NCR Proposed Fee Guideline – Reckless Lending Fee
We take a closer look at Section 5of the NCR’s proposed Fee guideline for debt counselling/ debt review fees. This section deals with incentivizing Debt Counsellors to look into reckless lending (and help cover their costs).
Reckless Lending is not just about giving a consumer funds they can’t afford to pay back. Credit can be reckless even if the consumer was easily able to pay the amount back. It is also about providing the correct, legal documents. Illegally granted credit is obviously …illegal and reckless credit can be written off (although some courts are debating this). Fines can be issued for these breaches of the NCA as well.
Reckless Lending is when a credit provider fails to do one of the following when granting credit to a consumer: (1) provide documents in a language that the consumer can fully understand (or with too much jargon) (2) failing to assess the consumers financial obligations and means (an affordability assessment (3) granting credit even if the consumer cannot afford to repay the credit (4) not providing a pre agreement quotation and or (5) not providing a proper agreement which sets out all the costs and which the consumer signs.
The Proposed Fee Guideline
5. Reckless Lending Fee (New Fee) This fee covers (1) Reckless lending assessment; (b) instructing of the attorney to draft the affidavit and (c) Supplying reckless lending documents to the attorney to draft the affidavit on the assessment outcome. The recommended amount is R250 per credit agreement and should be paid (subject to the consumer requesting a declaration of reckless lending) after the assessment.
The challenge with these investigations has and probably always will be getting the needed documents from the credit providers. This is because few of the credit providers really believed they needed to store and make accessible all the original documentation and research into the consumer’s situation. In the past, they were so seldom called out on this. As has been seen in so many securitization cases the original documents often are not accessible. even if they are stored somewhere and destroyed in phantom fires they are probably poorly indexed and hard to recover. Hopefully, this is changing with time.
Since debt review works best when done fast and furious and gets to court within the first 2 months of the application (this is not obligatory – the matter just has to go to court at some point) Debt Counsellors cannot wait around for credit providers to search and search and eventually turn up nothing (if they find nothing does that automatically make it reckless?).
A Debt Counsellor does not actually make a finding of reckless lending. They only make an averment that the credit granted might be reckless. A court (or the National Consumer Tribunal) is the only party empowered to make a final declaration (much like over indebtedness) as to whether the credit was granted recklessly. Some courts have now been looking at what to do when this is the case. The consumer has often got the benefit of the credit granted – having spent it- and nowadays some courts are thus hesitant to order the credit provider to give the consumer back all the instalments paid on the credit as well.
Some courts have now been looking at what to do when this is the case. The consumer has often got the benefit of the credit granted – having spent it- and nowadays some courts are thus hesitant to order the credit provider to give the consumer back all the instalments paid on the credit as well. Many courts prefer to defer payment till after other debt is settled. The NCR and DTI would like to see more credit providers hit with big fines for being reckless (Like the R1 Million fine handed out to Shoprite this month). They hope such punishment will help prevent future bad lending behaviour.
‘in the past, Debt Counsellors were expected to do this work at no cost’
More money for Debt Counsellors
At first glance, this appears to be an increase because, in the past, Debt Counsellors were expected to do this work at no cost. Many Debt Counsellors will thus be incentivised to look into reckless lending on every account consumers have. The question is how deep will they look? Will it simply be a request for original documentation in the 17.1 and a line in the court papers saying they asked but never got any info? If so, the credit providers will be hard pressed to cooperate. In fact, it may sour the attitude which credit providers have developed towards debt counselling. Is an antagonistic relationship necessarily a bad thing? Some courts may then delay matters and insist on these papers being supplied.
A Debt Counsellor is meant to be a neutral 3rd party representing and helping the court to have all the needed facts for a potential restructuring order. They are not meant to favour either the consumer or credit providers.
‘Legal fees can then be expected to double or potentially even quadruple to cover these associated costs’
At present too few reckless lending investigations happen due to the fact that it is estimated (by the 2014 DCASA research) to double the amount of hours taken in a debt review matter. Double the work for no extra money. This is now set to potentially change.
Another thing that is set to change is the legal fees which will need to be charged to cover the costs of credit providers fighting any court orders which mention reckless lending. Since there can be fines of R1 million it is clear why even if the debt is tiny. Legal fees can then be expected to double or potentially even quadruple to cover these associated costs.
Milking the System
A consumer is meant to initiate the reckless lending assessment process (unless you follow the NCR 2009 task team guideline which says that every account has to be investigated regardless of what the consumer wants). Will they now be prompted into doing so by Debt Counsellors looking to boost their income? This may cause some payment delay issues for credit providers.
More Payment Delays
For example: If the ‘average’ consumer* repays a restructured R2500 a month towards their debts and has 10 accounts, then the reckless lending investigation fee will amount to R2500 (a full month’s payment). This means that the credit providers will have to wait for an extra month (which may already have been delayed due to the timing of the restructuring fee payment). They then look to face even more delays as legal fees are taken.
‘you might have the situation where payments to credit providers are delayed for 6 months’
To cover the extra legal fees several months would have to go by for the ‘”average’ consumer. For example, if the legal fee went up from R2500 (equal to the consumers monthly debt repayment amount to double that it would result in a 2 month delay in payments to the creditors and if it had to quadruple it would delay payments by 4 extra months.
So, now you might have the situation where payments to credit providers are delayed for 6 months before this average consumers debt starts receiving funds. One month for the payment holiday (R300 application fee) , one month for the restructuring fee and then up to 4 months for the new much higher legal fee to cover all the fighting about reckless lending since all matters would need to be represented and opposed by an attorney from the creditor’s side and all that involves on the consumer’s side.
Some courts have recently handed down costs against Debt Counsellors following the NCR’s previous fee guideline which resulted in payment delays to the credit providers which they argued put the consumer’s accounts into default. Now with much longer payment delays will this arguement become a common issue across every court in the country? Will Debt Counsellors face even more punitive cost orders driving them out of business for following the NCR’s guidelines which are not part of the NCA or regulations?
Since the NCR (and Government) want to drive reckless credit investigations and many attorneys and Debt Counsellors would like to earn more, it might then turn the industry into a bloodbath of extra costs to consumers and long drawn out expensive court battles.
What about the situation where only a single account is investigated (it is hard to investigate one account in isolation from all others)? This would result in double the work for an extra R250 and then the spill on effect of much higher legal fees for the consumer – who may only end up having repayment of that particular debt delayed till all the others are paid off first (since there is no guarantee the court will find in the consumers favour.
What if it is Not Reckless?
If the court rules the matter not to be reckless then suddenly payments need to be allocated towards this account through the debt review. Here is another challenge. The Debt Counsellor may have worked out the entire payment plan month by month for 5 years or more with no funds allocated toward the potentially reckless debt. Now they would have to redo the entire review process (like speaking to all the other creditors) and change the proposal to court to include a payment to that particular account. Doubling the work again for potentially R250?
Some Debt Counsellors are asking is the fee R250 for only the single account involved or is it R250 x however many accounts the consumer has in total (regardless of if they are fully investigated and appear reckless). The wording in the fee guideline is not 100% clear. What is clear is that it is hard to consider only one account to the exclusion of all others.
Maybe the NCR is expecting Debt Counsellors to have limited feedback from Credit Providers anyway and so see this as a small fee to cover some time spent with the forms and a few emails sent. Thus only a small administrative fee to cover those 15 minutes taken.
No-one will do an entire reckless lending investigation purely to get R250. It would not financially be worthwhile. One solution is to then increase the amount and reconsider when this payment would be made and how funds would be set aside.
If the amount paid relates to all the consumer’s accounts (regardless of if only one or two are deeply investigated) then this needs to be made clear in the guideline.
If courts will get into the habit of making the reckless credit provider hand back all previous payments to the consumer (rather than just delay payments), then it might be a possibility to use those funds to settle the consumer’s other debts (which they may have been forced to fall behind on payments due to the additional pressure of the reckless credit). If so, then it may be possible for some of the returned funds to be allocated to the Debt Counsellor (or attorney) on a percentage basis to cover all associated costs. Eg. 25% or 50%. That may be a bigger incentive to enter this sort of antagonistic battlefield of intense court aggression and cover all the time taken.
* we have used a common consumer profile of 10 accounts and a repayment of R2500 a month towards their debt once restructured. Obviously different consumers pay different amounts.