Study Theme 6: Reckless credit and over-indebtedness

Question 1

NCAs new two fold approach

Answer 1

❖ Prevention of reckless lending and over-indebtedness,
and
❖ Alleviation of over-indebtedness

Question 2

❖ EXCLUSIONS:

Answer 2

❖ Measures not applicable if:
❖ Consumer is juristic person
❖ Provisions regarding reckless credit not applicable if:
➢ Pawn transaction;
➢ Incidental credit agreement;
➢ Temporary increase credit limit under credit
facility

Question 3

Reasoanble steps in which credit providers must take before enetring into a credit agreement

Answer 3

They must take reasonable steps to assess:
➢ Proposed consumer’s understanding and appreciation of risks, costs, rights and obligations;
➢ Proposed consumer’s debt re-payment history as consumer under credit agreements;
➢ If there is a commercial purpose for applying for credit, the reasonable estimated future revenue flow
from the business purpose; and
➢ Proposed consumer’s (and family and household
member’s) existing financial means, prospects and
obligations [Regulation 23A of NCA applies to this
one].
❖ Regulation 23

Question 4

Regulation 23A
Assessment Requirements:

Answer 4

Fair and Objective: The assessment must be conducted in a fair and unbiased manner.

Compliance with Regulation 23A: The assessment must adhere to the specific guidelines and criteria outlined in Regulation 23A.

Question 5

❖ Objective of Reg

Answer 5

Assess whether the consumer:
❖ Can afford the proposed credit agreement, or
❖ An increase in the limit of an existing credit agreement.

To determine this, the credit provider must assess the
consumer’s:
1. Discretionary Income
2. Mininum living expense

Question 6

1. Discretionary income

Answer 6

❖ Amount available to pay the credit instalments.
❖ Includes gross monthly income, less statutory deductions, less necessary living expenses and less
other committed payment obligations.

Question 7

2. Minimum living expenses

Answer 7

❖ Credit provider must deduct prescribed fixed amounts of
living expenses e.g. food, transport etc.
❖ Unless convinced otherwise that such expenses are the
prescribed amount.
❖ Regulation provides remedies to consumers who are
aggrieved by the outcome of the affordability
assessment

Question 8

❖ ABSA Bank v Kganakga

Answer 8

❖ The court held that with regard to the proposed
consumer’s understanding and appreciation of risks,
costs, rights and obligations,
❖ The following factors are to be considered by the courts:
❖ Firstly, the consumer’s state of mind relating to their
understanding and appreciation of the risks, costs, rights
and obligations under the agreement.
❖ Second is the consumers previous experience and
behaviour as a consumer under credit agreements.
❖ Third, the finances of the proposed consumer at the time
of the application

Question 9

❖ Standard Bank v Panayiotts

Answer 9

❖ Case dealt with the meaning of “financial means,
prospects and obligations”.
❖ Held that: Financial means include income and expenses
as well as assets and liabilities.
❖ Prospects must include prospects of improving the
consumer’s financial position, such as increases, and
even liquidating assets

Question 10

❖ Truworths Ltd v Minister of Trade and Industry

Answer 10

❖ Court set aside Regulation 23A(4) and
❖ Held that it was unfair to require unbanked and informal
traders to produce financial statements in order to
validate their gross income.
❖ Mainly because most of them cannot comply with this
requirement.

Question 11

Credit provider’s
complete defence

Answer 11

❖ NCA places obligation on consumer to answer credit
provider’s request for information, fully and truthfully.
❖ This is where credit provider obtains the information to do
the assessment.

Question 12

❖ Defence:

Answer 12

❖ Credit provider has a defence against an allegation of
reckless lending if consumer failed to answer fully and
truthfully.
❖ According to Court/Tribunal the credit provider’s ability to
do a proper assessment was materially affected by this
failure.

Question 13

Forms of reckless
credit

Answer 13

❖ There are 3 forms of reckless credit
❖ Form is determined by credit provider’s assessment
obligation and what happens thereafter

Question 14

The credit provider’s obligation involves:

Answer 14

Conducting Thorough Assessments: Ensuring that consumers can afford the credit.

Reassessing When Necessary: Re-evaluating the consumer’s financial situation if it changes significantly before granting additional credit.

Failure to meet these obligations can result in reckless credit, harming consumers and potentially leading to legal consequences for the credit provider.

Question 15

❖ First form of reckless credit

Answer 15

❖ Failure to conduct assessment at time credit agreement
was made or at time, the amount in terms of agreement is
increased.
❖ The mere failure to conduct compulsory assessment
constitutes recklessness.
❖ Is irrelevant whether consumer could afford the credit or
not at time of conclusion.

Question 16

❖ Second form of reckless credit

Answer 16

❖ If consumer did not generally understand the risks, costs
and obligations under proposed agreement.
❖ The disregard of consumer’s ignorance constitutes
recklessness.

Question 17

❖ Third form of reckless credit

Answer 17

❖ If outcome of the assessment indicates that entering into
agreement will cause over-indebtedness but agreement
was entered into regardless.
❖ The granting of credit thus directly causes overindebtedness of consumer.
❖ This is therefore reckless.

Question 18

❖ Over-indebtedness:

Answer 18

❖ Refers to preponderance information that a consumer is
unable to satisfy all obligations under all credit
agreements, in a timely manner
❖ Having regard to their financial means, prospects,
obligations; and
❖ The probable propensity/likelihood to satisfy all
obligations under all agreements in a timely manner
indicated by debt re-payment history.

Question 19

❖ S81 of NCA

Answer 19

❖ The Act prohibits the entering into reckless credit
agreements.

Question 20

❖ SA Taxi Securitisation v Mbatha

Answer 20

❖ Must the consumer be allowed to retain the financed
item (e.g, the motor vehicle) in his possession during the
period of the suspension?
❖ Court held that all the elements of the agreement would
have to be suspended.
❖ The consumer would therefore not be entitled to continue
to retain possession of the vehicle during this period.
❖ And, at the same time, the consumer would not have to
make any payments under the agreement, during this
period.

Question 21

❖ Restructuring/re-arrangement:

Answer 21

❖ A consumer’s obligation may be rearranged by:
➢ Extending period of agreement reducing instalments.
➢ Postponing, during specified period, the dates on
which payments are due under credit agreements; or
➢ Both

Question 22

❖ SA Taxi Securitisation v Dick Lennard

Answer 22

❖ May the court, when re-arranging, reduce the interest
rate?
❖ No. The NCA authorises the court to extend the period of
payment and reduce the amount of each payment
accordingly.
❖ No reference is made to any other terms of the ca which
may be re-arranged by the court.

Question 23

❖ ABSA V De Beer

Answer 23

❖ Court held that where a credit provider alleges that a
credit assessment was in fact concluded,
❖ They bear the onus of proving it to the court

Question 24

Consequences of
reckless credit

Answer 24

❖ If there is reckless lending, there are two ways in which
this comes to serve before the courts:
s83
s86(6)(b)

Question 25

Section 83 of the NCA:

Answer 25

Suo Motu Action: This means the court or tribunal can take action on its own accord.

Without Request: The court will intervene without any request or application from the parties involved.

Question 26

Section 86(6)(b) of the NCA:

Answer 26

​
Consumer Declaration: This section allows consumers to seek a declaration of reckless credit.
​
Action by Consumer: Unlike Section 83, here the consumer must actively seek the declaration.

Question 27

❖ Consequences of reckless credit
❖ First and second instance:

Answer 27

❖ Court/Tribunal has the powers to make an order:
➢ Setting aside all/part of consumer’s rights and
obligations in terms of particular credit agreement; or
➢ Suspending the force and effect of particular credit
agreement until determined date

Question 28

❖ Third instance:

Answer 28

❖ Court/Tribunal must consider if consumer is overindebted at time of those proceedings, if yes:
➢ Has the power to make an order:
➢ Suspending particular credit agreement until
determined date; and
➢ Restructuring consumer’s obligations under any
other credit agreement

Question 29

❖ Suspension:

Answer 29

❖ Consumer is not required to make payments;
❖ No interest/fee/charge may be charged; and
❖ Rights of the credit provider are unenforceable.
❖ After suspension, the rights and duties are revived and
enforceable; BUT
❖ Interest/fees/charges may still not be charged with regard
to suspension period.

Question 30

Credit quotation

Answer 30

❖ If the credit provider has conducted the assessment and
is satisfied that the consumer understands the credit
agreement, can afford it, etc:
❖ The credit provider must issue the consumer with a preagreement quotation in terms of S92
❖ A credit quotation remains binding on the credit provider
for a period of five business days, subject to exceptions
❖ The quotation sets out primarily financial info regarding
proposed credit agreement

Question 31

❖ Purpose of a credit quotation

Answer 31

❖ Pre-disclosure agreement which enables consumer to
make an informed decision on whether they can afford
the credit and search for cheaper credit.
❖ If consumer accepts the quotation, the credit agreement
is entered into between the parties