WORLD AT SIX , The credit act and its loopholes

28 November 2012

The National Credit Act may be a good idea, but implementation of the act will not be easy…especially when it comes to debt counsellors. For one, there’s a serious shortage of counsellors, while there are also a number of loopholes for the unscrupulous credit provider.

Bruce Whitfield:
Steven Logan, the head of Logan Attorneys, the National Credit Act coming into force, the final elements of it Steven on Friday. Three elements which theoretically should be possibly the most significant pieces of consumer legislation possibly in South Africa’s history?

Steven Logan:
Yes, I absolutely agree with that, I think they are very significant. If you think about affordability as a criteria for lending, it is a brand new legal concept, previously banks gave some sort of, well they really did not do anything, but they kind of acknowledged it and said okay, one third of your income must be available to pay off this debt, but they did not go and check anything.

Bruce Whitfield:
They did not check whether or not the other 18 people you had applied to for credit had actually done the same thing?

Steven Logan:
Quite right. So you had maybe six people giving you credit and you could not actually afford more credit than you were applying for, but you got it anyway. For the first time now, you cannot get that credit and some consumers are going to moan and scream about it, but actually it is really overdue.

The next thing is the reckless credit that people get away with especially on the micro lending market that is going to be unenforceable. So these micro lenders that have got away with basically enslaving people into debt are not going to be able to do that anymore.

Bruce Whitfield:
In very simple terms, I could have gone off and got four or five micro loans and suddenly, I would have defaulted on one of those loans and that person would have had the first dibs on my assets. The other four guys might have lost out, but claimant number one would have benefited and people were making money out of this.

Steven Logan:
Well our debt collections industry is so advanced, it is one of the most advanced in the world. And basically, as soon as you are in default, you are guaranteed to get more money than you would underneath your general agreement. So there is a huge incentive to allow people to go into default because you are going to get more money out of it.

Bruce Whitfield:
Let’s talk about the National Credit Act, three elements coming into force on Friday, what exactly are they?

Steven Logan:
Okay, it is affordability which I have mentioned, you cannot get credit unless you actually afford it. Reckless lending, this is practiced by anybody who does not explain the risks of the credit being entered into and does not do a proper affordability testing, which looks at your income, looks at your credit history, and looks at your financial obligations.

And then the last thing is debt counselling, because for the first time now, you actually have an entity, debt counselling, it is usually going to be individuals to start with, who you can approach and say look, I cannot afford this, please help me, I have got all of this debt, please restructure it. And for the first time, a debt counsellor can make sure that a credit provider actually agrees, is forced to accept a low payment, to take payment over a longer period of time.

Whereas previously, being in the business for several years, I know, I can tell you that creditors were not interested. You would go to them, you would say look, this person can only afford R600 per month, your prorate share is R50 per month or R60 and they would say, forget about it, I am not going to do that, I would rather take judgement, I would rather go and attach whatever goods I can and make their lives as miserable as possible, not that that was the intention, but really, that is how it came across.

Bruce Whitfield:
They wanted their money. Ultimately they were entitled to it and they wanted the money and they could not see the bigger picture and now this law is going to enforce that. Banana skins in terms of the new legislation.

There always are banana skins, there are bound to be plenty of test cases as well. So many potentially thorny issues. I look at this and I think to myself, debt counselling had got to be probably one of the thorniest issues in this particular piece of legislation. Is the National Regulator geared up for this particular aspect?

Steven Logan:
You know, I have got a lot of admiration for the National Credit Regulator. What they have done is, they have tried to do a pilot testing, where they actually do debt counselling and you can phone the National Credit Regulator ahead of the implementation of the act and they have seen that there is a lot of work to be done and they have tried to get on top of it, but it looks like they are way, way, way short of the numbers of debt counsellors they need.

Bruce Whitfield:
How many debt counsellors are actually needed in South Africa as we stand at the moment?

Steven Logan:
Well, it is really all thumb sucks, but at the moment, the National Credit Regulator is suggesting that we need upwards of 300.

Bruce Whitfield:
And as I understand it, there are probably fewer than 50 that have actually signed up so far and we have got this act been implemented on Friday?

Steven Logan:
Well, I know that I am one of the very first applicants and I am still waiting for my debt counselling certificate.

Bruce Whitfield:
And it is hardly a lucrative business, is it?

Steven Logan:
At R50 an application?

Bruce Whitfield:
Explain this to me because it is actually important and I guess the reason why there have not been a flood of applications for people to become debt counsellors, let’s say at best, 50 people have been approved so far to be debt counsellors, 50 out of the 300 that the National Credit Regulator wants, at R50 per application, can you ever make any money? Is it a business model that is actually worth while for you to pursue?

Steven Logan:
Well, speaking personally, we have looked into it and the Debt Counselling Association of South Africa has looked at the figures. So a new body formed for this purpose, and there is no way that you can attract the kind of people who have the financial, legal and other expertise for less than a salary of R15 000 per month.

Now that sort of person, if you look at the other start up costs, you are looking at an approximate start up cost in our approximation of about R60 000 to R70 000 in capital outlay over the first few months of operation and the R50, as you can imagine, just goes nowhere, it won’t cover the initial telephone calls to the Credit Bureau to get the information.

Bruce Whitfield:
But somebody who earns R15 000 per month for example, say that is R800 a day, roughly, on a 22 day working month. They have got to process 16 applications, or 16 debt counselling issues, just to break even, and that is before they have actually had a cup of coffee, taken up space in the office and made a phone call.

Steven Logan:
Look, it is highly intensive from a work perspective. There is a huge amount to do. Most debt counsellors are just not geared for it, even if they have expertise in it, they actually need a huge amount of technology and other infrastructure to actually deliver and do it really on an effective basis.

The economies of scale and debt counselling require a huge number of applications to be handled very effectively and if you are sitting with a pencil behind your ear, in some remote location without a computer and proper technology, you just are not going to be able to do it.

Bruce Whitfield:
Do you have any serious concerns about the effectiveness, at least initially, of the National Credit Act?

Steven Logan:
I think that basically, most of the Credit Act provisions are 100 percent possible. You can actually see…

Bruce Whitfield:
The intention is good, the legislation is good, but implementation is always another story.

Steven Logan:
The problem is mainly around debt counselling. The informal debt counselling which has taken place todate is not going to be replaced overnight by formal debt counselling as envisaged by the Act. The problem is, will it ever be replaced by the formal process?

The intention was to make sure that creditors come to the party and actually play by the rules and make sure that people who are over indebted are actually getting first of all, proper investigation as to whether they were lent too recklessly and secondly, actually be given a payment arrangement which is enforceable. Now, in the informal process, that is not likely to happen because credit providers have no incentive to go and look as to whether they extended credit recklessly and secondly, they will try and get as much money out of the process as possible.

The debt counselling formal procedures however is aimed at making sure that the person has enough to live on and actually pays all their debt off over time. So there is a lot to see but that is the real problem area.

Bruce Whitfield:
Are there huge loopholes here for unscrupulous lenders to continue taking advantage, despite the fact that implementation happens June the first?

Steven Logan:
Yes, I think they are, I think that is the biggest worry I have, is that unscrupulous credit providers will just get away with murder. They will be able to say, we have referred a person to a debt counsellor, but actually, we are undertaking an informal debt counselling process.
And they might, in that informal process, because there is no requirement to be fair, actually prefer themselves and especially those credit providers who know they are guilty of reckless lending, have more of an incentive to really try and keep this process away from the formal process.

Bruce Whitfield:
So, poacher, again, keeper, that whole thing all over again?

Steven Logan:
Yes, I think it is going to be interesting to watch this space.

Bruce Whitfield:
Steven Logan as always thanks very much indeed for taking the National Credit Act and making it tangible for all of us. Thank you very much indeed and he is the head of Logan Attorneys.

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