Now that the National Credit Amendment Act is in effect, you, as a consumer of credit, will enjoy better protection. However, experts say there is still room for the Act to be improved and a desperate need for a change of culture in the credit industry.

Consumers have been “burnt” by poor credit practices, and the market needs to be rehabilitated and made sustainable, so that 80 percent of consumers are in good standing with their creditors, attorney Stephen Logan says.

Of South Africa’s 22.5 million credit-active consumers, just under half have impaired credit reports, meaning they are in arrears on their repayments by three months or more.

Addressing a conference on “The National Credit Amendment Act: strategies to address over-indebtedness” this week, Logan said the stance taken by credit providers until now has been one of minimal compliance.

“Credit providers need to take responsibility for individuals instead of looking at their loan book as a whole. Their question should be: Can this person afford credit?” Logan said.

The conference was hosted by the Department of Trade and Industry and attended by the National Credit Regulator (NCR), the National Consumer Tribunal, the Credit Ombud, officials from the South African Reserve Bank, the Department of Justice and Constitutional Development, as well as members of the Credit Bureau Association, academics, credit providers, debt counsellors, debt collectors and lawyers.

“We don’t want to get rid of lending, we want to eradicate reckless lending and lenders who refuse to do robust affordability tests,” Joan Fubbs, the chairperson of the portfolio committee on trade and industry, said.

Reckless lending is when a credit provider extends credit to a consumer who can’t afford it. One of the key aims of the National Credit Act is to prevent reckless lending.

The regulations under the National Credit Amendment Act introduce criteria that credit providers must use henceforth to assess whether or not you can afford the credit for which you apply. Although it has always been mandatory, under the National Credit Act, for credit providers to carry out affordability assessments before extending credit to you, the Act never prescribed how the assessments had to be done.

Credit providers are now compelled to verify your income by checking your latest three bank statements and salary slips. From now on, credit providers must also use the “minimum expense norms” table in the regulations to calculate your existing financial obligations according to your gross monthly income.

This is to stop both consumers and credit providers from understating a consumer’s monthly expenses. Both credit providers and consumers have been known to do this to ensure that the consumer is approved for credit. For example, one bank asks a consumer applying for credit for a single figure for his or her total monthly expenses and does not ask how many dependants the consumer has. Debt counsellors contend that by not asking the right questions, the bank won’t elicit the right answers from the consumer.

The regulations state that when conducting an affordability assessment, the credit provider “must take into account all monthly debt repayment obligations in terms of credit agreements as reflected on the consumer’s credit profile held by a registered credit bureau”.

Credit providers have complained about being made to comply with the amendments with immediate effect, given that their systems and procedures need to change.

Lesiba Mashapa, the company secretary for the NCR, says that the effective way to combat over-indebtedness is to restrict the supply of credit to consumers who are “currently struggling” to service their existing debt. The affordability assessment regulations will help to achieve this objective, he says.

The regulations now also make it mandatory for credit providers to submit credit information to the credit bureaus in a manner and form prescribed by the NCR through conditions of registration and any guidelines issued by the regulator. However, the manner and form have yet to be set by the regulator.

Mashapa says that regulations on affordability assessments can only work if all lenders submit information to the credit bureaus and if all lenders update that information timeously. He says the NCR will work with the credit industry to stipulate how data is to be supplied to the bureaus. There will be enforcement action against those who fail to submit and update information.

Michelle Kelly-Louw, a professor of banking law at the University of South Africa, says the regulations dealing with the assessment of affordability are the “bare minimum”. She says it would be wrong for credit providers to think they would be fully compliant if they were merely to follow the regulations.

RECKLESS LENDING

To prevent reckless lending, credit providers also need to consider disclosure – not only of the full cost of credit, but also in the way they advertise credit – so that consumers fully understand their obligations before they enter into a credit agreement, Kelly-Louw says.

“Reckless lending is tested in the enforcement of the Act,” she says.

Debt counsellors are bound by the Act to investigate whether an over-indebted consumer is the victim of reckless lending and to report it to the NCR.

The regulator has been criticised for not doing enough to eradicate reckless lending. In its defence, it has maintained that only a court can declare a credit agreement reckless. But the amendments to the Act now empower the National Consumer Tribunal (NCT) to make findings of reckless lending.

The role of the tribunal is to adjudicate on matters referred to it by the NCR, among others. The NCR says the enhancing of the tribunal’s powers to decide on reckless lending should result in swifter action against errant lenders.

But Kelly-Louw says that reckless lending is not the only cause of over-indebtedness. The overcharging of interest and fees, including collection costs, also leads to over-indebtedness.

The National Credit Act provides for a cap on what a consumer in default can be charged in interest and fees, as well as credit life insurance and collection costs. But this section of the Act – section 103(5), commonly referred to as statutory in duplum – has been repeatedly challenged, and the regulator recently issued a proposed guideline providing a new interpretation of this section of the Act.

Kelly-Louw says that some banks have asked for legal opinion to see if they can contract out of the Act “to defeat the purpose” of this aspect of the Act.

Prescription

It is now unlawful for a credit provider to attempt to collect a debt that has prescribed or to sell debt that has prescribed. A debt prescribes – or lapses – if a creditor does not start civil proceedings in a court to recover the debt within three years of the last payment.

Before the Act was changed, prescription was interrupted if a debtor acknowledged the old debt or made payment towards it, but it is now unlawful for a credit provider to even try to recover debt that has prescribed.

Compulsory registration

The amended Act makes it mandatory for all credit providers to be registered with the NCR. Mashapa says that any loans granted by an unregistered credit provider are unlawful and consumers can refuse to pay. He says this is the only way to root out illegal lenders.

SECTION 126 NOTICES

The amendments to the National Credit Act clarify that a section 129 notice issued by a credit provider does not constitute legal action against you, but rather serves as notice of impending legal action should you ignore the letter and the remedies it offers. (A section 129 letter notifies you that you are in default and offers you several ways to remedy the default. One such remedy is to apply for debt review).

TERMINATION FROM DEBT REVIEW

The amended Act states that, as long as your debt review or debt counselling matter is before a court or the National Consumer Tribunal, a credit provider may not “terminate” debt review – meaning it may not remove or exclude the credit agreement from debt review.

A debt can be excluded from debt review if the credit provider commenced legal proceedings against you before you entered into debt counselling, or if you renege on your obligations while you are in debt review.

CLEARANCE CERTIFICATES

The amended Act now allows for consumers in debt review to be issued with a clearance certificate – which enables them to obtain more credit – once they have paid off all of their debts, except for their home loans.