Wednesday, July 18, 2007


By Michael Doherty

A lot of far-reaching provisions of the National Credit Act No. 34 of 2005 ("Act") will come into operation on 1 June 2007. The Act aims to protect consumers from unscrupulous lending practices and to compel lenders to ensure that consumers are financially fit before loans are advanced to them. Banks and other credit providers are incurring billions of Rands of expenditure in order to comply with the requirements of the Act.

Consumer Rights

The Act confers a right upon every natural person, juristic person and association of persons to apply to a credit provider for credit and provides protection against discrimination in respect of credit. The non discrimination provisions are detailed and relate specifically to such matters as assessing eligibility for credit, deciding whether to refuse or offer credit, cost of credit, the terms and conditions of a credit agreement, assessing or requiring compliance with the terms of a credit agreement, exercising any right of the credit provider, determining whether to continue, enforce, seek judgment in respect of or terminate a credit agreement and determining whether to report, or reporting any credit information or record. A credit provider is furthermore prohibited from reacting adversely in response to a consumer exercising, asserting or seeking to uphold any right, by discriminating against the consumer, penalising the consumer, altering the terms of a credit agreement to the detriment of the consumer or taking any action to accelerate , enforce, suspend or terminate a credit agreement.

Further rights are conferred by the Act upon consumers to be advised of reasons for the refusal of credit, to receive documents in an official language that the consumer understands, to receive information in plain and understandable language and to receive the required documents in the prescribed manner.

Credit Marketing Practices

When entering into a credit agreement, a credit provider must present a statement of the following options to the consumer and afford the consumer an opportunity to select any of them:
• to decline the option of pre-approved annual credit limit increases; and
• to be excluded from any-
▫ telemarketing campaign;
▫ marketing or customer list that may be sold or distributed by the credit provider; or
▫ any mass distribution of email or sms messages.

A credit provider is required to maintain a register of all options so selected by consumers and is prohibited from acting contrary to the option selected by a consumer.

Negative option marketing is prohibited. A credit provider may not make an offer to enter into a credit agreement or induce a person to enter into a credit agreement, on the basis that the agreement will automatically come into existence unless the consumer declines the offer. Similar prohibitions apply in respect of offers to increase credit limits and proposals to alter or amend credit agreements.

When a credit provider tries to persuade a consumer to apply for credit or enter into a credit agreement, the credit provider must not harass the consumer. Restrictions are also imposed upon entering into a credit agreement at a private dwelling and visiting a consumer’s place of employment for the purpose of inducing the consumer to apply for or obtain credit, or entering into a credit agreement there. Prohibitions are imposed upon the payment of fees, commissions, payments, consideration or any other monetary benefit to an employer or representative trade union, in exchange for a permitted visiting arrangement with the employer or trade union, or as a consequence of a credit agreement entered into during or as a result of that arrangement.

The Act also regulates advertising by credit providers. Any solicitation by or on behalf of a credit provider for the purpose of inducing a consumer to apply for or obtain credit must include a statement incorporating the information prescribed for that particular type of transaction.

Over-indebtedness and reckless credit

A significant part of the Act deals with over-indebtedness and reckless credit. These provisions do not however apply to a credit agreement with a consumer who is a juristic person.

If it is alleged in court proceedings that the consumer under a credit agreement is over-indebted, the court may either refer the matter to a debt counsellor for a recommendation to the court, or make an order to relieve the consumer’s over indebtedness.

A credit agreement is considered to be reckless, if the credit provider failed to conduct the required assessment or entered into the credit agreement with the consumer despite the fact that the preponderance of information available to the credit provider indicated that-
• the consumer did not understand or appreciate the consumer’s risks, costs or obligations under the proposed credit agreement; or
• entering into that credit agreement would make the consumer over-indebted.

The Act prohibits a credit provider from entering into a reckless credit agreement with a prospective credit receiver. Before entering into a credit agreement, a credit provider is required to take reasonable steps to assess-
• the proposed consumer’s-
▫ general understanding and appreciation of the risks and costs of the proposed credit, and of the rights and obligations of a consumer under a credit agreement;
▫ debt re-payment history as a consumer under credit agreements;
▫ existing financial means, prospects and obligations; and
• whether there is a reasonable basis to conclude that any commercial purpose may be successful, if the consumer has such a purpose for applying for that credit agreement.

The court may declare that a credit agreement is reckless. If it does so, the court may make an order-
• setting aside all or part of the consumer’s rights and obligations under that agreement, as the court determines to be just and reasonable in the circumstances; or
• suspending the force and effect of that credit agreement.

If a court declares that a credit agreement is reckless, the court must further consider whether the consumer is over-indebted at the time of the court proceedings. If so, the court may make an order-
• suspending the force and effect of that credit agreement until a date determined by the court when making the order; and
• restructuring the consumer’s obligations under any other credit agreements.

During the period that a credit agreement is suspended-
• 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 consumer; and
• the credit provider’s rights under the agreement, or under any law in respect of that agreement, are unenforceable, despite any law to the contrary.

Other Topics

The provisions coming into force on 1 June 2007 also deal with the following topics:
• Unlawful credit agreements and provisions
• Disclosure, form and effect of credit agreements
• Consumer’s liability, interest, charges and fees
• Statements of account
• Alteration of credit agreements
• Rescission and termination of credit agreements
• Collection and repayment practices
• Surrender of goods
• Debt enforcement by repossession or judgment

Bottom Line
The legislated consumer protection will impact greatly upon the procedures followed by banks when marketing credit and entering into credit agreements. It is noteworthy that banks will be required to demonstrate that they have not entered into reckless credit agreements with personal customers and have not created over-indebtedness on the part of personal customers. Courts are given the power to intervene when a credit agreement with a personal consumer is considered to be reckless and when a personal consumer is considered to be over-indebted.