Before legislation tackling reckless lending was put in place, there were many instances of consumers being granted loans that they simply could not afford to repay. Sebastien Alexanderson, CEO of SA’s leading debt counselling agency, National Debt Advisors says that practice of reckless lending was firmly put under the spotlight with the introduction of the National Credit Act 34 of 2005 (NCA) and subsequent amendments and affordability guidelines provided in the Act, in 2013. Bringing attention to the responsibility of the lender and more so but commonly overlooked, the borrower.
According to Alexanderson, a consumer has the chance of having their obligations towards a credit agreement completely set-aside or suspended if:
- A credit provider did not conduct an affordability assessment before entering into a credit agreement with a consumer, irrespective of what the outcome would have been. This includes doing a credit check.
- A consumer did not understand and acknowledge the risks, costs for obligations of the credit agreement.
- A consumer becomes over-indebted as a result of entering into a credit agreement.
“If consumers reasonably suspect that their credit provider has not complied with the criteria and regulations, they have every right to take the necessary steps to have the court or National Credit Tribunal declare that the credit had been granted recklessly,” says Alexanderson.
Courts have already ruled in favour of the consumer when it comes to reckless lending. In 2015, Judge Louw in the matter of Absa Bank Limited v De Beer and Others (26749/2011) handed down a judgment, in which the court found that Absa Bank recklessly granted a mortgage loan recklessly and failed to comply with the NCA - and found that the consumer’s obligation in respect of the mortgage agreement was to be set aside.
Alexanderson says that whilst this judgment was seen as a victory for consumers, it is of utmost importance that consumers be truthful when they apply for credit. For if they were dishonest in applying for credit, it will be extremely difficult to prove themselves a victim of reckless lending – even if they are one.
Section 81 (4) of the NCA states that the credit provider has a complete and absolute defence to an allegation that an agreement is reckless – if it can be established that the consumer was dishonest with the information supplied to the credit provider, as part of the required assessment.
Alexanderson says that National Debt Advisors (through intensive investigations on client credit agreements suspected of being reckless) are finding more and more incidences of desperate consumers tweaking the truth (especially with their expenditure) on loan applications, and then unsuccessfully trying to prove that they were a victim of reckless lending.
“Consumers need to borrow money, and creditors need to lend money. It is vitally important that these two parties work within the parameters of the NCA, to avoid issues down the line. Consumers who borrow money, have the responsibility to declare their correct income and expenditure – and creditors should act diligently and responsibly in their verification of all information and subsequent granting of loans.”
This is easier to achieve with a consumer’s stated income – which can be verified by pay slips, contracts, and bank statements. Expenditure is far more difficult to verify or dispute. So if a consumer is untruthful (eg: by declaring that they spend R200 instead of R 1500 a month on eating out and entertaining)yet states and signs that the amounts that they have declared on the loan application are correct and true, chances are that they will subsequently pass the scoring test – and credit provider will lend them the money.
So at first glance, cases of reckless lending seem to be aplenty – but after deeper investigation by registered debt counsellors, this number drops”
“If you are struggling to pay your monthly debt installments, you may be over-indebted, and consulting a registered debt counsellor should be a definite option,” says Alexanderson. “While a good debt counsellor is able to conduct a thorough investigation into your accounts to establish whether you have been granted credit recklessly, only a court or the National Consumer Tribunal (NCT) has the power to declare a credit agreement ‘reckless’. If you don’t have a debt counsellor, you can approach the courts yourself, hire an attorney, approach legal aid, or refer the matter to the NCT. Consumers should be honest, responsible and vigilant when filling out – or assisting consultants to fill out – their applications for credit. They should take particular care when signing declarations relating to their income and expenditure. These are valid legal documents which can be used to by them, or against them when it comes to a reckless lending matter before a court or the NCT.”
“Over-indebted consumers need to stop the denial about their financial situation, stop getting themselves deeper into debt because of desperation – and become fully committed to paying off their existing debt, before seeking new lines of credit,” concludes Alexanderson.