The leading retail banks signed an agreement with National Treasury this week undertaking to stop using garnishee orders against credit defaulters, with immediate effect.
A garnishee order is the term used to describe an emoluments attachment order, which gives a credit provider the right to dock your wages or salary in repayment of debt. There are numerous problems with these orders and they are being widely abused by some credit providers.
Last week, Personal Finance reported on the undesirable practices associated with garnishee orders and how you can be exploited when you consent to one or when one is issued against you.
The commitment by the banks to stop using them is in terms of an agreement reached this week between representatives of the major retail banks, the Banking Association of South Africa (Basa) and Treasury.
The undertaking to stop using garnishee orders applies to Basa members only and not to non-bank microlenders, retailers and non-bank vehicle financiers.
“Basa members ... believe the use of such orders for credit is inappropriate” and Treasury suggests that their use be restricted to maintenance orders, according to a joint statement issued by Minister of Finance Pravin Gordhan and Basa chairman Sim Tshabalala.
The agreement – which covers “several concerns” – is aimed at improving responsible market conduct, particularly lending practices, and preventing households from being caught in debt.
Basa and Treasury also agree:
* That “perverse incentives favouring reckless lenders should be stopped”. Ingrid Goodspeed, the chief director of financial sector development at Treasury, says such “perverse incentives” include the absence of a mechanism in either the national payment system or the system of debt counselling that discriminates against reckless lenders.
“Therefore a reckless lender receives the same, if not preferential, access to a consumer’s income for its repayments as does a non-reckless lender,” she says.
“If the consumer turns to debt counselling, all debt is treated equally, whether extended recklessly or not. So a credit provider that has extended credit appropriately and ethically is treated the same as the provider that extended the loan that finally pushed the consumer into a debt spiral.”
Goodspeed says the agreement seeks to “discuss how the current system of debt counselling can be improved”.
* That Basa members will “load payment data onto the various credit bureau systems as soon as is practically possible, preferably overnight in bulk”.
Goodspeed says this is to ensure that credit bureaus have a record of all the outstanding loans of a consumer, so that they can give credit providers an accurate picture of the consumer’s commitments.
“Credit providers use this information for affordability assessment purposes. Failing complete information, they have to rely on the information provided by the consumer. Unfortunately, consumers don’t always disclose all their commitments to credit providers, especially if they are desperate for the funds.”
* That Basa members will review how they assess affordability and ensure the selling of appropriate credit products to their customers.