THE NATIONAL CREDIT ACT
CREDIT ACT No 34 of 2005

Introduction

1. These notes are in summary form and are not intended to be a detailed legal discussion of the Act.  Many technical aspects of the Act are not dealt with here.  Emphasis is placed on how the Act effects the sale and mortgage of immovable property. 
2. The NATIONAL CREDIT ACT is being introduced in stages, the final important date of introduction being the 1st June 2007.
3. The Act replaces and amends a number of Acts dealing with credit and interest rates, the most important being the Credit Agreements Act 75 of 1980 and the Usury Act 73 of 1968.
4. Legislation regarding Credit is common.

Purpose of The NATIONAL CREDIT ACT

5. Promoting a responsible credit market.
6. The NATIONAL CREDIT ACT refers to consumers (credit receivers, including purchasers and mortgagors) on the one side and credit providers on the other.
7. Avoiding reckless credit.  (the most fundamental change).
8. Educating consumers about credit and their rights.
9. Protecting consumers from fraudulent and unethical conduct by credit providers and credit bureaus.
10. Dispute resolution and enforcement.
11. Providing a system of debt restructuring.

Reckless Credit

12. The Credit Provider must assess the creditworthiness of the consumer.  The Credit Provider must not enter into a reckless credit agreement with the consumer. 
13. Section 80 of the NATIONAL CREDIT ACT provides:
    A credit agreement is reckless if at the time it is made or when increased:
    The credit provider must conduct an assessment of the consumer’s general understanding and appreciation of the risks and costs of the proposed credit and the rights and obligations of the consumer under the proposed credit agreement; the debt repayment history of the consumer; the existing financial means, prospects and obligations of the consumer. 
14. If the credit provider does not do such an assessment at all, such is regarded as reckless credit regardless of the outcome had such an assessment been done.
15. The credit provider must establish whether there is a reasonable basis to conclude that any commercial purpose may prove to be a success. 
16. If a credit provider, having conducted the assessment, enters into a credit agreement with the consumer despite the fact that the preponderance of information indicates that the consumer did not generally understand his risks, costs or obligations or in entering into the credit agreement, would make the consumer over-indebted, then a court can declare the agreement to be reckless.  The Court must further consider whether the consumer is over-indebted at the time of the Court proceedings.  If the court declares the agreement reckless, the court may set aside all or part of the consumer’s rights and obligations or suspend the agreement for a certain period. (Section 83 (2) (a).  The court may order a re-structuring of the consumer’s debts under any other credit agreement.  If the court sets aside the consumer’s obligations in whole or in part, the consumer does not have to perform that obligation at all.  This is clearly a very serious consequence as far as the credit provider is concerned.  It could lead to numerous appeals and reviews.  Do the courts have the capacity to deal with this extra work-load?
17. The Credit Provider must take into account the credit limit of the proposed credit agreement and the credit limit of any prior credit agreement.
18. Section 82 of the NATIONAL CREDIT ACT provides:
    The credit provider may determine for itself the evaluative mechanisms or models and procedures, but if the National Credit Regulator finds that the Credit Provider is repeatedly not complying with its obligations, it may require the Credit Provider to apply guidelines as determined by it.
19. If a credit provider turns down a credit application, it must, if required, give the consumer detailed reasons. 
20. The banks can no longer charge for the property valuation, but can charge an initiation fee, the maximum being R1 000.00 per credit agreement, plus 10% of the amount of the agreement in excess of R10 000.00, but never to exceed R5 000.00.
21. If a court declares a credit agreement reckless, and concludes that the consumer is over-indebted, it may suspend the agreement for a period and may order the restructuring of the consumer’s debts.  In extreme cases, the court can declare the agreement to be null and void.

Pre-Agreement disclosure

22. The credit provider must furnish the consumer with a quotation and a pre-agreement statement before the conclusion of a credit agreement. (Section 92)  This is prescribed and includes the financial details (including interest payable), and the consumers important rights and obligations.  The consumer has five business days to consider the quote and statement and to shop around for better or cheaper credit.  This five business days should not be confused with the right to cool off which only applies to an installment agreement in respect of movable property.

Regulatory matters

23. 23.   The NATIONAL CREDIT ACT establishes numerous bodies, namely:
    a)      National Credit Regulator;
    b)      National Consumer Tribunal;
    c)      Debt Counsellors;  assist where the consumer is over-indebted.
    d)      Alternative Dispute Resolution Agents.
    All these must be registered, trained and pass exams.
    e)      Consumer courts ;
24. In addition Credit Bureaus are regulated. 
25. The powers and duties of various Ombuds must be considered.
26. Powers and duties of Magistrates Courts are prescribed. 
27. Role prayers must be registered.  If the Credit Provider is not registered when required to be, its credit agreements can be declared void.

Credit Bureaus

28. Must be qualified and registered.  Play an important role in providing information to establish whether credit will be reckless or the consumer is over-indebted.  Must keep records of consumers credit history, income, assets, debts, patterns of payments and defaults, and credit agreements to which he is or was a party together with personal and occupational details.  Credit Agreements must be registered, but this is for the future.  When a credit agreement has been discharged, this must be recorded.
29. A Credit Bureau must furnish a report to credit providers.  Information must be kept confidential.
30. Once a bad debt has been paid, it must be expunged from the records.

The NATIONAL CREDIT ACT in relation to Immovable Property.

31. The NATIONAL CREDIT ACT does not regulate:
    a)      The usual agreement of sale where the purchase price is paid on registration of transfer of the property in the name of the Purchaser.
    b)      Lease of immovable property (e.g. Lease of a house).
    c)      In relation to mortgage bonds, where the consumer is a Company, Close Corporation, or Trust with more than two Trustees.
32. The NATIONAL CREDIT ACT does regulate:
    a)      Installment sales agreements in terms of the Alienation of Land Act.  Usually if a purchaser cannot afford a bond, his ability to enter into an installment sale agreement is suspect and reckless credit is a consideration.  Seek the advice of a conveyancer before trying to conclude this type of agreement.  A quotation and a pre-agreement statement will have to be given. If the credit given is R500 000.00 or more and interest is charged, the Seller must register as a credit provider.  The Seller must be trained, pass exams and be registered.  This makes the exercise impractical.
    b)      Mortgage Bonds.

Mortgage Bonds

33. This is by far the most important subject as far as the NATIONAL CREDIT ACT and Estate Agents is concerned.
34. Bond Originators and Bank Consultants must be experts in collecting information for the Banks to consider.  They will have forms which they must fill in.

Discussion of the NATIONAL CREDIT ACT in relation to Mortgage Bonds.

36. Section 26 of the Constitution of the Republic of South Africa provides:
    (a)    Everyone has the right to have access to adequate housing.
    (b)    The state must take reasonable legislative and other measures, within its available resources, to achieve the progressive realisation of this right.
    (c)   No one may be evicted from their home, or have their home demolished, without an order of court made after considering all the relevant circumstances. No legislation may permit arbitrary evictions.
37. Mortgage Bonds are a primary source of financing the purchase of a home.  Enough emphasis cannot be placed on the importance of housing for all South Africans.  Apart from the fact that it is a source of security for the family, a home is usually an appreciating asset which enables consumers to accumulate wealth, advance their standard of living and on retirement have a home to live in or to sell, go smaller, and have the balance for their retirement needs.  
38. The problem with the NATIONAL CREDIT ACT is that there is no recognition of the fundamental difference in mortgage credit as distinct from other credit.  It is true that credit has got out of hand, and the NATIONAL CREDIT ACT must be credited with addressing numerous abuses.  However, when there is no distinction made between mortgage finance and other less important categories of credit distortions arise.  This should be addressed.
39. The consequences to banks of advancing what some magistrate or institution may regard as reckless credit means that banks will take a conservative approach when granting bonds.
40. The procedure may exclude persons of limited means (the poor) from being granted a bond as the Banks will be reluctant to grant credit which could be regarded as reckless credit.  Those consumers who the Legislature purport to protect, will be prejudiced. 
41. It would appear that even if a large deposit is made, this will not necessarily help the consumer to buy a house.
42. The question of the further bond should also be considered.  At present, a consumer may find himself/herself in financial difficulties which can relatively easily be solved by taking out a further bond, consolidating his/her debts and paying creditors who may be pressing.  It may be that his/her property has adequate security to justify the grant of the further bond.  The very fact of being in financial difficulties could mean that an advance of credit on a further bond could be regarded as reckless credit.  There is no mechanism to ensure that the consumer actually pays off the debts which he/she says he/she is going to pay off.  Therefore the further bond is refused, and the consumer must go to the time consuming, stressful, expensive and embarrassing route of consulting with a debt counsellor.  All creditors are advised of the consumer’s predicament and the consumer is declared to be over-indebted.  Until all his/her debts have been paid off, no further credit can be granted.  Where a business requires credit against a Suretyship signed by the proprietor/shareholder/member, such must be refused until all the consumer’s debts have been paid.  A black mark will be recorded at the credit bureau.  Companies and Close Corporations with assets or turnover in excess of R1 million do not fall under the NATIONAL CREDIT ACT.  But this will not help as the Bank will require a Suretyship. 
43. Although for practical purposes reckless credit and other provisions of the Act do not apply to Companies, Close Corporations and Trusts with more than two trustees, in most instances it would not be financially prudent to buy in one of these entities due to Capital Gains Tax and Secondary Tax on dividends considerations.  You still have the problem of the Suretyship.
44. In assessing whether to grant a credit facility, the credit provider must take into consideration the total debt facility rather than the amount owing at the time of the application?  For example, if a consumer has five credit cards where the credit limit is R50 000-00 on each, should consideration be taken as to how the consumer will pay the full R250 000,00, regardless of the fact that the total indebtedness at the time of the application is only R5 000.00.  Further, what is the position where the consumer has a bond on an investment property for R2million, but the balance owing at the time of the application is only R20 000.00?
45. At the time credit is given, the question is whether, in the event of the credit being granted, it is regarded as reckless credit.  In terms of Section 80 (3) (a), when making a determination as to whether a credit agreement, if granted will be reckless, the value of any credit facility is the credit limit at that time under that credit facility.        (b) in respect of a Suretyship, the settlement value, if the guarantee has been called up, or, if not called up, the settlement value discounted by a prescribed factor.  However in terms of Regulation 24 (10) of the National Credit Regulations, when making a determination in terms of sections 79 (3) (b) (ii) and 80 (3) (b) (ii), the value o f a credit guarantee is 0 (zero).  I presume that this is not a typographical error.  I was not aware that a regulations board can repeal sub-sections of an act of Parliament.  In effect, it would appear that deeds of surety signed by a consumer are not to be taken into account when determining whether a consumer is over-indebted or a credit agreement, if granted, amounts to reckless credit. 
46. In terms of Section 8 (1) and (5), a credit guarantee (Deed of surety) is a credit agreement.  Therefore if a Company, Close Corporation or Trust wishes to be granted credit, and as a condition of that credit advance, a surety/sureties is required to be signed, the credit provider must determine whether the Suretyship amounts to reckless credit.
47. The NATIONAL CREDIT ACT distinguishes between small, intermediate and large credit agreements.  A mortgage agreement is always a large credit agreement.  To constitute a mortgage agreement it is not necessary that interest is charged.
48. The problem is that when a consumer applies for debt relief, or to be declared over-indebted, no distinction seems to be made between a debt based on a mortgage agreement and any other credit agreement. 
49. Previously, payment of a large deposit was one consideration to satisfy the bank that their security was sound.  Now, this is not a consideration which a bank can take into account.   
50. In terms of Section 79 (1) of the NATIONAL CREDIT ACT, a consumer is over-indebted if on the preponderance of available information at the time the determination is made it appears that the consumer is not or will not be able to satisfy in a timely manner all the obligations under all the credit agreements to which the consumer is a party, having regard to that consumer’s
    (a) financial means, prospects and obligations and
    (b) probable propensity to satisfy in a timely manner all the obligations under all the credit agreements to which the consumer is a party, as indicated by the consumer’s history of debt repayments.  This enables a credit provider to refuse credit on the basis of a bad credit record.
51. In terms of Section 86 of the NATIONAL CREDIT ACT, a consumer may apply to a debt counsellor to have the consumer (himself) declared over-indebted.  If the debt counsellor considers that the consumer is over-indebted, the debt counsellor may issue a proposal recommending that the Magistrates Court declare one or more credit agreement to be reckless credit; and/or order that either one or more of the consumer’s obligations be re-arranged by extending the period of the agreement and reducing the amount of each payment due; postponing the dates on which payments are due; or recalculating the consumer’s obligations because one or more credit agreement is regarded as reckless credit. 
52. In terms of Section 88 (3) of the NATIONAL CREDIT ACT a credit provider who receives notice of court proceedings may not enforce by litigation any right or security under that credit agreement until the consumer is in default under a credit agreement and a court determines that the consumer is not over‑indebted, he has paid everything in terms of the debt re-arrangement or the consumer has defaulted in terms of the order of court.  In other words as long as the consumer performs in terms of the debt re-arrangement, he cannot be sued and the bank (mortgagee) cannot foreclose on the mortgage bond or exercise any rights in terms of the mortgage agreement.
53. There is no indication that a court will regard mortgage credit as having any preference over any other credit agreement.
54. a)      The importance of housing as a centre of the first step on the ladder of life must be recognized and promoted.
    b)      Housing must be the centre of family life.
    c)      Your house is your primary asset and the centre of any asset accumulation and advance.
    d)       In any event more competition for rented premises will lead to an increase in rent and a shortage of accommodation to the detriment of those who genuinely cannot afford mortgage credit.
    e)        The rental of immovable property has been excluded from the NATIONAL CREDIT ACT, and mortgage credit should have separate provisions which excluded from certain provisions of the act and provide regulations suited specifically to bonds on primary residences.