Should Debt Counsellors Be Charging For Reckless Lending Investigations?
Reckless Lending Fees
Debt Counsellors can help consumers identify reckless credit.
But what is it and how much should be charged for this service?
Should every client who enters debt review be charged for this service?
What is Reckless Credit?
If a credit provider offers credit to people who cannot afford to realistically repay the credit while managing their other expenses and debts then they have broken the law.
The credit they have offered is known as reckless credit.
Essentially, the credit provider would be setting the client up for failure (and all the ramifications that come with missed payments etc).
‘the credit provider would be setting the client up for failure’
Also, if a consumer does not get all the required documents before or during the deal or if they do not understand the obligations or wording of the contract they are signing it is considered reckless credit.
Consumers must be fully informed and understand what they are agreeing to.
What Are The Fees?
When consumers approach a Debt Counsellor for a review of their debt (debt review) then they can ask that the Debt Counsellor check for reckless credit.
At present, there are no legally published fees for Debt Counselling other than a R50 application fee mentioned in the National Credit Act.
However the current common industry fee for such a service is only R1500. This is based on guidelines published by the National Credit Regulator.
‘the current common industry fee for such a service is only R1500’
The NCR often publish their opinion on best industry practice in what are commonly known as “guidelines”. One such well known guideline is called the NCR Task Team Guideline. The NCR very much like when those in the industry stick closely to their suggestions and don’t like it when registrants do something different.
The 2009 NCR Task Team Report & NCR Guideline Requirements
The 2009 NCR Task Team Report (and subsequent NCR guideline) discusses reckless credit and reckless credit investigations in detail.
Below are some of the key highlights of what the NCR currently expect Debt Counsellors to do in regard to reckless credit investigations (and thus any fees that would be charged) as per the guideline.
We will highlight some portions of the guideline below with reference to the section or point number:
Section 1 (introduction)
1.1b sets out that DCs must investigate if the consumer asks or if any ‘appear’ reckless (so an additional obligation in addition to the NCA requirements).
This then says the consumer does not have to be the one instigating the investigation. This then has been the procedure as set out by the NCR since 2009.
Annexure B. 1.4 e
The annexure clearly states that the Debt Counsellor should check for reckless lending.
Section 3.4 Reckless Lending
Here is a whole section on the topic. It states that DCs are obliged and encouraged, as part of the financial assessment, to identify reckless lending.
Note: So, any possible fee (eg as per an NCR fee guideline) would apply automatically since as per this section it is an obligation.
Here it talks about the situation where a Debt Counsellor starts to check for reckless lending and ask a credit provider for information but maybe the credit provider is unable to find the info or is slow in sending the info.
3.4 Reckless Lending
Where Credit Providers fail to provide the information on request within 20 business days, the Debt Counsellor should use the available information and refer the matter to a Court for a hearing. The Debt Counsellor is advised to inform the Court of the attempts to obtain detailed information with a recommendation that the Magistrate review the available information to make a finding on the reckless lending recommendation from the Debt Counsellor.
The abovementioned assessment should indicate if reckless lending was present.
Should the Debt Counsellor be unable to make a determination because of the Credit Provider being unwilling to provide the required information and where reckless lending is evident, the Debt Counsellor should submit his recommendation to a Magistrate Court.
- Annexure b1 – Affordability Assessment Process Steps:
- Affordability Assessment
- Check for Reckless Lending
You will note that reckless credit investigation is set out as a step (no.6) above. So, any possible fee would apply automatically since it “has” to be done as one of these steps as set out since 2009 and the applicable NCR Guideline of 2015.
- Annexure b2 – Affordability Assessment Check List
Step 14.6 – instructs to check for reckless lending as you will see below where it says quite clearly:
14.6 Check for Reckless Lending
- a) Follow reckless lending test guidelines
16.6.d) If no information is received the Debt Counsellor should advise the Credit Provider that the lending could be reckless and make a recommendation that the debt be written off. If no reply is received before the scheduled Court date, include a recommendation of reckless lending to the Court and let the Court make a decision based on the information provided to the Court by all parties.
You will note that the current accepted conditions are that should no information be given, the recommendation regarding reckless credit is that the debt be written off and not deferred for payment after other debts. This seems to be a “motivator” for credit providers to provide the information swiftly.
Note: All BASA members formally agreed, in writing, to abide by the 2009 NCR Task Team Report and Guideline.
The NCR's Requirements Since 2009
Many Debt Counsellors do not like to be drawn into reckless credit investigations as credit providers will immediately hand the matter to their top legal teams and fight very hard at court against any such discussions.
They may even ask the court to give a cost order against any Debt Counsellor who mentions that an account may be reckless.
Why Are They Nervous?
It is not simply because a court may decide to write off such a debt or delay repayments. No, it is because any finding of reckless credit can make shareholders very nervous and cause chaos with share prices.
African Bank (the former one, not the current one that looks very similar) collapsed in part due to 12 reckless credit agreements that were highly publicized in the media. These cause massive shareholder panic and sell off.
The National Credit Regulator is able to take any reckless credit matters to the National Consumer Tribunal and ask for R1 million in fines for every one. Ouch!
No wonder credit providers bring out the big guns whenever reckless credit is mentioned.
Normally, consumers end up paying massive legal bills whenever a reckless credit matter is involved. So, as a result many Debt Counsellors are not eager to stick to the NCR’s longstanding guideline about the topic.
‘many Debt Counsellors are not eager to stick to the NCR’s longstanding guideline about the topic’
The NCR are very eager for registrants to stick to their suggested processes however. Which would essentially mean every matter should be investigated for reckless credit (regardless if the consumer asks or not).
So if Debt Counsellors are expected to stick to the guideline about what the current fees are then they also have to stick to the NCR’s existing Task Team guideline too and investigate each matter.
National Credit Amendment Act
Though the National Credit Amendment Act was never given an effective date (and so basically “never happened” even though signed into law), also requires all debt review matters to be investigated for reckless credit.
It took away the option to decide to stick to a guideline or not. It simply made it a requirement and the Debt Counsellors were set to inform the courts of their findings in each matter.
The Act has never actually kicked in so the requirement still falls under a guideline which is for the most part legally non binding even though the NCR do want Debt Counsellors to stick to the Task Team Guideline and thus do investigations.
The Answer Seems To Be Yes
The NCR Guideline is clear on both the current fee and the process.
It seems, as per their guidelines and the National Amendment Act, that Debt Counsellors should investigate every matter to see if it is reckless and should therefore charge the applicable fee.
Now, Debt Counsellors can decide to work for free and in reality the R1500 fee is hardly reimbursement for the time and effort and risk that results.
Credit providers find that such fees can mean they have to wait an extra few weeks to start getting money back from clients in debt review and this can make them uncomfortable. And that’s not to mention the other risks.
Consumers, of course, deserve the full protection of the law (even if there is a tiny fee) and can in some cases have their reckless credit completely written off by the courts or perhaps postponed so they can deal with other debt first.
The National Credit Act offers consumers amazing rights. It helps protect everyone from predatory lending practices and even punishes those credit providers who are slow to learn. And in the future we may see further legislative refinements to the reckless credit processes and even fees.
Until then we have some guidelines that can help both Debt Counsellors and credit providers follow the NCR’s suggested processes.