Unsecured debt: The DA’s plan to protect vulnerable South Africans 10 07 2013
Introduction While the Deputy Governor of the Reserve Bank has said that the unsecured credit market in South Africa is not big enough to affect the stability of the financial system, there is no denying that there are millions of South Africans who are chronically over indebted. The explosion of easy, unsecured credit often extended unscrupulously and without proper checks, has left many South Africans owing more than they can afford to pay. According to the National Credit Regulator (NCR), more than 9 million South Africans have more debt than they can afford to service on a monthly basis. More than 16 million South Africans have an impaired credit account, which means that they have fallen behind on their monthly payments, or have stopped paying. Many poor South Africans are also being exploited by credit providers who charge exorbitant handling fees and add on massive premiums for credit insuran ce, regardless of the customers’ risk profile and despite the loans being for small amounts. Many credit providers still illegally confiscate customers’ property; force them to hand over their ATM or SASSA cards and force customers to sign voluntary garnishee orders or emolument attachment orders. Garnishee orders, in particular, require a set of urgent interventions which the DA will be championing. They are often abused by credit providers who effectively use employers as debt collection agents, and most people do not understand the implications of garnishee orders on their credit records and on their take home pay. There are many unscrupulous lenders who abuse the financially illiteracy of a large number of South Africans to lure them into short term credit agreements the consumers cannot afford. Many of these practices are deeply unethical and several are illegal, but widespread regardless. This situation is a cause for serious concern to all South Africans and demands the urgent action of government and Parliament to protect vulnerable consumers. In this regard the draft National Credit Amendment Bill (NCAB) published by the Department of Trade and Industry (DTI) fails to address the most pressing issues in the unsecured credit industry. It is clear that the bill has been hastily drafted, leaving out crucial areas that require urgent attention. Nevertheless, that the Department has tabled an Amendment Bill so soon is a triumph for parliamentary oversight. As recently as February this year DTI to ld the Portfolio Committee on Trade and Industry that a review of the National Credit Act would not be tabled in Parliament before the end of the current government’s term of office.
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Members from all parties on the committee made it clear that this was una cceptable and that we expected a draft bill before us by the end of June. It remains unlikely, however, that the DTI will reach this target despite its efforts. The Democratic Alliance is pleased that the Department has taken note of the concerns of the Committee, and indeed the nation. The draft bill makes some much needed improvements but falls short in a number of areas in need of reform. This document sets out the DA’s proposals to reform the unsecured lending industry, protect consumers and scale back over-indebtedness in South Africa.
Credit is vital for Growth and Jobs The availability of credit is critical to sustainable economic growth over the long term. Access to credit allows thousands of South Africans to pay for education, create opportunities to start small businesses, purchase equipment or assets and improve their quality of life. A healthy, well-regulated credit market can be an important catalyst for job -creating economic growth and is therefore critical to any economy, especially so in a developing economy such as South Africa’s. Despite this, the business of providing credit in the South African social context with high unemployment and poverty brings with it significant risks. In order to ensure that credit is provided in a way that benefits the country and unlocks growth, a careful balance must be achieved between protecting consumers of credit and regulating the providers of credit.
The illegal credit provision industry While there is no comprehensive research on the size of the illegal credit market in South Africa, all indications are that it is significant – indeed, it is quite possibly larger than the formal credit market. The DA has consistently called on the National Credit Regulator to conduct formal research in to how big the illegal market is but this research has not yet been undertaken. However, isolated investigations conducted by the NCR have identified a significant problem with illegal lenders. It is a common feature in strikes and violent labour disruptions over the last two years for workers to complain that they are in debt holes that they cannot climb out of and their salaries no longer cover the money taken from them monthly by money lenders. In the weeks following the Marikana tragedy, the NCR conducted an investigation into illegal lending in Marikana, and found 10 illegal lenders in one street alone. 3
In our constituencies around South Africa, one need only walk down a single township street to see several signs advertising money lenders. The majority of these lenders are illegal. There are two main kinds of illegal operators - "loan shark" micro-lenders, referred to as mashonisas, and employers who loan money to their employees and deduct payments straight from wages.
Major investment in enforcement is needed The proper rigorous enforcement of the National Credit Act is still the best way to protect consumers from illegal lenders. But the National Credit Regulator is hopelessly under-resourced to tackle the problem, and the SAPS do not currently have the capacity, neither in terms of human resources nor skills, to root out illegal lenders. Besides identifying this as a problem, the Amendment Bill makes no proposals on better enforcement. The DA believes that the NCR needs to significantly increase the number of inspectors it can deploy to areas around the country to ensure that all licensed operators are sticking to the letter of the NCA. The Democratic Alliance has already proposed that the DTI allocate a larger proportion of their budget to proper enforcement of existing regulations, by beefing up the NCR inspectorate. However, these inspectors will not be able to tackle the enormous illegal sector alone. What is needed is a sizable, dedicated corps of specialised police officers who can find, investigate and charge illegal operators, working closely with the NCR to bring illegal lenders to book and get them behind bars. This can be achieved by including related contraventions of the National Credit Act in the list of offences of commercial crime cases to be investigated by SAPS’ Directorate for Priority Crime Investigation.
Make the NCA tougher Besides proper enforcement, it is also necessary to change the NCA to end the exploitative practices of some licensed lenders who stretch the law to exploit the poor. There are several things that we welcome in the proposed NCA Amendment: 
Ending the inclusion of mortgages in debt review processes. This currently precludes consumers from accessing new credit for 20 or 30 years 4
Empowering the NCR to issue minimum standards on affordability tests Emphasising consumer education Allowing consumers to enter debt counselling even after defaulting on loans Fixing a number of legal anomalies and errors
However, the amendment bill is silent on many of the most fundamentally abusive and exploitative practices. 1. Disclosure of information to credit bureaus Currently banks only provide updated information on customers’ payment profiles to the credit bureaus every 45 days. This means that when customers approach other banks for new loans, their credit histories, and therefore their risk profiles, are not up to date. The DA proposes that banks and credit providers should be required to update credit bureaus with customer payment information more frequently, and should send immediate updates when a customer has defaulted. In this regard, it is important to comment on the DTI’s proposed credit information amnesty, which will have a negative effect on poor South Africans, and will have the unintended consequence of limiting access to credit, not extending it. The amnesty will remove lenders’ ability to make informed decisions about whether to lend money to a customer or not, because much of the customers negative credit history will have been expunged. This means the risk profile of customers will deteriorate, and the risk is that lenders will simply limit access to credit or increase the price of credit. Given this obvious and predictable consequence, one can only assume that the Minister’s dogged persistence with this credit information amnesty is nothing more than cynical electioneering ahead of next year’s national election. 2. Truth about real costs Banks and lenders often prey on the financial illiteracy of customers by showing them contracts and forms that are written in dense, difficult to understand language. Research by FinMark Trust found that only ten percent of South Africans they interviewed properly understood what interest was and how it affected what they would pay on a loan. Banks can use it to their own advantage in a way that exploits the most vulnerable. Lenders also often do not disclose all the costs – like initiation fees and monthly administration fees – that they charge on top of the interest rate, so customers never really understand the total cost of what it is they are committing to. 5
The NCR’s Marikana investigation found two customers who had each taken out R1000 loans, but who paid R11 690 and R20 000 respectively on the repayment of those loans. This is rank exploitation and pure theft – but sadly such examples are not isolated. The following example is illustrative: Credit Amount
Initiation Reg Fee Fee
Total Credit
Interest Credit Monthly Monthly Total Cost of Life Admin Repayment Repayment Credit
R500 - 3 months
R86
R586
30%
0
1.9% R46
R251
R754
284%
The DA proposes that all credit agreements should state the full monthly payment, inclusive of all fees, insurance and other costs, in a highlighted coloured box on the top of the front page of the agreement. We further propose that the total repayment and the total cost of credit similarly be placed in a highlighted coloured box on the top of the front page of the agreement. In the above example, the front page of the agreement should contain a warning message as follows:
3. Credit life insurance Companies pressurise customers into purchasing credit life insurance without customers properly understanding what it is they are purchasing. Many credit life insurance products include disability, death, funeral and loss of income insurance, but customers rarely know this, or rarely know how to access this insurance should they need it. This insurance has consequently become a huge source of additional profit for many lenders, whilst also lowering the risk profile of customers. Most customers do not know that they have the right to shop around for better quotes on credit life insurance. There are also examples of lenders also being the owners of the insurance products being sold – a dangerous conflict of interest which exposes consumers to abuse.
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Moreover, consumers are often not told that if they default on their monthly installments they immediately forfeit their insurance – which means they cannot claim from it in the event they lose their job. The DA proposes, as with the cost of credit, that the front page of all credit agreements should contain a highlighted explanation of exactly what insurance is being purchased, the claims process, and the risks of missing even one monthly payment. 4. The maximum interest rate Currently the formula for the calculation of the maximum chargeable interest rate is: Maximum Rate = (Repo rate x 2.2) + 10%
When pushed for the rationale behind the above formula, the NCR has failed to provide any reasoning. The formula as it currently stands leads to the perverse situation in which a 1% increase in the repo rate results in a 2.2% increase in the maximum interest chargeable on unsecured loans. A 2% increase in the repo rate leads to 4.4% increase in the maximum rate. This means the relationship between the repo rate and the maximum rate is exponential. Any significant increase in the repo rate has a disproportionate negative effect on holders of unsecured credit – greatly increasing the chances of default and placing mainly poor South Africans under enormous financial pressure and stress. This is unacceptable, and must be amended. The DA proposed that a new formula be developed which establishes a directly proportional relationship between the repo rate and the maximum interest rate. This new formula should be developed in consultation with the NCR and the major lenders to allow for a reasonable profit margin, but which will not unfairly and arbitrarily punish customers for increases in the repo rate. 5. Debt judgements Currently it is difficult and expensive for people to have default judgments removed from their credit records. Even if they have fully repaid a loan, they still need to apply to a court to have a default judgment removed from their record. This is unfair double punishment for consumers who have worked hard to pay off loans, but who cannot afford to approach the courts have a default judgement removed. We propose that there should be no charge for removing a default judgement from one’s credit history, or indeed, that this should occur automatically once the loan in question has been fully repaid. 7
6. Job applications It is often reported that employers access potential employees’ credit records and use these records as a basis for hiring decisions. The Committee heard many reports of people being turned away from jobs because of their impaired credit history. This is clearly not acceptable. Credit information is not intended to be used in this way, and this practice is clearly unfairly prejudicial to the job applicant. We propose that the legislation makes it illegal for credit information to be requested, or used, in hiring decisions. 7. Limits on Garnishee orders Individuals who default on debt repayments often fall victim to garnishee orders. In many instances workers face multiple such orders, reducing their take-home pay to the extent that transport cost to work often becomes unaffordable. This results in increased absenteeism and lower levels of productivity. Furthermore, second garnishee orders can be obtained for the same debt after the first one to recover legal fees and additional interests on long-outstanding amounts. The effect of garnishee orders on the net take home income of the workers has a severely adverse effect during wage negotiations, placing an additional burden on employers. Finally, Small, Medium and Micro-sized Enterprises (SMMEs) are dealt the blow of increased bank charges, lawyers’ fees, time and lost opportunity costs of administering the garnishee orders against their employees. In an economic environmen t where we rely on SMMEs to be the back-bone of a growing economy and job creation, such additional burdens must be avoided. The DA proposes that South Africa adopt a framework similar to that of the United States that places clear limits on garnishee orders, at 25% or less of an individual’s gross income. Furthermore, we propose that credit providers should be held responsible for all legal and administrative costs of garnishee orders on individuals earning less than R15,000 a month. This will act as a deterrent for credit providers who intend on relying on garnishee orders to recover debt from low-earning workers.
Conclusion Access to credit, both secured and unsecured, is a necessary ingredient in any growing economy. In the South African context government has a responsibility to ensure that consumers are protected against exploitation that often leads to vulnerable people being swindled into effective debt-slavery. 8
A balance has to be reached where responsible lenders are provided the environment to operate credit businesses and consumers protected against exploitation by loan sharks and illegal operators. The DA believes that the proposals outlined here will contribute towards achieving that necessary balance.
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