By Nomthandazo Mahlangu
The National Credit Act 34 of 2005 (NCA) regulates the credit industry. The NCA is aimed at, inter alia, promoting responsibility in the credit market, and to achieve this objective, it encourages consumers to borrow responsibly in order to avoid over-indebtedness, while simultaneously prohibiting credit providers from granting credit recklessly (s 3(c)(i) and (ii)). The concept of reckless credit or ‘reckless lending’ was introduced by the NCA to protect consumers from over-indebtedness and to establish measures that credit providers must take when granting credit. A consumer is over-indebted if – after a careful assessment and all available information processed – a determination is made that the particular consumer is, or will be unable to satisfy all the obligations under all the credit agreements to which they are party to, in a timely manner (s 79).
Reckless credit, refers to a situation where – at the time of entering into a credit agreement – a credit provider fails to conduct the assessment, or having conducted an assessment, enters into an agreement that causes the consumer to be over-indebted (s 80).
Accordingly, it is required that before entering into a credit agreement, a credit provider must perform an affordability assessment to determine the consumer’s financial means, prospects and obligations (s 81).
Credit providers have a discretion to determine suitable evaluative mechanisms and procedures to meet the assessment obligations, provided they are fair, objective and not in conflict with any affordability assessment regulations (s 82).
The determination of whether a credit agreement is reckless or not, is made at the time the agreement is concluded. It follows that the credit provider’s affordability assessment is the basis for granting reckless credit. This is significant because, if the credit provider fails to conduct such an assessment, that credit agreement, is automatically classified as reckless credit (see VKB Landbou (Pty) Ltd v Van Deventer (FB) (unreported case no 6115/2017, 5-7-2018) (Van Rhyn AJ)). However, in the same breath, the consumer’s dilemma is that, only a court may declare that a credit agreement is reckless credit. The question to be considered is: Given that a consumer’s protection is central to the purpose of this Act, are consumers adequately protected by the NCA?
In the Shoprite Investments Limited case the retailer was fined R 1 million for extending reckless credit. The National Credit Regulator undertook an investigation into the lending practices of the retailer that was concluded between 2013/2014, following media reports that the retailer extended credit to debt-ridden customers struggling to pay existing debts. The matter was referred to the National Consumer Tribunal (the Tribunal), which found against the retailer in 2017, subsequent to which the retailer lodged an appeal on this, and on other grounds that are not necessary for purposes of this discussion.
The High Court dismissed the appeal. The issue before the court was whether the retailer’s affordability assessment method of potential consumers complied with the provisions of the NCA. It was the court’s conclusion that the lending practices used by the retailer directly contravened the provisions of the NCA.
The findings by the Tribunal established that the modus operandi used by the retailer consisted of new credit agreements that were concluded with consumers, by manipulating the consumers’ pre-existing and future commitments in favour of the consumer entering into a new credit agreement with the retailer. Moreover, in certain instances, customers pre-existing debt obligations were disregarded and credit bureau information was adjusted to enable the retailer to grant credit where the information was unfavourable to the granting of credit. The Tribunal further confirmed that the evaluation mechanisms and procedures used by the retailer did not bring about a fair and objective result to all the parties concerned. The evidence below i illustrative of the retailers conduct:
‘Prior to [the retailer] granting credit, [consumer one] had a nett salary of R 19 900,01, monthly instalments of R 17 160, monthly deductions of R 6 060 and thus a disposable income of –R 3 319, 99. After the granting of the loan, the disposable income was –R 3 542,37;
…
… a 61-year-old pensioner, [consumer two] had prior to the granting of the loan a nett disposable income of –R 201 and after the granting of the loan, had a disposable income of –R 493,25;
…
… a 67-year-old pensioner, [consumer three] had prior to the granting of credit by Shoprite a nett disposable income of –R 435 and after the granting of the loan, had a disposable income of –R 500,76;
…
… [consumer four] had a nett disposable income was –R 2 411,91 and after the granting of the loan, his disposable income was –R 2 674,01.’
With respect to consumer one, the retailer admitted to disregarding an instalment because only one month remained. The retailer further argued that as the consumer had a good repayment history, this suggested that the consumer could borrow from their bond.
Regarding consumer two, the 61-year-old pensioner, the retailer stated that certain instalments were disregarded. The reasons put forth were that the ITC records were purportedly obsolete, and in other instalments, only two or three months remained. According to the retailer, the consumer’s marital status was also considered, and it presumed that the ‘other spouse’ would assist with payments.
In relation to consumer three, the 67-year-old pensioner, numerous instalments were disregarded, and the retailer contended that, as the consumer was a good payer and married, the spouse could accordingly assist with payments.
Lastly, regarding consumer four, the retailer not only disregarded numerous instalments, but failed to consider other existing instalments.
It is trite that when assessing whether to grant credit, the credit provider should only consider the income that is reliable, consistent and sustainable (Absa Bank Ltd v De Beer and Others 2016 (3) SA 432 (GP)). Evidently, the retailer was not privy to the credit applicant’s spouse income and expenses, in order to reach the conclusion that ‘they’ would assist with payments. The court quite rightly remarked that, prospective customers were unaware that the retailer rearranged their financial affairs, nor were they consulted as to whether they were prepared to sacrifice their existing contractual agreement to obtain the credit, especially given that evidence points to the fact that many consumers still had negative affordability figures after the retailers so called ‘adjustment’ exercise. In passing, it must be mentioned that, aside from contravening the provisions of the NCA, the retailer has transgressed other aspects of the law.
It is the object of the NCA to promote a fair and efficient credit system by delineating the rights of credit providers and consumers. Hence, there are specific measures that are provided in the NCA aimed at preventing reckless credit. It is alarming that such measures seem not to have the effect intended. This case has illustrated that notwithstanding the prevailing measures, retailers continue to target the financially illiterate and vulnerable members of society. These are highly compromised consumers currently experiencing unsustainable levels of debt. Though the court grants the legal remedy to consumers against reckless credit, that determination is only made if that matter is referred to a court, and until such time when that particular agreement is either sets aside or suspended, it remains in full force and effect. I submit that while cognisant of the NCA endeavours to protect consumers, it is evident that such protection does not cascade to the under-privileged members of society. It is my contention that a review of the provisions in connection with an administrative fine that may be imposed by the Tribunal is necessary, in an effort to dissuade reckless credit granting. Ultimately, the consequences for reckless credit granting should constitute financial harm, otherwise credit providers will continue to flout the law.
Nomthandazo Mahlangu LLB (Unisa) is a Postgraduate Assistant at the University of South Africa in Pretoria.
This article was first published in De Rebus in 2020 (July) DR 34.
