Johannesburg – New efforts to fix the crisis-stricken debt review process have been welcomed, but there are still concerns about the system.
Three years ago, South Africa adopted new credit regulations which offered over-indebted consumers the chance to comply with more manageable debt repayment plans, drawn up by accredited debt counsellors.
However, a couple of months later the untested system was put through a baptism of fire after the financial crisis ramped up unemployment and put strain on households.
More than 180 000 consumers have already applied for debt counselling, with an average of 7 500 new applications being received each month. There are only 1 642 counsellors in the country, and huge backlogs in the courts to approve new debt repayment plans.
On Tuesday, the task team of the National Credit Regulator, which was set up in October 2009, released its findings on how to reduce the backlogs.
"Our findings show that backlogs in the debt review process are being caused by a complex set of factors including severe capacity constraints in the judicial system, weaknesses in the process, inadequate operational compliance by credit providers and debt counsellors as well as possible abuse of the process by consumers," said task team chairperson Neville Melville.
Roy Henderson, CEO of Debt Help Financial Services, said the courts cause the biggest bottlenecks in the debt review process. He thinks the legal process should be simplified.
Currently, debt counsellors have to present an affordable repayment plan for creditors to approve. If creditors oppose the plan, it is referred to the Magistrate's Court for a decision. But even if the plan is unopposed, it still needs to be approved by a magistrate.
There have been huge delays in this process, with many magistrates unwilling to take on any debt review cases because they are unclear on the guidelines and not sure how to proceed.
Legal documents were not standardised, while magistrates often have different approaches and their own set of requirements, said Alan Manshon of The Money Clinic.
While the situation improved somewhat after the NCR obtained a High Court order in August 2009, which clarified the interpretation of some contentious sections of the National Credit Act (NCA), there are still major backlogs.
The National Credit Regulator (NCR) task team has recommended the issuing of a new set of eligibility, affordability and reckless lending assessment guidelines. A set of debt restructuring rules is also recommended.
However, Manshon is concerned about the task team's inclusion of the eligibility guideline.
"In my opinion, eligibility is based purely on whether the consumer does have some means of income as defined by the act. I therefore believe that only a magistrate has the authority to determine non-eligibility, unless the debt counsellor has rejected the application as the consumer was not considered over-indebted.
"I would be concerned that guidelines would be drafted to exclude consumers where the income was deemed to be too low. This in itself should be investigated, as it raises questions about how the consumer was able to qualify for the credit in the first place."
He thinks this could provide a loophole for reckless lenders.
ALl parties need to pull togetherThe new guidelines will be compiled by a proposed new national debt review committee, which has been put forward by the task team. The committee will have representatives from the ranks of credit providers, debt counsellors and payment distribution agents.
Better cooperation between all parties is important, said Manshon.
"For the voluntary, non-statutory debt review process to work effectively, there needs to be a greater willingness from the credit providers to voluntarily cooperate. Currently we find that this is not often the case, with credit providers disregarding guidelines they had agreed to with the NCR."
Johan de Ridder, a banker and member of the task team, said credit providers support the task team's proposals and would work to combat over-indebtedness.
"Banks and debt counsellors need and should be able to cooperate more effectively from an administrative perspective under the proposed debt review process enhancements, format standardisation and debt restructuring rule principles in the task team recommendations with the aim to solve increasing numbers of cases through consent agreements, rather than through contested court hearings," he said.
Some of the task team's other recommendations include the establishment of a debt review ombud to adjudicate disputes, and improvements to the documentation produced by both credit providers and debt counsellors.
The interim payment arrangements will also be looked at. Currently there is no provision in the NCA for interim payment arrangements pending the date of the Magistrate's Court hearing, resulting in payment interruptions being treated as defaults.
- Fin24.com