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National Credit Act

National Credit Act. National Credit Act Bloemfontein November 2007. Consumer credit market & indebtedness. R760bn consumer credit to households Up by R400bn from 2002, most growth in mortgages 49% of GDP; 70% debt to income, 51% mortgages 14 m credit active consumers, 50 m open accounts

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National Credit Act

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  1. National Credit Act National Credit Act Bloemfontein November 2007

  2. Consumer credit market & indebtedness R760bn consumer credit to households • Up by R400bn from 2002, most growth in mortgages • 49% of GDP; 70% debt to income, 51% mortgages • 14 m credit active consumers, 50 m open accounts • 65,000 judgments for debt per month • 11%+ households with consumption debt > 20% of disposable income … potentially over-indebted Concerns with …

  3. Rationale for National Credit Act ? Act will drastically affect the credit market • R700bn+ market, 14 million consumers, 4000 credit providers … R100bn interest & fees / year Which undesirable practices ? • credit life insurance; preferences; blacklisting • negative option selling; misleading disclosure • extreme interest rates; inflated credit prices, • subsidized cash prices; • extreme over-indebtedness; • no effective debt rehabilitation • payroll deductions & garnishees inflated debt collection charges

  4. Reckless lending … Concerning level of household indebtedness … Courts = debt collectors for reckless credit ?

  5. Cap banks:- payroll retail Cost of credit, effectiveness of current cap, misleading disclosure … & competition All loans & credit M/loans & furniture finance (MFRC) Average of 91%; Cheapest lender in each category = non-bank Average for NGOs ≈ 90%

  6. Consumer creditproviders, volumes (banks only, per FEASibility, December 2006)

  7. The new Act – what it does • Huge cost in doing nothing, cost currently borne households & by society … • … impact upon municipal payments, welfare payments, courts etc … • Act intended to increase fairness, rationality, predictability, competitiveness & choice in credit market • Extensive international & local research • Parliamentary approval, after exhaustive consultation … mandate to NCR to enforce strictly

  8. Experience since 1 June, issues raised … Volume & profile of calls • Credit providers, consumers • Enquiries vs. complaints Issues, consumers • credit information, debt counselling • rejection, others (‘insurance fee’) … • Usury Act, Exemption Notice, Credit Agreements Act • Increasing own risk

  9. Experience since 1 June, issues raised … cont. Issues, NCR • Phase 1: advertising & marketing; quotes, agreements Problem: • credit provider staff insufficiently trained, informed • Increasing own risk

  10. B. Application of the Act

  11. Application of the Act:-Credit Agreements Credit agreement = • supply of goods or services or payment of amounts, where repayment is deferred, & “charge fee or interest” levied, on agreement or amount deferred • Section 8 – credit facilities, credit transactions, credit guarantees Pawn, discount, instalment, mortgage, lease, secured loan, any other… [S8, S9]

  12. Application of the Act:-Credit Agreements cont... Act applies to all credit agreements • as long as ‘arms length’, • excluding agreements where the consumer is the state or organ of state, & certain agreements where consumer is a juristic person[S4] • differentiations of secondary importance, e.g. (a) transactions & facilities, (b) types of agreement, (c) small, intermediate & large, (d) developmental [S8, S9]

  13. Application of the Act:-Incidental Credit Agreements Incidental Credit Agreements = “overdue accounts”) Definition: • … goods or services provided to the consumer + interest payable whenpayment not made on or before determined period • Becomes incidental credit 20 business days from charging late payment fee or interest Only certain sections of Act becomes applicable, • i.e., sections that are relevant from point of becoming a credit agreement • e.g. statements, interest limitations, debt collection process, debt counseling & restructuring • no initiation or service fees Not: pre-agreement disclosure; reckless lending etc. NO REGISTRATION [Def + S5]

  14. Application of the Act:-Incidental Credit Agreements vs Trade Accounts Trade Accounts & Application for Credit Clients buy/receive goods or services on 30/60 days credit Are these agreements under the NCA? Consider - Credit Application Forms - Credit Limits - Interest, fee or charge or No Interest, fee or charge? Contract may provide for interest, but if not charged, that agreement will not be credit transaction OR incidental credit. Remember the exclusion of large Juristic consumers and large agreements for the smaller juristic consumers.

  15. No limit on application to natural persons Act never applies if consumer a juristic person and Assets or turnover greater than R1mil Assets or turnover smaller than R1mil but transaction greater than R250k or mortgage agreement Certain sections never apply if consumer a juristic person, i.e. Reckless credit & over-indebtedness Limits on interest & fees Sales & Marketing prescriptions; definition, S4, S6, Application of the Act:-Consumers

  16. Application of the Act:-Registration Credit Providers • 100 agreements or > R500,000 • Fairly administrative, low entry barriers • If not registered, may not offer credit & agreements ‘unlawful’ • AND: Act applies irrespective of registration ! Credit Bureaus • Broad definition [43(1)] • Disqualifications: credit provider, debt collector Debt Counselors • Natural persons, Requirements, Disqualifications Conditions of registration S39 – S53

  17. C. Compliance requirements of the Act

  18. Compliance requirements:-Credit Advertising Practices Advertising information is regulated Depending if general or specific + information provided re cost Section 76(4) Advertisement for credit must:- • not be misleading, fraudulent or deceptive • not contain any statement prohibited by Regulation Advertisement for credit must set out the cost of credit in the prescribedmanner and form • Regulation 21(1) If it makes reference only to availability of credit – no further disclosure of the costs required. • Regulation 21 (2) If it discloses interest rate only (or range) – must also indicate initiation fee and service fee

  19. Compliance requirements:-Credit Advertising Practices cont. • Regulation 21(3) If it discloses monthly installment or any other cost of credit e.g. monthly repayment – must also include • Installment amount • Number of installments • Total amount of all installments, including interest, fees and compulsory insurance • Interest rate • Residual or final amount payable (if any)

  20. Television advertisements Television advertisements • Regulation 22 (2) – Television adverts must give equal prominence to all the information (both visual and audio) as required in Regulation 21(2) and (3)

  21. Compliance requirements:-Marketing and sales practices Negative option marketing • unlawful agreement, consumer must agree, Automatic increase in credit limits for credit facilities prohibited • but, 1 automatic increase per year, limited amount Consumer choice re info available for telesales & marketing Limits on marketing & sales @ home & work S74 – S76, 89(1)b, 119(4)

  22. Compliance requirements:-Agreements & pre-agreement disclosure Quote & pre-agreement disclosure, agreements • Prescribed quote, binding for 5 days • prescribed form & content for small agreements • flexibility for intermediate & large • full disclosure, simple & comparable Plain language & official languages • Right to receive documents in plain & understandable language • Right to receive documents in an official language (prescribed by Regulator) S92 & 93 ; S63 & S64

  23. Compliance requirements:-Unlawful Agreements, unlawful provisions Unlawful agreements • Unregistered credit providers; Automatic credit • Minors, mentally unfit • Contravention of Admin Order Unlawful provisions • Ability to prohibit certain practices, contractual clauses, • ‘sever unlawful provision from contract, or alter it to render it lawful’ • … rather than “unconscionable conduct” approach Which provisions • (a,b,g) Waive rights, obstruct Act, limit liability (c) common law exclusions; (j) provider = agent; (m) consent to priority processing; (n) ‘set off’, etc … S89, S90, S89, 90, 91, 164 only if declared by court NB !

  24. Compliance requirements:-Reckless credit & over-indebtedness Reckless credit • Over-indebted = “per available information, consumer will be unable to satisfy in a timely manner all the agreements to which the consumer is a party” • Reckless = (1) no assessment; (2) consumer did not understand obligations; (3) agreement made consumer over-indebted • Based on information when agreement made; consumer must “fully & truthfully disclose” • New requirement on credit providers to do assessment before entering onto any credit agreement. S78 – S88, S130

  25. Compliance requirements:-Reckless credit & over-indebtedness cont.. If reckless • Debt Counselor can recommend debt cancellation or restructuring + Court may suspend or reduce obligations Enforcement:- • Specific transactions dealt with only by courts • Cases against institutions to Tribunal S78 – S88, S130

  26. Compliance requirements:-Interest, fees & credit life insurance Credit providers may only charge … • Interest • Initiation fee • Service fee • Credit insurance • Default administration charges • Collection costs • Costs as per S102 (instalment sale, mortgage, lease, secured loan) • E.g. extended warranty, delivery, connection fees, licence or registration fees etc “Modified in duplum rule” • Interest & fees after default < debt at point of default S100 – S106

  27. RR = Repo Rate Limits per regulation:-Maximum interest rates & fees

  28. Limits per regulation:-Fees, insurance Initiation fee • Mortgages = [R1,000 + 10% amount > R10,000] < R5,000 • Other = [R150 + 10% amount > R1,000] < R1,000 • Always < 15% of amount deferred • (Special rules for developmental credit) Monthly service fee = R50 • Not applicable to charges not related to credit Insurance • only for obligations, assets or services provided per credit agreement • limited to outstanding obligations • monthly, not capitalized • Only certain items may be “required”, rest “optional” • Consumer must be given a choice of own policy

  29. Compliance requirements:-Debt collection Specific requirements for legal action re debt collection • S129 Notice: notify consumer before legal action commence + alert re rights re dispute resolution or debt counseling • S130: debt procedures in a court • Preconditions complied with ? • Recklessness & over-indebtedness ? • “In Duplum” limit on interest, fees & collection costs S86 – S88, S129, S130, S134, S136

  30. Compliance requirements:-Debt Counseling Counselors registered • Training requirement & criteria • Conditions Process if over-indebted: • S129 Notice alert consumer of right to approach DC • Assessment: Over-indebted ? Not ? • DC propose debt re-arrangement if over-indebted • Consent of all parties ? Or not ? • Single Tribunal member may confirm order if all parties consented • Only court may re-arrange obligations if no consent Clearance certificate to remove credit bureau information, if paid off S86 – S88, S129, S130, S134, S136

  31. Compliance requirements:-Credit Bureaus & Credit Information Credit Bureaux • Bureaus registered, conditions, returns, audits • Responsibility for data accuracy, • Information only obtained from & released for specified purposes & parties • Retention periods • Limited “amnesty” + “data cleansing process” Consumer • Notified before adverse info to bureaus + Free access to records + Procedure for correction + Disputed information blocked Credit register National, non-competitive register to enable indebtedness assessment; not competing with credit bureaus S68 to S73

  32. Effective dates of the NCA Act = 1 June 2006, certain sections later dates InstitutionsRegulator = 1 June 2006 Tribunal = 1 Sept 2006 Registration Credit providers + Bureaux = 40 working days from 1 June 2006 Debt Counsellors = before 1 June 2007 Credit bureaux & information = 1 Sept 2006 All other compliance sections = 1 June 2007 (disclosure, quotes, agreements, limits on interest & fees, reckless lending, debt counselling etc) Usury Act, Credit Agreements Act & Exemption Notice apply until 1/6/2007

  33. D. Roles of Tribunal & Court

  34. Enforcement:-Tribunal, Magistrate Court, High Court Prohibited conduct vs offense • Prohibited conduct = contravention of Act  Tribunal • Offenses, defined  Magistrate & High Court • Contractual disputes  courts Courts: powers substantially increased re debt-related orders • Civil court must apply Tribunal determinations • Same issue raised in Tribunal & civil court; Magistrates can decide to deal with matter, or may refer to Tribunal All Tribunal orders can be appealed to High Court; Regulator’s decisions appealed to Tribunal S1, S138, S148, S150, S164

  35. Usury Act, Credit Agreements Act & Exemption Notice Mandate • Per Schedule 3 Item10, cases within mandate of NCR & Tribunal Approach in enforcement • NOT: institutional investigations into historic compliance • BUT: enforcement of rights of complainants + pursuing redress for category of similar cases where legal position unambiguous • AND: Conscious non-compliance in period June 06 – June 07

  36. Dispute system, structure… role of NCR, ADR & others S129(1) Required procedure before debt enforcement • If the consumer is in default under a credit agreement, the credit provider— • may draw the default to the notice of the consumer in writing and propose that the consumer refer the credit agreement to a debt counsellor, alternative dispute resolution agent, consumer court or ombud with jurisdiction, • with the intent that the parties resolve any dispute under the agreement or develop and agree on a plan to bring the payments under the agreement up to date;

  37. Dispute system, structure… role of NCR, ADR & others cont.. S130 Debt procedures in Court • S130(1) credit provider may approach the court … to enforce a credit agreement only … • … 10 days after delivery of notice • … if consumer has (i) not responded to that notice; or (ii) responded to the notice by rejecting the credit provider’s proposals • S130(3) court may not determine matter … during the time that the matter was before a debt counsellor, alternative dispute resolution agent, consumer court or the ombud with jurisdiction …

  38. ADR & enforcement action… & its consequence Impact upon enforcement action, 130 Precondition for approaching Tribunal, 134(5) Difference from complaint to NCR Voluntary arrangement Consent order per 135 Rejection, certificate, 134(5) • Default notice per 129 • Consumer approach ADR per 134

  39. Debt counselling & over-indebtedness

  40. Debt counselling, process specified in ACT 1 2 3 4 5 6 Application S86(1) R24(1) Form 16 Notification S86(4) R24(2) Frm 17(1) Assessment S86(5,6) R24(3-8) Arrangement S86(7) R24(9) Orders S86(8),87 R24(10) End S88, 71 R24 Form 16,17 Rejection S86(7), R25 By court S85, 86(7), 87

  41. “States of over-indebtedness”… & its consequence • Parties notified • Consumer •  no further credit • Credit provider • reckless if further credit •  no legal action … unless consumer defaults Rejection Voluntary re-arrangement  consent order Arrangement by court order • Not over-indebted • Debt stressed • Over-indebted

  42. Debt counsellingStatutory vs voluntary • By Law • compulsory • oversight of court • discretion of court • further credit prohibited • reckless verdict • By agreement • between creditors & their client • voluntary

  43. Interest & fees Reckless lending Marketing & sales practices National Credit Act Enforcement & debt collection Agreements & quotes Unlawful agreements, provisions Debt counsellors Credit Bureaus National Credit Register

  44. Conclusions Many engagements with credit providers & associations … most constructive, mostly ! Engagements with credit bureaus … supportive Engagement with debt counsellors … to ensure consistency & co-operation Attorneys responsible for interpreting the Act, advising clients, drafting of contracts and applying new procedures in Court Magistrates critical role in applying Act to specific cases Tribunal critical role in action against contravening registrants … on track, so far, but there are challenges …Encourage positive attitude – trying to make this Act work, not fail!

  45. Thank You !

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