The National Credit Regulator (NCR) has issued proposed guidelines on how a section of the National Credit Act (NCA) is to be applied that some debt counsellors say will open the way for credit providers to impose the maximum charges more than once on an account in default.

The proposed guidelines for the interpretation and application of section 103(5) of the NCA, issued by the regulator in January, are an “untenable interpretation” of the Act, according to the submissions made by debt counsellors who spoke to Personal Finance this week. The deadline for comment on the regulator was last Friday.

The debt counsellors say that if the proposed guidelines were to be implemented, they would ensnare consumers in a debt trap.

Stephen Logan, an attorney who specialises in consumer law, says “there is a very good chance the proposed guidelines would have the negative consequences outlined by these debt counsellors”.

The guidelines suggest that you if you have defaulted on paying an account, your charges will be limited but only until you have paid off the charges. If you default again, the maximum charges can be imposed again. The guidelines also have a harsh effect on people in debt review (see “Consumers in debt review”, below).

Known as statutory in duplum (see “What does in duplum mean?”, below), section 103(5) deals with all the costs – from fees and interest to credit life insurance and collection costs – that you are liable to pay when in default.

This is a contentious section of the Act: it caps the interest credit providers can charge a consumer in default and prevents them and/or their collection agents from charging unlimited fees for debt collection services. Debt recovery is a massive and lucrative industry, which includes firms of attorneys.

Philip Nortje, a debt counsellor in George, says attorneys and debt collectors are adamant that their fees should not be included in the calculation of the total charges covered by the Act. However he says a declaratory order issued almost six years ago makes it clear how section 103(5) ought to be interpreted.

In August 2009, about two years after the Act came into full force, the regulator applied to the High Court for a declaratory order to clarify “interpretational difficulties with the practical application of aspects of the Act”, including section 103(5).

The respondents in the case included the four major banks, two organisations representing credit providers, microlender Onecor and an association for debt counsellors.

The case resulted in the court granting 11 orders: 10 relating to procedures that apply to debt review and one relating to section 103(5).

The latter order stated that once the charges on a default debt (charges such as initiation fees, service fees, interest, credit insurance costs, default administration charges and collection costs, listed in section 101 of the Act) equal the amount of the unpaid balance at the time that the default occurred, no further charges may be levied, and any payments made by the consumer thereafter do not permit the credit provider to charge any further interest and charges while the default persists.

Dissatisfied with the order, the respondents applied to the Supreme Court of Appeal. But the Supreme Court upheld the lower court’s ruling. The NCR duly issued a communiqué, outlining the court’s orders.

Why is there the need now for the regulator to revisit an issue dealt with by a declaratory order six years ago and upheld by the Supreme Court four years ago?

Lesiba Mashapa, the company secretary at the NCR, says the proposed guidelines should not be viewed as revisiting the declaratory order and Supreme Court judgment; rather they seek to “address some of the issues of practical application” that the order did not resolve.

“These issues include [the question of] what constitutes collection costs and principal debt amount under credit facilities, such as overdrafts and credit cards, for the purpose of section 103(5). These issues were not dealt with by the Supreme Court four years ago,” he says.

The guidelines state that debt collector and attorney fees should be included in the collection costs capped by section 103(5), he says.

But Deborah Solomon, the founder of the DCI, a portal for the debt counselling industry, says the proposed guidelines provide an “untenable interpretation”, which is not in line with the declaratory order of 2009. She says it would result in the statutory imposition of the common-law in duplum rule, and would allow for section 103(5) to apply more than once to the unpaid balance of a debt, which is contrary to the clear intention of the Act.

She gives the following example of how statutory in duplum applies. Assume a consumer defaults on her credit card payments. The unpaid balance at the time of default is R2 000. Section 103(5) applies immediately, which means that when the debt, including all costs, amount to double the unpaid balance at the time of default, no more costs can be applied. In other words, the consumer cannot be held liable for more than R4 000 on that debt.

According to the proposed guidelines, should the consumer default again, after having paid all section 103(5) charges, and after continuing to make use of the credit facility, section 103(5) can be applied again.

The guidelines state: “Once the consumer has purged the default by paying all the arrears in relation to the section 101 charges [not the capital], section 103(5) no longer applies. If the consumer defaults again, section 103(5) becomes operative and the amounts that accrued during the first period should be added to the amounts that accrue during the second period of default and any subsequent periods of default to determine the amount of the section 101 charges that should not exceed the balance of the unpaid principal debt. The balance of the unpaid principal debt that should be used in these circumstances is as at the second period of default and any subsequent periods of default.”

Solomon says this means the credit provider can now hold the consumer in our example liable for double the “unpaid balance”.

She says section 103(5) as defined by the Supreme Court of Appeal speaks of “a” default date and therefore can apply only once to a credit agreement.

But Mashapa says that is not what the court’s ruling means.

Solomon says that if the consumer defaults again, the credit provider is free to seek legal recourse, which allows for it to take default judgment against the consumer. Should the credit provider obtain judgment, it would be entitled to the prescribed rate of interest (nine percent) on the judgment amount. (The Prescribed Rate of Interest Act, or PRIA, is not amended by the NCA, so the judgment amount attracts interest in terms of the PRIA.)

This is a fair balancing of the interests of both the credit provider and the consumer, she says.

“[But] the net effect of the proposed interpretation is that each time the consumer manages to pay off the maximum amount of costs allowed in terms of section 103(5), the amount can be charged in full again. No payment towards the capital amount would, in effect, ever be made, and credit providers would be able to claim the capital amount and interest and charges again and again,” she says.

“Section 103(5) is clearly intended to provide a cap on the amount of the debt re-payable.”

Solomon says the guidelines also provide for consumers to be given access to more credit under the same agreement that they defaulted on where the credit agreement is an “open source of credit”, such as a bank overdraft, access bond, revolving credit facility, credit card or store account.

She says credit providers don’t want to cut the line of credit to such consumers. When a consumer with any of these credit agreements defaults, and once section 103(5) has reached its cap, the credit agreement should be cancelled to stop the consumer from accessing more credit until they have repaid their debt in full. This would mean that consumers would need to reapply for credit. Once the new affordability assessment under the amendment to the Act is applied, many of these consumers will not qualify.

A consumer in default is generally either delinquent and/or over-indebted, Solomon says. If they are over-indebted, they could be victims of reckless lending or guilty of reckless borrowing. (Reckless lending is is an offence and occurs when a credit provider fails to do a proper assessment of your affordability, resulting in you being granted credit you can’t afford.)

WHAT DOES IN DUPLUM MEAN?

Literally, in duplum means “double the amount”. The following extract from the Supreme Court of Appeal judgment (in Nedbank v National Credit Regulator) explains the difference between the in duplum rule found in common law and statutory in duplum as contained in the National Credit Act:

“Section 103(5) was intended to provide some redress for borrowers of expensive credit. It includes within its ambit not only interest but also the other costs of credit, which are set out in the Act. [Professor Michelle] Kelly-Louw correctly summarised one of the differences brought about by its introduction:

‘From this exposition, it is apparent that the vital difference between the common-law and the statutory in duplum rules lies in the fact that under the common-law rule, it is only interest (contractual and default) that ceases to run if it equals the outstanding capital amount. By contrast, under the statutory rule, all the amounts – such as the initiation fees, service fees, interest (contractual and default), costs of any credit insurance, default administration charges and collection costs – cease to run if they combine to exceed the outstanding principal debt. Clearly, the statutory in duplum rule offers better consumer protection than its common-law counterpart. However, the statutory rule has worsened the position of credit providers’.”

THE SUPREME COURT JUDGMENT

The Supreme Court of Appeal in Nedbank v National Credit Regulator, stated:

“The intention of the legislature could not have been expressed in clearer terms. Section 103(5) does not merely give rise to a ‘moratorium’ on payments while the consumer is in default but indeed determines the latter’s obligations under the credit agreement.

“If all the legislature intended was a restatement of the in duplum rule, it would have said so and would not have included the introductory words to the subsection [“Despite any provision of the common law or a credit agreement to the contrary”]. It follows that Du Plessis J was correct to make the declaratory order in respect of section 103(5). The legislature had in mind the protection of the consumer who may, under the common law rule, end up by paying much more than the capital originally owing.”

CONSUMERS IN DEBT REVIEW

The proposed National Credit Act guideline also classifies a debt review order as a judgment, which leaves consumers in debt review worse off than they would be in had they not elected to go under debt review, Michelle Barnardt, a debt counsellor in Mpumalanga, says.

Classifying a debt review order as a creditor judgment is contrary to the provisions of section 86 of the Act, which deals with debt counselling, and the intention and spirit of the Act, she says.

The effect is especially bad on accounts that have reached statutory in duplum before the consumer applies for debt review, Barnardt says. “Let’s say the consumer’s principal debt was R10 000 at the time of default. Statutory in duplum was reached before summons, so the collectable balance is R20 000, and so too is the judgment debt. The guideline states that after judgment has been granted, interest at the rate granted by the court will start to run afresh on the judgment debt. When a default debtor defaults on the judgment debt, and the proposed guideline is applied, interest will only stop running once it equals the unpaid balance of the judgment debt, meaning the debtor will be liable to pay back R40 000 – on an original principal debt of R10 000,” Barnardt says.

“A debt review order is not a judgment, therefore interest and charges cannot start to run ‘afresh’ after the date the order was granted; a debt review arrangement does not ‘novate’ or change the credit agreement and therefore there will only be one default amount and one default date to which section 103(5) will apply.”