Reckless Lending Continues Despite Laws Banning the Practice

The term ‘Reckless Lending’ refers to a loan issued to a consumer without the credit provider assessing whether the individual is able to repay the loan.northwood-key-in-front-door-keyhole

South African law states that a credit provider should conduct a detailed financial assessment of their potential consumer/s prior to entering into a credit agreement. If the preceding dealings between the consumer and credit provider are not handled in accordance to the laws set out by the National Credit Act 34 of 2005, the client could fall victim of Reckless Lending.

The following are classified as instances of Reckless Lending:

  • If the credit provider does not perform an assessment of the consumer before entering an agreement
  • If the credit provider performs an assessment and discovers that the consumer does not understand the risks, costs and obligations involved, but still pursues an agreement with the consumer
  • If the credit provider performs an assessment and discovers that the proposed credit agreement would negatively affect the consumer (i.e. they are unable to pay back the sum of money and will become over-indebted), but still pursues an agreement with the consumer

Despite the fact that Reckless Lending is strictly prohibited, the practice continues, with large scores of consumers becoming severely affected. In the financial year 2014/15, 9,589 cases of Reckless Lending were reported, and in the financial year 2015/16, 19, 097 cases were reported. In these cases, home and car loans were the predominant loans issued.

In a typical example:

A consumer approaches their banking service provider to apply for a bank loan. After being denied the loan from their bank, the consumer (miraculously) receives an SMS from a money lender offering them a loan; granted on the same day, and at a higher interest rate. At a later stage, the same consumer discovers that the bank who had originally declined their initial loan request happened to be a major shareholder in the same money lender company who had agreed to grant the loan.
Is this a coincidence?

In the case study of Ms. Sebona, her banking service provider, Nedbank, had charged a fee of 42% interest on her loan. At the time of her loan agreement, the repo rate was  10%, but then dropped to 6.5%. Surely the 42% interest rate should have dropped to 34%, but alas, it did not. For a total of 30 months, Ms Sebona was overcharged by her credit service provider. Capitec did the same.

With this, the maximum rate chargeable now is set at 60% per annum.

In 2010, ABSA bank was found guilty of reckless lending. The banking service provider had granted a loan to an 81-year-old pensioner in full knowledge of the fact that the repayment instalments would be higher than the consumers’ monthly income. The pensioner, a Port Elizabeth resident, had applied for; and been granted; a home loan of R 350 000.00, with the bond repayment installations set at R 4 200.00. Both he and his wife earned a monthly collective income of R 3 700.00 and their monthly expenditure totalled R 2 472.00. With these figures, the consumer was undoubtedly unable to repay his bond instalments, and thus defaulted on his repayments. As the bank itself threatened to repossess the consumer’s home, debt counsellors took charge of the pensioner’s case and went to court. The Port Elizabeth Magistrate’s Court determined that the issuing of the bond was reckless and that the loan should be scrapped.

In 2015, a case of Reckless Lending arose wherein a Cape Town based domestic worker and single mother of three; who earned a total of R 4 700.00 per month; owed a sum total of R 85 900.00 to both African Bank and Standard Bank. Eight years prior, she had taken out her first loan policy with Africa Bank, and since then, had initiated roughly nine additional loans to cope with her scores of debt. Within the 2012 to 2014 period, the credit records of the individual showed that she had taken out three loans with Africa Bank, with the figures ranging from R26 200 in June 2012 to R55 450 in January 2014. In August of 2014, she ceased to make her repayment installations and her outstanding balance rested at a figure of R 60 029.00. Also in 2012, after she had acquired credit from African Bank, the individual had been issued a credit card by Standard Bank. By early 2015, the outstanding balance on the credit card was totalling R 11 233.00.

Although Reckless Lending is a prohibited act, it still continues to this day. Earlier this month, May 2016, Capitec had been accused of Reckless Lending. In a court case addressed by Summit Financial Partners, a company which assists low-income consumers with financial advice, it was claimed that Capitec had been offering short-term credit facilities to its customers; disguising their multi-loan credit products as a series of short-term “payday loans”. According to Summit Financial Partners, Capitec had been charging initiation fees each time a customer renewed a loan, even though there was evidence that the customers did not reapply each time they accessed the facility. Furthermore, Capitec did not conduct an affordability assessment each time. Here, Capitec had been issuing loans on the 18th of the month, requesting them to be repaid on the 25th along with an initiation fee of roughly 12%. Calculated over the seven-day loan period, the fee would translate to 1.7% per day, or 625% per year, before interest and monthly service fees were added. Although Capitec, in defence, had stated that these “pay day” loan structures had aided the economic challenges which affected their clients, Summit vetoed, and stated that consumers are now needing to use large portions of their salaries in order to settle Capitec’s instated multi-loans, and that they will be left with too little finances in order to survive the month unless they did not take out another “top up” loan.

Instances of Reckless Lending cause the average consumer to land up in extreme situations with sever financial hinderances. As a collective group, we should all urge that the National Credit Act to be amended to ensure that the companies who over lend to their consumers be stopped. 




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