Home Loan & Mortgage Disclosure Bill: hearings

Meeting report

HOUSING PORTFOLIO COMMITTEE
26 September 2000
HOME LOAN AND MORTGAGE DISCLOSURE BILL: HEARINGS

Documents handed out:
Banking Council submission
COSATU submission

SUMMARY
The Banking Council stated that it agreed with the need for disclosure on the part of banks, but were concerned that this be done in the most cost-effective and practical way possible in order to ensure that undue onus is not placed on the banks. Further considerations were the nature of the information required to be disclosed, and the recommendation was that this be limited to gender and race.

Extensive discussion ensued relating to the ‘red-lining’ of certain areas, with the Banking Council stating that this takes place on the basis of person, property and location, with most applications being rejected on the basis of location. The Banking Council stated that it is the responsibility of the banks, government and stakeholders to ensure that these locations are rehabilitated, but underlined that this would have to be a co-ordinated effort.

COSATU supports the objective of the Bill to require financial institutions to disclose their lending patterns. This would identify the geographical areas where red-lining occurs or categories of people whose access to credit is unfairly restricted. The main shortcomings of the Bill is it fails to outline the type of information to be disclosed and enforcement. COSATU are anxious to see community reinvestment legislation tabled as well.

MINUTES
The Chair reminded members of the Gauteng provincial visit taking place on 29 September, and stated that the numbers allowed to attend had not yet been confirmed by the Chief Whip.

Members had received copies of the written submissions from organisations, with only the Department of Housing and the Banking Council electing to make presentations in addition to their written submissions. The majority of submissions indicated that they were in support of the legislation, with certain areas of concern and clarification. A few amendments had been proposed.

The Chair expressed the view that she would have liked to have seen more input from the part of the consumers, but added that it was likely that consumers had been consulted by those organisations that had submitted written submissions, and that the view of the consumer would be expressed in this way. She particularly would have liked to have heard from residents who lived in the `red-lined’ areas.

It was decided that the formal stage of the process would go ahead the following day in spite of the fact that this had only been scheduled for 03 October, as it was felt that the time should be utilised in order to expedite the passage of the Bill. Mr Lee (DP) stated that he disagreed with this as the submissions had only been received on that day, and he had told his party that formal debate would only take place on the 3^rd. He agreed to attend the discussions the following day, but asked that it be noted that he would only be able to take part formally after caucus on Thursday.

The Banking Council’s submission
Mr Cas Coovadia (General Manager – Transformation), accompanied by Ms Mary Thomkinson (General Manager – Housing) and Mr Prince Maluleke (Senior Manager – Housing), stated that the Banking Council agreed that there is a need for disclosure in order for a full picture to be gained of low-income housing in South Africa. He stated that the Banking Council is being asked for disclosure from many fronts, and that these requests are becoming unwieldy and are impacting on the systems requirements of the Banking Council. The Banking Council is therefore asking for co-ordination of all requests for disclosure, so that a single system can be built which accommodates all requests.

He stated further that banking has taken a pro-active stance on racism, and had undertaken to identify and prosecute any instances of racism within banking in conjunction with the SA Human Rights Commission.

He underlined the need for accessing finance in the low-income housing environment, and the added need for stabilising this arena. Banking sees this being done through three strategies:
Restructuring the banking industry
Governance (including labour and organised business to ensure that community action does not prevent legal repossession of defaulted properties, as well as ensuring that the value of the properties do not decline.)
Stakeholder involvement

He stated that the Banking Council wants similar objectives in the identification of discrimination and the disclosure of statistics. The Banking Council find themselves, however, caught in the middle between the departments of Housing and Trade and Industry and Reserve Bank. While on the one hand they are being required to become more involved in the low-income housing market, Trade and Industry and the Reserve Bank require that the high standards of banking, as well as banking integrity and international competitiveness be retained.

The concern of the Banking Council is that a number of lenders are not registered financial institutions, and are therefore not included in this legislation. It is the opinion of the Banking Council that all lenders should be included in the Bill in order for effective monitoring to take place. A further concern is that the distinction between disclosures and aggregated disclosures becomes blurred in this draft of the legislation, and it is the proposal of the Banking Council that this needs to be made very clear.

The Banking Council also want reporting to be able to be made on an electronic basis, as this would allow the office to be set up in such a way as to allow information transfer to happen almost immediately without the hassle of written reports. The Banking Council proposes that reporting be done on a "group" basis, and that care should be taken to ensure a minimisation of costs to be incurred as a result of this requirement.

The Banking Council proposes that the categories of disclosure be limited to only race and gender as this will become too cumbersome otherwise. There is a conflict with the Equality Act, which states that race and gender should play no part in the granting of loans, as there will now be a requirement that race and gender be recorded.

The Banking Council stated that ‘red-lining’ happens on the basis of three criteria:
The Person : the affordability of the property and credit history. This is done on a score-card basis.
The Property : based on whether the property as sufficient value
The Location : based on the environment, local authority, crime, proximity to employment (e.g. mines), repayment rate and, if the property is a sectional title, the body corporate.

They continued that decision making is done at a central location in order to minimise bias, and that most ‘red-lining’ takes place on the basis of location, although it can happen as a result of any of the three criteria.

The Banking Council sees this legislation as part of a triad of legislation based on the American legislation of the same kind passed during the 1960s and 1970s, and is of the opinion that the third piece of legislation is essential to addressing location shortfalls and so enable lending.

The Banking Council stated that it should be noted that ‘red-lining’ happens not only when the transaction would be a bad investment for the bank, but also when it would be a bad investment for the lender as a result of environmental factors.

The Banking Council proposed that sections 5 (c) and (d) be moved into the "Community Re-investment Act"-type legislation as it deals more with turning areas than disclosures on the part of the bank.

The Banking Council identified section 5 (e) as being costly and onerous, and recommend that this has already been handled under the Equality Act

The Banking Council also proposed that the Minister and Banking Council should consult regarding regulations to be imposed in terms of the Bill.

The Banking Council proposed that a statement be included stating that the Act is not intended to encourage unsound lending practices.

Discussion
The Chair asked the Banking Council to brief the meeting regarding the Botshabelo agreement, asking them to comment in particular on how far the banks have come in terms of the requirements as set out.

Ms Thompson replied that the Botshabelo Agreement was signed in October 1994 with two main intentions: firstly, there was the intention to re-introduce banks into the low-income housing environment, and secondly to oblige government to normalise the lending environment. The Mortgage Indemnity Fund was constituted to look at ‘red-lined’ areas and to re-audit these areas, which was done for about 2 ½ years. The intention was that conditions would be created under which the locations would pass. 140 000 loans were made available in this time, but government was to have a contingent liability and this was no longer seen as advisable, and the MIF was disbanded. The economy has deteriorated in the time since the disbanding of the MIF resulting in the fact that the default book has grown and the lending environment worsened considerably, which has had a serious effect on Banks. It is the opinion of the Banking Council that this problem cannot be managed or solved by the Banking Council on its own, but that stakeholders and government should be included in order for this to be effective.

Ms Coetzee-Kasper (ANC) stated that it was her contention that it was indeed the person and not the location that was being red-lined in spite of assurances that loans are granted fairly and equitably.

Mr Lee stated that he could understand when red-lining was effected on the basis of a person or a property, but questioned whether it was fair that it should be done according to the area, as there was more than one kind of person that lived in an area. If this is the case then it would constitute discrimination in his view.

Mr Nash (ANC) stated that he was of the opinion that red-lining on the basis of person, property and location was discriminatory. The Banking Council needs to take cognisance of the fact that it dealing with the low-income housing market, and that by blanketing them as non-payers this can be seen as discrimination. He asked what record the Banking Council has that indicates that these people do not repay their loans. He asked what basis the Banking Council has for alleging that the government went back on its word in terms of the Botshabelo Agreement, stating that the banks did not honour the requirements placed on them for any of the three years, and the government reneged as a result.

Mr Coovadia responded that it is a fact that the SERVCON project is not working – that people do not have jobs and that there is economic hardship in the country. The question to be answered is what we do as a country in order to alleviate this problem. Government cannot continue overlooking this fact and still require banks to lend in these areas, as the banks will be stopped by the Registrar of the Reserve Bank. This can only be addressed through consulting and creating pro-active solutions e.g. funding to which all sectors contribute to alleviate the problem. There is role for the banking industry to take responsibility for the problem, but the fact remains that they cannot solve this problem alone.

He continued that if an area has been ‘red-lined’ and people are being treated differently, then this should be pointed out to the banking council and the Banking Council will investigate and prosecute if necessary. The Banking Council recognises that there are different people in these areas, but the reality is that the property value is dropping. This drop in value must be addressed, and all banks and stakeholders must have a part in this process. The Banking Council is prepared to be proactive in this – by way of example with the rehabilitation of the Johannesburg Central area where the Banking Council is paying the salary of people employed for this purpose. The Banking Council is ready to engage with issues which will allow them to lend in a sustainable way.

With regard to the Botshabelo agreement, the fact remains that the country is still faced with the situation which the MIF was constituted to fix – turning areas around.

The Chair asked for clarity with regard to the records for 1995, how many loans were in fact provided?

Mr Coovadia replied that the MIF lending report can be made available to the committee. He continued that banks have been trying to engage government on these issues, and have not been successful. The Banking Council is not trying to simply hand the problem over to government – they are proposing that a co-ordinated solution be found. At the same time the Banking Council cannot be forced to lend when it cannot get the money back again. It should be noted that this situation does not only affect the banks, but affects the lenders as well - and banks are receiving requests for loan amounts to be reduced as the property value no longer supports the loan amount. Who can be held accountable in this situation – it is not the lender’s fault, but at the same time is not the responsibility of the bank.

The Chair asked whether it is the Banking Council’s contention that Servcon has failed?

Mr Coovadia replied that it has not failed completely, but the environment has not been normalised. People are in too much financial hardship, and even where bonds have been reduced to rental agreements people are unable to pay. Are we then saying that for the next five years people will not be able to afford houses? If so, then we need to address the reality of the situation.

A member of the ANC stated that she was disturbed by the hostile attitude of the Banking Council during the introduction. As government the members are here to ensure that unsound lending does not happen, but at the same time the committee wants to ensure that there is just lending. What had the Banking Council done to turn around ‘red-lined’ areas, as these residents are also depositors whose money the bank uses to lend.

Mr Schoemann (ANC) stated that he was also taken aback by Mr Coovadia’s introduction, and that he got the impression that the Banking Council will do and say anything to obstruct the process. He stated that the Banking Council should be mindful of the fact that banks had a large part in marginalising communities in the period pre-1994, and the government is therefore asking them to play a part in the reconstruction of these communities. He asked what the banks are doing to teach people to manage their finances, as education forms a large part of helping develop these communities. There is merit in the recognition on the part of the banks that there is a need to turn these communities around, but this will take a long time, and the question has to be: what becomes of these communities in the mean time?

Ms Morule-Maine (ANC) asked what exactly the Banking Council has done to engage with the government. She said that it was all very well to recognise that the areas result in the ‘red-lining’ of applications, but constructive steps to rehabilitating these areas were still needed. Even if people could all be moved to ‘good’ areas, the fact would remain that they are still jobless.

Mr Lee picked up on the comment of the Banking Council that it would be expensive to disclose to all the organisations which now require this. He asked whether the Banking Council had in fact done a costing of this, how much it would cost, and what impact this would have on systems.

Mr Coovadia apologised for the fact that his introduction had come across as combative or disrespectful, assuring the committee that this was not his intention. He said that the Banking Council’s intention for the meeting was to have fruitful interaction with the committee to pave the way for co-ordinated moves to address the issues at hand. He stated that he would like to dispel the impression that he had picked up among members that the Banking Council did not want to help the poor. It is not so much the physical nature of the areas, but rather what is going on in these areas that is the problem, and it is an unacceptable situation that people are being killed for buying a house which has been repossessed through due process. In this instance the new owner of the house was a member of the community. There is only one solution, and that is to address the problem in the communities that is making them unstable and ungovernable. But this returns to the main point raised here today, namely that the banks cannot solve the problem on their own. Banks want to make positive progress, and once again commit themselves to this process, even if it means that they need to provide resources to ensure the sustainability of this.

The Banking Council has been interacting with the Department of Trade and Industry, and would recommend that a workshop be held in addition to these public hearings in order to facilitate further discussion on these issues, as well as the formulation of action plans to carry these out. If the banks then don’t deliver the government must then act against them.

The Chair asked for details of interaction between the Banking Council and government.

Ms Thompkinson stated that the CEO and government had been scheduled to meet in April, but that government had phoned to postpone the meeting on the night before it was scheduled. This has still not been rescheduled by government in spite of requests by the Banking Council. A letter has also been sent by the Director of the Banking Council to the Minister of Housing at the beginning of May regarding Servcon outlining areas of weakness with regards this project. These issues have also been brought up in various fora, but as yet no response has been received from government.

The Chair asked that a letter detailing these interactions (with backup correspondence if possible) to be sent to her as she would like to follow this up. She stated that the government went into agreement with various sectors at Botshabelo, and it may be valuable to get these together again to evaluate the project.

The Banking Council stated that they would welcome any interaction with the committee, and looked forward to a fruitful future relationship. The Chair thanked the Banking Council for their input.

COSATU
Mr Neil Coleman of COSATU said they support the underlying object of the Bill, namely to require financial institutions to disclose their lending patterns. This way the public and government would be able to identify the geographical areas where red-lining occurs or categories of people whose access to credit is unfairly restricted. The Bill is in line with COSATU’s call for legislation to end the legacy of discrimination against black people and low income earners.

Mr Coleman said the Bill complements the Constitution, the Promotion of Access to Information Act and the Promotion of Equality and Prevention of Unfair Discrimination Act. He said it is clear that South African financial institutions have not changed their practices through self-regulation. The country is entering its sixth year into a democracy and the banks still fail to extend financial assistance to poor communities and low income areas are still being redlined.

COSATU said the RDP document called for legislation to make credit and other services available in low-income areas and for redlining and other forms of discrimination by Banks to be prohibited. The continued discriminatory practices of Banks require more urgent action to ensure access to credit by poor communities. Requiring disclosure on the part of banks is a move in the right direction but this in itself is not sufficient.

The main shortcomings of the Bill are:
- the absence of a community reinvestment legislation;
- the type of information to be disclosed and enforcement;

Mr Coleman appealed to the Committee to introduce a community reinvestment scheme in the Bill or that it be expedited and introduced as soon as possible. The absence of a community reinvestment legislation makes the Bill powerless. He expressed concern that the financial sector has a very powerful lobby against any legislation that goes against it and that this might frustrate attempts to bring about legislation of this nature.

The type of information the Bill requires to be disclosed is already available in the Deeds Registry. He pointed out that the main form in which banks now give credit – about R10 000 for building materials – is outside the scope of the Bill which requires disclosure only of loans for recorded bonds in the Deeds Registry. The enforcement mechanism is unnecessarily bureaucratic and denies consumers direct information form Banks. The Bill is silent on what steps would be taken where information acquired from the banks reveals substantive unfair discrimination against particular categories of borrowers. The Office of Disclosure should have an active and proactive role, to be able to even litigate, to ensure compliance with the Bill.

COSATU felt the Bill needed a substantial overhaul to include the community reinvestment obligation for the financial institutions. Amendments to improve the provisions of the Bill regarding information disclosure relate to:
- the powers and functions of the Office of Disclosure;
- access to information by consumers;
- intervention by the Office of Disclosure in cases where substantial discrimination is revealed;
- a study of the Deeds Registry to ascertain where and which banks lend; and
- to bring small loans (under R10 000) under the scope of the Bill.

COSATU’s submission includes proposed amendments to specific clauses of the Bill.

Discussion
The Chairperson asked what the COSATU position is regarding offences and penalties in the Bill.

Mr Coleman said the Bill only provides for criminal penalties which does not go far enough. The only type of offence that would be covered is refusal by a bank to disclose information. COSATU is calling for a different type of intervention making it possible to enforce the anti-discrimination legislation.

The Chairperson asked if she is correct in saying that COSATU is calling for the community reinvestment obligation to be included in the Bill failing which it should rapidly be introduced in a separate piece of legislation.

Mr Coleman said they are calling for the Bill to be overhauled to provide for the community reinvestment obligation. If this is not possible to achieve, to agree as part of passing this Bill that it will be subject to a more comprehensive piece of legislation to provide for community reinvestment scheme for financial institutions.

The Chairperson observed that the COSATU submission makes reference only to the American experience regarding community reinvestment legislation. She asked if this is the only country from which South Africa can take lessons, as it is not the only country to experience discrimination.

Mr Coleman said they have not done an extensive study of every country but felt that America is a pertinent example, especially considering that it is a minority that was being discriminated against there. Even considering the relatively small scale on which this was being carried out it has been difficult to implement legislation that combats this. This points to how powerful the financial sector lobby is in influencing legislation that impacts on them.

The Committee asked COSATU if it would not be better for the community reinvestment scheme to be provided for in a separate Bill at a later stage.

COSATU felt that the community reinvestment scheme should be integrated into this Bill as it would make it easier for reference purposes and implementation. Saying that it would be provided for at a later stage in a separate bill could complicate the whole process and there are no guarantees that it would happen soon enough since no time frames are set.

The Chairperson suggested that COSATU discuss the issue of community reinvestment legislation with the ANC study group.

The meeting adjourned.