Section 1: Consumer Credit

WEEK 1 - 2

3. Types of Credit Agreement under the NCA

Last week we discussed the general concept of what constitutes a ‘credit agreement’ for the
purposes of the NCA. This involves any agreement in which credit is granted to a ‘consumer’
(as defined in the NCA) and where there is a cost to that credit (interest, fees, or charges).
This week I will set out the various sub-categories of credit agreement under the NCA.
Essentially, there are three high level categories: (1) Credit Facility; (2) Credit Transaction;
and (3) Credit Guarantee. Under category (2) there are also various sub-categories. In what
follows, I will set out each category and break it down from there further as required, using
examples where necessary.

3.1 Credit Facility

A credit agreement where the credit provider supplies goods or services to the consumer OR
pays money to the consumer OR pays money to a third party as directed by the consumer,
AND:

a) payment for the above is deferred,

b) there is a cost to this credit in the form of interest, fees, or charges.

This is a very common form of credit agreement, which includes credit cards from a bank;
retail store cards; and bank overdraft facilities. Essentially the consumer is provided with a
mechanism in order to access credit on a revolving basis.

3.2 Credit Transaction

This category includes several specific types of credit agreement, which are individually
defined. Some of these definitions overlap (the NCA is not the best drafted statute):

a) Pawn transaction

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 Money is lent to a consumer by a pawnbroker, who takes an item of the consumer’s
movable property as security. The property is returned when the loan is repaid, or
sold if it is not.

Pawn shops are not a new concept, nor are they only found in South Africa. The
NCA has extended formal statutory regulation to this common type of credit
agreement.
b) Discount transaction
Goods or services are provided over a period of time AND a discount is offered if
payment is received before a certain date.

Kelly-Louw & Stoop Consumer Credit Regulation in SA (Juta, 2012) provide this
example (pp 59-61): a store sells goods for R5000, if payment is received by one date.
The cost will increase to R6500 if payment is received thereafter. They also note (ibid):
according to the definition provided in the NCA, there does not need to be any interest,
fees, or charges beyond this. [The higher price charged after a particular date indicates a
cost of credit, bringing this within the general definition of credit agreement provided
above.]

c) Incidental credit agreement

Similar to a discount transaction (larger amount payable after a specified date), but
the consumer receives an account from the credit provider (setting out the relevant
charges). If payment is not received by specified date, then interest, fees or charges
become payable.

An example of this type of credit agreement is the cellphone contract, where an account
is received, and interest is charged after a specified date if no payment has been received
by then. Note: for the purposes of the NCA, this type of contract only becomes an
‘incidental credit agreement’ once the relevant date has passed and interest begins to
accrue. [This is because before this date there is no cost of credit, hence leaving the
agreement outside of the general definition of ‘credit agreement’.]

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 d) Instalment agreement

Movable property is sold to a consumer and the price is paid in instalments over a period
of time. Interest, fees, and charges are added to these instalments. Sometimes the
consumer only becomes owner of the goods once the price is paid in full, but this does
not have to the case and depends on the specific contract terms.

This type of credit agreement is often used in vehicle finance arrangements. If the
credit provider reserves ownership in the goods until the last instalment is repaid, this
provides it with a measure of security: if the consumer defaults on the repayments, the
credit provider may cancel the agreement (for breach) and thereafter obtain a court order
to repossess the goods.

FYI: this is similar to what used to be referred to as ‘hire purchase’ agreements. Many
South Africans bought assets (such as furniture) on these terms in the past and obtained
ownership of the goods only after repaying the price plus interest in instalments over
time.

e) Mortgage agreement
A credit agreement where the consumer borrows money from the credit provider and
there is a mortgage bond registered over immovable property belonging to the consumer
in order to secure the loan. (Mortgages will be discussed in the ‘Security’ module.)
Interest, fees, and charges are levied on the consumer as part of the credit agreement.

This is the type of credit agreement entered into by many when buying a home to live in.
By mortgaging the home (and the land on which it is situated) to the bank, the consumer
is able to provide sufficient security to the bank in order to cover the bank’s risk in lending
the large sum of money needed for the purchase.

f) Secured loan

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 A credit agreement where the consumer borrows money from a credit provider; interest,
fees, and charges are payable on the loan; and the credit provider takes security over one
or more items of the consumer’s moveable property.

There are various forms of security available for use over movable property, we will
discuss these further in the module on ‘Security’. An example would be where the
consumer borrows money from a bank and gives the bank rights over the consumer’s
shares in a company as security for the loan. Should the consumer fail to repay the loan,
the bank may sell the shares to recover the debt.

g) Lease
MOVABLE property is rented to the consumer, who pays rent in instalments over time.
At the end of the lease, ownership in the property passes to the consumer. There is a cost
to this credit in the form of interest, fees, or charges.

NB: this is different to a lease at common law (which involves temporary use of property).
Instead this is similar to what is known as ‘rent-to-own’ in the USA and also overlaps
with an instalment agreement. [It should at this point perhaps be noted that the NCA was
drafted by a Canadian.] Depending on whether goods are leased or purchased, there may
be different accounting treatment from an instalment agreement, however. This is
because in a sale, the property reflects as an asset of the consumer, whereas in a lease,
the property belongs to the lessor and consumer is merely paying for its use.

NB further: Movable property does not include land or premises in which to live. A lease
of accommodation is classed as a lease of IMMOVABLE property, which we saw under
topic 2.2 above is an example of an excluded agreement, not covered by the NCA.

h) Other agreement with credit + fee/charge/interest: section 8(4)(f).

Any credit agreement where money is lent to a consumer and there is a cost
to this credit. (The ‘catch all’ provision.)

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 A catch all provision is intended to capture those types of agreement where
money is lent to a consumer at a cost, but the credit agreement in question
does not fit one of the recognised categories. In order to avoid a situation
where such consumers are not protected, the NCA includes this general
category.

NB: what does this mean for a credit agreement which does not fit the
recognised categories under the NCA and where there is no cost of credit?
For example, an interest free loan. Would such a loan be subject to the NCA?

3.3 Credit Guarantee

An agreement where a consumer undertakes to settle an obligation owing to a credit
provider by another consumer in terms of a credit agreement subject to the NCA.
This includes a suretyship (discussed further under the ‘Security’ module).

NB: both the party providing the credit guarantee and the underlying debtor must be
consumers AND the underlying debt must be subject to the NCA. (See the rules on
application of the NCA to credit agreements under topic 2 above; AND see rules on
who is a consumer (topic 1.3) and what is a credit agreement (topics 1.5, 3.1, 3.2
above).)

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Using the above description and diagram, let’s play around with some examples:

Example 1: Party A ‘Credit Provider’ is Big Bank Ltd; Party B ‘Underlying Debtor’ is Mr
Jones; and Party C ‘Surety’ is Mrs Smith. Does the NCA protect the surety, Mrs Smith?

Answer: We need to check the above facts against the rules of application stated above.
The underlying debtor, Mr Jones, and the surety, Mrs Smith, are both natural persons
and hence ‘consumers’ for the purposes of the NCA. In order for the suretyship agreement
between Big Bank and Mrs Smith to be protected as a ‘credit guarantee’ under the NCA, we
now just need to know if the underlying credit agreement between Big Bank and Mr Jones is
subject to the NCA. Assuming that this loan involves a cost of credit (interest, fees, or
charges) the NCA will apply to it. This then means that suretyship agreement between Big
Bank and Mrs Smith is covered by the NCA and constitutes a
‘credit guarantee’. [This would mean that the various protections which the NCA
provides to consumers would be available to Mrs Smith.]

Example 2: Party A ‘Credit Provider’ is Big Bank Ltd; Party B ‘Underlying Debtor’ is ABC
(Pty) Ltd; Party C ‘Surety’ is Mrs Smith, who is a director of ABC (Pty) Ltd. Does the
suretyship agreement between Big Bank and Mrs Smith constitute a ‘credit guarantee’ for
the purposes of protection by the NCA?

Answer: Mrs Smith (the surety) is a natural person and hence a consumer under the NCA.
But is the underlying debtor ABC (Pty) Ltd a consumer? ABC (Pty) Ltd is juristic person,
so we need to know its asset value and annual turnover in order to answer this. [As
above, both must be below R1m.] Assuming that ABC (Pty) Ltd is a consumer, we then
need to know the size of the credit agreement between Big Bank and ABC (Pty) Ltd.
[Remember, large credit agreements (= loan of R250 000 or more; or = any credit agreement
secured by a mortgage bond) where the borrower is a juristic person will never be protected
by the NCA.] Assuming that ABC (Pty) Ltd is both a consumer and that the credit agreement
is not a large one, the NCA would apply to the loan between Big Bank and ABC (Pty) Ltd.
Only if this is true would Mrs Smith as surety be protected by the NCA (that is, the suretyship
agreement between Big Bank and Mrs Smith = ‘credit guarantee’).

3.4 Credit Agreement Size Classifications

The NCA categorises credit agreements into three size classes:

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 a) Small = R15 000 or less;
b) Intermediate = between R15 000 and R250 000;
c) Large = R250 000 or

more. Irrespective of amount:

• Pawn transactions: always small

• Mortgage transactions: always large

The reason for size categorisation is that particular rules and exclusions apply according to
size. For example: even a juristic person which qualifies as a consumer is only protected by
the NCA if capital amount borrowed is below R250 000 and there is no mortgage securing
the loan. (In other words, as above, a ‘large’ loan to a juristic person is never subject to NCA.)

4. Other relevant NCA actors

In this topic 4, I provide some basic details about some of the key role-players under the
NCA. These are the entities and persons who will reappear in our narrative in the later topics
of this module.

4.1 National Credit Regulator

The National Credit Regulator (‘NCR’) is an independent juristic person, set up under
the NCA to promote and support its broad aims. The NCR regulates the consumer
credit industry. It also maintains a register of credit bureaux; credit providers; and debt
counsellors. (This is the body with whom credit providers must register.) The NCR promotes
informal dispute resolution by investigating
and dealing with complaints by
consumers.

4.2 Credit Bureaux

(Singular = credit bureau; plural = credit bureaux.) These are independent repositories of
consumer credit information. Credit bureaux must register with NCR and may not be a
natural person. (That is, they must be incorporated as a juristic person.) Credit bureaux
investigate consumer credit records and maintain data on these. In this process, the credit
bureaux must take reasonable steps to ensure accuracy. This is because it is common for a
credit provider to do a background check on a consumer’s credit history with a credit bureau
before entering into a new credit agreement with them. Sometimes this is also done by a
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landlord before agreeing to rent immovable property to the consumer. Hence negative
information (Eg: previous non-payment; court judgments ordering payment) can be an
obstacle for a consumer. The NCA aims to make these information repositories more
transparent and to establish procedures to challenge incorrect information.

4.3 Debt Counsellors

These are natural persons who have registered as such with NCR. Debt counsellors must
have certain required qualifications and experience as stipulated in National Credit
Regulations. They must also pass a dedicated debt counselling training course. Their
function in the credit market is to assess consumers for ‘over-indebtedness’ as part of the
debt review process under the NCA (see topic 6 below). They must at the same time
investigate whether credit was extended recklessly to the consumer.

4.4 Magistrate’s Courts

Both Magistrate’s Courts and High Courts can hear matters relating to the NCA.

NB: the normal monetary limits do not apply to Magistrate’s Court jurisdiction when dealing
with NCA matters. Hence a Magistrate’s Court could hear even a matter concerning a large
credit agreement, such as a home loan. This is a good thing as litigation is cheaper in the
Magistrate’s Court, which assists consumers. Magistrate’s Courts play a role in restructuring
consumer debts under debt review (see topic 6 below).

4.5 National Consumer Tribunal

This is an administrative tribunal with an adjudicative function. It adjudicates specifically

consumer complaints. The tribunal functions like a court and can make various orders (e.g.:
cancellation of a credit provider’s registration). National Consumer Tribunal (‘NCT’) orders
have the status of High Court orders, but it is a separate body from the courts, and it can only
hear certain types of matter. As we will see below under topic 6, the 2019 amendments to
the NCA have increased the powers of the NCT. The NCT will in the future play a greater
role in resolving consumer over-indebtedness (once the amendments come into force).

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 5. Reckless Credit

Before discussing the provisions of the NCA on reckless credit it is useful to give
some general background. Prior to the introduction of reckless credit rules by the NCA, it
was not unusual for even those earning a comparatively low salary to be offered large loans.
Jane Franco, the course convener, tells the story of how when she started working as a
candidate attorney (many moons ago!) she was earning a monthly salary of R3 000. She
applied for a credit card from her bank and was granted this, with a credit limit of R80 000!
In Jane’s case, there was no unhappy ending to this story, but imagine if Jane had not been
financially literate and she had maxed out her card. The monthly repayments (including
compound interest, fees, and charges) would have been extremely problematic on her small
salary, leaving her little money to live on. Imagine further that she had lost her job and had
been forced to draw down on her credit card in order to meet her necessary monthly expenses.
The result would have been a rapid descent into over-indebtedness. This type of lending by
Jane’s bank could well be said to have been ‘reckless’, since the loan extended was beyond
Jane’s means to repay in full.

Consider further the following story, taken from the facts of The University of Stellenbosch
Legal Aid Clinic and Others v Minister of Justice and Others 2015 (5) SA 221 (WCC)
@para 33-38:
The Stellenbosch University Legal Aid Clinic acted on behalf the applicants in this case. All
were low income debtors who had been extended loans they could not afford. The credit
providers had then obtained emolument attachment orders (= ‘garnishee’ orders) which
meant that the debts had to be repaid to the credit providers from the salaries of the debtors
by the debtors’ employers. This case was about placing limits on emolument attachment
orders and the Constitutional Court later confirmed some of the restrictions suggested in this
judgment by the Western Cape High Court. In what follows, I quote from the facts as
recounted by Judge Desai in the Western Cape High
Court.

‘The individual applicants were all granted loans…. The loans were granted
without reasonable steps being taken to assess the applicants’ existing financial means and
obligations prior to concluding the credit agreements. The individual applicants were granted

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the loans with repayment terms exceeding 50% of their monthly income. The affordability
assessment was either perfunctory or non-existent. The Second Applicant’s affordability
assessment indicates his sole expense to be groceries of R50 per month. In the case of the
Ninth Applicant her only expense is groceries of R100 per month. The affordability
assessments in respect of the Fourth and Fifteenth Applicants reflect that they have no
expenses at all.

The … loans were advanced in breach of sec 81 of the National Credit Act … which seeks to
prevent the granting of reckless credit through affordability assessments.

The Fourth Applicant’s monthly net income was R3759.82 at the time she was granted a loan
of R7982.00 which was to be repaid in six instalments of R1986.00 per month.

The Eighth Applicant’s monthly net income was R2260.00. He was granted a loan of
R6280.00 to be repaid in monthly instalments of R1574.00 per month.

The above reflects the nature and extent of the loans advanced. These were quite obviously
reckless and unsurprisingly the applicants defaulted on their repayments.’

The NCA seeks to curb this type of reckless lending behaviour by credit providers. Jane did
not get into difficulties with her credit card – she was fortunate. The consumers in
the University of Stellenbosch case above were not so lucky. The general mechanism now
employed by the NCA is to require credit providers to do proper background checks on
consumers before lending to them. Credit providers must also ensure that consumers
understand what they are getting themselves into. In what follows, I give a summarized
account of the rules on reckless credit in the NCA and the regulations thereunder.

5.1 Reckless Credit under the NCA

According to the NCA, reckless credit occurs

when:

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 a) Credit provider fails to conduct an assessment of whether consumer can afford the
credit; or b) Credit provider fails to make sure that consumer understands the risks,
costs, or obligations
involved in entering into a credit agreement; or

c) Credit provider contracts with a consumer despite evidence that this will cause the
consumer to become over-indebted. [The concept of ‘over-indebtedness’ is defined
under topic 6 below.]

These rules on reckless credit do not apply to all types of credit agreement. The
following are examples of credit agreements which are excluded:

a) A student loan.

b) A pawn transaction;

c) An incidental credit agreement;

d) Any agreement where the consumer is a juristic person (regardless of asset value or
turnover).

Thus with a student loan (for example), young people about to enter university are unlikely
to have sufficient income to repay the loan at the present moment in time. The credit provider
takes a risk here, on the assumption that a university educated person will earn a sufficient
salary in the future to be able to repay the loan then. This is probably a valid assumption,
but it would not be possible to assess future ability to repay the loan when it is first granted,
making the reckless credit assessment as set out above and further below impracticable.

[The credit provider may also require security for this loan, such as when the student’s
father or mother stands surety for the loan. As above, this means that if the student does not
repay the loan when the time for repayment comes, the credit provider may sue the surety for
payment.]

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 Before entering into a credit agreement with a consumer, the credit provider must
assess:

a) Consumer’s understanding of the related risks and costs.

b) Consumer’s understanding of rights and duties under the contract.

c) Consumer’s ability to afford the credit now and in the future;

d) Consumer’s debt repayment history.

e) [For business loans:] Prospects of success of the business.

The consumer must answer questions from the credit provider truthfully: consumer deceit is a
valid defence open to the credit provider against a later allegation of reckless lending.

If a court later finds that the credit provider failed to do a proper reckless credit assessment,
or that it entered into a credit agreement with a consumer when this was reckless, then:

a) Obligations of consumer may be set aside if this is ‘just and reasonable’; or

b) Consumer’s obligations may be suspended. During this time no interest/fees may

be charged, and the debt is unenforceable by credit provider.
c) Court may at the same time rule on whether consumer is over-indebted and make
an order restructuring her debt (see topic 6 below).

Thus, we see that where the credit provider is found to have lent recklessly to a consumer,
there will be sanctions on the credit provider involving loss of income. Either the entire
amount lent may be forfeited (if the credit agreement is set aside), or there may be a loss of
interest income while the loan is suspended. A consumer who has received reckless credit
may well also be over-indebted. Hence the court may at this point want to consider using its
powers under the debt review provisions of the NCA. We will discuss these in week 3 under
topic 6.

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 5.2 National Credit Regulations: Affordability Assessment

The NCA is original legislation. The National Credit Regulations are delegated legislation,
created by the Minister of Trade and Industry acting under powers to do so conferred on
him/her by the NCA. Regulations usually add further detail to the framework of the original
legislation. In this section we look at the affordability assessment, which credit providers are
required to conduct when assessing whether to lend to a consumer under the above reckless
credit checks set out in the NCA. This affordability assessment was added to the National
Credit Regulations by amendment in 2015. The relevant provision is regulation 23A. You
will see that this regulation illustrates how delegated legislation adds detail to the reckless
credit framework of the NCA.

The assessment works as follows: Regulation 23A sets out the relevant criteria which
the credit provider must use to confirm the consumer’s gross income, namely by checking:

a) Where salary is paid:

i. Latest 3 payslips
ii. Latest 3 bank statements showing salary deposits

b) Where self-employed:
i. Latest 3 months’ bank statements
ii. Latest business financial statements

Credit provider can then determine discretionary income, using the formula in the
regulations and working backwards from gross income. Discretionary income is the money
available each month to pay new debt.

Discretionary income is calculated as follows:

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Monthly gross income

LESS: statutory deductions (eg: income tax/UIF)

LESS: monthly living expenses (accommodation/food/transport)

LESS: existing credit agreement monthly repayments

LESS: maintenance obligations for dependents

EQUALS: Discretionary income

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