National Credit Amendment Bill [B47-2013]: research input and public hearings Day 1

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Trade and Industry

28 January 2014
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

The Chairperson introduced the National Credit Amendment Bill as an important and potentially transformative piece of legislation that could radically change the economy.  Quality of life was being negatively impacted due to the indebtedness of South Africans, particularly the majority who earned the least. The Committee’s Researcher, giving some background to the Bill, said that debt restructuring was a measure employed by some governments as a means of relief to indebted consumers or households, and included the debt counselling process that was a well-known approach in South Africa.  A more radical approach was for government to intervene in mortgage financing by buying mortgages from the bank and offering it to consumers at lower repayment rates or longer terms. An administrative approach did not directly affect indebtedness, but it would address other measures that were related to employment, accommodation or rental issues.  Research done in preparation for the Bill showed that many countries had employed interventions, some more radically than others and that these interventions would be considered when dealing with the National Credit Amendment Bill.

National Treasury (NT) supported the direction of amendments that the Bill proposed, since credit was important for the economy, for both growth and jobs.  The Bill highlighted efforts to limit reckless lending, the introduction of affordability criteria, the introduction of ‘fit and proper’ standards for debt counsellors, removal of certain loopholes and unintended consequences from the debt counselling process, and the registration and supervision of payment distribution agencies.  The key questions were whether the amendments would protect customers more effectively from reckless lending practices, would allow for tougher standards for ‘payday lenders’, and whether licencing would be subject to tougher fit and proper requirements that included capital adequacy requirements. NT noted that South Africa, after the global financial crisis, had moved towards tougher regulation, and had approved policy objectives, in a move to a Twin Peaks system (which would be presented in a Bill shortly) that aimed to improve market conduct, combat financial crime, strengthen financial stability, and widen financial services. NT proposed, however, that the Bill should clearly outline the role of the National Credit Regulator (NCR) to protect the customer over all other players, and needed to address perverse incentives related to debt counselling, which mainly assisted those who were employed and could pay a debt counsellor. Currently, it was of concern that South African households were over-indebted, particularly in the lower income market, and that 47% of the 19.3 million credit active consumers had impaired records of three months or more in arrears, with a further 14.7% in arrears for one or two months. It was suggested that some measures that could be implemented quickly included affordability criteria, pricing caps - particularly for payday loans and mortgages, consumer credit insurance reforms, voluntary debt mediation, unilateral relief by lenders to distressed borrowers and initiatives to eliminate abuse of emolument attachment orders. NT supported having regular and careful clean-up of data that would not prevent lenders from determining whether a loan would be reckless. It recommended that the credit information review proposal should be carefully assessed to ensure that it did not worsen reckless lending and over-indebtedness. It wanted to see tougher regulatory standards to deal with payday lenders and the debt collection industry. Finally, NT suggested that a comprehensive study on the impact of the entire financial sector regulatory framework. Members focused, in their questions, on the need for consumer education, particularly to foster understanding of their own responsibilities, and the impact of reckless lending. Members emphasised the need to have and enforce good legislation, and asked NT what it would be proposing. Members questioned the challenges around cooperation between the different credit authorities, discrepancies in the national payment system and excessive interest rates by payday learners.

The Credit Providers Association (CPA) noted that it was a voluntary association of industry players who shared payment performance information about their debtors, with the aim of allowing for the best credit and risk decision possible. The importance of good data, including the insight it could offer into consumer behaviour, was emphasised, both to enable business to do risk assessment and mitigation, and to enable access to credit, which boosted the economy.  South Africa was highly rated in having amongst the world’s best credit reporting systems, with a flow of 71 million accounts per month, whilst the National Credit Act enforced amnesty policy well. However, lack of consumer education and consumers tending not to check their profiles posed a problem, for 15 000 of the 21 000 disputes lodged were resolved in favour of the debtors. 73% of the 71 million accounts were classified in good standing. CPA suggested that certain categories should be included in the current data environment, and emphasised the need for better recognition of the value of data, strong custodianship of credit data, and broader reach and contribution by more providers, since research indicated that removal of data would have negative impacts.

Microfinance South Africa described itself as a reputable micro-financier organisation, whose members were all registered with the NCR. It was not fully in agreement with earlier statements on payday loans, nor the correlation between indebtedness and social behaviour, and emphasised the need to distinguish between registered and unregistered providers. It agreed that there were problems of “massive informal loan-sharking” which might also involve trade unions. Short-term lending had not increased much, compared to exponential increases in unsecured lending, so negative perceptions had to recognise that fact. There were probably around 50 000 unregistered loan sharks, compared to 5 500 NCR- registered credit providers. The former were ruthless, charged exorbitant interest rates. It was true that proper approval of short-term loans took longer than “instant approval” by loan sharks, but this must be linked to the adverse effects of reckless lending. MFSA said that all lenders, regardless of size or amounts loaned, should be registered and regulated. It felt that the service fee, static for the last seven years, should be raised. There were difficulties in synchronisation of regulators, different standards of regulation, lack of focus on conduct, affordability guidelines and proposed removal of data, which could feed the underground market. Members focused their questions on data integrity, asked for written breakdown of interest rates on short and unsecured loans and asked that specific recommendations on clauses needing amendment be forwarded to the Committee.

Standard Bank supported the need for regulation of the credit market. As the largest mortgage lender in South Africa, it was concerned that home-loan lending had been discouraged because of unintended consequences of the National Credit Act. The in duplum rule, which stated that origination fees and accumulated interest could never exceed the original loan amount, was explained, but it was noted that the current wording of section 103(5) of the National Credit Act made it difficult to assist customers who missed a payment, and definitions were needed for when default occurred and when it was cured. The Bank shared the Chairperson’s concerns expressed earlier that rental, but not home loan repayments, were currently considered an essential living expense. It supported the concept of affordability assessment guidelines from the regulator, but was concerned how they would affect home loans applications. Members asked for a breakdown of credit and bank costs across the sector, questioned the differing requirements for loans for houses and cars, emphasised the need for consumer education on the impact and cost of credit, and sought more information on the national payment system, noting that a Collections Review had been initiated by the South African Reserve Bank.
 

Meeting report

National Credit Amendment Bill: public hearings
The Chairperson said the National Credit Amendment Bill (the Bill) was an important and potentially transformative piece of legislation that could radically change the economy. Quality of life was being negatively impacted upon at the moment, due to the indebtedness of South Africans, particularly the majority who earned the least.  The Committee wanted to ensure that the Bill would result in robust legislation that was equitable, fair and positively impacted upon the socio-economic environment of South Africa.

Input by Committee Researcher
Ms Zokwanda Madalane, Committee Researcher, said the research on how other countries had addressed credit measure had covered the situation in France, Ireland, Iceland, the United States of America and South Africa.

Debt restructuring was a measure that was employed by some governments as a means of relief to indebted consumers or households, and comprised of the debt counselling process that was a well-known approach in South Africa.  A more radical approach was Government Finance, that could see a particular government intervene in mortgage financing by buying mortgages from the bank and offering to consumers at lower repayment rates or longer terms.  The Administrative approach did not directly affect indebtedness, but it would address other measures that were related to employment, accommodation or rental issues.  South Africa had not employed any radical approaches in the National Credit Amendment Bill, because it was necessary to ensure that there was a good fiscal state and economic conditions before adopting radical measures, which might also raise the risk of consumers defaulting because of government interventions.

The Chairperson said the research showed that many countries had employed interventions, some more radically than others and that these interventions would be considered when dealing with the National Credit Amendment Bill. 

National Treasury (NT) submission
Mr Ismail Momoniat, Deputy Director General: Economic Policy and Financial Relations, National Treasury, said his presentation would provide broader perspectives of the overall policy framework adopted by Cabinet to reform the regulation of the financial sector, following the 2008 Global Financial Crisis (GFC), in order to deal with the problem of over-indebted households, and how the Bill fitted in these objectives.

National Treasury supported the direction of amendments in the Bill because it recognised that credit was important for the economy, for both growth and jobs, although some credit was bad for both households and the economy. He cited the example that most of the Marikana miners had been found to be severely indebted.  The Bill highlighted efforts to limit reckless lending, the introduction of affordability criteria, the introduction of ‘fit and proper’ standards for debt counsellors, removal of certain loopholes and unintended consequences from the debt counselling process, and the registration and supervision of payment distribution agencies (PDAs). The key questions were whether these amendments would protect customers more effectively from reckless lending practices, whether they would allow for tougher standards for ‘payday lenders’, and whether licencing would be subject to tougher “fit and proper” requirements, which included capital adequacy requirements.  The practices of some of the payday lenders were disgraceful and enslaved the lower income population sector.

Following the 2008 GFC, G20 countries had led attempts to make the financial sector safer and to have the toughest standards applied to systematically important financial institutions (SIFIs).  South Africa also moved to tougher regulation, including the shift to the Twin Peaks system of regulation approved by Cabinet in 2011.

Twin Peaks Reform
Mr Momoniat explained that the GFC forced a change in the regulatory paradigm, from light-touch regulation to a more intrusive and effective system of regulation.  The financial sector was globally integrated, but regulated nationally, hence the need for global standards. The G20 leaders set standards via the Financial Stability Board and the International Monetary Fund (IMF).  The former had been tasked with setting standards for financial regulation, monitoring implementation of those standards, peer reviews, and ensuring co-ordination between countries.

The President committed South Africa to meet with global standards at G20 Leaders Summits, and Cabinet approved publication of new Twin Peaks legislation for comment in December 2013. The Financial Sector Regulations Bill mandated the South African Reserve Bank (SARB) to protect financial stability within an agreed framework, established the Prudential Regulator within the SARB, and established a new Market Conduct Regulator from the Financial Services Board. 

The current regulatory system in South Africa was fragmented, for credit was regulated by the National Credit Regulator (NCR), but deposits by the Bank Supervision Division (BSD) in the SARB.  Most major financial institutions tended to be conglomerates which did banking, lending, insurance, asset management, retirement funds, and the key consideration was to what extent the regulators worked together and did not cause a financial crisis when acting against a financial institution.  Cabinet had approved four policy objectives within Twin Peaks; namely, the need to improve market conduct, the need to combat financial crime, the need to strengthen financial stability, and the need to widen financial services.

Twin Peaks was a system with many parts.  Prudential Authority enhanced oversight of micro-prudential regulation for banks, insurers, financial markets, with special focus on conglomerates.  Market Conduct Authority regulated laws that were complete, harmonised, integrated, and proportionate, which had an increased focus on outcomes, especially “treating customers fairly”; and also targeted interventions to market failures. Financial Services Tribunal and Enforcement ensured that regulators would have clear internal policies and procedures for enforcement. Financial Stability promoted inter-agency coordination of financial stability issues.

Twin Peaks would be implemented in a phased manner that reduced risks and simplified implementation.  South Africa was assessed in 2013 by peer countries in the Financial Stability Board, which identified weaknesses in current regulatory system, and also assed the Twin Peaks system proposals.  Government was considering the recommendations, and no final decisions were to be made until after receiving public comments on the Twin Peaks Bill.

Protecting Customers: Household indebtedness and Market Conduct
Mr Momoniat said that the Bill aimed to protect the customer better through market conduct reforms, and to regulate how financial institutions conducted their businesses.  The financial sector should be held to a higher standard and should be pushed to compete on price, and not on product.  The new approach followed on the Jali Commission of Inquiry into bank charges, and recent work on charges and costs in retirement industry.  The Bill provided for the NCR to register, deregister, and accredit alternative dispute resolution agents (ADRAs) although a regulatory framework that already existed for ombud schemes.

The Bill was silent, however, on a regulatory framework for voluntary debt mediation and a key challenge was how the Bill would enable NCR to deal with abuses in the retail credit industry. National Treasury (NT) believed that the Bill should clearly state that the NCR’s primary function was to protect the customer over all other players. It needed to deal with perverse incentives related to debt counselling.  Debt counselling mainly assisted consumers who were employed and earned sufficient income to pay debt counselling fees, which comprised an upfront fee of up to R6 000 and up to 5% on monthly payment, to a maximum of R400.  There were only 500 active debt counsellors and over 8 000 consumers signed up every month.  Debt counsellors were not regulated as financial advisors, even though they managed the entire balance sheet of customers.

Cabinet was extremely concerned at over-indebtedness problem in South Africa and South African households were indebted up to 76% of disposable income, concentrated in the lower income market.  NCR figures at end of December 2011 indicated that 47% of the 19.3 million credit-active consumers had impaired records (three months or more in arrears), with a further 14.7% in arrears for one or two months.  Proposals that could be implemented quickly included affordability criteria, pricing caps, particularly in respect of payday loans and mortgages, consumer credit insurance reforms, voluntary debt mediation, unilateral relief by lenders to distressed borrowers and initiatives to eliminated abuse of emolument attachment orders.  It was possible, in the medium term to implement norms and standards for access to the payment system, reform of debt collectors’ regulatory framework, improved regulatory monitoring, supervision and enforcement to shut down unregistered credit providers. A relatively long-term approach would be implementation of an improved solvency regime.

Slides 24-27 showed preventative proposals by government to minimise the risk of over-indebtedness in the future and proposals to assist households already in a debt trap (see attached presentation for full details).

Mr Momoniat concluded that National Treasury supported the regular clean-up of data, but said  that should be done carefully and not in a way that made it more difficult for lenders to determine whether a loan was reckless or not.  The credit information review proposal should be assessed to ensure that it did not worsen the problem of reckless lending and over-indebtedness.  Tougher regulatory standards were required to deal with payday lenders and the debt collection industry.  A comprehensive view of the impact of the entire financial sector regulatory framework was needed to prevent regulatory arbitrage, and to be more effective.

Discussion
Mr G McIntosh (COPE) said there was not sufficient focus on consumer education around budgeting and the impact of debt. He believed that the emphasis should not only be on reckless lending, but also on reckless borrowing.  He asked if the Financial Stability Board would be subject to review by the IMF and Financial Sector Assessment Programme (FSAP).

Mr Momoniat said education was important and the system was looking into getting this type of education into school level, but he pointed out that even very well educated people also became trapped in debt.  Greed or optimistic scenarios of what people thought they would be able to earn could also be a cause of over-indebtedness, or the fact that in most cases consumers compared not on price, but on products, and were unable to save. The FSAP did not only review the Financial Stability Board, but also banks, insurance and securities standards that were specific issues to the financial sector.

Mr D Swanepoel (ANC) asked how synchronisation between the National Credit Act and the Twin Peaks legislation could be achieved.

Mr Momoniat said that financial sector legislation should be amended once all the processes were in place. Although the legislation would most probably not be fully aligned, any gaps identified should be addressed.  If synchronisation was the only consideration, it could lead to long delays in the legislation processes, but the main aim would be to avoid major contradictions in the legislation.  Joint hearings between Committees should be encouraged and regulatory differences should be addressed by regulators, so that accountability could be enforced.

Mr G Hill-Lewis (DA) said the proper enforcement of good legislation should be emphasised.  He asked about the work agenda of NT that focused on the short and medium term, and what NT would be putting forward, apart from the budget.

Mr Momoniat agreed that enforcement was a big issue, especially in the financial sector. With regard to the work agenda, Cabinet had approved the Twin Peaks legislation for public comment in December 2013 and in collaboration with the Department of Trade and Industry (dti), National Treasury would create a concrete plan and would require at least a further two months to be able to comment on the work agenda.

Mr G Selau (ANC) said the synchronisation of cooperation between the different credit authorities seemed difficult to achieve, and asked if this section of the legislation would not be just revisited in a few years’ time.

Mr Momoniat said that Parliament should be responsible for the enforcement of cooperation. This challenge was not unique to South Africa and could be enforced through Memorandums of Understanding, as was being done in the United Kingdom.

The Chairperson referred to the payday loans and the excessive interest rates. She noted that Automatic Teller Machine (ATM) loans needed to be repaid within 30 days, failing which the interest rate could go as high as 51%.  She asked how and why these loans were made available at such excessive rates.  She referred to the national payment system, where accommodation expenses such as mortgage payments were not considered essential, but rental payments were. She asked if NT was aware of the fact that the banks were not open for business on public holidays, except when money was owed to them.

Mr Momoniat said, in regard to the ATM loans, that BSD did not deal with or were not very good with consumer protection, and the Jali Commission had identified the need for a Market Conduct Authority that could address the issue of market practices, with consumer protection as a priority.  The national payment system favoured smaller loans against bigger loans like mortgages, but could only be assessed on a case-by-case basis, because in some instances these smaller loans were assessed to be essential for different reasons.

The Chairperson reiterated there was a specific peculiarity and distinction between how rental and mortgage payments were regarded, which could not be accurate, and it needed to be addressed.

Credit Providers Association Presentation (CPA) submission
Ms Darrell Beghin, Executive Director, Credit Providers Association, said CPA was essentially a data facilitation organisation and her presentation would be centred on the importance of data, more than the provision and management of credit.

CPA was a voluntary association of industry players who shared payment performance information about their debtors, with the aim of making the best credit and risk decision possible.  It was a forum for credit exchange, but there was very limited information exchange relating to what was allowed to be reported within Section 70 of the National Credit Act, and not without consumer consent.

Data afforded insights into consumer behaviour, to allow for business risk assessments and risk mitigation strategies and tactics.  Young and early entrants (“thin file” consumers) gained access to credit which they would otherwise not qualify for, and small, medium and micro-sized enterprises (SMMEs) were able to access and extend credit, which benefited themselves, their customers and contributed to employment. Slide 12 showed how data was applied within the business cycle, and it was illustrated that more information was often needed to distinguish between ‘good faith’ and ‘bad faith’ customers.  Data could be applied for credit vetting, propensity models, tracing, fraud identification and prevention, marketing, debt consolidation, triggers and alerts, employment vetting, development of risk assessment tools and price or premium setting.

South Africa was rated as having amongst the world’s best credit reporting systems, with a flow of 71 million accounts per month. The National Credit Act-enforced amnesty policy worked well.  Where the data flowed, business grew, consumers had options, government received more taxes and statistical insights existed to inform all. 

The lack of consumer education was illustrated on slides 15-16. These showed that of the 20 million credit active consumers during the last quarter of 2013, only 164 000 had viewed their own credit profiles.  There were approximately 21 000 lodged disputes, of which around 15 000 were resolved in the customer’s favour.  The volume of global business information doubled every 1.2 years and poor data cost 20-35% in operating revenue.  Slides 18-20 gave an overview of the benefits of data to the economy, consumers, and credit or service providers.

She noted that of the 71 million accounts, 51 million (73%) were classified as “in good standing”, whilst adverse listings remained under 6% of total accounts since December 2010.  The rising cost of living, unemployment figures, and the younger population profile called for ways to move more people into the economy.  The challenge was not the data, but rather the cost of doing business, competition within the markets, consumer earnings, low financial literacy, what was behind the current National Credit Act domain and what data was not reported or available for risk management and government insights.

Understanding and augmenting the credit data drove innovation, informed policy and legislation and enhanced consumer choices.  Categories missing from the current data environment included spatial data employment (geography for better planning), debt collection data, debt counselling data and SMME business credit consumption and payment performance data. She submitted that there was a need to recognise the value and role of data, to have strong custodianship of the credit data and broader reach and contribution by more service and product providers  The dti had not yet done an economic impact assessment on the impact of the credit data removal, but reports from UNISA’s Bureau of Market research indicated that removal of data could have dire impacts on the economy, financial ranking of South Africa and on consumers at large.  The best way for government to be informed, in order to tailor relevant and effective legislation and policy, was to have sufficient information, which would be provided through explicit, quality, current data on credit consumption, credit application and use, and payment performance.

The Chairperson said the Committee would assume that the data in the presentation referred to ‘data with integrity’. She asked Ms Beghin to cover ‘blacklisting’ at this point.

Ms Beghin said blacklisting was the recording of data at the end of a cycle when consumers had failed to pay accounts.  This usually happened after legal action had been instigated or a debt had been written off and the integrity of data in this regard was critical.

Microfinance South Africa (MFSA) submission
Mr Hennie Ferreira, Chief Executive Officer, MFSA, said MFSA was a reputable micro-financier member organisation, whose members were all registered with the NCR.  The organisation was against ‘loansharking’ and stated that reckless credit was a danger to all credit providers and that “over indebtedness was the beginning of the end for the credit industry”. MFSA did not agree with the statement made previously by dti and National Treasury regarding payday loans and their effects on the over-indebtedness of South Africans. It also did not support the correlation drawn between payday loans and the Marikana tragedy. It wished to see a clear distinction between registered and unregistered lenders.  There was massive informal loansharking being done, also involving trade unions that were not accredited or registered and this meeting could serve as an awareness platform.

Information provided by NCR showed that short term lending had not increased much over the last six years while unsecured lending had increased exponentially.  The short term loans hardly grew, so increased negative references to short term loans from registered micro lenders were thus unwarranted.  Mr Ferreira provided an overview of the short term loan and the unsecured loan and how the interest was calculated, showing that the unsecured loan was substantially more expensive.

The MFSA conservatively estimated there were 50 000 unregistered loan sharks, compared to 5 500 NCR-registered credit providers. These loan sharks were ruthless and demanded excessive interest rates.  There had been some comments made regarding the speed of approval of the short term loan, but he pointed out that responsible conduct made business sense, and the market in itself punished reckless lending. Paper processes were slow, expensive and not necessarily more accurate.  MFSA would like to see all lenders, regardless of size or amount of accounts registered, properly regulated.

MFSA was concerned that the service fee needed to be raised, as it had remained the same for seven years. It had further comments on the difficulty of synchronisation of regulators, the seemingly different standards by which organisations were being regulated. It noted that industry codes of conduct used introduced regulation, not conduct. It was concerned about the affordability guidelines, and the proposed removal of data, which would feed the underground market.  MFSA was committed to eradicate bad practices and welcomed transparent and fair oversight.

Discussion
The Chairperson asked that all discussion be clearly focused on the Bill. A resolution had been passed in Parliament on credit amnesty, although the importance of data was not to be undermined. 

The Chairperson, addressing Mr Ferreira, said the Committee did not want any of the stakeholders to leave the meeting with the notion that ‘going underground’ was an option. However, the Committee wished to hear comment from all, recognising that there were a number of organisations that functioned outside of the ‘legal space’.

Mr Ferreira accepted that point and said he was happy to cooperate with whatever was expected of the organisation.

Mr McIntosh asked if the Tenant Profile Network (TPN) was part of the CPA. He asked how non-South Africans, who made a significant contribution to the economy, formed part of the Association.

Ms Beghin said TPN was a registered credit bureau, registered with the NCR, specialising in rental and property data, but was not part of CPA. TPN could apply to be part of the Association and would be accepted all criteria were met.  Non-South Africans could be logged on South African credit bureaus, using passport numbers or date of births. CPA was working with other African countries to create a credit-reporting alliance, which was still in its early phase.

Mr Swanepoel said the Committee did not have a problem with data, but with data integrity.  By the Association’s own admission, 75% of the queried data was in fact wrong. He asked how the CPA would ensure that accurate data profiles of consumers were kept. 

Ms Beghin said her presentation illustrated that when consumers managed their credit profiles, the situation would improve. Inaccurate information could be captured, but the CPA was developing software for all its members to ensure that information entered was up to the CPA’s standard.  The NCR had a role to play in audit of credit bureaus and credit providers. Through a collective effort, inaccurate data could be addressed.

Mr Swanepoel said Mr Ferreira seemed to have an idea that the Committee was targeting micro lenders, but the Committee was in fact concerned about  ‘loan sharks’, of whom MFSA estimated there to be around 50 000.  If money was loaned at the same interest rate on a short or long term, the cost of credit should be the same. He thus asked how MFSA’s calculation worked out lower than the bank’s cost of credit.  He asked what the average monthly interest rate of MFSA members was, and how many consumers who borrowed money at the end of a month came back to borrow again and again after repaying the loans. He also wondered if this information was being reported to the NCR.

Mr Ferreira said there was a need to distinguish between registered and unregistered organisations. Payday lenders were currently referenced in a way that did not distinguish registered micro lenders from ‘loan sharks’.  The formulas distinguished between the unsecured and the short term loan.  Both sectors had three components, but differentiated by how the interest was calculated.  The origination fee was charged at the initiation of the loan.  For a short term loan, the maximum interest to be charged was 5%, with R50 per month services charged.  For the unsecured loan, the interest rate was calculated by taking the repo rate x 2.2 + 20.  He offered to send these calculations through to the Committee. There were clients who took loans every month, but there were also clients who took loans at specific times of the year, perhaps for school expenses. Some took loans to cover unexpected expenses like funerals.  MFSA reported credit information to CPA, but had also launched a new project recently to consolidate consumer information.

Mr S Radebe (ANC) asked for comment how data integrity would be ensured in instances where borrowers were victimised. He cited a case of stolen bank statements reported from a certain bank, and another where it was known that a cheque was falsified, but the owner of the cheque ended up being listed adversely.

Ms Beghin said that information could be loaded and emotive, but there were several ways for consumers to protect themselves. This also tied in with consumer education and proactive attitudes. 

Mr Selau noted the call for stronger custodianship of data, and asked for proposals on what exactly the amendments to the National Credit Act should be.

Ms Beghin said there was a role for the CPA terms of the custodianship, but there was also a role for government with regard to policy. The NCR had a reasonable amount of power in the National Credit Act, although not over credit providers and their data accuracy, and that was an aspect needing to be strengthened.

Mr Selau asked that the reference to the involvement of trade unions and dubious lending practices be clarified.

Mr Ferreira gave instances of registered credit provider trade unions who deducted payments from the payroll, some unregistered credit providers who collaborated with trade unions in the collection of payments, and registered or unregistered employers who did lending through collaboration with trade unions.

The Chairperson said the Committee understood that MFSA was a reputable organisation with a sustainable microfinance vision. She asked that it should send through more specific comment on each clause where it considered there was a need for amendment.  The Committee wanted businesses to earn a reasonable and legal profit and to ensure that those who borrowed paid a fair interest rate.

Standard Bank submission)
Ms Wendy Dobson, Head: Group Regulatory Advocacy, Standard Bank, said that Standard Bank supported the need for regulation of the credit market.  Credit could be empowering, because consumers could buy homes and cars or pay for their children’s education, but when credit went bad, it could be very damaging. 

Standard Bank was the biggest mortgage lender (with a 29% market share) in South Africa. It believed that lending for the purpose of buying a home had been discouraged as a result of certain unintended consequences of the National Credit Act.  There had been a decrease in secured lending, with the home loan market in past years showing growth of only 3%. The amendment process could be used as an opportunity to consider how to improve support for mortgage lending and home ownership.  There was a perception that banks forced customers to take a home loan over a 20 year period, but this was not true; it rather came down to affordability.  Slide 3 showed the average home loan repayment amounts for the middle market and affordable housing sectors, over five to 30 years.  The bank tried to encourage customers, through advertising, to pay more into their home loans, because the benefits were significant over the repayment term.

The in duplum rule meant that the origination fees and the interest charged, accumulated, could never exceed the original loan amount.  However, the way that section 103(5) of the National Credit Act was currently worded made it difficult to assist customers who missed a payment.  The absence of a definition for when “default occurs” and when “default is cured” created difficulty in restructuring a home loan repayment and deciding how the in duplum rule should be applied.  Often, home loans were the least expensive debt, because of the extended period and relatively low interest rates. In this debt review process, the more expensive loans were prioritised. She too commented that rental was considered an essential living expense but not home loan repayments.  Consumers could then be in danger of losing their houses. Standard Bank supported affordability assessment guidelines from the regulator, but was concerned how the guidelines would affect home loan applications, particularly in the affordable housing market.  It was important to look at all the reforms that had been introduced, to prevent and eradicate abuses that happened in consumer credit through home loans.

Discussion
Mr N Gcwabaza (ANC) said there was a lack of information between the bond holder and the bank with regards to shorter home loan terms, and the disadvantages of longer repayment terms that needed to be addressed.  Banks would not necessarily volunteer that kind of information, because by the 20th year the paid up amount was four to six times the original loan amount. He asked how this was allowed to happen.  In instances where the repo rate went down with the interest rate, it was to the bond holder’s advantage to leave the instalment the same, but often banks would invite customers to take out a second mortgage on their home loans, without specifically advising what the impact of such a burden would be. This could be described as ‘unscrupulous’ practices by banks.  He asked also about the relationship between the bond that was being repaid over 20 years and the value of the property that supposedly increased, and whether this was the reason for the greatly increased amount?

Mr Steven Barker, Head: Home Loans, Standard Bank, said consumers spent roughly 20-25% of their gross income on their home loan installments, and the term of the home loan depended on the affordability of the loan.  In the future, he agreed with the need for greater education of customers so that there was a greater understanding of the cost and impact of credit.

Mr Z Wayile (ANC) said the presentation touched on the social goals of the National Development Plan. He asked why it was accepted that a R600 000 car could be bought and paid for over a shorter number of years, but a R200 000 house needed to be paid over 20 years.  The social consequences of losing a house were significant, as it was shown recently in Motherwell, Port Elizabeth, where approximately 50 workers were retrenched and the Municipality had to intervene because these houses were being paid off over longer than ten years. A significant relationship should have been built over ten or more years, but the State had to intervene. He wondered if there were any statistics on similar cases.

Mr Barker said the repossession of a house was a painful and costly experience for the consumer, and was  only done as an absolute last resort.  Standard Bank helped in excess of 30 000 people during the 2006/7 period to rehabilitate their home loans, and they were still owned their homes.  That number of people greatly exceeded the number of people who were taken through the legal process and eventually lost their houses.

Mr Swanepoel said that, prior to the financial crisis, banks offered 100% loans, but had subsequently required customers to put down 10% or 20% deposits. He asked if there was a significant difference in repayment ability.  He asked what checks and balances were in place so that the deposit requirements could not be circumvented.

Ms Dobson said there was some research information available that showed that payment ability increased when clients paid a deposit upfront. It was not the policy of Standard Bank to allow for unsecured lending. 

Mr Barker noted that in the affordable housing sector, 65% to 70% of home loans were processed as a 100% loan with no deposit required, but higher up in the housing finance sector, some sort of equity was expected.

Mr Radebe raised a question on data integration, and what checks were in place to ensure that bank employees did not compromise customers’ confidential information.  With the issue of social responsibility and debit orders, he asked why mortgage payments were often the last payments to be deducted from a consumer’s salary. 

Ms Dobson said the Bank put all the controls necessary in place to protect the integrity of customer information, but there could never be 100% surety on confidentiality. The national payment system was responsible for the order in which payments were deducted from a consumer’s salary. SARB had initiated a Collections Review, which would be finalised toward the middle of next year, which looked into reprioritising payments.

The Chairperson asked what additional costs, apart from interest, banks charged.  She asked why, in the case of car loans and credit cards, the repayment consisted of a combination of capital and interest, but in the case of home loans the interest needed to be repaid first.

Ms Dobson said the Bank would provide the Committee with a written breakdown of its cost of credit, as well as a breakdown of all costs across all products.

The Chairperson asked if all home consumers were charged the same interest rate on home loans, across the board. She was concerned that the low income market may be paying higher interest rates on their home loans.

Mr Barker said that prior to the property slow-down, highly competitive rates were charged to customers, but recently the interest rates were aligned to the customer’s risk profile.

The Chairperson asked that the presenters hand in specific proposals on the Bill for consideration by the Committee. She said that these public hearings were intended to allow for public input on the proposed legislation.

The meeting was adjourned.
 

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