National Credit Act The Impact on the Real Estate Industry
The National Credit Act is aimed at regulating the consumer credit market, principally by improving access to credit for those previously excluded.
Many South Africans are financially illiterate, and incur credit without fully comprehending the impact thereof. Occasionally reckless credit extension by credit providers has led to the over indebtedness of poorly informed consumers.
Only about 15% of the population are able to access credit from the main banks, at regulated interest rates. Lower income groups are usually relegated to non-bank credit and informal sector loans, often at exorbitant interest rates up to ten times that paid by the wealthiest income groups.
At present, about 68% of household income is utilised to service debt in South Africa. This is not quite as high as in some first world countries, such as the United States, where the credit extension has reached a high of 140% of disposable household income.
In terms of our common law, loan agreements are fully enforceable and there is virtually no protection against abuse by credit providers. The laws promulgated to protect consumers have not been effective, for example the Usury Act, which capped the interest rates on certain loans.
Who are Credit Providers?
A credit provider is any person or legal entity that advances credit and charge interest, at arms length (Le. not loans between, for example, family members). This will include all banks, stores that advance credit and charge interest, and "loan sharks".
Any person ("consumer") is entitled to apply for credit and credit providers cannot discriminate against an applicant. There is an obligation on credit providers to advance lending to the previously disadvantaged, however, this does not mean that the banks are obliged to provide credit indiscriminately.
In terms of the Act, a credit provider is obliged to entertain each and every application for credit; to furnish a consumer with reasons for its decision not to advance credit; and to treat all credit information confidentially and not disclose such information to third parties.
Credit bureaus are also regulated in terms of the Act and may not divulge information without advising the consumer. Consumers are entitled to challenge the accuracy of the information and credit bureaus are required to investigate any such challenge.
How Does this Affect Property Transactions?
Mortgage loans are classified as credit agreements and the banks will have to comply with the provisions of the National Credit Act. The Act does not apply to the rental or leasing of property.
There are also provisions in the National Credit Act which deals with insurance policies. At present, banks can insist that insurance is taken out on the structure of the dwelling that is being purchased. The Act now compels banks to inform consumers of their right to take an insurance policy of their own choice.
The Act also provides for the registration of "Debt Negotiators" whose function would be to mediate between credit providers and consumers who have fallen into debt, and to put forward a payment plan to the courts in the event that the parties are unable to agree on a payment plan.
Protection for Credit Providers
There is some protection for credit providers, in that should a consumer fail to make a full disclosure of his financial affairs and his financial commitments, as required by the credit provider when first applying for credit, the consumer would not enjoy the protection in terms of the Act. Furthermore, if the consumer fails to make payments in accordance with the debt rearrangement, the credit provider will be able to execute and sell the asset that was financed or bonded.
The Act provides that a court may declare the operation of a credit agreement to be suspended and in the event of such a finding, the court may make an order setting aside all or part of the consumer's obligations under that agreement or suspend the force and effect of that credit agreement. The effect of the suspension is that the consumer is not required to make any payment required under the agreement; no interest, fee or other charge under the agreement may be charged to the customer; and the credit provider's rights under the agreement are unenforceable.
Test for Over Indebtedness & the Provision of Reckless Credit
A consumer would be over indebted if at the time that he applies for credit, or further credit, the information provided by him indicates that he is already unable to satisfy all his obligations in a timely manner. The credit provider must take into account the financial means, prospects and obligations of such a consumer; and the ability of the consumer to satisfy all of his obligations in a timely manner, taking into account his history of debt repayments.
A credit agreement would be deemed to be reckless if, at the time that the agreement was made, the credit provider had failed to adequately assess the consumer's obligations or proceeded to enter into a credit agreement when it is clear that the consumer would be unable to meet the credit obligations.
Default & Enforcement of Payment
The Act encourages a credit provider to assist the debtor to restructure payment of his debt. The credit provider may draw the default to the notice of the consumer in writing and propose to him that he consults with a debt counsellor and develop a plan to bring the payments under the agreement up to date. The credit provider may not commence any legal proceedings to enforce the agreement before such notice has been given to the debtor.
A debtor may at any given time bring his arrears up to date by paying all amounts that are overdue and will then be returned possession of any property that has been repossessed. A credit provider may also only approach the court for an order to enforce a credit agreement if the consumer has been on default for at least 20 business days and has not responded to the notice advising the consumer of his rights to employ the services of a debt negotiator.
Disclosure of Information
The credit provider must furnish the consumer with a written quotation setting out the cost of credit under the agreement. This quotation will remain binding on the credit provider for a certain period. In addition, the credit provider cannot increase the credit limit on the credit facility unless the consumer specifically requested this option in writing. A consumer can also at any time elect to reduce the credit limit under an existing credit facility. The credit provider is prohibited from charging the consumer a fee for reducing the credit limit or the early repayment of credit.
Cost of Credit
A credit provider charging interest in excess of the maximum interest rates determined by the Minister from time to time can only recover prescribed amounts from the consumer. A credit provider also cannot unilaterally change the interest rate under credit agreement.
Statements of Account
A credit provider must provide a consumer with statements of account on a regular basis. A consumer is entitled by notice in writing to dispute the accuracy of any information contained in such statement and the credit provider cannot take action against the consumer for non-payment until such time that this has been resolved.
It is early days and hard to predict exactly how the Consumer Credit Act will impact the property industry. The Act will undoubtedly cause banks to exercise more caution when they lend out money.
For example, the National Credit Regulator had stated that where the credit provider simply looks at the value of the asset, without considering the ability of the purchaser to repay the debt, would be regarded as the provision of reckless credit. This may well mean that the bank would be unable to recover the balance outstanding on that particular bond, for the court could make an order suspending payment of any mortgage loan repayment.
Each application for credit will have to be considered carefully and the credit obligations of the consumer need to be taken into consideration as a whole together with his ability to meet his or her monthly commitments.
Estate agents and mortgage originators will also find it more difficult to obtain bond finance and any information relating to new business will have to be very clearly communicated to the consumer.
It is uncertain how these measures will impact the housing market, but one thing is for certain, banks will have to be very careful when they lend out money!
Courtesy Agent Estate Agency Affairs Board