More Protection Against Reckless Credit for Consumers

The recent amendments to the National Credit Act, 2005 which came into force on the 13th of March 2015, has yet again heralded in a higher level of protection for South African consumers in the credit market. The amendments are far reaching, but one of the main focus points is definitely the new rules for affordability assessments, prior to credit being extended, which was sanctioned in the amendments to the Act and prescribed in more detail in the regulations.

Gone are the days when it was “normal” to see an amount of anything between R20 – R200 on an affordability assessment form!

One of the objectives of the Act, since its inception in 2006, has always been to prevent over-indebtedness and to curb reckless lending.  On the other hand, the Act also aimed to provide a framework for a sustainable, responsible, and more importantly “accessible” credit market- specifically taking into consideration the needs of low income persons and communities and historically disadvantaged persons. The South African credit market expanded and the statistics proved that more and more consumers were accessing credit. Unfortunately, not all that credit was granted responsibly – in fact, far from it! Over the last few years there has been a growing concern about the rise in unsecured debt, over-indebtedness and the rising number of accounts which were in arrears.

One of the reasons for the high default rate, and the alarming consequences, was the fact that reckless credit agreements were part of normal business practices for many credit providers. A reckless agreement, is an agreement which in laymen’s terms, causes the consumer to be over-indebted and therefore unable to repay his debts and afford his basic living expenses.

So although the better access to credit for all consumers should have been the start of uplifting the poor and building wealth for the average consumers, this result was regrettably not achieved. Based on the quarterly and annual statistics published by the National Credit Regulator, in December 2014, we had 22.84 million credit active consumers, with 10.26 million of those consumers who had accounts in an impaired status. Accounts are classified as “impaired” as per the credit bureau records if they are 3 months or more in arrears.

The latest report released by the Regulator, recorded that 22.28 million accounts were impaired, a staggering increase of 2.54 million accounts as compared to the previous year!

The NCA clearly did not provide adequate protection and reckless lending practices continued to affect millions of consumers every day. Consumers who were clearly already struggling to repay their existing credit agreements, were granted new credit all the time – without due regard to the real consequences for that consumer – especially if the consumer should fall into arrears and collection processes or legal action had to follow!

In an attempt to curb this negative outcome, the new affordability assessment guidelines were introduced, and they are already in force.

The criteria to conduct an affordability assessment, applies to all current prospective and joint consumers; it applies to all credit providers and it also applies to all  credit agreements to which the Act applies except where the consumer is a juristic person. There are a few other exceptions, notably when you are dealing with a developmental credit agreement; a school / student loan; a pawn transaction or an incidental credit agreement.  (Note that there are other exceptions not mentioned here).

HOW IT WORKS

From now on, the new legislation places stricter requirements on the credit providers at the time of entering into a new credit agreement. It requires them to:

  1. Ensure that they obtain 3 months’ pay slips; or the latest 3 months bank statements, reflecting 3 salary deposits; or
  2. Latest 3 documented proof of income or
  3. Latest financial statements
  4. They must work on average over not less than 3 months, in cases where there is a material variance in the income
  5. The next step is for the credit provider to perform a very specific calculation to ascertain the following:
    1. Firstly they have to establish gross income, as per the requirements set out above.
    2. Then they must deduct all the statutory deductions.
    3. Next they have to calculate what the “minimum living expenses” – according to the minimum expense norms, is, in order to establish the nett income.
    4. Finally they have to take into account all the consumers’ existing debt obligations, and the net result is the consumer’s “discretionary income”
  1. The “discretionary income” is the amount available to repay new debt. The monthly repayment on any new credit agreement must be less than this amount.

 

CONSUMERS BEWARE

Consumers who are regular customers of credit may find that the new application of a “minimum living expense”, affects their access to credit the most. Some consumers may well be used to fill in any amount for living expenses, in order to qualify for the new credit. With the new dispensation, the credit provider will automatically have to take a minimum amount as set out in the regulations, into account. The consumer, who always used to qualify for the loan or other credit, may suddenly be faced with a rejection of his/her application for the first time!

Similarly, we foresee problems with the new requirements forcing credit providers to obtain proof of income. Some consumers may have been able to obtain credit regularly without such proof, but purely based on their past track records with that credit provider. If they apply the new law, the same consumer who has been a repeat customer, could be turned away due to these stricter requirements.

For example:

A consumer earning a net income of R 4000.00 per month, will have a minimum amount of R 1016 deducted as a minimum living expense.

And

A consumer earning a net income of R 15 000,  will have a minimum amount of R 1 955.38 deducted as a minimum living expense.

OUTCOME OF AFFORDABILITY ASSESSMENT

In order to safeguard the consumers against unfair or incorrect practices in this regard, the regulations also stipulated a process for aggrieved consumer who are unhappy with the outcome of the credit providers’ affordability assessment. They may at any time lodge a complaint in terms of sections 134 or 136 at credit provider. The credit provider must attempt to resolve within 14 days. If the complaint is not resolved, the consumer can approach the NCR. The NCR must in turn resolve the complaint within 7 days. If the NCR issues non-referral notice, then the consumer may approach National Consumer Tribunal directly with the complaint about this issue.

Consumer should always be aware that they do not have to accept unfair treatment or any other breaches of their rights in terms of the Act. They could contact the office of the Credit Ombud for FREE assistance with all disputes relating to credit bureau listings, credit agreements with non-bank lenders and retailers. We also assist consumers with debt collection matters, garnishee orders and issues regarding statements of account etc. The office can be contacted on 0861 66 28 37; on the website www.creditombud.org.za or email us at [email protected]

 

 

 

black and silver door knob
Finance

Meeting savings goals does not mean you have to open multiple savings accounts

With a single saving offering embedded in the account, account holders can opt for a single investment that covers short-term, long-term, and wealth-building opportunities at the same time.   A shift in thinking and services has accompanied increasing digitization and electronic delivery. The focus is now on reducing the want for different accounts and offering […]

Read More
black Android smartphone on red flip case
Finance

8 Expenses to Factor Into Your Home Budget

Your home budget, also known as your household budget, is the money you set aside that will go toward essential living expenses. It’s critical to budget your finances to only spend what you can afford and reach your savings goals.  You can guess what kind of things go into a home budget: rent or mortgage, […]

Read More
Breathe neon signage
Finance

How to Stay Calm When Dealing With Financial Stress

Have your money problems become so dire that you find yourself searching “I need financial help immediately?” We get it. You’re in a tight spot, and you’re panicking. Hearing that you’re not alone doesn’t really help, and you aren’t sure what to do while you’re not thinking clearly.  Take a breath. Financial stress can be […]

Read More