benefit from being able to choose a method of payment, because there are more cost-effective payment methods than PDAs. For example, you can pay your creditors directly, which will cost you whatever a debit order costs, or you can use a third-party payment service provider, also known as a “switch”. Switches are governed by the National Payment System Act and audited by the South African Reserve Bank.
Solomon says PDAs make bulk payments to creditors. The payment is accompanied by a schedule that details how the creditor must allocate the money to the accounts of the individual consumers. Solomon says this “manual system” often results in a creditor not being able to “find” the payments made by an individual consumer, which leads to the credit provider terminating debt counselling. Switches, on the other hand, make payments directly into the account of each individual debtor.
PDAs charge each consumer a transaction fee, despite the fact that they make one bulk payment. The fees charged by switches are much lower.
7. Removal of adverse consumer information
Another win is the removal of adverse listings and judgments from consumers’ credit reports within seven days of the credit bureau receiving proof that the debt has been settled.
Before the Act was amended, a listing for a judgment stayed on your credit report for five years, irrespective of whether you had paid off the judgment debt. If, after settling the debt, you wanted to remove the judgment from your report, you had to have the order rescinded, at great expense.
“This is a huge saving for consumers, who don’t need to rescind a judgment unless it was obtained erroneously,” Mphahlele says.
Adverse listings record defaults and debt collection, including bad debts that have been written off. Adverse listings also record if you have absconded or had a credit card revoked. They stay on your report for one year.
8. Issuing of clearance certificates
A clearance certificate is issued to consumers in debt counselling once they have paid off all their debts. The certificate enables a consumer to acquire credit again. The debt counsellor notifies the NCR that he or she has issued the certificate, and the regulator notifies the credit bureaus.
Consumers in debt counselling have complained that if their debt included a home loan, which can have a term of up to 20 years, they could not get out of debt counselling until they have paid off their mortgage bond. In terms of the amended Act, a clearance certificate can be issued once consumers have repaid their short-term debt, including vehicle finance, and they are no longer in arrears with their home loan repayments.
9. Registration of credit providers
The amended Act makes it mandatory for all credit providers to register with the NCR, irrespective of how many loans they issue annually, or the value of their loan book. Before the Act was amended, a provider did not have to register with the regulator if it had issued fewer than 100 credit agreements or had a loan book of less than R500 000.
Lesiba Mashapa, the company secretary at the NCR, says any loans granted by an unregistered credit provider are unlawful. You would have to apply to the courts to have such a loan written off. The NCR can apply to the tribunal for the unregistered provider to be fined and interdicted from doing business.
10. An up-to-date credit report
Your credit profile is useful only if it is up to date and is an accurate reflection of the status of all your credit agreements. It was not mandatory for all credit providers to supply information to the credit bureaus, although Mashapa says that most of the big credit providers did submit data to the bureaus.
Mashapa says the regulations under the amended Act now state that a credit provider must submit information to the credit bureaus “in the manner and form” prescribed by the regulator in any guidelines issued by the NCR from time to time.
The regulator also has the power to require every credit provider to supply data to the bureaus, and it will, in due course, impose time lines for updating information.