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Wednesday, August 1, 2007
Discredited

I have to think back a long time to find any law as convoluted and as messy as this one. I am referring to the National Credit Act 2005 (NCA), which became fully effective 1st June 2007. It seeks to regulate every aspect of credit granting in South Africa and repeals both the Usury Act,1968 and the Credit Agreements Act, 1980, and replaces the Integration of Usury Laws Act 1996.
Even legal authorities and bank informational leaflets suggest there’s a deal of confusion out there. The previous article we ran, which was from Garlicke & Bousfield Inc, was not entirely correct (see Insurance Times & Investments Vol 20.4 May 2007 page 2). Hopefully, this more extended analysis will do better. But it is a fact that when you have exclusions beneath exclusions mixed up with cross-references things don’t always mean what they say.
The NCA generally applies to every credit agreement between parties dealing “at arm’s length” and made in, or having effect in, South Africa. It aims to protect consumers entering into credit agreements from unscrupulous lending activities, and to create a well-regulated lending business. It excludes debt arising out of default of payment for goods or services where there was no credit arrangement, that is, the purchase was a normal cash transaction.
It was passed into law on 15th March 2006, and the majority of its administrative provisions came into force on 1st June that year, with the balance of the Act becoming fully effective a year later.
The Act makes provision for the control and regulation of all credit transactions, including mortgages, credit cards, overdrafts, micro-loans and pawn broking of individuals and certain smaller corporations. Specifically, the Act:
• Regulates all institutions that provide consumer credit, including banks, furniture companies, clothing and other retailers, micro-lenders and pawnbrokers;
• Regulates credit bureaux and consumer credit information, providing for free access to this information, kept by credit bureaux, and for a process by which any errors on the credit records can be corrected;
• Makes provision for the registration of debt counsellors and debt restructuring for over-indebted consumers; and,
• Prohibits certain credit agreements, the inclusion of unlawful provisions in credit agreements, the extension of reckless credit or credit that will cause the consumer to become over-indebted.

It contains detailed provisions regarding the permissible fees, charges and interest under credit agreements, advertising practices of credit providers, and consumers’ rights to apply for credit, to certain information, to protection of confidential information and to reasons for credit being refused.
The NCA casts its net over most credit products where payment is deferred and a charge, interest or fee is payable on the outstanding balance. Typical products are: overdrafts and credit cards, incidental credit agreements, unsecured loans (personal loans), installment agreements, mortgages or secured loans or leases and credit guarantees (suretyships).

National Credit Regulator
The National Credit Regulator (NCR) was established under the Act and is responsible for the regulation of the South African credit industry. The Act requires the Regulator to promote the development of an accessible credit market, particularly to address the needs of historically disadvantaged persons, low income persons, and remote, isolated or low density communities.
Included in its brief is:
• Education;
• Research and policy development;
• Registration of industry participants, including credit providers, credit bureaux and debt counsellors;
• Maintain a national register of credit agreements;
• The investigation of complaints; and, generally,
• Ensuring compliance with the Act.

A special consumer court, the National Consumer Tribunal (NCT), was established 1st September 2006 with powers to adjudicate applications in terms of the NCA and any allegations of prohibited conduct.

Scope and thresholds

The NCA applies to credit agreements with all consumers (natural persons or individuals). It also applies to other entities (juristic persons) whose asset value or annual turnover is below a prescribed threshold (currently set at R1 million).
The NCA does not apply to credit agreements involving:
• Stokvels;
• Family loans and shareholders’ loans (because they are not at ‘arm’s length’);
• The State or organs of State;
• A ‘large agreement’ in terms of which the consumer is a juristic person whose asset value or annual turnover is below the threshold (currently set at R1 million); or,
• A juristic person whose asset value or annual turnover, together with the combined asset value or annual turnover of all related juristic persons, equals or exceeds the threshold (R1 million).

Juristic person. A ‘juristic person’ is a close corporation, company, partnership or a trust.
Arm’s length. A person is related to another person if one of them has direct or indirect control over the whole or part of the business of the other or if a person has direct or indirect control over both of them. In such case they are not at arm’s length and a loan between them falls outside the scope of the Act. One point of contention is whether a loan by an employer to an employee is an arm’s length transaction. The authorities view this as the case.
Thresholds. These are to be determined by the Minister of the Department of Trade and Industries from time to time – the current thresholds were published on 1st June 2006.
Large Agreement. The Act differentiates between small, intermediate and large agreements depending on monetary thresholds stipulated in the National Credit Regulations, and whether the contract is for a ‘credit facility’ (eg credit cards) or a ‘credit transaction’ (eg instalment sales & loans):
• a small agreement is:
o any pawn transaction;
o a credit facility of R15 000 or less; or,
o a credit transaction of R15 000 or less but excluding a mortgage or surety,
• an intermediate agreement is:
o a credit facility where the limit exceeds R15 000; or,
o a credit transaction where the credit limit falls between R15 000 and R250 000, but excluding a pawn transaction, a mortgage or surety;
• a large agreement is:
o a mortgage agreement; or,
o any credit transaction exceeding R250 000, but excluding a pawn transaction or surety.

Surety. According to section 8(5) a suretyship (credit guarantee) is governed by the Act only if the agreement to which it relates is subject to the NCA. Thus a surety for a company above the threshold, for instance, has no protection under the legislation.

Types of credit agreement. The NCA defines four categories of credit agreement:
• Credit facilities, which are typically credit card arrangements;
• Credit transactions, which include all other types of credit agreements (i.e. where payment is deferred and fees, charges or interest are payable to the credit provider), such as pawn and discount transactions, incidental credit agreements, instalment sale agreements, mortgage agreements and secured loans, lease agreements;
• Surety. A surety or ‘credit guarantee’ is form of loan security where a person, other than the borrower, signs an agreement to assume liability for the loan in the event of default; and
• Combination. Credit agreements that are a combination of the above.

Interest rates. Until 31st May 2007, Usury Act interest rate limits applied to credit transactions that fell within the ambits of the Usury Act and the Credit Agreements Act. Credit transactions entered into under the Exemption Notice are now not subject to an interest rate limitation provided the credit provider is registered with the NCR and in addition is also registered in compliance with the Exemption Notice.
All existing loans taken before 1st June 2007 may continue to be priced as agreed under the Usury Act, but all new loans from that date will be subject to the pricing provided for under the NCA.
The maximum interest rate that may be charged on an outstanding balance is the current Reserve Bank Repurchase rate multiplied by 2.2, plus the following additional percentage rate:
• 5% (for mortgage agreements);
• 10% for credit facilities including credit cards;
• 20% unsecured credit transactions, and ‘developmental credit agreements’; or,
• 10% for ‘other’ credit agreements (that is, those not defined above).

This excludes ‘short term’ and ‘incidental’ credit agreements. For example, if the repo rate is 9.5%, the maximum that can be charged for a credit card facility therefore is 30.9% per annum (9.5x2.2+10). In terms of the NCA the rate of interest payable is not stated on the proposal form, but forms part of the final offer of a loan once the client has been properly assessed.
Short term credit transactions are currently defined as those not exceeding an amount of R8 000 and a loan period of six months, in which case the maximum prescribed interest rate is currently set at 5% per month. For incidental credit agreements the limit is 2% per month.

Early settlement. A consumer may pre-pay any amount owing at any time, and fully pay out the account at any time, subject to a termination charge of not more than three months interest, only in the case of mortgage bonds or agreements in excess of R250 000.
Microlenders/loans. Pre-existing microloans from microlenders who were subject to exemption under the Usury Act remain subject to the unregulated rates applicable to such loans. All loans granted since the NCA came into force are subject to the Act, including the interest rates.

Rights of the consumer. The NCA introduces fundamental Consumer Rights including the right:
• To be given reasons for credit being refused or discontinued (the reason to be given in writing on request of the consumer);
• To information in plain and understandable language in terms of which guidelines may be published; and,
• To have access to and to challenge credit records and information held by credit bureau, to have incorrect records of debt adjustments expunged and, to be given notification before negative information is reported to the credit bureau.

Marketing. Consumers are protected from “aggressive advertising”:
• Negative option marketing is prohibited. This occurs when goods or services are offered with the assumption they have been ‘purchased’ unless returned or refused within a certain time period;
• Marketing of credit at the consumer’s home or workplace is prohibited unless the visit is prearranged or the consumer invites the credit provider to visit for that purpose;
• The credit provider must give the consumer the option to:
• decline pre-approved annual credit limit increases;
• be excluded from any telemarketing campaign, marketing or customer list that may be sold or distributed, or any mass distribution of email or sms messages. The credit provider must maintain a register of options selected.

Credit assessment. The credit provider must conduct a proper assessment of each consumer’s ability to meet obligations, taking reasonable steps to investigate and evaluate the consumer’s:
• Understanding and appreciation of the risks, costs and obligations of the proposed agreement; and,
• Ability to meet those obligations in a timely manner in terms of his existing financial means and debt repayment history.

Reckless lending. A credit agreement will be reckless if the credit provider failed to conduct the required assessment, or having conducted it, entered into an agreement with a consumer despite the fact that he did not appreciate the nature of the risks, costs and obligations, or could not afford them.
However the onus is on the consumer to answer fully and truthfully any request by the credit provider for information as part of the assessment required. Failure to do so will be a defence to any allegation that the agreement was reckless.
The consumer may make a claim of reckless lending through a debt counsellor, who needs to investigate and seek an order from a court of law or from the NCT.
If a court determines the loan is ‘reckless’ it may set aside all or part of the consumer’s rights and obligations under the agreement. If the court determines the consumer is ‘over indebted’ it may suspend the agreement until a later date and/or restructure the consumer’s obligations. During the suspension no repayments are required and no interest may be charged.
Note that a consumer who has had debts re-arranged cannot incur further credit (including the use of a credit card) until all the re-arranged debts are paid off. By Nigel Benetton

Copyright © Insurance Times and Investments® Vol:20.7 1st August, 2007
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