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We are putting this information together, nowAmbitious Attempt to Take the Sharks Out of Credit Provision
Business Day (Johannesburg)
September 20, 2004
Posted to the web September 20, 2004
By Charlotte Mathews, Consumer Industries Editor Johannesburg
High costs of credit structure could undermine one of the draft bill's intentions: to make credit more accessible for a greater proportion of South Africans
THE trade and industry department has published ambitious draft legislation aimed at creating a more responsible lending environment for banks, microlenders, credit bureaus and retailers selling on hire purchase or credit and even pawnbrokers.
Unfortunately, the details in the draft imply that the new structure will not be cheap. Theoretically, the credit-granting industry will have to carry the costs of compliance, but in practice they will be passed on to consumers, in one form or other. This could undermine one of the intentions of the draft Consumer Credit Bill, which is to make credit more accessible for a greater proportion of South Africans.
According to the explanatory memorandum to the bill, most of SA's R362bn credit market consists of mortgages, vehicle finance and overdrafts at moderate rates, but the bulk of South African consumers do not have access to these products. Most only qualify for in-store cards, hire purchase or microloans, all at higher rates. Research conducted for the trade and industry department shows 72% of credit is extended to about 15% of the population while 67% of the population enjoys only 6% of total credit granted.
Interest rates charged vary from 2 percentage points below prime annually for mortgage and provident-fund secured loans, to 50%-100% for furniture finance, right up to an annualised 360% for one-month loans. The cost of credit is frequently inflated further by credit life insurance, loan application fees, administration and club fees, which are poorly disclosed. "Consumers often are not aware that fees and credit life insurance make up 50% of the total cost of credit," trade and industry says.
"Nonstandardised disclosure prevents consumers from comparing the product offerings of different credit providers, leading to a lack of competition in the market and high costs."
The draft Consumer Credit Bill aims to address developments in the past few years such as an increase in microlending, concerns about consumer overindebtedness, a lack of financing for small and medium enterprises and abuses related to administration orders. Administration orders are intended to help overindebted consumers owing less than R50 000 and with few assets to reschedule their debts.
Dick Behrens of JD Group, on behalf of the Furniture Traders' Association, says members' responses to the bill are being collated. The bill does appear to contain extra costs of compliance, he agrees, and there will also be a cost in changing computer systems. Although the bill is ambitious, he believes the drafters have done a good job in trying to tackle the issue, but it will lead to ongoing debate.
Microlenders Association executive director Hennie Ferreira says it is necessary for the credit industry in SA to be reviewed and revamped. The association sees this as an opportunity to bring the microfinance industry into the mainstream and ensure economically active poorer people enjoy appropriate access to the financial system.
But there are many grey areas in the draft bill and the association would like to work with the drafters to get clarity so that the final legislation creates certainty for the market.
"There has to be a balance among the legislators, the responsible credit grantor/lender and the consumer," he says.
Banking Council GM Nicky Lala-Mohan says members' responses are being collated and a submission would be made to the department by September 28. He did not want the department to read the council's reaction to in the press first.
According to the preamble to the published draft, the bill intends to provide a fair and nondiscriminatory marketplace for access to consumer credit, as well as to ensure a sustainable and responsible credit industry. It covers pawn transactions, instalment sales, mortgages, credit cards, personal loans or any other agreement where payment is deferred and interest or fees are incurred. But it does not apply to agreements that are closer than arm's length (such as between family members) or loans to the state, or property transactions above a certain threshold, or insurance.
The final Consumer Credit Act will replace the Usury Act of 1968 and the Credit Agreements Act of 1980. It will apply to any credit agreement, even if that agreement was put in place before the act becomes effective.
The draft bill proposes appointing a national consumer credit council to determine consumer credit policy and monitor consumer credit, a 12-member national consumer credit advisory committee to make proposals and advise the minister and a national credit regulator.
The regulator will register credit providers and debt counsellors, implement public education, monitor credit granting and investigate contraventions of the act. A consumer tribunal will adjudicate on issues arising from the act.
The regulator must keep a single national register of all outstanding credit agreements derived from prescribed information from credit providers. One of the reasons for this is to help prevent consumers from becoming overindebted as a result of not disclosing all their commitments.
But credit grantors must also make a reasonable attempt to ascertain all their applicants' commitments. If they believe an applicant will not be able to repay a loan they must not grant it.
If a debt counsellor reports to the consumer tribunal that a consumer is overindebted, the tribunal could decide to restructure the consumer's debt.
The tribunal could also declare that a credit agreement was reckless and suspend all or part of it. While an agreement is suspended the borrower need not make payments and no fees or interest can be charged.
Lenders of a certain size must register with the regulator to be credit providers, and being approved as a credit provider will include commitment to meeting black economic empowerment targets and a proposed contribution to combating overindebtedness. Those who wish to register as debt counsellors must demonstrate their qualifications and experience. Credit grantors and debt counsellors will have to pay an application, registration and annual fees, which may differ according to various categories.
In addition to those costs, credit providers must provide more and better information to consumers. Every document must be available in at least two official languages and in a form that an averagely literate consumer can understand.
Consumers must receive periodic statements of account and must receive free of charge orally or in writing certain other information if they request it, such as current balance, new debit or credit amounts or overdue amounts.
If a consumer is refused credit, or offered a lower limit than applied for, or the provider refuses to increase the limit or renew an expiring credit facility, the credit provider must provide written reasons at the consumer's request. Credit bureaus will also share in the increased burden of consumer protection.
Consumers have the right to be informed when an adverse report is made to a credit bureau, to inspect the information without charge, challenge its accuracy and require the bureau to investigate without charge. Consumers have the right to be compensated for the cost of correcting incorrect information by the person who provided that information.
Inaccurate and incomplete information at credit bureaus inhibits credit providers' ability to assess risk, and is to the detriment of consumers, the drafters of the bill say.
Advocate Ashina Singh of the Credit Bureaux Association says the credit bureau industry is not opposed to a legal framework for the industry, but it submits that it needs to be appropriate and relevant and to follow international precedent, as the Data Privacy Bill, currently being drafted, does.
"We also want to prevent potential duplication and conflict between the two pieces of legislation. Unlike the draft Consumer Credit Bill, it appears from the issue paper on data privacy that the Privacy Bill will not put the obligation on credit bureaus as data processors to notify the consumer, with whom they do not have a relationship, about negative credit reports," she says.
"We are also concerned that free credit reports, unlimited in number, for all consumers, will incur excessive costs for credit bureaus."
The bill also places various restrictions on the way credit can be sold, for example it outlaws negative option marketing. This is where the loan or facility comes into effect unless the consumer actively takes steps to reject it. Banks commonly use this practice in raising their customers' credit card limits.
Also, there cannot be harassment to take up credit and an agreement cannot be entered into at a private dwelling, or a place of work, unless the consumer arranges the visit.
Credit providers may not require applicants to deposit identity books, credit or debit or ATM cards with PIN numbers as security or insist on having access to premises to take possession of goods under the credit agreement. Credit agreements may not state that the interest rate is variable, unless by fixed relationship to a reference rate stated in the agreement (for instance prime plus X). Consumers must be given a pre-agreement statement and quotation in the prescribed form, setting out the amount to be borrowed, distribution of payments, interest rate and other costs and the total costs.
The only amount a consumer should pay in terms of a credit agreement must be the principal, the application fee (as prescribed), the service fee (as prescribed) and interest, expressed as an annual percentage.
The minister can prescribe a way for calculating the maximum effective interest rate and maximum fees.
Although credit providers may require credit life insurance or insurance over the property or goods, consumers must be allowed to choose an alternative policy to the one being offered. Credit providers cannot add an extra fee on top of the actual cost of insurance as arranged, or receive commission or remuneration from an insurance company above the prescribed amount for selling the product to the consumer. They must disclose to the consumer any fees they are receiving for the sale of the policy.
The bill is not particularly emphatic about consumers' obligations, though perhaps it goes without saying that borrowers are obliged to pay sums when due and answer questions honestly and truthfully.
The bill specifies they must keep the credit provider informed of the address where the goods on finance are being held. If a consumer is at least two months in default on an instalment or personal property lease, the credit provider will be able to take possession of the goods, but may not start any legal proceedings until it has exhausted all the other prescribed steps.
Trade and industry has asked for comments to be submitted by September 28 and has been holding information sessions round the country to discuss the bill.
Distributed by AllAfrica Global Media (allAfrica.com).
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