FNB zapped for reckless lending

Tribunal rescues indebted client

A consumer was allowed to increase her credit card limit and overdraft to over six times her monthly income, and to take out a revolving loan – all within eight months.

An affordability assessment must be done to avoid reckless lending. Picture: 123RF
An affordability assessment must be done to avoid reckless lending. Picture: 123RF

A First National Bank consumer who was allowed to increase her credit card limit and her overdraft to more than six times her monthly income, as well as to take out a revolving loan of about half her income – all within eight months – is no longer liable for this new credit as the National Consumer Tribunal had declared it reckless.

The tribunal found the bank had  failed to assess whether the woman could afford to repay the credit.

The consumer’s debt counsellor, Zero Debt, first complained to the National Credit Regulator (NCR) in September 2016 that the consumer, Miss L, was a victim of reckless lending. 

FNB denied the reckless lending allegation and after considering her complaint, in June 2018, the regulator decided not send it to the tribunal as it appeared to be vexatious or frivolous or without a legal remedy.

The women then approached the tribunal directly.

The tribunal issued its judgment at the end of last month finding that the credit was indeed reckless. 

In her complaint to the tribunal, Miss L alleged that the bank did not assess her income and expenditure properly and should have realised that she could not afford to repay the credit. She asked the tribunal to set aside all her obligations in terms of the credit granted. 

WHAT IS RECKLESS LENDING?

Reckless lending is prohibited in terms of the National Credit Act. The Act states that a credit agreement is reckless if, at the time that it was made, the credit provider failed to assess whether you could afford to repay it – irrespective of what the outcome of the assessment would have been.

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 
* By taking on the credit you became over-indebted or unable to pay your debt repayments and living expenses.

The consumer alleged that her applications for increases to her credit card limit and overdraft facility were made telephonically, and that she did not provide any documentation or information relating to her income and expenses. 

Similarly, when she applied for the  revolving credit loan, which was made inside a branch, she was not required to provide any documentation or information about her income and expenses. 

She contended that had FNB done a proper affordability assessment, the bank would not have granted any credit to her because she could not afford to repay it. She asked the tribunal to order FNB to write off her debts and reimburse her payments made to the bank since 2016.

The bank denied that it had entered into credit agreements recklessly, explaining that its way of assessing the creditworthiness of applicants was consistent with the requirements on how affordability should be assessed as set out in regulations under the Act.

FNB said it assessed what Miss L could afford based on her average income calculated from her bank statements, her existing credit obligations (from credit bureau data) and the monthly living expenses derived from the Stats SA’s Household Income and Expenditure Survey, the judgment says.

The bank worked out her income based on credits and deposits into her transactional account, excluding inter-account transfers, it said. 

In its analysis and findings on evidence, the tribunal says the bank was “unable to produce any affordability assessment done” on Miss L’s applications for increases to the credit card limit or overdraft. 

FNB was also unable to produce the original credit agreement and evidence of an assessment on her application for a revolving loan. Although the bank reconstructed the credit agreement, it reflected only the loan amount and interest and did not contain any information relating to an affordability assessment.

FNB is a major bank in South Africa and can reasonably have been expected to have had good systems in place to ensure it can produce evidence of the assessment done, the judgment says. “It may have conducted assessments but in the particular circumstances of this matter it was unable to provide adequate proof thereof. 

It cannot be ignored that the consumer contributed to her own financial distress by continuing to apply for credit and utilising the funds.
National Consumer Tribunal

The bank should have settled the matter when the complaint was reported in September 2016, the judgment says. It, however, continued to dispute the allegations and forced the consumer to report the matter to the tribunal. 

“The pattern of credit applications by the consumer in 2015 clearly indicates a trend of financial distress. A reasonable lender would have been wary of granting all the credit that it did without further inquiry. It however cannot be ignored that the consumer contributed to her own financial distress by continuing to apply for credit and utilizing the funds,” the judgment says.  

In the light of this, the tribunal found it was just and reasonable to set aside all of the consumer’s future rights and obligations under the credit agreements that the tribunal declared reckless. 

The judgment means Miss L is no longer  liable for any payments made on the three credit agreements after September 30 2016, which is approximately when her debt counsellor took the complaint to the regulator. 

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