Don't be a victim of reckless lending

Many household debt levels have been rising in recent years thanks to reckless lending by institutions. This has been driven in part by the growth in consumer lending that has coincided with rising incomes of many low-income households.

With a more impoverished population that until now could not defend itself from creditors, many women have been taken advantage of in their eagerness to become financially stable and sufficient.

According to the Consumer Bureau Market Report for the first quarter of 2017, there are 24.7-million credit-active consumers in SA. Of the 53.5-million consumer accounts measured, 839,000 were in arrears. And more than 72% of household income being used towards servicing debt.

I recall the aftermath of the real estate crash and the demise of financial security for many Americans in 2008. What caused the large default on loans was the irresponsible lending practices by banks and other such lenders. This was the result of lax regulations on banks and lending practices that had taken place a few years earlier, and in hindsight, the outcome should’ve been seen a mile away.

We have already seen reckless lending scandals taking place in the country. Last year, the National Consumer Tribunal (NCT) ruled that Shoprite Holdings was guilty of reckless lending and was fined R1million. This came about when the NCR discovered that Shoprite kept giving consumer credit without conducting a reasonable and objective assessment of the consumers' ability to afford the loans.

In another case, a woman was given a personal loan of R30 182 by Nedbank. This is roughly 5.5 times her average monthly salary at an interest rate of 35.4% per year. She had to repay a total of R66 501.60 over a four-year period. She also received a Nedbank and American Express credit card from the bank. The personal loan was granted in April 2016 before the introduction of interest rate caps. (Source: Moneyweb)

Absa Bank, Capitec, FNB and other retail stores have all been guilty of reckless lending. Reckless lending was introduced by the National Credit Act to help consumers against the abuse of credit.

According to the Financial Services Board study done in 2017, South Africa currently has a financial literacy rate of 51%. Therefore, it is important you improve your financial literacy, and learn more about planning, budgeting, saving and investing.

I believe that credit providers have to also give consumers financial literacy training - training that treats clients as intelligent counterparts who can make their own decisions but provides simple guidelines and rules of thumb that clients can put to use in their day-to-day lives. Credit companies have to offer borrowers an understandable contract and avoid hidden fees.

1. What is Reckless Lending?
Many consumers are unaware that there are numerous reckless lending cases in South Africa. This is why it is important to know your rights as a consumer, and understand the rules set out by the National Credit Act (NCA) before taking out credit offered to you by credit providers. According to the NCA, reckless lending is when a credit provider does not conduct an affordability assessment before entering into a credit agreement with a consumer. 
If a consumer does not understand and acknowledge the risks, costs or obligations, this is also considered reckless lending.

Lastly, if a consumer becomes over-indebted as a result of entering into a credit agreement this, too, is classified as reckless lending.

2. When is an agreement considered reckless?
Credit providers have a huge amount of responsibility to the consumer. This includes abiding by the rules and regulations stipulated in the National Credit Act. These guidelines have been set out to ensure that credit agreements are fair when they are processing a credit agreement. An agreement between the credit provider and the consumer is also deemed as reckless when the credit provider did not conduct an affordability assessment, to understand whether or not the consumer is able to afford the repayments on the credit account.
If consumers don’t understand the risks, costs or obligations of the credit agreement, it could also be labelled as reckless. It is the credit providers responsibility to make consumers understand what exactly they are agreeing to.
If the consumer is granted the credit and this results in over-indebtedness, this is also regarded as reckless.

3. How do I identify reckless lending?
If you took out credit after 2007 and fell into arrears, you may have fallen victim to reckless lending. Credit providers are legally required to perform affordability assessments to ensure that you can afford to make repayments on your debt.

If you fall into arrears even though your financial circumstances have not changed, your credit providers could be at fault. This means you could have the court declare that the credit agreement was a case of reckless lending. Consequently, you could have the debt written off,  which means that you would not have to pay it.

4. To prove reckless lending, you must show that:
You were not able to afford the loan when you entered into the credit agreement; or
You did not understand the terms and conditions of the credit agreement.

However be wary of the latter as credit providers normally escape liability by making you sign below the fine print acknowledging that you understand the terms and conditions.

4: Where to go for help
National Debt Advisors (NDA) offers free credit checks, whereby we assess all of your credit agreements to see whether any of them can be classified as reckless lending. If we suspect that any of your accounts are reckless, we will approach the court or tribunal on your behalf to have the agreement declared as reckless and the debt written off.

Remember as a consumer you have the responsibility to truthfully disclose your finances when applying for credit. If you misrepresented facts about your finances, at the time of entering into the agreement, your matter will not be regarded as reckless lending.