By APHIWE NONYUKELA, candidate legal practitioner, Rhodes University Law Clinic
Two of the aims of the National Credit Act are to ensure that creditors do not grant credit recklessly and to encourage responsible borrowing on the part of consumers. There is a duty on a credit provider to ensure that the credit provider checks a consumer’s creditworthiness before granting credit. This is done to avoid consumer over-indebtedness, a situation discussed in September’s article where a consumer’s debts exceed the consumer’s financial means.
A pre-agreement affordability assessment
Before entering a credit agreement with a consumer, a credit provider must undertake a pre-agreement affordability assessment. This considers whether a consumer can afford to pay back the credit provided. When concluding a credit agreement, a credit provider must take reasonable steps to assess the consumer’s general understanding and appreciation of the risks and costs of the proposed credit, the rights and obligations of the consumer under a credit agreement, the consumer’s debt repayment history as a consumer under credit agreements, and the consumer’s existing financial means, prospects and obligations.
These general requirements are given greater detail by regulation 23 of the Act, which sets out a comprehensive set of mandatory affordability assessment matters which the credit provider must investigate or seek information about. There is also a duty on the consumer to answer any requests for information made by the credit provider fully and truthfully. Should a consumer not disclose fully, the credit provider may use this as a defence in debt proceedings.
When will a credit agreement be regarded as reckless?
A credit agreement will be considered reckless:
- If the credit provider, at the time of concluding the agreement, failed to conduct a pre-agreement assessment, irrespective of what the outcome of the assessment would have been;
- If the credit provider entered into an agreement despite the information available to the credit provider showing that the consumer did not understand the nature and extent of the risk and costs or obligations under the credit agreement, or if the conclusion of the agreement would cause the consumer to be over-indebted.
Reckless credit remedies
During any proceedings involving debt, a court must first determine whether the original credit agreement was concluded recklessly. If the agreement is found to be reckless, a court may make an order setting aside a part of the consumer’s rights and obligations under the agreement; or may suspend the force and effect of the agreement for a specific period.
If a court finds that an agreement was reckless, it must then also decide whether the consumer is over-indebted at the time of the proceedings. If a court finds that a consumer is over-indebted, it may then make an order suspending the force and effect of the agreement for a certain period and order the restructuring of the consumer’s obligations under the agreement.
During the time the agreement is suspended, the customer has no duty to pay anything in terms of the agreement. Interest that would have normally accrued to the customer may not be charged to the customer. The credit provider’s rights in terms of the agreement are also not enforceable during this period. Only after the period of suspension ends will the parties’ rights and obligations under the credit agreement be revived.
Reckless credit provisions do not apply to some agreements
Some agreements exclude them from being regarded as agreements that can be subject to reckless lending. Therefore, the requirements of the NCA on reckless credit do not apply to the following agreements:
- An emergency loan (for death, illness, theft or a natural disaster);
- a school loan or student loan;
- public interest credit agreement;
- the temporary increase of credit limit;
- incidental credit agreements;
- pawn transactions.
Creditors are warned against providing reckless credit, and the consequences of not adhering to the Act’s provisions affect creditors negatively. A complaint about an allegation of reckless credit may be filed with the National Creditor Regulator, or the National Credit Regulator may complain itself against the credit provider. The National Credit Regulator is empowered to investigate the credit provider’s business practices in their entirety, which can have significant consequences for the business if a pattern of illegitimate practice is exposed, and the National Credit Regulator has to take further punitive steps.