The National Credit Act and Reckless Lending.

The National Credit Act and Reckless Lending

Click here to see the case analysis of the recent judgment of Chaity Investments CC v Schoombie

The National Credit Act, Act 34 of 2005 (‘NCA’).

The provisions that prohibit reckless credit granting form part of the measures that were introduced by the NCA with the aim of resolving the problem of over-indebtedness and preventing reckless credit lending. In terms of section 81(2) of the NCAa credit provider may not enter into a credit agreement with a consumer without first taking reasonable steps to assess the consumer’s debt repayment history, existing financial means, prospects and obligations, his understanding of the risks and costs of the proposed credit, and his rights and obligations under a proposed credit agreement. The credit agreement will be reckless in terms of the NCAif the credit provider fails to conduct this assessment, irrespective of the outcome of the assessment.

If you are over indebted it may be because your  credit providers did not conduct an affordability assessment before entering into a credit agreement with you, or you did not understand and acknowledge the risks, costs or obligations of the loans, or even if you became over indebted because you entered into a credit agreement in the first place.  All these factors could be classified as reckless lending.

The following sections of the NCA apply:

A credit provider must make a credit assessment of the Consumer’s affordability[1].

This is related to the prevention and consequences of reckless credit and the NCA makes it peremptory that a credit provider cannot enter into credit agreements with a consumer without making an assessment as to the latter’s:

  • Understanding and appreciation of the risks and costs of the credit.
  • His rights and obligations involved.
  • His debt repayment history as a consumer under an existing credit agreement.
  • His existing financial means, prospects and obligations.
  • If a commercial purpose is intended with the credit, it must be able to conclude that there is a basis of success[2].

Section 80(1) stipulates the criteria for measuring reckless credit. If a credit provider fails to conduct an assessment as required by section 81(2), irrespective of what the outcome of such an assessment might have been, or despite having made an assessment and there is a preponderance of information that indicates that the consumer did not generally understand or appreciate the risks, costs or obligations under the proposed credit agreement or that if he enters into the credit agreement the consumer would become over indebted, such a credit agreement is considered reckless[3] and a court may mero motu[4]declare such an agreement reckless in any proceedings[5]. If it declares such an agreement as reckless, it is obliged[6] to consider whether the consumer is over-indebted at the time of the court proceedings because the fact that a specific agreement is reckless does not means that the consumer is over-indebted overall. If it does declare a credit agreement to be reckless and it concludes that the consumer is over-indebted, the court may suspend the credit agreement for a certain period[7] or restructure the consumer’s obligations under any credit agreement under section 87[8].

If a court sets aside, either in whole or in part, the consumer’s obligations on the grounds of reckless lending, the consumer does not have to perform any of his obligations under the agreement at all. If the agreement is suspended, as opposed to being set aside, in addition to not being obliged to making any payment during the period of suspension, no interest, fee or charge may be debited and the credit provider’s rights under the agreement or under any other law in respect of that agreement are unenforceable[9]. It’s axiomatic that when the period of suspension ends, the reciprocal rights and duties of the parties are revived and are fully enforceable except to the extent that a court may order otherwise[10]. The interest, fee and charges will not, however, be permitted to be recovered[11].

[1] Section 81(2)

[2] Section 81(2)(b)

[3] Section 80(1)

[4] Section 85(1)

[5] Section 83(1)

[6] Section 83(3)

[7] Section 83(3)

[8] Section 83(3)(b)

[9] Section 84(1)

[10] Section 84(2)

[11] Section 84(2)(b)

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