National Credit ActNational Credit Act

BloemfonteinNovember 2007

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Consumer credit market & indebtedness

R760bn consumer credit to households Up by R400bn from 2002, most growth in mortgages 49% of GDP; 70% debt to income, 51% mortgages 14 m credit active consumers, 50 m open accounts 65,000 judgments for debt per month 11%+ households with consumption debt > 20% of

disposable income … potentially over-indebted

Concerns with …

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Rationale for National Credit Act ?

Act will drastically affect the credit market R700bn+ market, 14 million consumers, 4000 credit providers …

R100bn interest & fees / year

Which undesirable practices ? credit life insurance; preferences; blacklisting negative option selling; misleading disclosure extreme interest rates; inflated credit prices, subsidized cash prices; extreme over-indebtedness; no effective debt rehabilitation payroll deductions & garnishees inflated debt collection charges

4

% H/hs with cons debt > 20% of income: 2000

05

10152025303540

H/h regular disp. income

%

Concerning level of household indebtedness …

% loans > 60% of client income(per MFRC)

0

20

40

60

80

100

M B S B B L R L S S B C S S B S S R S S S S S S S B

Reckless lending …

Courts = debt collectors for reckless credit ?

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Cost of credit, effectiveness of current cap, misleading disclosure … & competition

Effective cost of different products - inclusive of credit insurance & fees

0%

50%

100%

150%

200%

Mortgages Overdrafts Vehicles C/Cards &accounts

Instalmentsales

Term micro-loans

Cap

All loans & credit M/loans & furniture finance(MFRC)

Average of 91%; Cheapest lender in each category = non-bank

Average for NGOs ≈ 90%

R5000 for 12 months Legal % TCOC of lenders in 4 sub groups

0%20%40%60%80%

100%120%140%160%180%

A B C D E F G H I J K L M N O P Q R S T U V W

Low High Weighted Average

banks:- payroll

retail

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Consumer creditproviders, volumes

Credit providers as at 31 March 2007Category Number

Consumer debt ≥ R15 billion 6

Consumer debt ≥ R5 bn < R15 bn 11

Consumer debt ≥ R1 bn < R5 Billion 26

Consumer debt ≥ R100 million < R1 Bn 99

Consumer debt ≥ R5 m < R100 m 191

Consumer debt ≥ R1 m < R5 m 293

Consumer debt ≥ R1 m 3,342

Total as at 31 March 3,968

(banks only, per FEASibility, December 2006)

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Huge cost in doing nothing, cost currently borne households & by society …

… impact upon municipal payments, welfare payments, courts etc …

Act intended to increase fairness, rationality, predictability, competitiveness & choice in credit market Extensive international & local research Parliamentary approval, after exhaustive consultation … mandate to NCR to enforce strictly

The new Act – what it does

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Experience since 1 June, issues raised …

Volume & profile of calls Credit providers, consumers Enquiries vs. complaints

Issues, consumers credit information, debt counselling rejection, others (‘insurance fee’) … Usury Act, Exemption Notice, Credit Agreements Act

Increasing own risk

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Experience since 1 June, issues raised … cont.

Issues, NCR Phase 1: advertising & marketing; quotes,

agreements

Problem: credit provider staff insufficiently trained, informed Increasing own risk

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B. Application of the Act

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Application of the Act:-Credit Agreements

Credit agreement =

supply of goods or services or payment of amounts, where repayment is deferred, & “charge fee or interest” levied, on agreement or amount deferred

Section 8 – credit facilities, credit transactions, credit guarantees Pawn, discount, instalment, mortgage, lease, secured loan, any other…

[S8, S9]

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Application of the Act:-Credit Agreements cont...

Act applies to all credit agreements

as long as ‘arms length’, excluding agreements where the consumer is the state or organ of

state, & certain agreements where consumer is a juristic person[S4] differentiations of secondary importance, e.g. (a) transactions &

facilities, (b) types of agreement, (c) small, intermediate & large, (d) developmental

[S8, S9]

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Application of the Act:-Incidental Credit Agreements

Incidental Credit Agreements = “overdue accounts”)

Definition: … goods or services provided to the consumer + interest payable when

payment not made on or before determined period Becomes incidental credit 20 business days from charging late payment fee

or interestOnly certain sections of Act becomes applicable,

i.e., sections that are relevant from point of becoming a credit agreement e.g. statements, interest limitations, debt collection process, debt

counseling & restructuring no initiation or service fees

Not: pre-agreement disclosure; reckless lending etc.

NO REGISTRATION [Def + S5]

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Application of the Act:-Incidental Credit Agreements vs Trade Accounts

Trade Accounts & Application for Credit Clients buy/receive goods or services on 30/60 days credit

Are these agreements under the NCA?Consider - Credit Application Forms- Credit Limits- Interest, fee or charge or No Interest, fee or charge?

Contract may provide for interest, but if not charged, that agreement willnot be credit transaction OR incidental credit.Remember the exclusion of large Juristic consumers

and large agreements for the smaller juristic consumers.

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Application of the Act:-Consumers

No limit on application to natural personsAct never applies if consumer a juristic

person and• Assets or turnover greater than R1mil• Assets or turnover smaller than R1mil but transaction greater

than R250k or mortgage agreement

Certain sections never apply if consumer a juristic person, i.e.

Reckless credit & over-indebtedness Limits on interest & fees Sales & Marketing prescriptions;

definition, S4, S6,

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Application of the Act:-Registration

Credit Providers 100 agreements or > R500,000 Fairly administrative, low entry barriers If not registered, may not offer credit & agreements ‘unlawful’ AND: Act applies irrespective of registration !

Credit Bureaus Broad definition [43(1)] Disqualifications: credit provider, debt collector

Debt Counselors Natural persons, Requirements, Disqualifications

Conditions of registrationS39 – S53

C. Compliance requirements of the

Act

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Compliance requirements:-Credit Advertising Practices

Advertising information is regulated Depending if general or specific + information provided re cost

Section 76(4)Advertisement for credit must:- not be misleading, fraudulent or deceptive not contain any statement prohibited by Regulation

Advertisement for credit must set out the cost of credit in the prescribed manner and form

Regulation 21(1) If it makes reference only to availability of credit – no further disclosure of the costs required.

Regulation 21 (2) If it discloses interest rate only (or range) – must also indicate initiation fee and service fee

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Compliance requirements:-Credit Advertising Practices cont.

Regulation 21(3) If it discloses monthly installment or any other cost of credit e.g. monthly repayment – must also include

i. Installment amountii. Number of installments iii. Total amount of all installments, including interest, fees

and compulsory insuranceiv. Interest ratev. Residual or final amount payable (if any)

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Television advertisements

Television advertisements

Regulation 22 (2) – Television adverts must give equal prominence to all the information (both visual and audio) as required in Regulation 21(2) and (3)

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Compliance requirements:-Marketing and sales practices

Negative option marketing unlawful agreement, consumer must agree,

Automatic increase in credit limits for credit facilities prohibited

but, 1 automatic increase per year, limited amount

Consumer choice re info available for telesales & marketing

Limits on marketing & sales @ home & work

S74 – S76, 89(1)b, 119(4)

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Compliance requirements:-Agreements & pre-agreement disclosure

Quote & pre-agreement disclosure, agreements Prescribed quote, binding for 5 days prescribed form & content for small agreements flexibility for intermediate & large full disclosure, simple & comparable

Plain language & official languages Right to receive documents in plain & understandable

language Right to receive documents in an official language

(prescribed by Regulator)

S92 & 93 ; S63 & S64

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Compliance requirements:-Unlawful Agreements, unlawful provisionsUnlawful agreements

Unregistered credit providers; Automatic credit Minors, mentally unfit Contravention of Admin Order

Unlawful provisions Ability to prohibit certain practices, contractual clauses, ‘sever unlawful provision from contract, or alter it to render it

lawful’ … rather than “unconscionable conduct” approach

Which provisions (a,b,g) Waive rights, obstruct Act, limit liability (c) common law

exclusions; (j) provider = agent; (m) consent to priority processing; (n) ‘set off’, etc …

S89, S90, S89, 90, 91, 164NB !

only if declared by court

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Compliance requirements:-Reckless credit & over-indebtedness

Reckless credit Over-indebted = “per available information, consumer will

be unable to satisfy in a timely manner all the agreements to which the consumer is a party”

Reckless = (1) no assessment; (2) consumer did not understand obligations; (3) agreement made consumer over-indebted

Based on information when agreement made; consumer must “fully & truthfully disclose”

New requirement on credit providers to do assessment before entering onto any credit agreement.

S78 – S88, S130

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Compliance requirements:-Reckless credit & over-indebtedness cont..

If reckless Debt Counselor can recommend debt cancellation or

restructuring + Court may suspend or reduce obligations

Enforcement:- Specific transactions dealt with only by courts Cases against institutions to Tribunal

S78 – S88, S130

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Compliance requirements:-Interest, fees & credit life insurance

Credit providers may only charge … Interest Initiation fee Service fee Credit insurance Default administration charges Collection costs Costs as per S102 (instalment sale, mortgage, lease, secured loan) E.g. extended warranty, delivery, connection fees, licence or

registration fees etc

“Modified in duplum rule” Interest & fees after default < debt at point of default

S100 – S106

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Limits per regulation:-Maximum interest rates & fees

RR = Repo Rate

Maximum Interest Rate

Mortgage agreements [(RR x 2.2) + 5%] per year

Credit facilities [(RR x 2.2) + 10%] per year

Unsecured credit transactions [(RR x 2.2) + 20%] per year

Developmental credit agreements

  for development of a small business

[(RR x 2.2) + 20%] per year

  for low income housing (unsecured)

[(RR x 2.2) + 20%] per year

Short term credit transactions 5% per month

Other credit agreements [(RR x 2.2) + 10%] per year

Incidental credit agreements 2% per month

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Limits per regulation:-Fees, insurance

Initiation fee Mortgages = [R1,000 + 10% amount > R10,000] < R5,000 Other = [R150 + 10% amount > R1,000] < R1,000 Always < 15% of amount deferred (Special rules for developmental credit)

Monthly service fee = R50 Not applicable to charges not related to credit

Insurance only for obligations, assets or services provided per credit agreement limited to outstanding obligations monthly, not capitalized Only certain items may be “required”, rest “optional” Consumer must be given a choice of own policy

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Compliance requirements:-Debt collection

Specific requirements for legal action re debt collection

S129 Notice: notify consumer before legal action commence + alert re rights re dispute resolution or debt counseling

S130: debt procedures in a court Preconditions complied with ? Recklessness & over-indebtedness ?

“In Duplum” limit on interest, fees & collection costs

S86 – S88, S129, S130, S134, S136

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Compliance requirements:-Debt Counseling

Counselors registered Training requirement & criteria Conditions

Process if over-indebted:

S129 Notice alert consumer of right to approach DC Assessment: Over-indebted ? Not ? DC propose debt re-arrangement if over-indebted Consent of all parties ? Or not ? Single Tribunal member may confirm order if all parties consented Only court may re-arrange obligations if no consent

Clearance certificate to remove credit bureau information, if paid off

S86 – S88, S129, S130, S134, S136

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Compliance requirements:-Credit Bureaus & Credit Information

Credit Bureaux Bureaus registered, conditions, returns, audits Responsibility for data accuracy, Information only obtained from & released for specified purposes

& parties Retention periods Limited “amnesty” + “data cleansing process”

Consumer Notified before adverse info to bureaus + Free access to records

+ Procedure for correction + Disputed information blocked

Credit register National, non-competitive register to enable indebtedness

assessment; not competing with credit bureaus

S68 to S73

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Effective dates of the NCA

Act = 1 June 2006, certain sections later dates

Institutions Regulator = 1 June 2006Tribunal = 1 Sept 2006

Registration Credit providers + Bureaux = 40 working days from 1 June 2006

Debt Counsellors = before 1 June 2007

Credit bureaux & information = 1 Sept 2006

All other compliance sections = 1 June 2007(disclosure, quotes, agreements, limits on interest & fees, reckless lending,

debt counselling etc)

Usury Act, Credit Agreements Act & Exemption Notice apply until 1/6/2007

D. Roles of Tribunal & Court

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Enforcement:-Tribunal, Magistrate Court, High Court

Prohibited conduct vs offense Prohibited conduct = contravention of Act Tribunal Offenses, defined Magistrate & High Court Contractual disputes courts

Courts: powers substantially increased re debt-related orders Civil court must apply Tribunal determinations Same issue raised in Tribunal & civil court; Magistrates can decide to

deal with matter, or may refer to TribunalAll Tribunal orders can be appealed to High Court;

Regulator’s decisions appealed to TribunalS1, S138, S148, S150, S164

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Usury Act, Credit Agreements Act & Exemption Notice

Mandate Per Schedule 3 Item10, cases within mandate of NCR &

Tribunal

Approach in enforcement NOT: institutional investigations into historic compliance BUT: enforcement of rights of complainants + pursuing

redress for category of similar cases where legal position unambiguous

AND: Conscious non-compliance in period June 06 – June 07

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Dispute system, structure… role of NCR, ADR & others

S129(1) Required procedure before debt enforcement

If the consumer is in default under a credit agreement, the credit provider—

may draw the default to the notice of the consumer in writing and propose that the consumer refer the credit agreement to a debt counsellor, alternative dispute resolution agent, consumer court or ombud with jurisdiction,

with the intent that the parties resolve any dispute under the agreement or develop and agree on a plan to bring the payments under the agreement up to date;

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Dispute system, structure… role of NCR, ADR & others cont..

S130 Debt procedures in Court S130(1) credit provider may approach the court … to enforce

a credit agreement only … … 10 days after delivery of notice … if consumer has (i) not responded to that notice; or (ii)

responded to the notice by rejecting the credit provider’s proposals

S130(3) court may not determine matter … during the time that the matter was before a debt counsellor, alternative dispute resolution agent, consumer court or the ombud with jurisdiction …

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Voluntary arrangement

Consent order per 135

Rejection, certificate,

134(5)

ADR & enforcement action… & its consequence

1. Default notice per 129

2. Consumer approach ADR per 134

Impact upon enforcement action, 130

Precondition for approaching Tribunal, 134(5)

Difference from complaint to NCR

Debt counselling & over-indebtedness

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Arrangement

S86(7)R24(9)

Assessment

S86(5,6)R24(3-8)

Notification

S86(4)R24(2)

Frm 17(1)

Debt counselling, process specified in ACT

Application

S86(1)R24(1)

Form 16

Orders

S86(8),87R24(10)

End

S88, 71R24

Form 16,17

1 2 3 4 56

Rejection

S86(7), R25

By court

S85, 86(7), 87

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Rejection

Voluntary re-arrangement consent

order

Arrangement by court order

“States of over-indebtedness”… & its consequence

1. Not over-indebted

2. Debt stressed

3. Over-indebted

Parties notified

Consumer no further credit

Credit provider reckless if further credit no legal action

… unless consumer defaults

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Debt counsellingStatutory vs voluntary

By agreement

►between creditors & their client►voluntary

By Law

►compulsory►oversight of court►discretion of court►further credit prohibited►reckless verdict

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National Credit

Act

Marketing & sales practices

Agreements& quotes

Reckless

lending

Enforcement &debt collection

Debt counsellorsCredit BureausNational Credit Register

Interest & fees

Unlawful

agreements,

provisions

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Conclusions

Many engagements with credit providers & associations … most constructive, mostly !

Engagements with credit bureaus … supportiveEngagement with debt counsellors … to ensure

consistency & co-operationAttorneys responsible for interpreting the Act, advising clients,

drafting of contracts and applying new procedures in CourtMagistrates critical role in applying Act to specific cases Tribunal critical role in action against contravening registrants

… on track, so far, but there are challenges …Encourage positive attitude – trying to make this Act

work, not fail!

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Thank You !