NCR Change Their Mind About Reckless Lending Fee Guideline
The National Credit Regulator (NCR) surprised the debt counselling and credit industry this month by recalling a fee which incentives Debt Counsellors to investigate Reckless Credit.
Download the Circular HERE
What is Reckless Lending?
When credit providers (1) give credit to people who do not understand the obligations of the agreement, (2) have not completed or received all the required documentation, (3) do not check if people can afford the credit or (4) if they grant credit which the consumer is not able to afford this is called “reckless credit“.
Why the Fee Was Added
Government is concerned that since the National Credit Act (NCA) was introduced so few reckless credit court cases have happened. They want to see consumers rights protected and predatory credit behaviour curbed. One of the main reasons why Debt Counsellors are not eager to take on reckless credit investigations is because it creates a lot of extra work. It can even double the entire workload on a consumers matter. The initial work on a reckless credit investigation can be the same amount of work hours as is taken over 5 years of a debt review. This is a massive investment.
Debt Counsellors were never obliged to do such investigations when the National Credit Act was introduced in 2007 due to the wording which left this up to consumers applying for help (and the wording still has not been changed even though the Act has been amended before).
Also, credit providers have been very bad at providing the necessary information for a proper investigation (because then there is then a danger that the account may actually be found to be reckless).
Several different ways have been tried to force more investigations such as draft changes to the National Credit Act currently in process and even adding investigations into guidelines to the industry. These have to date had little impact.
Finally, after many years there was seemingly a decision to try and incentive investigations by adding a small professional fee in the NCR debt counselling fee guideline. The incentive immediately had an impact and Debt Counsellors across the country began to conduct investigations.
How Much Was the Fee?
The NCR fee guideline suggested a professional fee of R1500. This was seen to be a good enough fee to cover the many hours of work involved. At the time most Debt Counsellors felt a bit underwhelmed and disappointed at the low amount. However, with good systems and refinements to software, some companies soon realised that they could ‘make a go’ at doing such investigations regularly.
Some ask: should this fee always be charged? The guideline introduces fees which Debt Counsellors can follow but do not have to*. They can, for example, charge less than the fee suggested. That said, the fee guideline includes many fees which are charged on every debt review matter and are worked into the process. Consumers do not make these payments above and beyond their normal monthly debt repayments via debt review and it does have the potential to save them thousands of Rands where reckless credit was granted.
Are Many Credit Agreements Reckless?
One of the largest debt counselling firms in the country (DebtSafe) recently released a report into their investigations into reckless credit. They reported that they found thousands of probable cases of reckless lending (note: only a court or the National Consumer Tribunal can declare an account reckless – not a Debt Counsellor who can only report that something looks suspicious and why).
‘Many Debt Counsellors only check for a single part of reckless credit’
Many Debt Counsellors only check for a single part of reckless credit: if the consumer could afford the credit at the time or not. There are many other facets of reckless lending that are not being investigated which may actually push the incidents of this practice even higher. Many consumers do not understand the obligations they are taking on when applying for credit and contracts in South Africa are still very complex and hard to understand.
Read That Article HERE: Debtsafe Reveal Shocking Statistics on Reckless Credit
Credit Providers Taking Strain
If an account is found to have been recklessly granted it is possible that the amount will only need to be paid back after other debts are paid up but it can also result in the debt being possibly written off. While this may seem trivial in the case of a small debt of R1000 or less, a court finding that reckless credit was granted can result in the NCR asking the National Consumer Tribunal to fine a credit provider millions.
‘a court finding that reckless credit was granted can result in the NCR asking the National Consumer Tribunal to fine a credit provider millions’
When African Bank reported on irregularities at one of their branches the NCR took them to task and huge amounts of money had to change hands. Even scarier was the reaction of investors who panicked (there were some other warning signs at the same time) which saw the bank collapse soon after.
This means that the banks have to make sure that even the most trivial small amount needs to be defended by the best Advocates they can afford. This is expensive (which is why they try to get the courts to make the Debt Counsellors pay the bills).
Banks are also being asked for papers from long ago and been given a very short time period to supply these documents which they may not actually have or even know where they are stored. One bank almost always claims the documents burnt up in a fire and they do not have them saved on their computers.
‘When Debt Counsellors actually started asking for the required information they began to take strain’
When Debt Counsellors actually started asking for the required information they began to take strain. Not supplying the information is also very suspicious and can give the impression of hiding information or not having it.
Looking for those documents also can be costly even if you do have them. Costs are to be avoided where possible in business. So credit providers began to make various suggestions about how they could avoid having to provide these documents at Credit Industry Forum (CIF) meetings. Many credit providers began to complain that Debt Counsellors where now doing reckless credit investigations (nobody likes change).
Conflicts with the NCR Task Team Agreement & Guideline
Another unintended consequence of the new fee was that it sometimes pushed payments out of a time period which the NCR recommended in their 2009 Task Team agreement guideline. In that agreements, credit providers are meant to get payments in the third month of a debt review (after the Debt Counsellors fee and Attorneys fees). This was a pattern that most Debt Counsellors followed when making proposals. Recently, however, the NCR’s new changes to the fee structure has conflicted with the 9 year old report and guideline. It seems obvious that the new fee guideline would replace the or change the old agreements but this was never expressly said by the NCR who may have failed to address this with credit providers.
Reckless Lending Investigations: Obligatory or Not?
The Draft Bill of Amendments to the National Credit Act which has been approved by the National Assembly and now sits on the Presidents desk says about reckless credit investigations:
In the opening paragraph (we cut some stuff out so we can skip to the part about reckless):
To amend the National Credit Act, 2005, so as to provide for debt intervention; to…to provide for the recordal of information related to debt
intervention; to require a debt counsellor to investigate whether an agreement is reckless;…
In describing the contents of the Bill it is stated:
3.10 Clause 10 inserts section 82A into the Act, which requires debt counsellors to report suspected reckless credit. It further requires credit providers to provide certain information within seven business days and provides that the Tribunal may impose an administrative fine for failure to do so.
The Bill further ammend Section 86 like this:
Amendment of section 86 of Act 34 of 2005, as amended by section 26 of Act 19 of 2014
12. Section 86 of the principal Act is hereby amended—
(a) by the substitution in subsection (6) for paragraph (b) of the following
‘‘(b) [if the consumer seeks a declaration of reckless credit,] whether any of the consumer’s credit agreements appear to be reckless.’’;
This means they will remove the section about consumers having to ask and as is stated in the draft bill:
3.12 Clause 12 amends section 86 of the Act to require a debt counsellor to always consider credit agreements for reckless lending, and not just at the request of the consumer
Thus the new bill will make it obligatory for all accounts to be investigated, every time.
The NCR’s own published Guideline on their 2009 Task Team Report about debt review says:
In Annexure B 1.4 e) when reviewing what Debt Counsellors should do in every matter: ‘The Debt Counsellor should check for reckless lending’
On page 12 of the NCR guideline, it states: ‘Debt Counsellors are encouraged to take the Affordability Assessment Regulations into account when implemented and use the process as set out in Annexure B to identify possible reckless lending’
On the same page in Section 3.4 under the heading Reckless Lending, the NCR Task Team Guideline clearly states:
‘Debt Counsellors are obliged and encouraged, as part of the financial assessment, to identify reckless lending by Credit Providers…’ [undelining ours]
On page 15 of the same guideline, it is written that when reviewing consumers cost of living and possible reduction of luxury living, that the level of over-indebtedness should be considered ‘after reckless lending has been ruled out’
On page 25 in laying out the steps for an affordability assessment step 6 is: ‘Check for Reckless Lending‘
In the annexure b2 – affordability assessment checklist (14) step 14.6 is clearly marked: ‘Check for Reckless Lending’.
In Annexure B on page 29 when talking about possible reckless lending and doing a quick test point 16.3 says: ‘The possible reckless debt indicator needs to be completed for each debt‘.
The steps outlined in 16.6 d) indicate that if a Debt Counsellor asks for information about a debt that looks like it might be reckless and does not get a response from the credit provider or the requested information they should proceed as if the debt is reckless.
The NCR in that guideline states that: ‘The identification and determination of reckless lending is important’. So, it is abundantly clear from this guideline and the original Task Team Report, which the major banks all signed off on, that the NCR clearly want it investigated in every matter.
This then means that all accounts should be investigated and the fee then is perfectly legitimate on all matters since all cases HAVE TO BE investigated. Thus any complaint that Debt Counsellors should not be investigating as much or charging the published professional should be taken up with the NCR and Parliament as this is clearly the intent of the coming bill and the NCR guidelines.
Debt Counsellor Reactions
The reaction to the NCR recalling their fee guideline has not been very positive from Debt Counsellors. Many Debt Counsellors have been less than complimentary about the recall and feel that the NCR are caving to pressure from credit providers who do not want them looking too closely into their lending practices (and potentially costing them millions of Rands in damage). Many credit providers, however, are happy and are saying they are glad to see an end to the abuse of this fee.
Debt Counselling Fee Guideline: Did the NCR Get It Wrong?
The last NCR fee guideline was released many years after the previous review and was met with a sigh of relief as Debt Counsellors saw that their fees were not going to be cut. The addition of the reckless lending investigation fee was seen a small incentive and keeping aftercare fees consistently at the same amount over the years was as perceived as an acknowledgement of the work involved in debt review.
Debt Counsellors had been calling for a fee increase for many years and even threatened legal action at some points. Associations did extensive research and the NCR themselves appointed a research firm to investigate and propose updated fees. This would then seem to imply that the process was thoroughly investigated and considered by the NCR, who have the right to publish their views on fees for the industry.
The timing of the release was not particularly auspicious as it came shortly after something of a TV scandal about a particular roleplayer in the industry and the NCRs actions or inaction in regard to them. To some, it seemed like a knee-jerk distraction technique and hard questions were asked about why the promised actuarial consideration of the proposed fees had not taken place as was indicated would happen.
‘The recall of one part of the fee guideline then calls the rest into question as well’
The recall of one part of the fee guideline then calls the rest into question as well. Many have issues with the section on legal fees (the NCR acknowledge that they cannot set legal fees and only the law society can do so) which the NCR say should only be taken in the month the court action begins (this can be delayed by the courts for a long time or may never happen if things change to an application to the NCT).
Some see the NCR removing legal fees attached to the NCT as an aggressive way to get Debt Counsellors not to make use of the NCT and to try sideline the NCT from the process.
For the NCR it is a bit of reputation management firstly and then a fresh look at the Fee Guideline which they perhaps rushed out too soon. Will they review other aspects of the fee guideline such as when legal fees should be taken (as currently, attorneys do not like to work for free and not know if they will get paid)? That is unclear.
‘It should also be expected that reckless lending investigations will come to a halt or dry up as the incentive has been removed’
It should also be expected that reckless lending investigations will come to a halt or dry up as the incentive has been removed and as the industry wait to see what happens with the new draft bill which is sitting at the Presidents office and what the NCR now do with their guidelines (Task Team and Fees).
*Debt Counsellors who do not like the guideline do not have to conform to it but can even appeal to the NCT to have the guideline set aside for them specifically if they wish.