Are you a victim of reckless lending?
Reckless lending is in the news again, with the launch of a “reckless lending indictor” by one debt counselling firm, showing that 40% of all credit agreements entered into by the firm’s clients between April and July this year were reckless.
The National Credit Act (NCA) says that a credit provider must not enter into a reckless credit agreement with you, the consumer. A credit agreement is reckless if, at the time it granted the credit, the credit provider failed to assess whether you could afford to repay it – irrespective of what the outcome of the assessment would have been.
In other words, even if you would have passed the affordability assessment, a credit agreement is reckless if no assessment was done.
A credit agreement is also reckless if you didn’t understand the risks and costs to you of the credit or your obligations in terms of the agreement.
And, if by taking on the credit you became over-indebted or unable to pay your debt repayments and living expenses, then the credit was granted recklessly.
Stephen Logan, an attorney and the founder of Fair Credit, says if your creditors cannot produce a copy of the affordability assessment that they did before granting you credit, you can raise the defence of reckless lending.
An affordability assessment should include a copy of your credit report at the time you applied for credit. If the creditor did not check your credit report before giving you credit, this is indicative of reckless lending.
If you had an adverse listing and/or had a judgment against you at the time that you were given more credit, this is prima facie reckless lending, Logan says.
If you are a victim of reckless lending and a creditor takes legal action against you, you should give notice of your intention to defend yourself on the grounds of reckless lending, he says.
If you think you’re a victim of reckless credit, here’s what you need to know:
• You have legal recourse
If a court finds a credit agreement is “reckless”, it can “set aside” part or all of your rights and obligations, which means you are no longer obliged to continue paying.
Alternatively, the court may suspend the agreement. This means you don’t have to repay the credit for the duration of the suspension – in effect, a payment holiday. During that time, the credit provider may not charge you fees or interest. When the suspension is lifted, all of your and your credit providers’ rights and obligations are revived.
• You need to go to court or the National Consumer Tribunal
You or your debt counsellor may suspect that you are a victim of reckless lending, but only a court or the National Consumer Tribunal (NCT) has the power to declare that a credit agreement is reckless. If you don’t have a debt counsellor, you can wait to be sued, or approach the courts yourself, or you can approach Legal Aid for assistance.
You can also refer the matter to the NCT, which can adjudicate in cases where it is alleged that a credit provider lent recklessly.
• Debt counsellors should investigate for reckless lending
If you apply to go into debt review, your debt counsellor should assess your financial situation to establish whether or not you are over-indebted. Even if you are not over-indebted, you may still be a victim of reckless lending.
The NCA is in the process of being amended to oblige debt counsellors to check whether you were a victim of reckless lending. Until it is amended, the onus is on you to ask your debt counsellor to check for reckless lending.
• A reckless lending application will cost you
Most of the fees debt counsellors earn are determined by the amount of money that you pay towards your debt. So, the higher your instalments to your creditors, the more the debt counsellor earns in fees. If some of your credit agreements are declared reckless, and set aside, the debt counsellor makes less money out of you.
Policymakers have realised that this has created a “perverse incentive” for debt counsellors to ignore cases of reckless lending.
Debt counsellors who do investigate for reckless lending argue that it is hard work for no pay. To address this, the National Credit Regulator, which regulates debt counsellors, has introduced a fee of R1500 to cover the cost of applying to a court to declare your credit agreements to be reckless.
• If you were not truthful, you have no recourse
If you were not honest when you applied for credit, then you can’t claim to be a victim of reckless lending, even if you are one. For example, if you overstated your income or understated your expenses or debt repayments and were granted a personal loan of R200 000, which you could not afford, you can’t ask for the credit agreement declared reckless.