If you suddenly had access to credit which you knew you didn’t have the means to repay, would you go on a spending spree anyway?
And if you did, and then defaulted on your repayments, whose fault would that be – yours or the credit provider who gave you credit you clearly couldn’t afford?
The National Credit Act, which came into effect in mid-2007, struck fear in the hearts of credit providers across the land because of its “reckless lending” provision.
If a bank or other credit provider does not check on a consumer’s credit history and carry out a proper financial assessment to determine how much credit a consumer can afford – given their income and other financial commitments – if the consumer later defaults, the agreement can be declared reckless and the credit provider forced to write off part of or all of the amount advanced.
But the credit providers have an “out”.
According to the act, “it is a complete defence” to a reckless lending allegation if they can prove that the consumer failed to truthfully answer questions at the time the loan or credit was given.
And here’s a case in which that defence was used.
“Mike” wrote to me recently, having discovered by mistake that his wife had acquired a credit card from Standard Bank, used it and then failed to make payment.
A small business owner working from home, Mike, who asked that I not reveal his or his wife’s identities, said his wife did not have a fixed income, but informally earned small amounts of commission from his business.
“Unbeknown to me, my wife was called by what I assume was a Standard Bank telesales person and offered a Blue Bean credit card with a limit of R29 000. She accepted both the card and the limit.”
And then she began to spend on it. By February the bank was demanding that she pay a lump sum of R3 400 or face legal action.
Mike became aware of the situation accidentally – he answered a call on his wife’s cellphone one evening while she was in the shower.
Naturally, he asked his wife to explain. She said she had explained to the agent that she occasionally helps her husband out in his business. Asked what she got paid, she told Mike she’d said it varied between R1 000 and R5 000 a month.
“What concerns me is that my wife is not employed, she was not asked for proof of employment, was not asked to provide bank statements, and was not asked to provide proof of income,” Mike said.
When I took the case up with Standard Bank, I was asked if I’d like to listen to the recording of the sales call with Mike’s wife.
I said I would, and heard the woman say something other than what she told her husband she’d said.
She did say that she does not “draw a salary” from his business and that “I just help my husband out”.
But she overstated the amount she draws from the business by quite a bit. “Probably about R10 000 a month,” she said.
She said she only had to pay her own accounts out of that – no more than R2 000 – and confirmed that she was left with R8 000 for herself every month.
On the basis of that, a gold Blue Bean credit card was approved, with a credit limit of R29 000.
“The bank relies on the customer to disclose their income and expenditure fully and truthfully,” said Standard Bank’s media complaints manager Denise Singh. “At no point in the conversation did she say that she was unemployed.
“Based on the information the bank would ensure all affordability requirements are being met and you will note in the NCA (Section 81) that the bank has an absolute defence where the customer has induced us into granting the required facility on the information that the customer provided.”
In other words, if the consumer lies about their income the bank can’t be accused of reckless lending.
Mike sees it differently.
“In my opinion, what should apply is once the agent has determined that the person they have called qualifies for the credit card, he should then request them to provide proof of residence, employment and income.
“That way nobody gets hurt – if the consumer proves, with documentation, employment and income, they qualify. If not, they don’t. This way it’s far too easy to get access to money literally being thrown at you,” he said.
I accept that consumers ought to be truthful about their financial situations.
But in this case, where a consumer has been called, unsolicited, by a bank and pretty much offered credit on a golden platter, I am uncomfortable with the fact that the bank could simply take the word of the woman, not ask for any supporting documentation relating to her earnings or other monthly commitments, and then, when accused of reckless lending after she defaults, claim as its “absolute defence” that the consumer was not truthful.
Minister of Trade and Industry Rob Davies clearly has concerns about reckless lending as he has proposed tightening the provisions in the National Credit Amendment Bill.
I asked Reana Steyn, deputy credit ombudsman, whether a credit provider is obliged to insist that consumers prove their income and expenditure by means of documentation, or they can simply take their word for it.
The credit ombudsman deals with consumer disputes with all credit providers apart from the banks, but the law applies to them all equally.
“We regularly encounter similar complaints from consumers who accepted the credit that was granted on very ‘flimsy’ information, and afterwards want to rely on a breach of the NCA provisions relating to reckless credit,” Steyn said.
While the act does state that consumers can’t accuse a credit provider of reckless lending if they were not 100 percent truthful about their financial situation when the contract was entered into, Steyn said her office’s counter argument was that the credit provider did not take “reasonable steps to assess the consumer’s affordability”.
“In most of our cases, the credit providers do obtain a copy of the consumer’s payslip to verify their income. Very, very seldom is this not done.
“The issue is usually the grossly understated expenses of the consumer.
“They record the consu-mer’s living expenses on a form and, if one looks at it, it is usually ridiculously low. We have seen groceries for R200 and nothing for accommodation and amounts of R100 for transport.”
While it is not possible to verify such expenses, the office had argued many cases on the basis of the “reasonable steps to assess” principle, Steyn said.
“My argument is then that it is impossible for any person to survive on these amounts, and therefore the credit providers should not hide behind the fact that the consumer ‘lied’.
“We succeeded in many cases, but not all.”
She advised the couple in this case to lodge a complaint with the ombudsman for banking services.
Interestingly, the draft National Credit Amendment Bill says credit providers should not only “assess” a prospective client’s income and existing commitments to establish whether they have the means to pay the proposed credit instalments, but also “take reasonable steps to validate income by referring to payslips and/or bank statements”.
“Where the consumer’s monthly income shows variance, the average income over the period of not less than three months preceding must be used.”
If that clause makes it into law, credit providers won’t be able to take a prospective consumer’s word about their financial situation.
Clearly, had Mike’s wife been made to submit proof of her income, she would never have been given that credit card. And that would have spared both her and the bank a lot of bother.