Should state pensioners be given easy credit?

Illustration: Colin Daniel

Illustration: Colin Daniel

Published Sep 19, 2015

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Daniel Lourens is an illiterate pensioner of 75 who subsists on a social grant, but Electric Express and Finbond gave him credit and sold him credit life insurance, which pays out in the event of retrenchment or death. This is despite the Finbond policy document stating that consumers over the age of 70 are not eligible for credit life insurance.

Both credit providers are in the bad books of the National Credit Regulator (NCR). Last month, the regulator reported the JD Group (the parent company of Electric Express) to the National Consumer Tribunal for selling retrenchment and disability cover to pensioners, and in June the NCR called on the tribunal to fine Finbond for charging consumers “excessive” and “unreasonable” premiums for credit life insurance.

But the regulator has never taken action against either credit provider for reckless lending.

Philip Nortje, of Norphil Debt Counselling in George in the Western Cape, says Lourens is a victim of reckless lending and the insurance he was sold was inappropriate. Nortje is applying for a court order declaring that the credit agreements that Lourens entered into with Electric Express and Finbond were granted recklessly. If they are found to be reckless, Nortje will also ask the court to refer the cases to the NCR for investigation.

In addition, Nortje is claiming back costs, including instalments for credit life insurance against death, disability and retrenchment, from Lourens’s creditors. The case is set down for hearing on October 6.

Lourens, who is a widower with a dependent grandchild, says his debt problems began in 2012, when he bought a stove on credit from Electric Express. At the time, he and his grandson were living on an old-age grant of R1 200 a month and a foster-care grant of R770 a month. The stove cost R1 750, but he was offered other appliances at a discount, so he bought those, too.

The goods cost R2 240 in total. Once the delivery fee, initiation fee and interest of 21 percent a year over 24 months had been added, his debt amounted to R3 860. The debt escalated to R6 044 after Electric Express added its monthly service fees of R1 094 (a credit provider can charge a service fee of up to R50 a month) and credit life insurance and product insurance of R1 086. (These fees and costs are not interest-bearing.)

Lourens says he understood that this meant he had to pay R252 a month for two years, and opted to pay his instalments in cash.

Three months later, Lourens went back to Electric Express to buy a lounge suite. But when he left the store, he had bought a lounge suite and a hi-fi on credit. The furniture cost R9 100, and the total amount repayable was R18 700 once the delivery fee, initiation fee, interest, monthly service fees and insurance had been included. But the monthly instalment of R781, plus the R252 payable for the first lot of goods, meant he was paying monthly instalments of R1 033 – from an income of less than R2 000 a month.

Ek het siek geraak(I became ill),” Lourens told Personal Finance this week as he reflected on how the stress of not being able to support himself and his grandson caused his blood pressure to rise.

The affordability assessment conducted by Electric Express when Lourens first applied for credit reflects just two expenses: R400 a month for groceries and R100 for utilities. The document bears his thumb print in place of a signature. On the affordability assessment for the second credit agreement, his expenses drop to R300 a month for groceries and to R50 a month for utilities.

When Lourens turned to Finbond for a loan in October 2013, he was in arrears with his Electric Express accounts. Nevertheless, over the following 14 months, the bank granted him 12 short-term loans of between R300 and R800 a month at an interest rate of five percent. He paid these loans via a debt order on his old-age grant.

Dr Willie van Aardt, the chief executive officer of Finbond, says that lending to consumers who are in arrears with one credit provider does not necessarily constitute reckless lending. Finbond’s affordability assessment showed that Lourens had “sufficient surplus cash after all [his] debt has been serviced, and his Codix credit score was 631, which means that the customer has a good credit record”, he says. (Codix is the credit-scoring tool used by credit bureau Compuscan.)

“The fact that Mr Lourens borrowed from us 11 more times after the first time and repaid all his loans promptly is clear evidence that the affordability was done correctly and [that] ... he could afford the loans. Please note that we did not give 12 loans at once, but 12 short-term loans (mostly 30-day loans) over a period of 14 months.”

Personal Finance suggested to Van Aardt that 12 consecutive loans – monthly pay-day loans (or microloans) – could indicate that Lourens was caught in a debt spiral, and that he repaid the loans only because the payments were deducted from his pension. Lourens stopped taking loans once he was in debt review (counselling).

When Lourens went under debt review in mid-March this year, he was over-indebted. He owed Finbond R411 and Electric Express R3 429. Despite the debt review, Finbond deducted the outstanding balance from Lourens’s social grant on April 1.

Van Aardt says Lourens’s account was settled before any negotiation [with the debt counsellor] took place to restructure the consumer’s account. “It is practice and correct in law that we only cancel debit orders once a proposal [from the debt counsellor] is accepted, or when we receive the court order officially declaring the consumer over-indebted and his account/s restructured,” he says.

The NCR, however, considers a consumer to be in debt counselling once an application has been lodged on the NCR’s Debt Help System and not when a court order has been granted, Lesiba Mashapa, the company secretary at the NCR, says.

On the subject of lending to recipients of social grants, Van Aardt says they are no different to other customers. “Social-grant recipients are often under-serviced by the credit market and often end up in the hands of unscrupulous, unethical and illegal lenders, because they have no other place to go. We believe that institutions can and must lend to these customers responsibly and ethically to give them access to the financial services that they require and are entitled to.”

Stephen Logan, an attorney who specialises in credit law, says any credit provider lending to a consumer whose only income is a social grant is not applying the minimum expense norms set out in the regulations under the National Credit Amendment Act, and is prima facie in breach of the regulations.

“If a social grant is your only income, you have no ability to afford credit,” Logan says.

(The minimum expense norms, which are linked to your income, are the minimum expenses a credit provider must accept that you have when it assesses your creditworthiness. They are designed to prevent either you or a credit provider from understating your expenses.)

Ian Wason, the chief executive of the Intelligent Debt Management Group, which includes Debt Busters, says lending to consumers on social grants is morally reprehensible.

“This should not happen and is completely against the spirit of the National Credit Act,” he says.

Deborah Solomon, a debt counsellor and the founder of The DCI, a portal for the debt counselling industry, says the South African Social Security Agency defines the recipients of social grants as “people who are vulnerable and in need of state support”.

“Any credit provider that grants credit to a person dependent on a social grant should be reported to regulator for reckless lending,” Solomon says.

CREDIT COVER FOR OVER 70s

Finbond’s loans came with credit life insurance. The policy document that Lourens was given clearly states that, “to be eligible for cover under the policy, the consumer must be at least 18 and less than 70 years of age on the date of application for cover”. Under the heading “When the cover ends”, the policy states that no benefit will be payable as soon as a policyholder turns 70.

However, Van Aardt insists that Finbond insures clients older than 70, and points to a clause in the contract that states “you [the consumer] must have been receiving a pension for 12 months immediately before the start date”.

Finbond says it is justified in selling retrenchment cover to pensioners, because, in the event of death, disability or critical illness, the percentage of the premium that went towards retrenchment cover provides “additional credit protection cover”, which can be used to settle debts with other creditors to the same value as the outstanding balance of the Finbond loan.

JD GROUP RESPONDS

Any person who feels they have been treated unfairly in terms of the JD Group’s processes is welcome to engage directly with the company or take the matter to the National Credit Regulator, Ian Nel, the investor relations manager at the JD Group, says.

JD Group is the parent company of Electric Express.

Asked about charging an unemployed consumer a premium for retrenchment cover, Nel says retrenchment benefits are part of a package of benefits that includes death and disability cover, and some benefits may not have value to all individuals.

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