Perspectives on the South African Responsible Lending Regime and the Duty to Conduct Pre‐agreement Assessment as a Responsible Lending Practice

• Published date: 01 June 2015
• Date: 01 June 2015
• Author: Corlia Van Heerden,Stéfan Renke
• DOI: http://doi.org/10.1002/iir.1233

Perspectives on the South African

Responsible Lending Regime and the Duty to

Conduct Pre-agreement Assessment as a

Responsible Lending Practice

Corlia Van Heerden*and Stéfan Renke**

Department of Mercantile Law, Faculty of Law, University of Pretoria, Pretoria, South Africa

Abstract

In the 2001 INSOL International Consumer Debt Report: Report of Findings

and Recommendations, the view was held that the solution to overspending and

over-indebtedness is inter alia to be found in the idea that prevention is better than

cure. Ex ante responsible lending practices as preventative measures to avoid

reckless credit granting and over-indebtedness are arguably more important tools

in establishing a healthy credit market than ex post measures. The focus of this

contribution, is therefore, to provide a detailed overview of the South African

reckless credit regime as a debt- prevention measure aimed at promoting respon-

sible lending, with specific focus on the aspect of pre-agreement assessment as a

core mechanism to avoid reckless credit granting and over-indebtedness. The

main features of the reckless credit regime are highlighted, and afterwards, a

detailed exposition of the evolution and extensive recent development of the

pre-agreement assessment component in South Africa is undertaken. Finally,

observations are made regarding the South African reckless regime in general

and with regard to affordability assessment specifically and its ability,

benchmarked against the essential features of a responsible lending regime as

advocated by Wilson in the book ‘International responses to issues of credit and

over-indebtedness in the wake of crisis’, to promote responsible lending. The con-

clusion is reached that benchmarked against the four characteristics of an effective

responsible lending regime as identified by Wilson, it is apparent that the South

African reckless lending regime is no ‘toothless tiger’, and that it attaches the nec-

essary amount of significance to the credit provider’s duty to take reasonable steps

to do a proper pre-agreement assessment in order to avoid reckless credit

granting. Copyright © 2015 INSOL International and John Wiley & Sons, Ltd.

*E-mail: corlia.vanheerden@up.ac.za;

**E-mail: stefan.renke@up.ac.za

Copyright © 2015 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 24: 67–95 (2015)

Published online 21 April 2015 in Wiley Online Library

(wileyonlinelibrary.com). DOI: 10.1002/iir.1233

I. Introduction

The ongoing worldwide recession did not leave the South African economy un-

touched. Statistics released by the institution responsible for the regulation of the

consumer credit market in South Africa, the National Credit Regulator,

1

show

that South African consumers incur high levels of consumer credit debt.

2

A great

number of these consumers become over-indebted as a result of their credit debt

or are at least experiencing difficulties in servicing such debts. This is underscored

by the fact that out of the 21.71 million credit-active consumers credit bureaus re-

corded, 9.60 million

3

had impaired credit records at the end of March 2014.

4

It is

also disconcerting that many South African consumers are exposed to adverse

shocks, for instance, a rise in interest rates, and therefore to the risk of becoming

over-indebted in future.

5

In the INSOL International Consumer Debt Report: Report of Findings and

Recommendations (2001),

6

the view was held that the solution to overspending

and over-indebtedness is inter alia to be found in the idea that prevention is better

than cure.

7

In the context of the prevention of over-indebtedness, responsible lend-

ing practices by credit providers play a pivotal role in avoiding consumers getting

caught in a debt trap, which leaves them locked into a vicious cycle of over-

indebtedness. It is thus of paramount importance for a country which seeks to

INSOL International Insolvency Review68

1. See, for instance, National Credit Regulator, Credit

Reports (December 2011–September 2013)–available

at www.ncr.org.za ‘accessed 18 August 2014’.

Quarter-to-quarter and year-on-year comparisons in

these reports make it possible to ascertain trends in

the credit market, such as an increase (or decrease) in

total credit extension. For instance, R107.60 billion

new credit was granted for the quarter ended

December 2011, R109.62 billion for the quarter ended

June 2013 and R117.21 billion for the quarter ended

September 2013. The statistics also differentiate

between different types of credit products. It should

be noted that mortgages account for a substantive

percentage of these amounts. It should also be noted

that the statistics provided by the National Credit

Regulator only reflect credit that is granted by

registered credit providers.

2. The total outstanding gross debtors book of

consumer credit for the quarter ended September

2013, for instance, amounted to R1.49 trillion –

National Credit Regulator (n 1).

3. In other words 44,2%.

4. National Credit Regulator, Credit Bureaux Monitor

(Quarter March 2014)–available at www.ncr.org.za

‘accessed 18 August 2014’. The information is for the

quarter ended March 2010 to the quarter ended

March 2014. It is interesting to note that at the end

of September 2007, shortly after the National Credit

Act came into effect, out of 16.9 million credit-active

consumers, 6.38 million (or 37,75%) were credit

impaired–National Credit Regulator.

5. The net wealth position of households (according to S

Walters et al, Quarterly Bulletin of the South African

Reserve Bank (December 2011) 69, available at https://

www.resbank.co.za/Lists/News%20and%20Publications/

Attachments/4899/01Full%20Quarterly%20Bulletin.pdf,

‘accessed on 18 August 2014’, the net wealth of households

represents the difference between the total assets and

liabilities in the household sector. A household is

better equipped to withstand or absorb sudden

shocks in the economy or a fall in income if there

is an increase in its net wealth position. This, in turn,

has an effect on the household’s capacity to borrow

and thus to spend or invest. Reflecting on recent

trends in South Africa, Walters et al. sound the

following warning: ‘With the growth in household

debt outpacing that in household assets, the ratio of

household debt to total assets advanced from 16,6

per cent at the end of 2003 to 19,1 per cent at the

end of 2010, suggesting that South African house-

holds over time became more vulnerable to changes

in lending interest rates and conditions.’) and debt

to income ratios (the ratio of household debt to

disposable income was 74.3% in the 4th quarter

of 2013, which is high. See the Quarterly Bulletin

of the South African Reserve Bank (March 2014)

11, available at https://www.resbank.co.za/Lists/

News%20and%20Publications/Attachments/614 0/

01Full%20Quarterly%20Bulletin%20%E2%80%

93%20March%202014.pdf, ‘accessed on 18 August

2014’) serve as indicators.

6. Hence the ‘INSOL Report (2001)’–29.

7. See also the Report of the Committee Consumer

Credit, chaired by lord Crowther vol 1 and 2 Cmnd

4596 Her Majesty’s Stationery Office, London (1971)

377–hence, the ‘Crowther Report’.

Copyright © 2015 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 24: 67–95 (2015)

DOI: 10.1002/iir