By Angelique Ruzicka, editor, Justmoney
The Department of Trade and Industry (DTI) has made amendments to the National Credit Act (NCA), which has finally been gazetted by the Government, in a bid to put a stop to reckless lending and ensure companies do more to assess consumers’ affordability for the loans they apply for.
Reckless lending has become a major focus for the regulators and the DTI. Just two years ago African Bank was fined R20 million for reckless lending and banks such as Nedbank, Absa and Standard Bank have been criticised for awarding vehicle finance loans through the Satinsky R699 car scheme.
More recently, the focus has been on reckless lending in the unsecured lending space. This year Capfin and Cash Converters have been accused of reckless lending, but investigations into both respective companies have not been resolved yet.
Unsecured loans by definition includes loans for which the lender holds no security by pledge or personal security. The National Credit Regulator (NCR) has reported growth in unsecured lending from R40bn in 2008 to R172bn in 2014.
Some say that because there has been cases of reckless lending in the industry and as such a large amount of money has been leant that this double whammy has contributed a lot to consumers’ struggle with over-indebtedness.
While the new stringent affordability guidelines are meant to reduce the chances of reckless lending it could put future borrowers on the back foot. Before the NCA was amended, lenders could at their discretion, interpret how to apply the affordability guidelines in their own way. Some were stricter than others and some kept better records than others. This, in some instances, allowed consumers to take advantage of the situation and borrow more than they could afford.
But now some argue that the rules may have tipped the scales so far the other way that it may even affect those who can afford loans but who get irregular sources of income, for example, or who don’t have the paperwork to back up their application.
The enforcement of stringent affordability guidelines
Banks and other credit providers have dug their heels in about affordability guidelines imposed on them and have argued that the industry should be left to provide lending at its discretion, using its own risk criteria to assess affordability.
The new affordability guidelines now stipulate the following criteria, which credit providers must adhere to before giving loans out:
• Disclosing the total cost of credit in the pre-agreement statement and quotation. The disclosures must be based on a year of full utilisation of the credit facilities up to the credit limit proposed. The principal debt, interest and initiation fee, if any, must also be disclosed.
• Assessment of the consumers existing financial means and prospects; by considering three months of pay slips or three latest months’ bank statements (or similar credible income and expense verification).
• Consideration of the consumer’s existing financial obligations such as current debt profile and payment history; a calculation of discretionary income, as well as all existing debt repayments and account maintenance obligations must be conducted. Industry standard expense norms must be followed in addition.
• Resolution of complaints regarding the outcome of the assessment must be conducted within 14 days.
What does this mean for the borrower?
Consumers will be obligated to provide detailed financial information and cannot spend more on their debt repayments than the amount specified by the NCA guidelines. As credit providers start tightening their lending criteria in response to the new affordability guidelines, it will become more difficult for cash strapped consumers to take out debt.
According to debt counselling company, DebtBusters, many South Africans that are already at the end of their credit line won’t meet the new affordability requirements and their loan applications will be declined. Consumers who have a habit of borrowing from ‘Peter to pay Paul’ and revolving credit will no longer be able to do so.
Perhaps this may, in the end, not be such a bad thing as it will stop people from getting into a spiral of debt. “We see this behaviour all the time. DebtBusters clients typically start borrowing from the ‘big four’ banks. However, when the ‘big four’ are no longer comfortable lending to them, they turn to second- and third-tier credit providers at much higher interest rates,” said Ian Wason, CEO of DebtBusters.
Wason added that 20% of DebtBusters clients have pay day loans, with an average loan size of R3, 500. As credit providers start implementing the new affordability guidelines, turning to high interest, short-term debt, from alternative lenders will no longer be an option.
Rise in debt counselling applications?
Financially vulnerable consumers are likely to turn to debt counselling for help and an anticipated increase in debt counselling applications are on the horizon. Wason explained: “DebtBusters has experienced over 50% year-on-year growth in new debt counselling enquiries and has assisted over 20,000 customers under debt counselling. We expect these numbers to increase, as consumers debt repayment behaviour changes.”
Clampdown on reckless lending
Regulators won’t be the only ones keeping a sharp look out for lenders that don’t stick to the rules. Debt Counsellors are obliged to confirm whether affordability guidelines are followed for credit applications after the date of implementation of the amendments.
Debt counsellors are to refer reckless credit matters to the NCR who will further investigate and report to The National Consumer Tribunal, in order to provide consumers with reduced costs if credit was granted recklessly. Ian Wason states, “The DebtBusters Reckless Credit Assessment Department has saved clients over R2 million in the last year on instances where affordability assessments have not been done correctly. This number is expected to increase with the enforcement of stringent affordability guidelines.”