Credit insurance loophole for lenders
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Capitec Bank is considering charging for credit life insurance on its unsecured loans – which until now it has offered free – once limits on interest rates are in place, in a move that “undermines the purpose of the National Credit Act”, a commentator says.
Credit life insurance, or consumer credit insurance, is cover you take out on a loan or credit agreement in the event of your death, disability or retrenchment.
“We are currently exploring various pricing options,” Capitec spokesman Charl Nel says. “We will, however, be able to make a decision only once the interest rate caps are formally in place.”
Under the National Credit Act, a credit provider can insist that you take out this insurance, but it can’t force you to take its product.
The regulations that limit interest rates and fees charged on credit are “soon to be published by the DTI”, according to Lebogang Selibi, the spokeswoman at the National Credit Regulator (NCR), although no date is forthcoming. The regulations will not apply to existing agreements, only to new ones.
Comments on the draft regulations closed on July 24.
The proposals include capping the maximum interest rate for unsecured credit at 24.78 percent (down from the current 32.65 percent), and limiting the charge on credit facilities (overdrafts, credit card debt and store card debt) to 19.78 percent instead of 22.65 percent.
At the same time, proposals have been made to limit the premiums lenders can charge for credit insurance. At present, there is no cap, and lenders can charge at their discretion on unsecured loans. Abuse is rife, with some lenders, for example, charging pensioners retrenchment cover.
“We have finalised a regulation to cap credit life insurance premiums, and the regulation awaits publication by the DTI,” Selibi says.
The DTI has not indicated what the limit will be, although the NCR has suggested a cap of R4 per R1 000 borrowed per month.
Attorney Stephen Logan, chief executive of Fair Credit and co-author of The Credit Guide, points out that the National Credit Act stipulates only that premiums should be “reasonable and at a reasonable cost to the consumer”.
“This is what has enabled lenders, such as Finbond Mutual Bank, to charge as much as R90 per R1 000 borrowed per month. Unless caps on credit insurance premiums are put in place, the current maximum interest rates and fees are easily flouted,” he says.
The NCR figures show that the average cost of credit insurance is R7 per R1 000 per month.
It’s a profitable business: in 2012, consumers paid R16 billion in credit life insurance premiums.
In its “Technical Report on the Consumer Credit Insurance Market in South Africa”, the National Treasury found that rates charged for credit insurance were about 10 times those charged for stand-alone life covers, such as funeral cover. But claims made on credit insurance policies were less than half those made on stand-alone life cover.
The average loss ratio (claims paid by an insurer as a percentage of the premiums it collects) for credit insurance is less than 20 percent, says Lesiba Mashapa, the NCR’s company secretary. The average loss ratio on other short-term insurance products is about 60 percent.
Logan says that if a product’s loss ratio is very low, you know there is a problem with the product – either people are not claiming or claims are being denied. “What is not repaid in claims is raked off as profit by the lender,” he says.
“When the caps on credit life premiums come in, they will not be retrospective,” Logan says. “We are witnessing credit providers seeing a loophole and saying, let’s exploit it before the regulations come in … Making up income like this is total abuse. It undermines in a significant way the whole purpose of the National Credit Act.”
Logan is of the view that a number of credit providers will exploit the loophole.
In Capitec’s unaudited financial results for the six months to August 31, the bank reported that its gross loans and advances rose eight percent to R37.9 billion. Gross loan impairment expenses were up 11 percent to R2.51 billion, and loans in arrears fell eight percent to R1.8 billion. Capitec also raised its provision for doubtful debts by 13 percent to R4.2 billion. Headline earnings were up 25 percent to R1.469 billion.
The Treasury’s financial sector policy unit has been driving the consumer credit insurance roadmap, which will come out of Treasury’s technical report. The roadmap is expected to address legislation and abuses in the consumer credit insurance market.
Logan says that unless the government takes decisive action now, consumers are likely to pay as much or more for credit insurance than they do in fees and interest.