Amnesty spells trouble for credit industry

Johannesburg – The agreement by cabinet to implement a credit amnesty brings South Africa one step closer to a major crisis in the credit industry, according to Neil Roets, CEO of national debt counselling firm, Debt Rescue.

The credit amnesty will see credit bureaus removing adverse credit information, especially on consumers who have paid their debts.

The option chosen by cabinet will remove all listings by credit bureaus of adverse information on a continuing basis about consumers once they had paid their debts, as well as of all paid-up court judgments.

Roets said the cabinet decision will effectively make credit bureaus impotent, because they would not be allowed to keep the credit histories of persons who defaulted, had records as bad payers or who had judgements against them for the currently prescribed periods of three to five years depending on the listing.

“The whole purpose of credit bureaus is to provide credit grantors with a history of how consumers managed their debt and whether they were a good or a bad credit risk.

“The plan now accepted by cabinet will effectively remove all listings once the debt and any associated court costs had been paid, leaving retailers and banks without any indication of how their prospective clients behaved in the past.”

Mark Seymour, chairperson of the Credit Providers Association, also warned that removing blacklisted creditors from databases would make credit providers more cautious when lending money, particularly to lower income groups.

Also, the increased risk might be passed on to other consumers in the form of more expensive credit, he said.

Roets concurred, saying if the decision to go ahead with the amnesty was enacted in law, it would in real terms have a negative impact because it would encourage consumers, who were already drowning in debt, to borrow more.

It would also make it more difficult for people who in the past had good credit histories to get credit because it would be difficult for credit providers to determine their credit worthiness without complete records.

“It appears that not a single lesson was learnt after the failure of the first credit amnesty in 2006-2007, and will only provide temporary relief to deeply indebted consumers and drive many into even more profound indebtedness requiring debt counselling.

“Because there had been inadequate information made available to especially poor and semi-literate consumers with the previous amnesty, many thought that their debts had been wiped out and even those who realised this was not the case then used the opportunity to pile up more debt because they were no longer black-listed.”

Roets said the previous amnesty affected approximately 600 000 consumers.

According to the Parliamentary Monitoring Group, 64% of affected consumers had taken up further credit. Of that number, 74% ended up having bad accounts – defined as accounts three or more months in arrears – whilst 44% had judgments and adverse records, with 19% having judgments taken against them in the last five years, he said.

Trade and Industry Minister Rob Davies rejected the industry concerns stating that the removal of adverse credit information would simply mean that credit providers would have to conduct proper affordability assessments on all their prospective clients.

Davies said that much of the information held by credit bureaus was “outdated and misleading”. Also, under the current system it was extremely difficult, costly and time-consuming to get the information removed through court processes. This would be addressed as well.

The Banking Association of SA is fiercely opposed to the plan and will highlight its objections during the one-month period that will be provided for public comment once the notice of the Cabinet decision is published shortly in the Government Gazette.

In February banks rejected a proposal by the department of trade and industry (dti) for a credit amnesty for highly indebted individuals.

The sector told parliament that an amnesty was a “bad idea” because it would create risk and encourage inappropriate “culture and practice”, among other things.

Debt must still be paid

The National Credit Regulator’s (NCR’s) initial recommendation entailed that adverse credit listings up to the value of R10 000 would be removed, irrespective of whether the amount of debt had been paid or not, according to Sika Ackotia, a candidate attorney at Schindlers Attorneys.

In June 2013, the majority of the parliament’s select Committee for International Trade and Relations voted in favour of dropping the monetary cap of R10 000, in order that the credit amnesty would apply to any amount of debt, irrespective of whether the amount had been paid or not.

The NCR has argued that this proposal does not amount to a blanket amnesty which would result in creating more debt for consumers who cannot afford credit.

It has further released affordability assessment guidelines and adverse listing rules which credit providers are to comply with before granting a consumer credit.

The NCR aims to audit these affordability assessments on an on-going basis and will prosecute cases of reckless lending.

The NCR’s motivation for removing adverse data is that it would benefit 86% of people earning under R10 000, assist the middle class to access credit such as home loans, educational loans, increase employment opportunities and prove beneficial to those who cannot afford fees for the rescission of judgment debts which have already been settled, according to Ackotia.

“It must be noted that the removal of negative debt data from the credit profile of the consumer does not write-off the duty to repay a debt to the respective credit provider,” said Ackotia.

“Further, a consumer’s payment history would not be completely destroyed and credit bureaus would still be required to maintain a record of a consumer’s monthly payments.”

Credit providers, however, will have lost the benefit of viewing adverse credit listings.

The NCR has further confirmed that although there is a possibility that outstanding debts may remain unpaid post-amnesty, a credit provider would not be able to blacklist a consumer for the same debt.

“Key stakeholders in the economic sector such as banks and other credit providers have rightly expressed general opposition to the proposal,” Ackotia said.

Their primary concern is that the lack of access to adverse listings will lead to an increase in lending risk, as credit providers will not be able to tell the difference between consumers who have received amnesty although they are high-risk lenders and consumers who are, factually, low-risk lenders who can manage credit well.”

According to Ackotia this means that those with positive credit records may be prejudiced by high lending rates for home loans, micro loans and any other sort of credit, post-amnesty.

It further raises the question of whether a credit provider will have legal recourse against the state for unpaid credit which was granted post-amnesty, as a primary source of assessing credit risk would be removed from the credit profile of a consumer.

Another issue which has been raised is that 74% of consumers who received clear credit records under the first credit amnesty in June 2007 are currently defaulting on credit payments.

“The NCR has acknowledged concerns regarding the proposed credit amnesty and advises that it will be working with pre-existing structures within local communities in order to educate consumers to take on credit wisely,” said Ackotia.

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