The National Credit Regulator (NCR) needs more muscle to deal with rampant reckless lending, the Department of Trade and Industry (DTI) says. It needs the power to carry out “proactive” investigations, impose fines on reckless lenders and order compensation for consumers. So the DTI has proposed amending the National Credit Act (NCA) accordingly.
As it stands, the Act prohibits reckless lending and makes it the job of a debt counsellor to check whether you, as an over-indebted consumer, are a victim of reckless lending, and, if so, to report your case to the regulator.
It is the regulator’s duty to enforce the Act: it must investigate reckless lending and if it finds that a lender or any other credit provider has lent you money recklessly, it must refer the case to the National Consumer Tribunal (NCT). The tribunal can issue the credit provider with a notice of non-compliance (notifying the credit provider that it has failed to comply with the Act or is in breach of the conditions of registration) or impose a fine.
The regulator can also refer a matter to the National Prosecuting Authority where it finds that a credit provider has acted unlawfully.
So why does the DTI want to beef up the powers of the regulator?
According to the DTI, the problem is that the tribunal is not easily accessible to you, with minimal formalities. “The reality is that it functions like a court of law,” Macdonald Netshitenzhe, the acting director-general of the DTI, told Parliament’s Portfolio Committee on Trade and Industry late last month.
In presenting to the committee a review of the current policy on credit, Netshitenzhe said that cases referred to the tribunal by debt counsellors, consumers and the regulator had clogged the system and rendered it inefficient.
Not all cases referred to the tribunal relate to reckless lending. In fact, according to the tribunal, the bulk of cases referred to it are from debt counsellors seeking to have their proposals to restructure their clients’ debts made a consent order.
The DTI’s proposed solution to the problem is to give the NCR more powers to enforce the Act and to use the tribunal only for appeals against or reviews of the NCR’s decisions.
“The NCR should be given the power to declare credit agreements reckless and unlawful, and to declare provisions of credit agreements unlawful,” Netshitenzhe said.
To curb the problem of reckless lending, the Act should not only prohibit it, but make it a criminal offence. The directors of firms that provide credit should be held personally accountable for this practice, he said.
Collecting debt that has prescribed and failing to check that you can afford credit in line with the regulations under the Act should be “reportable irregularities”, Netshitenzhe said.
But some debt counsellors say that the real problem is not so much the tribunal’s inefficiency or the regulator’s lack of power, but that the Act is not being enforced or upheld. They contend that credit providers have been allowed to exert considerable influence over the “rules” that the regulator says debt counsellors must apply in the practice of debt counselling.
The rules – known in the industry as the Debt Counselling Rules Set (DCRS) – benefit credit providers at the expense of over-indebted consumers, according to some debt counsellors who have refused to apply the rules.
These include Deborah Solomon, who has been openly critical of the regulator, and Michelle Barnardt, who earlier this year penned an open letter to the regulator setting out how the Act is being misapplied and how debt counselling according to the DCRS is to the detriment of you, the consumer.
Solomon and Barnardt say that by applying the rules, a debt counsellor fails in his or her duty to act in the best interests of consumers, as required by the Act.
Debt counsellors such as Solomon and Barnardt say the main problems with the DCRS are:
• There is no provision for identifying reckless credit agreements. Therefore, the debt counsellor can’t postpone payment to those creditors. As a result, reckless credit agreements get treated the same as credit agreements that are not reckless. “The DCRS was designed to ensure that the debt counsellor gets the consent of all creditors, provided the consumer can, in accordance with the rules, pay, for example, all unsecured debt in five years,” Solomon says.
Debt counsellors use the DCRS to get consent for their proposals, because if just one creditor objects to the proposal, it can’t be submitted to the tribunal for a consent order, she says. The DCRS does not ask the debt counsellor if there is alleged or suspected reckless credit or if the consumer has been overcharged interest.
“This is a massive problem. This is why reckless lending continues unabated. If the very people who are meant to check for reckless lending are not doing it – because it doesn’t suit them to do so, and they are not being compelled by the regulator to do so – of course it won’t stop,” Barnardt says (see Debt balloons despite counselling).
But the NCR’s manager for debt counselling, Kedilatile Legodi, says the DCRS does not restrict the identification of reckless lending by debt counsellors and there are debt counsellors using the DCRS who do check for reckless lending.
• The consumer’s debt gets refinanced, instead of rearranged, in DCRS, Barnardt and Solomon say. “The Act does not allow for this. It refers to debt being ‘rearranged’ which is to lower the instalment and extend the term. The purpose of debt counselling is to ‘rearrange’ debt, not ‘refinance’ it.”
Solomon says that, in terms of regulations under the Act, a debt counsellor must take the “total outstanding balance” (including interest, insurance and all charges due to the credit provider) and base the proposal on this amount. In other words, the total outstanding balance is the contractual amount that the consumer has agreed with their credit provider.
The debt counsellor must then “rearrange” the consumer’s debt. “There is only one way that a debt counsellor can do this: by lowering the instalment and by extending the term. The Act makes no mention of negotiating or recalculating interest rates,” she says. “So why are consumers in debt review being charged interest over and above what is included in the total outstanding balance?”
The so-called concessions made by creditors who “slash” interest on debts in debt counselling is a sham, Solomon says. Interest is built into the total outstanding balance. To take account of fluctuations in the prime rate, six months before the consumer has paid off the debt, the creditor must issue a reconciliation of the account with the relevant adjustment to the interest, and present that to the debt counsellor.
“This would result in the consumer being due a refund or owing the creditor more,” Solomon says.
• Consumers who should be eligible for debt counselling are being denied debt counselling by the DCRS, which throws out proposals that don’t “solve” in five years. In other words, if you are not able to pay all your creditors (excluding your home loan provider) in full over five years, the system throws out your proposal and a debt counsellor who uses the DCRS would not be able to take you into statutory debt counselling.
This is grossly unfair, debt counsellor Philip Nortje says. “Nowhere in the Act does it state that the consumer must have discharged all of their debts in five years. There are consumers who can pay off their debt in debt review in three years, and consumers who might take 10 years.”