(All opinions expressed in the Expert Opinion section are those of the writer and do not necessarily reflect the opinion of the Credit Ombud.)
The proposed credit information amnesty will provide relief to over-indebted consumers and significantly improve the regulation of the consumer credit market.
By Lesiba Mashapa, National Credit Regulator (NCR) Company Secretary
The introduction of the National Credit Act 34 of 2005 in 2006 and 2007 came at a time when there was insufficient protection for consumers against over-indebtedness and reckless lending. This momentous piece of legislation came as a beacon of hope for millions of South Africans who had been unprotected from abusive practices in the consumer credit market.
But six years since the introduction of the Act, many South Africans are highly indebted and credit impaired. As at the time when the research on the credit amnesty began, nearly half of all credit-active consumers (some 9 254 300) were credit impaired, having at least one account at least three months in arrears or worse. Of that number, some 5 355 680 were significantly credit impaired, having adverse information, judgments and administration orders. In general, the level of consumer credit impairment has grown significantly: from 36,4% in June 2007 to 47% in September 2012. In addition, most personal finance indices and living standards indicate that the personal finances of South Africans are unhealthy.
While the constant increase in credit impairments since 2007 cannot be attributed to one factor, inadequate affordability assessments conducted on credit applicants is one of the causes of consumer over-indebtedness. A number of weaknesses were identified with respect to how these assessments are conducted. These include, amongst others:
- credit providers lending to the maximum of consumers’ discretionary income, leaving no margin to cater for changes in the financial circumstances of consumers;
- the acceptance of low living expenses declared by consumers in credit applications; and
- delays in approving credit from the time credit information was obtained from credit bureaus.
Assessing the creditworthiness of a consumer requires that credit providers conduct comprehensive assessments that take into account all available income and expense information of the consumer. The assessment should also consider both the consumer’s propensity and ability to repay the credit, since these two factors are not mutually exclusive and neither one of them is sufficient in itself.
There are severe implications for over-indebted consumers who are listed at the credit bureaus. There is a direct correlation between credit impairment, on the one hand, and the cost of credit, access to employment, and rental accommodation on the other. Consequently, consumers whose credit records are impaired are more likely to pay more for new credit and find it difficult to obtain employment and rental accommodation. If they have civil judgments on their credit records, they often have to incur additional costs to have the judgments rescinded by the courts, so that these may be removed from their credit records.
The critics of the credit amnesty say that the difficulties experienced by over-indebted consumers with poor credit records should be addressed without the removal of adverse listings. They argue that no adverse information should be removed and Government should instead focus only on addressing the underlying causes of consumer over-indebtedness and high credit impairment. This sounds appealing, but what it really means is that if you are over-indebted and have a poor credit record, no one will assist you. Cannot find a job because your credit record is impaired? Tough luck, you are on your own. Wait for the retention period on the listing to expire and look for a job only once the listing falls away. Your financial position and affordability have improved since you have been listed, but you cannot get access to new credit? Sorry, that’s your problem.
The path that the proposed credit amnesty is offering is fundamentally different from the one that does not recognise that there is a need to assist many over-indebted South Africans who are struggling at the moment. It is a path that will provide relief to them by removing the adverse listings while introducing countervailing measures, such as the affordability assessment guidelines, new listing rules, prohibition on the collection of prescribed debt, and effective credit literacy interventions to address the underlying causes of consumer over-indebtedness.
For many consumers, it is expensive to rescind paid-up civil judgments that are listed on their credit records. The amnesty proposals will address this problem by requiring credit bureaus to remove paid-up civil judgments from consumers’ credit records on submission of proof of payment. The same will apply to adverse listings where the underlying debts have been settled. These proposals will act as an incentive to consumers to repay their debt and are obviously to the benefit of credit providers as well.
There is clearly a need to ensure that the scope and impact of the proposed amnesty are not detrimental to the industry and consumers. It would clearly not be helpful to make consumers fall deeper into debt or for credit providers to ignore consumers’ repayment history and behaviour. The main concerns expressed by some industry associations are that the removal of data will enable consumers to obtain more credit that they cannot afford to repay, increase the risk of defaults, make it difficult for credit providers to price for risk and differentiate between high-risk and low-risk consumers, and prejudice consumers with unimpaired credit records.
The proposed amnesty has sought to strike a balance between the interest of the over-indebted consumers and credit providers. The payment profile data will not be removed at all. This information shows how every account is paid on a monthly basis. It is reflected by credit bureaus for up to three years per account. Moreover, many credit providers make use of this information in credit scorecards for longer periods after the expiry of the statutory data retention period.
The introduction of the affordability assessment guidelines, prior to the credit amnesty, is aimed at ensuring that credit is not given to consumers who cannot afford to repay it. These guidelines are also intended to offset any potential unhealthy surge in credit acceptances following the implementation of the credit amnesty.
While the industry may have a different view on the amnesty, there will be a need for the industry to work together with the Department of Trade and Industry and the NCR on the implementation of the credit amnesty legislation.