The National Credit Act [NCA]affects all of us as consumers and economic citizens. We are all invited to make submission to the Portfolio committee on Trade & Industry by this Friday, 29 November 2013. Please, please, please make sure that you submit your comments to firstname.lastname@example.org or email@example.com
You are welcome to copy some or all of these comments and add give your own input and send to the addresses above. Please, please make use of this opportunity. Where possible, please give personal examples. The more people who respond to this call and send comments in, the higher are the chances that the Act would be changed to suit the needs of all South Africans. This article is long so please read the blue heading and focus on the ones that affect you
1. Make fair, independent, objective and good quality consumer education mandatory for low income people
Over 9.4 million South Africans have an impaired credit record. This is partly due to the fact that there is no quality and independent consumer education / financial literacy. Lenders continue to lend money to people who for an example have no understanding of what interest rate they would be paying and what the total cost of the credit agreement would be. Independent consumer education must therefore be a pre-requisite to lending especially for people who earn up to R10 000 per month. In fact, South Africa would be best served to have quality financial education taught at school.
2. Simplify interest rate limits prescribed by the NCA. For an example, unsecured credit transactions have a limit of [(Repo rate x 2.2) + 20%]per year.
This is complex even for educated people. The NCA is meant to protect consumers and therefore it has to be simple. Before you can know what this interest is, you have to know what the Repo rate is, then you need a calculator to multiply the Repo rate by 2.2 as not all of us can do such calculations in our heads and you still need to know BODMAS. In a country with low financial literacy, it is important that laws affecting millions of consumers are simplified. The maximum rates are not governed by natural laws so they can be simplified and linked to prime e.g. this rate could simple be Prime rate + 22%. An average person does not know what Prime rate is or even understands what it stands for. Expecting them to understand and know the Repo rate is expecting too much, especially in the absence of consumer education / financial literacy
3. Be fair to the low income person and do NOT charge them exorbitant interest rates when they apply for loans.
As an example, the NCA allows lenders to charge maximum interest of 5% per month for loans up to R8000 repayable in a period of not more than 6 months. If you annualise this rate to enable you to compare it to interest rate limits for other types of loans, it works out to 60% per year. If you compare this to the maximum interest allowed for credit cards, overdraft, motor vehicle finance, lenders are allowed to charge [(Repo rate x 2.2) + 10%] = 21% per annum as at 26 November 2013. People who take out small short term loans are generally low income people. So the NCA allows that they can be charged close to 40% more than people who apply for car loans, take out credit cards, etc…. This is unfair and explains why many low income people default on their loan repayments. They are being over charged in the first place and because there is no financial literacy, they don’t even know it. You cannot allow a few people to profit from the ignorance of the majority
4. Again, be fair to low income people and do NOT allow that they be charged exorbitant interest rates when they apply for home loans.
Prior to the NCA, the norm was that banks would charge Prime + – 2% for home loans. Now that home loans are offered to more people including low income people, banks are now allowed to charge a maximum of [(Repo rate x 2.2) + 5%] = 16% as at 26 November 2013. So the richest person would pay for a home loan at 6.5% and the poorest person could be charged 16% for a home loan as at 26 November 2013. This is a 9.5% difference. There is no justification for allowing people to be charged such a high rate of interest – this is simple exploitation of the poor. In the absence of credible financial literacy, again they don’t even know they are being exploited
5. Consumers must be refunded where penalties for reckless lending are levied against irresponsible banks and lenders
When the National Consumer Tribunal fines lenders for reckless lending, part of the money should go to the debtors who were lent money recklessly. As an example, African bank was recently fined R20 million on the 3rd of October 2013. The consumers who are now in all likelihood over indebted and blacklisted should be compensated and their credit records cleared to the extent involving African Bank’s reckless loans
6. Tell South Africa who is responsible for the majority of garnishee orders
The Pareto principle informs us that only a handful of lenders are responsible for the majority of the garnishee orders. It is important that a list of banks, retailers and other lenders responsible for the garnishee orders be published. This would warn ordinary South Africans of what their likely fate would be if they choose to deal with a company listed in such a report. The ombudsman for long term insurance published a report advising South Africans of the companies that repudiate their claims. Similarly, South Africa needs to know who is leading the garnishee order rally. Banks, retailers and other lenders should also disclose in their financial statements the number of garnishee orders they have issued in a given financial period as well as a cumulative number of garnishee orders they have issued over time. Where a number of garnishee orders issued increases over time, this could be a clear indicator that the company is lending recklessly
7. Do not allow high credit insurance and refund consumers who have been overcharged
Enough is being written about this at the moment. This is years after Judge Brian Galgut, the Ombudsman for Long Term Insurance warned on the high cost of credit insurance and the low claims ratio. The manner in which this insurance is sold is also highly unsatisfactory and misleading. Many people have it without knowing about it because they are not told about it. Those who are told about it are not told that they can shop around for it or that it is optional and they can choose to take life cover and cede it to cover the debt. The act must be amended to ensure that consumers who have been mis-sold this cover be refunded
8. Should people who lose their jobs be blacklisted?
The economy has been shedding jobs since 2008 and the promise for job creation has not borne any fruit. Many people are even discouraged to look for jobs. There are many kinds of people that default on their payments. Some however default for reasons beyond their control. If you lose your job, you might not be able to keep up with your monthly repayments to service all of your debts. Some people who lose their jobs suffer from many different types of negative feelings. These range from fear, shock, sadness, anger, feelings of being worthless, etc… Many have no idea where to start to deal with the reality of being without a job. In this state, they don’t do what is logical e.g. cutting down on expenses, moving to a smaller home, selling their home, etc… It is normal to hope that you will find a job soon so many don’t want to make these drastic changes to their lives.
So is it fair to blacklist people who have lost their jobs through retrenchment? I believe not. As a creditor, I want to know that someone failed to pay because they lived above their means or they just couldn’t be bothered to pay. Also, I don’t want to be forced not to help someone who lost their job by not being able to offer them a loan because if I do so, this would be considered reckless. How can it be reckless to give a loan to someone who lost their job and fell onto hard times?
I believe the NCA has to be reviewed to cater for people who lose their jobs through no fault of their own. There should be a well – defined process to assist them and the credit bureaus must have a different flag for them
9. Should people who default on a home loan wait for 20 years before they can access credit?
Currently, once you are blacklisted, you can only be cleared once you have paid back all your debts that you were blacklisted for. If consumers defaulted on their home loan, they must be given at least 5 years of good payment record and then cleared after the 5 years. Letting them wait for 20 years to pay off their home loans before they can be cleared is not justifiable
10. Do NOT allow garnishee orders to wipe out entire salaries of employees in the private sector
Government restricts garnishee orders to a maximum of 40% of the employee’s salary. What is good for government employees is also good for all South African employees. Extend this restriction to all employees, including those in the private sector
11. Act on magistrates that issue invalid garnishee orders beyond their jurisdiction
The University of Pretoria Law School published the report on garnishee orders in 2008. Nothing has been done to address the findings and instead, the abuse of the system continues. In 2012, a major multinational appointed Edward Nathan Sonnenburg [ENS]firm of attorneys to audit it’s garnishee orders. ENS found that over 40% of the garnishee orders are invalid. 1 year later, nothing has been done to correct the legal flaws. When problems are not addressed, they don’t disappear but instead they get worse. The addressing of all findings of these 2 major studies are long overdue
12. Investigate malpractice of the garnishee order system
No one can deny the abuse of this system. We now not only have invalid garnishee orders but we also have fraudulent garnishee orders. There is no denying that Marikana was partly prompted by high indebtedness and high levels of garnishee orders amongst mine workers. The system is skewed in favour of the lenders and an employee whose salary is garnished has very little recourse. Make the system fair by allowing quick investigation and rectification of complaints relating to garnishee orders otherwise this country will continue to have a highly disgruntled workforce
13. The NCR must find a mechanism to check if the debt was not issued recklessly before a garnishee order is approved
Lenders continue to lend recklessly because they rely on the garnishee order system to collect their debt. So before a garnishee order is granted, there must be a step to check if the debt was not issued recklessly in the first instance. The fact that many people have multiple garnishee orders against their names and garnishee orders that are unaffordable and sometimes wipe out their entire salaries indicate that some of the debt was issued recklessly
14. Declare issuing of credit cards to students reckless lending
Some employers do not hire people with an impaired credit record. Most students do not have money to pay back student loans let alone credit card debt. Allowing banks to give credit cards to students is reckless. Some of the students will be unemployable as a result. Students need to be given financial wisdom, not credit cards
15. Do NOT allow charging of high interest rates to young people and other people with no debts
Many young people find that when they apply for the first time for car loans, credit card, home loans, etc… they are told by banks that they are charged higher rates of interest because they have no credit history. This is causing many people to get into debt they don’t need so that they can have the requisite credit history to qualify for lower interest rates. Young people should NOT have credit – where will they get the money to pay for it? Surely there are other ways of determining the willingness to pay of young people without penalising them for not having a credit history. Lenders must develop other means of establishing willingness to pay without penalising those who choose to be debt free
16. Transparent credit scoring to ensure transparency and fairness
South Africa needs a clear and transparent credit scoring. At the moment, the credit bureaus only focus on exception reporting of negative information and there is no scoring of positive information. This would also ensure that there is no bias in who gets to be given credit and would remove subjectivity especially w.r.t. the interest rate charged.
17. Why are insurance companies levying a higher premium to blacklisted people?
There is no justification for charging higher premiums to people with an impaired credit record. Poor credit record is just being used as a means to profit from already heavily indebted people. We are all aware of insurance fraud but until we can show a clear cause – effect relationship i.e. irrefutable study that shows that high fraudulent claims are submitted by people with an impaired credit record, then loading the premiums of heavily indebted people is just opportunistic and must be stopped.
18. Limit the amount to be collected through a garnishee order to 2 times the original debt
I learnt with shock that the in duplum rule covers all costs except for the legal fees. That is why we continue to have R1000 loans turning to R26000 garnishees. The in duplum rule must cover legal fees as well or there must be a cap put to how much lawyers can charge for garnishee orders. We cannot have legal firms whose sole income is garnishee orders
19. No garnishee order should be issued without the final date of payment
Currently, there are garnishee orders with no final date of payment and there are consumers who have been paying for the same debt for over 10 years. This is exploitative. Debtors must be given statements indicating the amount outstanding every time a deduction is made and should be given settlement amounts if they wish to pay off the debt
20. Relax and educate the employer on the requirements they must meet i.t.o. the NCA to be able to offer staff loans
The department of Human Settlements and the banks already have incentives for employers and the banks to assist low income employees to own homes. So a similar scheme can be put in place for unsecured loans for low income employees. If many low income people continue to have garnishee orders, they will never be able to access the home incentives scheme and they will become poorer because of the unsecured loans.
21. Encourage, assist and incentivise employers to offer staff loans especially for their low income employees e.g. those that earn up to R8000 per month.
Where low income people (say salary up to R8000pm) apply for an unsecured loan with a bank, let the repayment for the loan be deducted from the salary to prevent default.
I receive invitations from concerned employers to address their employees on garnishee orders and I also receive emails from some employers concerned about garnishee orders – especially the high interest rate charged on garnishee orders. Garnishee orders require all employers to deduct the amount determined by the courts from the employees’ salary. Given that employers already have the administrative burden to pay out a garnishee order, I want to believe that they would be able to and perhaps even prefer to rather pay towards the loan rather than the garnishee order.
If you have any other input, please send it through.
At the time of writing this, i.e. on 26 November 2013,
Repo = 5.00 and
Prime = 8.5