By Kris Harmse
One of the purposes of the National Credit Act 34 of 2005 (as amended) (the Act) as set out in its preamble, is ‘to promote responsible credit granting and use and for that purpose to prohibit reckless credit granting.’ It is, therefore, clear that, in the prevention of reckless credit, obligations exist not only for a credit provider, but also for a prospective consumer.

When does reckless credit occur?

When making a determination whether a credit agreement is reckless, one must focus one’s attention on the period when the consumer applied for credit (s 80 (1) of the Act).

If, during this period, a credit provider failed to conduct an assessment in terms of s 81(2) of the Act or if, having conducted such an assessment, a credit provider entered into the credit agreement with the consumer despite the fact that the preponderance of information available to the credit provider indicated that the consumer did not understand or appreciate the risks, costs or obligations under the proposed credit agreement or entering into that credit agreement would make the consumer over-indebted, the credit agreement is reckless in terms of s 80(1).

What are a credit provider’s obligations and when are these obligations created?

The obligations of a credit provider are set out in s 81(2), which states that a credit provider must not enter into a reckless credit agreement, and requires ‘reasonable steps’ to be taken to first assess the proposed consumer’s general understanding and appreciation of the risks, costs, rights and obligations under the credit agreement, the proposed consumer’s debt repayment history, and the existing financial means, prospects and obligations of the proposed consumer.

Thus, a credit provider’s obligations come into existence when a consumer applies for credit.

The requirement that a credit provider must take ‘reasonable steps’ in its assessment was described by Louw J at para 60 in the judgment of Absa Bank Ltd v De Beer and Others 2016 (3) SA 432 (GP) as an assessment which is done ‘reasonably, ie not irrationally.’

A credit provider’s obligation to conduct an assessment in terms of s 81(2) was discussed at some length by Satchwell J at paras 24 to 28 in the judgment of Absa Bank Limited v Kganakga  (GJ) (unreported case no 26467/2012, 18-3-16) (Satchwell J). The issues to be covered by the assessment are –

• a consumer’s state of mind as it relates to his or her understanding of the risks and costs of the proposed credit and the consumer’s right and obligations under a credit agreement;
• a consumer’s previous experience and behaviour as a consumer under a credit agreement; and
• the finances of a prospective consumer at the time of the application must be disclosed to ensure that the consumer can afford to pay the instalments in terms of the credit agreement.

A further assessment is required in terms whereof, a credit provider must assess whether there is a reasonable basis to conclude that any commercial purpose may prove to be successful, if the consumer has such a purpose for applying for that credit agreement. The commercial purpose must, therefore, relate directly to the application for credit and, as appears at para 31 of the Kganakga judgment, the ‘commercial purpose does not pertain to any other or underlying agreement with other persons.’

For purposes of conducting the assessment contemplated in s 81, the credit provider may in terms of s 82(1) of the Act, determine for itself the evaluative mechanisms or models and procedures to be used, provided that this will result in a fair and objective assessment. It is interesting to note that the wording of s 82(1) does not place an obligation on the credit provider insofar as determining its own evaluative mechanisms or models and procedures. However, a credit provider is ultimately not left with any alternative if it wishes to comply with its obligations in terms of the s 82(1).

This was illustrated in the Kganakga judgment, where it was found that no proper assessment was done by the credit provider even though ‘reasonable steps’ were in place to conduct the necessary assessment.

The obligations of a credit provider are, however, not limited to the requirements of s 81(2). In what can almost be described as a verbatim repetition of s 81(2) (and perhaps a further reminder to credit providers not to enter into reckless credit agreements with consumers). Section 81(3) spells out that the credit provider must not enter into a reckless credit agreement with a prospective consumer. It is unlikely that the legislature ever intended to unintentionally repeat itself and this peremptory provision creates a further obligation for credit providers.

What are a consumer’s obligations and when are these obligations created?

Before examining the nature and duration of a prospective consumer’s obligations, one must consider their underlying purpose – to assist a credit provider with its assessment as contemplated in s 81(2).

The obligations of a prospective consumer in the prevention of reckless credit are set out in s 81(1), which states that: ‘[W]hen applying for a credit agreement, and while that application is being considered by the credit provider, the prospective consumer must fully and truthfully answer any requests for information made by the credit provider as part of the assessment… .’

A prospective consumer’s obligations therefore come into existence at the moment when applying for credit, and continue to exist while the application for credit is being considered by the credit provider. During this time, a prospective consumer must fully and truthfully disclose the information required by the credit provider in making its assessment.

What remedies are available to a consumer when a credit agreement is believed to be reckless?

Depending on the circumstances, a consumer may either raise reckless credit as a defence, or make application to court or to the National Consumer Tribunal (the tribunal) to have a credit agreement declared reckless.

If a consumer alleges that a credit agreement was concluded recklessly, sufficient facts must be presented in support of such an allegation. Our courts have not been inclined to declare credit agreements reckless in the absence of substantiated and detailed allegations. This was clearly illustrated in the judgment of SA Taxi Securitisation (Pty) Ltd v Mbatha and Two Similar Cases 2011 (1) SA 310 (GSJ). At para 26 of this judgment, Levenberg AJ noted with some concern that there is a tendency for defendants to make bland allegations that they are ‘over-indebted’ or that there has been ‘reckless credit’. He continued by saying that a bald allegation that there was ‘reckless credit’ will not suffice.

Should a consumer be successful in proving that a credit agreement was concluded recklessly, the court or tribunal may make an order in terms of s 83(2) of the Act whereby all or part of the consumer’s rights and obligations under the agreement are set aside, or suspend the force and effect of the agreement.

Again with reference to the De Beer judgment, the court or tribunal should be mindful that the remedy must be ‘just and equitable’, taking into account factors such as the ‘extent of the recklessness’.

What defences are available to the credit provider?

Although the Act clearly creates more obligations for a credit provider than for a consumer, it does provide a credit provider with a complete defence to an allegation of reckless credit.

The defence is set out in s 81(4) and states that, if a consumer failed to fully and truthfully answer any requests for information made by a credit provider as part of its assessment, and such failure materially affected the ability of the credit provider to make a proper assessment, the credit provider will have a complete defence to the consumer’s allegation of reckless credit.

Despite the provisions of s 81(4), a credit provider may still have a defence regardless of whether a consumer made a full and truthful disclosure.

To illustrate this point, one can refer to the judgment by Ebrahim J in Standard Bank of South Africa Ltd v Herselman (FB) (unreported case no 328/2015, 3-3-2016) (Ebrahim J), where the consumer was found to have made a full and truthful disclosure. However, the credit provider complied with its obligations in that it conducted the required assessment. It was, therefore, held that the defence of reckless credit was without merit.

A consumer must, therefore, be very careful in circumstances where he or she may, in fact, be the one throwing stones in a glass house.

Conclusion

Reckless credit is not a one-way street. The Act creates obligations for both the consumer and the credit provider, and each party is therefore, in its own way, equally responsible for preventing the conclusion of a reckless credit agreement.

Kris Harmse LLB (UJ) is an attorney at Smit Sewgoolam Inc in Johannesburg.

This article was first published in De Rebus in 2016 (Dec) DR 24.