A recent High Court decision provides yet another cautionary tale for lenders. The stakes are high: get this wrong, and you could lose everything.
Two big risks for lenders
Before you lend, be aware of two major risks that you need to manage. Both are imposed by the National Credit Act (NCA):
A family trust lends R430k to a heavily indebted couple
A SAPS employee and her husband, heavily indebted to a range of creditors, approached a debt consolidation business for help in 2012.
Having carried out its version of the credit assessment required by the NCA, the debt consolidator organised a lifeline for the couple in the form of a R430,000 loan from an investor (a family trust) to pay off their debts. The loan was secured primarily by a bond over the couple’s house in Kraaifontein. A secondary security in the form of a sale agreement by the couple to the trust was to be held in reserve and activated only in need. The idea was that, after a short period of financial rehabilitation, the borrowers would refinance the loan through a bank, but that never happened.
When the borrowers defaulted on their repayments, the trust sued for R430,000 plus interest (a lot of money at 17.1% p.a. for 10 years), and an order allowing it to sell the couple’s bonded house to satisfy the debt.
The Court declared the credit agreement “reckless credit” and set it aside. The trust must now write off the balance of its loan and interest, cancel its bond over the couple’s house, and pay all the legal costs. Its only consolation is that the Court, in exercising its discretion to structure a just and equitable solution between the parties, allowed the trust to keep the R251,325 already paid to it.
What went wrong?
Why did the lender lose so badly? In a nutshell, the affordability assessment performed by the debt consolidator was flawed. Instead of asking whether the couple could afford this loan based on their existing financial means (as required by the NCA), the assessment relied on “a risky potential of future funding”, i.e., the speculative prospect of a mainstream bank granting a further loan in the future. The borrowers had always been over-indebted, this new loan made their situation even worse, and therefore the lending was reckless.
Lenders: How to avoid a “reckless lending” declaration
NCA regulations in force since 2015 set out in detail the various technical criteria and formulae to be used in assessments. This is just an overview of what you need to cover:
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