The practice of reckless lending continues unabated, even among major credit providers. It often goes hand in hand with reckless borrowing, but the victims are almost always consumers. And not enough is being done to stop the unethical practices that facilitate over-indebtedness.
Today, Personal Finance reports on what seem to be obvious cases of reckless lending (see below).
The National Credit Act (NCA) states that granting a loan to someone who cannot afford it is reckless lending. The Act allows the National Credit Regulator (NCR) to apply for the licence of a credit provider that engages in reckless lending to be revoked, which will put the credit provider out of business. The NCA came into force in June 2007, but to date only a handful of small lenders have been deregistered.
Just under half of all credit-active consumers in South Africa have impaired credit reports, which means they are in arrears by three months or more. According to the latest data from the NCR, of the 22.5 million credit-active consumers at the end of September 2014, those with impaired credit records increased by 100 000 from 9.95 million to 10.05 million in one quarter.
The latest data from credit bureau Compuscan shows that the percentage of consumers with adverse listings increased by 48 percent, to two million people, in the last quarter of December 2014. The number of accounts with adverse listings increased by 56 percent in the last quarter of 2014. There was a 22-percent increase in revolving loans, and a 134-percent increase in revolving loans of between R8 000 and R15 000 in the fourth quarter, Jacobus Eksteen, an analyst at Compuscan, says.
Lesiba Mashapa, the NCR’s company secretary, says the regulator received 291 complaints of reckless lending in 2014. The NCR’s annual report for 2013/14 shows that the regulator investigated 153 cases pertaining to alleged contraventions of the NCA (not only reckless lending), and the NCR referred 23 cases to the National Consumer Tribunal. The tribunal imposed fines that totalled R1.8 million in 2014.
We have uncovered the following cases where consumers who could not afford credit were lent money.
A Gauteng domestic worker and single mother of three earns R4 800 a month. She has debt of R21 600 and her credit record shows that she has defaulted on two accounts. Nevertheless, Cash Converters this month granted her a loan of R500. She is paying R1 574 a month via debit orders to three of her lenders, but she has not paid the other two for more than five months and is therefore clearly over-indebted.
The Act requires a credit provider to assess a consumer’s ability to afford credit, but the domestic worker says Cash Converters did not ask her any questions about her living expenses.
In December, the regulator took action against Cash Converters for alleged breaches of the Act, including failing to conduct proper affordability assessments when granting loans. The case will be heard by the tribunal later this month.
Asked to comment on the domestic worker’s case, Cash Converters chief executive Richard Mukheibir says the company uses a consumer’s latest payslip, three months of bank statements and details of “coming financial commitments” to determine whether a borrower can afford a microloan – or what Cash Converters calls a payday loan.
He declined to disclose the domestic worker’s affordability assessment on the grounds of consumer confidentiality, but promised to investigate the case.
A number of the 67 franchisees of Cash Converters have complained to Personal Finance that their contract with the franchisor compels them to lend money at their own risk, without the borrower’s ability to afford the loan being assessed properly. They say that, in addition to the loan application software failing to “take into account the customer’s living expenses”, the customer’s credit report is not checked.
“The product is an absolute nightmare,” one franchisee says. “Some guys will have to close their shops because of the losses [stemming from defaulting consumers].”
But Mukheibir denies there are many unhappy franchisees, and says franchisees earn the lion’s share of the profits from the payday loans. He says that although the NCA obliges a credit provider to prevent reckless lending, it gives the credit provider the discretion to use its own affordability assessment.
A draft regulation that provides guidelines on how affordability assessments should be conducted was issued under the NCA in 2014, and Mukheibir says Cash Converters will comply when the regulation takes effect.
The President signed the National Credit Amendment Act in May 2014, but the date on which the amendments will take effect has yet to be announced. McDonald Netshitenzhe, the chief director of policy at the Department of Trade and Industry, says this is because the regulations accompanying the Act had to be finalised.
Capfin is another of the domestic worker’s creditors. Since January 2013, she has been granted nine microloans by Capfin.
(The NCA defines a microloan as a short-term credit transaction. It is a loan of no more than R8 000, repayable within six months. It attracts interest of five percent a month, which is the statutory maximum interest rate for this type of credit agreement.)
She says that, after paying a few instalments on her first loan of R1 500, Capfin offered her an extra R1 000 – effectively, rolling over the loan. “Since 2013, they’ve been doing that; you don’t finish the loan,” the domestic worker says.
When she was granted her last Capfin loan in December 2014, she was more than five months in arrears on both her Jet and Ackermans accounts.
There is no trace of an enquiry (a record that someone has viewed a consumer’s credit report) from Capfin on her credit report. Enquiries remain on your report for two years.
Marthie Horn, the manager of legal and compliance at Capfin, says that is because Capfin did a batch process – “not an individual credit enquiry for one credit record only” – which would not leave a footprint on the consumer’s report.
“If the consumer was in default on her accounts, it would have been taken into account in the [credit] bureau variables, but would merely have been one of the variables considered by Capfin.”
The domestic worker has reported Capfin to the NCR.
* The NCR applied to the National Consumer Tribunal this week to cancel Capfin’s registration because of reckless lending, Mashapa says.
African Bank and Standard Bank
A Cape Town cleaner and single mother of three earns R4 700 a month. She owes R85 900 to African Bank and Standard Bank.
She took out her first loan with African Bank about eight years ago, and has taken out about nine additional loans to consolidate her debt.
Her credit report shows she took out three loans from African Bank, ranging from R26 200 in June 2012 to R55 450 in January 2014. The outstanding balance is now R60 029, and she stopped her repayments in August last year.
Her credit report also shows that, in November 2012, after she had acquired credit from African Bank, Standard Bank issued her with a credit card. The outstanding balance on the card is now R11 233.
She went on to obtain three personal loans from Standard Bank, two for R10 000 each and one for R5 000. She says she used one of the loans from African Bank to pay off one of the Standard Bank loans.
At the end of last year, a co-worker encouraged her to lodge a complaint with the NCR. Mashapa says the regulator is investigating.
Consumers who bought cars from the now-collapsed Satinsky Group obtained vehicle finance from Absa, Nedbank MFC and Standard Bank, even though their credit reports clearly showed that some of them had a bad repayment history.
A bookkeeper from East London had a judgment against her, but Absa gave her finance for a Satinsky car. Furthermore, her credit report showed that her Absa home loan instalment was R4 423 a month, but her credit application stated that her total monthly debt repayments were R3 900 and that her total monthly living expenses were R1 000.
A receiving clerk in Durban was more than five months in arrears on his African Bank and Blue Bean credit cards when Absa granted him finance for a Satinsky car.
His credit application form shows a gross monthly income of R8 840; monthly living expenses of R2 000; and total debt repayments of R1 649 a month. But his credit report showed that the monthly instalment on his Blue Bean card alone was R12 236 (because it was overdue), while all his other instalments came to R1 958 a month.
These consumers say their credit reports provide a measure of proof that Satinsky’s agents committed fraud when processing their credit applications, by understating the consumers’ debt so they would qualify for credit that they could not afford. They say it also proves that the banks are guilty of reckless lending, because Satinsky’s agents acted as agents of the banks when vetting their credit applications.
The banks have washed their hands of these consumers, saying they signed credit applications that stated their income and expenditure. It is a complete defence against a charge of reckless lending if a consumer was untruthful when applying for credit.
But most Satinsky consumers applied for credit telephonically. Only when they took delivery of their cars did they sign documentation. The cars were typically delivered early in the morning or at dusk, and the people who delivered them were in a hurry. The consumers say they thought they were signing delivery notices. But it turned out that these were their credit application forms.
* Debt counsellors are required to submit quarterly reports to the regulator that show, among other things, the number of reckless credit agreements that they have investigated. When asked for statistics on reckless lending compiled from the debt counsellors’ reports, Mashapa said the regulator “does not have the number”.
WHAT THE NATIONAL CREDIT ACT SAYS ABOUT RECKLESS LENDING
The National Credit Act (NCA) says that a credit provider must not enter into a credit agreement without first taking reasonable steps to assess a consumer’s:
* Debt repayment history;
* Existing financial means, prospects and obligations; and
* General understanding and appreciation of the risks and costs of the proposed credit, and his or her rights and obligations under the credit agreement.
Stephen Logan, an attorney who specialises in the NCA, says that if a court is presented with evidence that the credit provider failed to take these reasonable steps as required by law, the credit provider may be found to have acted recklessly.
The Act provides for a court to apply three different remedies when credit was granted recklessly. The court may set aside the credit agreement, restructure it, or suspend it, depending on the circumstances.
* Setting aside a loan effectively means that it is written off, Logan says, because the court may terminate all of the consumer’s obligations to make payment.
* Restructuring a credit agreement may result in the consumer paying lower instalments.
* Suspending the credit agreement may provide the consumer with time to put his or her finances in order or supplement his or her income before having to resume payments.
The court will order the credit agreement to be set aside only where the circumstances warrant it, such as where the credit provider failed to conduct an affordability assessment properly or at all, or where it did not check the consumer’s credit history, or where it granted credit to a consumer who was already over-indebted.
Logan says the Act also provides a “self-help” remedy for consumers who are victims of reckless lending. In other words, you do not have to rely on the National Credit Regulator or a debt counsellor to help you get redress. If you default on your repayments and your creditor takes you to court, you may raise the defence (for non-payment) of reckless lending, and the court must investigate it.