National Credit Bill: deliberations

Meeting report

TRADE AND INDUSTRY PORTFOLIO COMMITTEE
14 September 2005
NATIONAL CREDIT BILL: DELIBERATIONS

Chairperson:

National Credit Bill [B18-2005]
Responses to comments on Credit Bill, 2005
Department of Trade and Industry Possible Amendments to Bill of 14 September
COSATU submission

Relevant document
Department of Trade and Industry Possible Amendments to Bill of Friday 16 September

SUMMARY
The Department of Trade and Industry continued presenting proposed amendments to the National Credit Bill to the Committee. Then members of the Consumer Credit Association (CCA) and the Credit Bureau Association (CBA) presented the Committee with their thoughts regarding the question of an amnesty. They said that an amnesty for all blacklisted persons would remove credit providers’ ability to assess and calculate risk if negative information was removed. The CCA was unclear how, and to what extent the amnesty would happen. Generally there were misconceptions about credit scoring. The score was very objective and gave an accuracy of decisions above any human capability. If negative data was removed, people would be homogenous and this would make it different to make predictions. Credit providers would become more restrictive and seek other sources of information. The removal of the information would not solve the problems of a lack of consumer education and how to manage debt.

Members of the Committee asked what the situation would be if the current system was not in place. Good payers would also be victims to the cautious and restrictiveness of the credit providers if the negative information was removed. They asked to what extent was an amnesty for individuals practical, and what the effect of the amnesty would be on the cost of credit if only negative information was removed as compared to a total wiping out of records.

MINUTES
Ms Astrid Ludin (DTI Deputy Director-General: Corporate Consumer Regulation Division) continued presenting its proposed amendments to the National Credit Bill.

Clause 81
Ms Ludin said that the words "or the Tribunal" were deleted in from this section to give courts exclusive jurisdiction in this area.

Discussion
Mr M Stephen (DA) asked who had to be satisfied in terms of the word "establishes."

Mr J Strydom, the DTI legal advisor, said that the word "establishes" gave credit providers an opportunity to prove certain facts in court.

Mr S Rasmeni (ANC) asked if the omission of the words from the Tribunal meant that only courts could make determinations about reckless lending.

Ms Ludin replied that yes, it was only for the courts to determine the recklessness as such situations involved to contracts.

Dr E Nkem-Abonta (DA) asked if the result of the DTI’s change would not render subsection (b) superfluous. He said that the reality of the industry was that any loophole was exploited therefore the DTI had to close remove any opportunity for cheating.

Mr Strydom replied that subsections (a) and (b) were inextricably linked and so (b) could not bee removed.

Prof B Turok (ANC) said that the clause placed a huge burden on consumers. The word "fully" could be onerous, and it was better to have the word "truthfully."

Dr Nkem-Abonta said that removing the word "fully" opened up the possibility of people not making full disclosures of information.

Mr Rasmeni asked if this clause was common to other pieces of legislation. Credit providers could use this clause to defend themselves against a claim of reckless lending, and so this gave them a ready defence.

Mr Stephen said that the clause was not clearly worded. It placed an onus on credit providers, but it was impossible to separate the words "truthfully" and "fully" from "material."

Ms Ludin said that the DTI’s intention had been for providers to show that the consumer did not disclose certain information truthfully and fully, but the full disclosure had to be material. The clause was a way out for providers but it could not be too easy to do so.

Prof Turok said that the clause amounted to a defence for providers and therefore it was important that the questionnaires be standardised to ensure that "fully" had only one meaning.

Dr Nkem-Abonta said that the clause operated against the consumer as credit providers could ask virtually anything. They had to ask only relevant questions, so the clause had to be rephrased.

Mr T Hercules, the State Law Advisor, said that subsection (1) gave the assessment that a court would consider and normal court procedures allowed the court to decide on the type of information that was relevant. Ms Ludin added that consumers had obligations as well as rights. There had to a balance.

Clause 83
Ms Ludin said this amendment was needed to indicate that the rights of a consumer may be suspended just as those of the credit provider.

Clause 89
Ms Ludin said that the concern here was that the question of contractual capacity was part of the general law and so there was no reason for it to be dealt with again in this Bill. The wording was unfortunate as it did not allow for unemancipated minors to contract with the consent with the consent of their guardians. The clause was amended to allow this.

Discussion
Mr Stephen said that too much repetition of the Common Law made the Bill bulky.

Mr Rasmeni said that the Bill was written for people who did not have law degrees and so it was necessary to have the Bill as clear as possible.

Mr Strydom said that in this regard it was possible to remove the whole of subsection (2)(a). Ms Ludin agreed that there was a need to codify the Common Law as it was not accessible to non-lawyers.

Clause 90
The concern here was that the reference to the giving of a power of attorney was too wide. The clause was amended to provide for exactly which types of power of attorney were prohibited by the Bill.

Discussion
Prof Turok asked if an employer necessarily had priority where they had given an employee a loan.

Ms Ludin said no.

Clause 93
Ms Ludin said that the words "outstanding accounts" with reference to incidental credit were superfluous and so had to be deleted.

Discussion
Prof Turok asked what the situation was now with regards to stop orders.

Ms Ludin replied that stop orders were temporary provisions of credit and were types of incidental credit which were not covered by these provisions.

Clause 94
Ms Ludin said that the concern here was that sections 94(2) and 94(1)(b) were contradictory. Section 94(1)(b) was deleted as there had to be a responsibility on the credit provider to cancel a credit card facility as soon as a credit card had been reported stolen or lost.

Clause 102
The insurance industry requested that the clause be expanded to allow the initiation fee to be part of the principal debt and the clause was so amended.

Discussion
Ms F Mohamed said that there had to a ceiling on the initiation fee.

Ms Ludin said that the Minister had the power to determine that ceiling in the regulations.

Prof Turok asked at what point interest was charged because the amount differed if it was charged at the end or the beginning of each month.

Ms Ludin replied that the manner in which interest was paid was also set in the regulations.

Clause 103
The concern here was that the clause prohibited credit providers from catering for different interest rates on higher and lower risk portions of the debt. The DTI accepted this and made the necessary change.
Ms D Ramodibe (ANC) said that this was unnecessary as there were too many charges already.

Mr G Davel, the Chief Executive Officer of the Micro Finance Regulatory Council, said that the Bill tried to deal with the problem of a multiplicity of charges. If all the charges were removed, credit providers would place all their costs in the interest charges.

Clause 104
Ms Ludin said that the concern here was that same day notification was unrealistic given the large volume of transactions and accounts in the formal banking system. However, if the notice period was too long it would be redundant. The DTI proposal was that the client had to receive written notification within 30 days of a change in the rates. The second concern was that section 104(4) gave the consumer the right to freeze the rate of the existing debt with negative implications for long-term loans. The DTI accepted this reasoning and deleted subsections (4) and (5).

Consumer Credit Association and Credit Bureau Association Presentation
Mr A Elliot, the Executive Director of the CCA, said that the CCA granted 95% of all the credit in South Africa so its members had an obligation to follow all of its rules including verifying the accuracy of information as far as possible. The CCA held 36 million records and the members’ equipment automatically corrected any absurdities. If any consumer brought individual queries, these were dealt with as well. The CCA notified consumers of the intent to report them to credit bureaux, it was not a threat. The consumer had to give their consent to have that information shared.

The CCA had a service level agreement with credit bureaux to verify the accuracy of data, and all of the CCA members had to give data in a certain format. An amnesty for all blacklisted persons would remove credit providers’ ability to assess and calculate risk if negative information was removed. The CCA was unclear how, and to what extent the amnesty would happen. The providers had to retain the information or they would fall foul of the Company’s Act to keep that information for five years, and only after this was made clear could the CCA give a proper response.

Mr H Shroder, the Experian Data Director, said that currently the bureaux deleted debts of under R100 and removed prescribed debt records. Any amnesty would affect decision-making in risk assessment.

Mr Andrews, the Experian-Scorex International Director said there were misconceptions about credit scoring. The score was a statistical technique that calculated the likelihood of repayment within the prescribed time. This score included demographic information and information stored by the bureaux, and this was the most important forecaster of the likelihood of repayment. The score was very objective and gave an accuracy of decisions above any human capability. The score was built on 15 criteria, and if someone stumbled on one of them, they could still qualify for credit on the basis of the rest. The score did not decline applications for credit. The onus was on the credit providers to decide whether to take the risk. There was no indication on who were good or bad payers, and the scoring model did not use race, language or income as criteria.

If negative data was removed, people would be homogenous and this would make it different to make predictions. Credit providers would become more restrictive and seek other sources of information such as income, and this would slow down their ability to provide services, ultimately increasing the cost of credit as they would adopt a single lending policy. Consumers would see a reduction in their purchasing power, which would affect the economy. The removal of the information would not solve the problems of a lack of consumer education and how to manage debt.

Discussion
Prof Turok asked if the principal of informing consumers of any adverse information was important. He asked if the CCA agreed that the selling of credit information had to be controlled. He said that no-one wanted the total removal of data, but in some cases data had to be removed where the circumstances dictated it. The CCA system was very mechanical with no human input.

Ms A Singh, the Credit Bureaux Association legal representative, said that had to be informed that adverse information was being sent to the bureaux and there was no debate that the market for information had to be regulated. The system was very mechanical and maybe there was a need for other input. Mr Elliot said that the machine was not the sole determinant of whether credit was granted. Individual managers had a discretion to grant credit, and so there was some human input.

Mr J Maake asked what the criteria were that Experian used.

Mr Andrews said that age; stability at work and at home; contractibility, marital status; the number of successful payments and gender were used as criteria

Dr Nkem-Abonta asked what the situation would be if the current system was not in place. Good payers would also be victims to the cautious and restrictiveness of the credit providers if the negative information was removed. As long as the information was predictive it had to be kept. He asked what the implication of the amnesty would be for poor people.

Ms Singh said that the bureaux facilitated access to credit, and without such a system there would be no credit. Mr Elliot said that a lack of access to credit would lead to a reduction of sales with the resultant loss of manufacturing capacity and unemployment.

Mr Stephen said that not all of the information could be removed. He asked what a ‘single lending policy’ was and what the effect of the amnesty would be on the cost of credit if only negative information was removed as compared to a total wiping out of records. To what extent was an amnesty for individuals practical?

Mr Elliot said if there were no records at all, an item that cost R100 would be sold for R230 over two years after giving R150 as security. Individual cases could be considered if there was no blanket amnesty.

Mr Shroder said that the information was updated once a month but changes in status were made daily. The retention periods were not forever, and the system automatically removed adverse information after the retention period lapsed.

Mr Andrews said that there had been a growth in scoring systems as a result of a growth in the demand for credit. People wanted decisions there and then, and this required a fast, mechanical system. There was no single global scoring model and each system was designed for each specific client.

Ms M Mpahlele, another DTI Deputy Director-General, asked what standards non-members of the CCA had to meet. She asked what the impact on the predictive nature of information would be if the retention period was dropped to three years as once-off measure.

Ms Singh replied that 98% of the credit bureaux industry was governed by the same code of conduct. Mr Elliot said that there would not be a huge impact if the retention period was dropped to three years as once-off measure.

Clause 106
The DTI reviewed and completely revised the clause.

Discussion
Dr Nkem-Abonta asked why the replacement value was not used as the asset value may be too much especially given the increase in house prices.

Mr Stephen was not convinced about the effectiveness of the new provision. The way it was set up, subsection (4) would cause many problems with regards to monthly insurance payments.

Mr Davel replied that he did not know how to solve the problem administratively as this could cause problems. Subsection (4) allowed for the charging of commission to be stated up front to the benefit of the consumers.

Mr Rasmeni said that the provision removed the interface between consumers and insurance companies and their agreements.

Ms Ludin said that this relationship was regulated by the Insurance Act.

Clause 107
The reference to ‘prepaid credit’ was substituted with ’incidental credit agreement.’

Clause 111
The concern here was the compulsory 20 day delay in the implementation of the recovery process. The DTI proposed the deletion of the constraint imposed on consumers with respect to notifying credit providers of incorrect information in subsection (1) and the deletion of "at least 20 business days" from subsection (2)(b).

Clause 116
Ms Ludin said that credit card clients had been accustomed to notices of changes of the terms and conditions by receiving completely revised agreements. The provisions of the clause were costly and impractical and imposed difficulties where the document was not in hard copy. Some commentators wanted the current system retained. The DTI agreed with the proposed amendments.

Clause 121
The concern here was that the cooling-off period would lead to disputes about the value of returned assets. There was also a different treatment in section 74(2)(b) The DTI saw legitimacy in these points and amended the clause by substituting "account" with "agreement" in section 121(1)(a) and deleting subsection (2)(b).

The meeting was adjourned.