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BANKS have warned that a new court ruling will force them to clamp down on clients who fall behind on payments, and will push up the cost of credit.
It may also mean that in future you will receive a debt summons much faster – which, after another ruling, you now have to avoid at all cost.
Recently, the Supreme Court of Appeal (SCA) placed a cap on the amount that banks can charge from indebted customers. The court ruled in favour of the National Credit Regulator over the in duplum (double the amount) rule.
It basically means that once in default you never have to pay back more than double the unpaid capital borrowed – even if interest and fees have been running up. (Read more here).
This puts the banks in a dangerous position, particularly when it comes to home loans.
The interest and fees on mortgages may reach more than double the initial capital amount. Take the example of a home loan client, who pays only R10 less than his required monthly mortgage payment. If the bank doesn't pick up the shortfall, the client can years later claim that he is in default and only needs to pay back double the capital amount. This could leave the banks with major losses.
According to the calculations of a credit risk solutions company, if you default on a R1m home loan the in duplum rule will be applicable when interest (even ignoring fees and charges) exceeds only 8% per year.
Enforcing the stricter in duplum rule will mean that banks will have to look very closely at who is falling behind on payments and take action quickly.
"This... judgment may... compel credit providers to enforce agreements vigorously where consumers default and fail to fully cure any such default (however small) in order to avoid the possible punitive implications," the Banking Association South Africa said in a statement.
This will be applicable to home and vehicle loans, as well as credit cards and overdrafts. "The judgment in this regard may in addition unfortunately also curtail the ability of credit providers to enter into voluntary rearrangements with consumers experiencing difficulties, as such arrangements will trigger the penalty provisions of section 103(5) for the credit provider even where consumers adhere to the arrangements.
"Furthermore, credit assessment criteria and the terms of credit extension may need to be adjusted by the credit industry to accommodate the possible consequences of this portion of the judgment in terms of anticipated additional default costs and risks.
"These adjustments may detrimentally affect both access to and the terms and conditions and pricing of credit for all consumers."
However, Gavin Opperman, chief executive of Absa Retail Bank, says it would take a number of years for interest and fees on an account (especially home loans) to exceed the capital amount.
"The in duplum calculation only commences once an account is in default or the section 129 letter has been sent to a defaulting customer. As a result, we do not believe that the ruling will have a significant impact on our business, but we will review our strategies as appropriate."
Luke Hirst, managing director of the debt counselling group DebtBusters, expects banks to send notices warning of legal action if a debt is not repaid (the so-called section 129 letters) faster than is the case at present, to protect themselves.
The section 129 letter itself was the subject of a recent SCA ruling – which dealt a blow to indebted consumers.
Debt review dilemma
The court ruled in favour of the banks' argument that as soon as a Section 129 notice is issued to a consumer, that debt is excluded from the debt review process. That means that a debt counsellor can't negotiate lower repayments for that debt.
So far, most banks have been quite lenient on including debts under debt review where a section 129 has been issued, as long as clients are making a decent monthly payment, says Hirst."This is because debt counselling done well can act as an effective collection model for the credit providers."
But the two rulings together may create a perfect storm where the almost nine million South Africans who have fallen behind on debt repayments are slapped with section 129 letters much faster – and then won't be able to include that debt under a debt review.
It will be interesting how consumers start reacting to a section 129 letter, says Hirst. Currently very few South Africans take much notice of the letter of demand. Hopefully it will make consumers act faster and ultimately seek help before a section 129 is issued, Hirst said.
"I wonder what effect this is going to have on the credit market; the National Credit Act is there to give access to credit to all South Africans, but those who earn less tend to pay higher interest rates and therefore a default will mean in duplum is reached faster."
He suspects microlenders will possibly make loans more expensive or request salary deductions direct from the employer.
"And all this in a low interest environment. What happens when rates start rising?"
- Fin24
It may also mean that in future you will receive a debt summons much faster – which, after another ruling, you now have to avoid at all cost.
Recently, the Supreme Court of Appeal (SCA) placed a cap on the amount that banks can charge from indebted customers. The court ruled in favour of the National Credit Regulator over the in duplum (double the amount) rule.
It basically means that once in default you never have to pay back more than double the unpaid capital borrowed – even if interest and fees have been running up. (Read more here).
This puts the banks in a dangerous position, particularly when it comes to home loans.
The interest and fees on mortgages may reach more than double the initial capital amount. Take the example of a home loan client, who pays only R10 less than his required monthly mortgage payment. If the bank doesn't pick up the shortfall, the client can years later claim that he is in default and only needs to pay back double the capital amount. This could leave the banks with major losses.
According to the calculations of a credit risk solutions company, if you default on a R1m home loan the in duplum rule will be applicable when interest (even ignoring fees and charges) exceeds only 8% per year.
Enforcing the stricter in duplum rule will mean that banks will have to look very closely at who is falling behind on payments and take action quickly.
"This... judgment may... compel credit providers to enforce agreements vigorously where consumers default and fail to fully cure any such default (however small) in order to avoid the possible punitive implications," the Banking Association South Africa said in a statement.
This will be applicable to home and vehicle loans, as well as credit cards and overdrafts. "The judgment in this regard may in addition unfortunately also curtail the ability of credit providers to enter into voluntary rearrangements with consumers experiencing difficulties, as such arrangements will trigger the penalty provisions of section 103(5) for the credit provider even where consumers adhere to the arrangements.
"Furthermore, credit assessment criteria and the terms of credit extension may need to be adjusted by the credit industry to accommodate the possible consequences of this portion of the judgment in terms of anticipated additional default costs and risks.
"These adjustments may detrimentally affect both access to and the terms and conditions and pricing of credit for all consumers."
However, Gavin Opperman, chief executive of Absa Retail Bank, says it would take a number of years for interest and fees on an account (especially home loans) to exceed the capital amount.
"The in duplum calculation only commences once an account is in default or the section 129 letter has been sent to a defaulting customer. As a result, we do not believe that the ruling will have a significant impact on our business, but we will review our strategies as appropriate."
Luke Hirst, managing director of the debt counselling group DebtBusters, expects banks to send notices warning of legal action if a debt is not repaid (the so-called section 129 letters) faster than is the case at present, to protect themselves.
The section 129 letter itself was the subject of a recent SCA ruling – which dealt a blow to indebted consumers.
Debt review dilemma
The court ruled in favour of the banks' argument that as soon as a Section 129 notice is issued to a consumer, that debt is excluded from the debt review process. That means that a debt counsellor can't negotiate lower repayments for that debt.
So far, most banks have been quite lenient on including debts under debt review where a section 129 has been issued, as long as clients are making a decent monthly payment, says Hirst."This is because debt counselling done well can act as an effective collection model for the credit providers."
But the two rulings together may create a perfect storm where the almost nine million South Africans who have fallen behind on debt repayments are slapped with section 129 letters much faster – and then won't be able to include that debt under a debt review.
It will be interesting how consumers start reacting to a section 129 letter, says Hirst. Currently very few South Africans take much notice of the letter of demand. Hopefully it will make consumers act faster and ultimately seek help before a section 129 is issued, Hirst said.
"I wonder what effect this is going to have on the credit market; the National Credit Act is there to give access to credit to all South Africans, but those who earn less tend to pay higher interest rates and therefore a default will mean in duplum is reached faster."
He suspects microlenders will possibly make loans more expensive or request salary deductions direct from the employer.
"And all this in a low interest environment. What happens when rates start rising?"
- Fin24
