AN INCIDENTAL CREDIT AGREEMENT
As the title suggests, is not considered, primarily, as a credit agreement. It is regulated merely because it may have some attributes of a credit agreement. The Act defines an incidental agreement as an agreement in terms of which an account is rendered for goods and services that are provided to a consumer over a period of time, and; (a) a fee, charge or interest becomes payable if the account is not paid within a specified time, or (b) two prices are stated for the payment of the account, with a lower price being payable if the amount is paid early; before the agreed date and a higher price being paid if payment is made after the stated date.
An incidental credit agreement can also arise in terms of section 4(6) (b) of the Act, where a supplier of a utility or a continuous service provider provide services to a consumer from time to time and defers payment for the services until an account has been given to the consumer and does not charge any interest or fees on the deferred amount unless the consumer fails to effect payment within 30 days after the delivery of the statement to him
UNLAWFUL CREDIT AGREEMENTS – SECTION 86
The Act also determines that in certain instances a credit agreement in it’s totality could be rendered unlawful. This occurs when the entire principle under which the contracts where concluded is unlawful and the act regards these contracts as void from the day they were entered into. During the debt counseling process, it is important to identify these agreements and refer them to court for judgment. These instances include:
- Agreements entered into with unemancipated minor unassisted by a guardian;
- Agreements entered into with a person that has been declared mentally unfit by a competent court;
- Agreements entered into with a person subject to an administration order as contemplated in section 74 (1) of the magistrates’ Court Act where the court appointed administrator has not consented to the agreement;
- Agreement that result from negative option marketing;
- Agreements that contain an unlawful provision and purports to supplement another credit agreement;
- Agreements entered into with an unregistered credit provider required to be registered;
- Agreements entered into with a credit provider who has received a notice from the NCR ordering it to stop engaging in the granting of credit;
The agreements listed above will not be regarded as unlawful where the consumer misrepresented to a credit provider that he/she had legal capacity by withholding or obscuring the true facts.
Credit insurance has to be limited to insuring the outstanding obligations of the consumer on the reducing balance and the cost of which should be reasonable.
- If the credit provider proposes the purchase of a particular policy, the consumer must be informed of his right to waiver the policy proposed and instead use a of his own choice –Form 21of the regulation has to be used. If the consumer chooses his own insurance policy, the credit provider may require the consumer to provide written direction that will allow the credit provider to pay any premium (monthly) due under the policy during the term of the credit agreement on behalf of the consumer to the insurer and to recover the money paid from the consumer –Form 22 of the regulations has to be used.
- The consumer also has to nominate the credit provider as the beneficiary of the insurance policy – to settle any outstanding amounts – Form 23 of the regulations has to be used.
WHAT IS OVER – INDEBTEDNESS?
Over – indebtedness is not an easy word to define. The meaning of the word often depends on the discipline and attitude of the individual. Sociologists, economists and lawyers may hold different views on the subject. It is generally accepted that most people are indebted in one way or another. Credit is often necessary. It enables a consumer to get immediate access to a product or service , allowing him to pay a purchase price over a period of time. It is, however difficult to determine with precision the point when a person crosses the indebtedness line and moves into the realm of over- indebtedness . In short , a consumer is over indebted when he/she does not have the ability to meet all his/her financial commitments at the end of the month.
Over – indebtedness in the National Credit Act is central to the reckless lending concept. Section 80(1) (b) prohibits credit providers from entering into credit agreements that would cause consumers to be over-indebted . Over – indebtedness is also important for the debt review process in terms of section 86 of the Act. Debt counselors are required in terms of section 86 (6) to conduct an assessment concerning the over – indebtedness of the debtor and to attempt to create a restructuring agreement acceptable to all credit providers, alternatively to make recommendations to the magistrates Court on how the individual can be helped. The Act also states that if the debt counsellor is of the opinion that it is likely that the consumer will not be able to meet his/her financial commitments at the end of a month, that consumer is over-indebted.
CAUSES OF OVER-INDEBTEDNESS
As already indicated, credit is a necessary component of existence for a lot of people. Unfortunately, the use of credit sometimes gets out of control resulting in over-indebtedness. There are various causes of over indebtedness and these include the following:
- The general availability of credit,
- Increase in the cost of credit and ignorance of financial products
- Reckless lending and inflation and economic upswings
- Change in circumstances like job loss, divorce etc.
- Emergencies like funerals,
- Lack of planning, failure to budget and lack of financial discipline,
- Social pressures
- Partner or spousal debt e.g. partners who get you in debt and leave you to sort the mess alone
WHAT CONSTITUES RECKLESS LENDING?
Before we define reckless lending, it is important to understand what the Act requires from credit providers before they grant a consumer credit. The Act prescribes that the credit providers must first determine if the client will be able to afford the repayments of the credit they take, and this is determined by conducting an affordability assessment. The assessment that credit providers have to follow in determining over- indebtedness or potential over- indebtedness of a person is an objective test. The person who assesses a debtors ability to repay credit need not to be convinced beyond reasonable doubt that the consumer will definitely be unable to pay all his debts in a timely manner. He must be persuaded, nevertheless that on a balance of probabilities, based on the information given the consumer will not be to repay his debt; the consumer is over- indebted.
An objective test is referred to in law as the test as the reasonable person. Essentially in any assessment of over-indebtedness , the inquiry is what a reasonable person with expertise of the credit provider or the debt counselor, would have to decide based on the information that was made available concerning economic status of the debtor. The score cards used by various retailers are highly sophisticated and are based on a matrix. Retailers and credit bureaux spend millions of rands to research and analyze categories of people and their payment behavior . Different scores are developed based on types of information considered. Retailers use a score that consists of factors such as age, gender , marital status whether the individual as a credit card , whether the individual has a current account, number of dependants, etc. The factors are used because of their predictive nature. Research has shown that when one takes these factors into consideration, you would get a clear view a customer’s risk to the retailer. Credit bureaux have over the years created a score based on certain criteria, for each person listed on its data base. These types of score cards require different factors to determine a score . A combination of two or more scores would then provide the retailer with a score with would allow the retailer to approve the credit , decline the credit or refer the decisions for further consideration. Micro lenders and micro financiers generally have a less sophisticated scoring method. Some rely on credit bureau scores. Others would usually have alternative methods to secure payments from the borrower, such as retaining the borrower’s bank cards and pin. These collection methods have now been declared illegal in the National Credit Act. In the past banks primarily replied on credit bureau information to determine a consumers ability to repay a loan as well as the risk that the specific consumer holds for the credit provider. The score was not based on the consumers ability to afford the load, but rather on the consumers past payments profile and how well he/she as been servicing their debt commitments. Therefore although a consumer might have not shown the ability to repay a loan when assessed he/she was committed to pay their debt every month.
The NCA however requires a credit provider to ensure that the consumer can afford the loan based on their surplus available at the end of the month. This already results in a number of consumers not qualifying for credit. Some of the current factors considered when developing a score might in future in prohibits in terms by the NCA. The Act prescribes that anyone who assesses the over- indebtedness of a consumer should consider the: Financial means, prospects and obligations “ of the consumer. These include the following in terms of the section 78(3) of the National Credit Act:
FAILURE TO CONDUCT A CREDIT ASSESSMENT ON THE CONSUMER AS REQUIRED BY THE ACT.
The requirements of the credit assessment that a credit provider has to conduct on a consumer are stated in section 82 of the Act . the section does not prescribe any specific assessment. As already indicated above, the test of whether a credit agreement will cause over-indebtedness or whether a consumer is over- indebted is an objective test that in based on the standard of the reasonable person. The application of the test of the reasonable person is supported by the requirements stipulated in section 82 (1). This section allows the credit providers to use their own method of assessment provided they are fair and objective. The word “objective” indicates a reasonable standard. Fairness means that the methods should not be discriminatory . Discriminatory assessments are deemed by section 61(1) of the act to be a violation of a consumer’s right which may be referred to the Equality Court. The National Credit Regulator permitted the act to provide non-binding assessment guidelines. A credit provider can however, be compelled by the Tribunal to comply with the guidelines if the Tribunal is satisfied that:
- The credit provider as failed to comply with the assessment requirements that are stated in the Act, or
- The assessment of the credit provider are not fair or objective.
Although the assessment methods are not prescribed, section 81 requires that they must at least consider the following:
- General credit repayment history of the consumer,
- Existing financial means, prospects, and obligations of the consumer
Assessing a person’s existing obligations will require the credit provider to consider debt information that is listed on the National Credit Register. Section 69 of the Act requires all credit providers to list their current credit agreements on this Register. Because the assessment is a necessary preventative measure against over-indebtedness, the Act views the failure to do it as reckless lending regardless of whether or not the lending actually results in over-indebtedness.
ENTERING INTO AN AGREEMENT WITH A CONSUMER WHO DOES NOT UNDERSTAND OR APPRECIATE THE COST, RISK, AND OBLIGATIONS OF THE CREDIT AGREEMENT
The purpose of deeming a credit agreement of which a consumer does not understand or appreciate the cost, risk and obligation to be reckless extends beyond the question of over-indebtedness. There is little doubt that the ignorance of risks and terms of an agreement may be a cause of over-indebtedness. The cost of credit may be higher than what one imagined or payment terms may be too strenuous to ensure that consumers understand their agreements.
Although it is not clearly prescribed, it does appear that the understanding and appreciation of the contract and its obligations by the consumer must stem from the assessment product by the credit provider. Section 81(2) expressly prohibits a credit provider by entering into a credit agreement without ensuring that the consumer:
- Understand and appreciates the risk of the contract,
- Understand and appreciates the cost of the contract,
- Understand and appreciates his rights and obligations in the agreement.
This is important because it means that credit providers must ensure that their assessments are not limited to pure mathematical calculations concerning over-indebtedness but they must also consider whether the consumer understands and appreciates the terms of a contract which is also an important element of the law of contract. Any agreement that shows that there was no consensus or meeting of mind of the parties is invalid.
ENTERING INTO AN AGREEMENT THAT WILL MAKE A PERSON OVER INDEBTED
This covers situations where a credit provider, after conducting an assessment, deliberately of negligently enters into an agreement with a consumer knowing that is can cause over-indebtedness. As an example, refer to the case study that involves a person, though over-indebted was able to still get more credit and insurance policies.
COMPLETE DEFENCE AGAINST RECKLESS CREDIT
Section 81(4) states that it is a complete defence to an allegation that a credit agreement is reckless if the credit provider establishes that the consumer failed to fully and truthfully answer a request for information made by the credit provider as part of the assessment required by this section and a court or the Tribunal determines that the consumers failure to do so materially affected the ability of the credit provider to make a proper assessment. If the credit provider can assess the information by other means or where the information in provided is a blatant understatement of economic realities, then the false information argument cannot be used . A typical example is where a consumer understates expenditure for food on the application form. Such an understatements should not be accepted by a credit provider due to the fact that any assessment model should have built-in rules to identify unrealistic budget entries.
Insolvency issues are presently dealt with under the insolvency Act 32 of 1936. Generally in terms of South African law any persons whose liabilities exceed his assets is said to be insolvent.(venter v volkskas Ltd 1973 (3) SA 175 (T) 175). Inability to pay ones debt is usually considered as acceptable evidence that a person is insolvent. The remedy that is available for individuals who are unable to pay their debts in insolvency law is the sequestration order.
A sequestration order can be voluntary (the insolvent applies to court to be sequestrated) or it can be compulsory (a creditor applies for the order). Its purpose is to ensure the orderly and equitable distribution of a debtors assets. Voluntary sequestration allows a debtor who is insolvent the opportunity to surrender his estate (including assets and liabilities) to a trustee, who disposes of the estate and tries to settle the debts of a debtor. All creditors of an insolvent estate have to look to the trustee, who has been appointed, to dissolve the estate for the payment of their debts – this is limited to available assets. The voluntary sequestration mechanism was, initially, the only available mechanism that an individual could use to relieve himself from harassment by creditors. This, unfortunately, was not the ideal route to follow for the most insolvent individual.
The law of insolvency, from Roman law times, was not designed to protect consumers but creditors( Ex pillay 1955 (2) SA 309). As a result, even to this day, any person who wishes to apply voluntary sequestration has to show the court that his sequestration will be to the advantage of the creditors. In addition to this problem, the voluntary sequestration application is a complicated and costly High Court application, which above the ordinary comprehension and affordability of most consumers. In fact section 6(1) of the insolvency Act stipulates that before a person can be sequestrated he must be able to convince the court that he has the sufficient realizable property to defray the cost of the sequestration. Another problem associated with sequestration is that in order for a debtor to be rehabilitated he has to make another application to the High Court for rehabilitation. This is also a complicated and costly exercise.
The government, realizing the cost and inefficiencies of a sequestration order, introduced the administration order procedure, which was incorporated into the Magistrates Court Act 32 of 1944 (section74). This procedure was designed for consumers who could not afford to use the sequestration procedure. The present cap of the total debt that can be placed under administration is R50 000.00. In terms of this procedure the estate of the debtor is not completely dissolved but the magistrates Court appoints an administrator to manage the financial affairs of the debtor. Creditors are not permitted to deal directly with the debtor. Whilst the procedure was generally accepted as necessary for estates that where in financial dire straits, concerns were expressed in about the abuse of the procedure. More and more individual who were not insolvent were placed under administration by unscrupulous administrators. This was a disadvantage to the both consumer (in the sense that he could not get any more credit) and the creditor (who could not collect his money). The winners were the administrators who were entitled to claim 12.50% of money collected from the consumer as fees. This was fortunately altered by the supreme Court of Appeal. One of the major concerns was the fact that the administrators, because it was not compulsory to appoint an attorney as an administrator, were not regulated in any way.