CONSUMER CREDIT WEEK 1

1. TERMINOLOGY AND CONCEPTS

1.1 Consumer Credit: Concept and Importance
- 2 features of credit: an agreement for debtor to repay the resulting debt at a future time &
there is a cost to the debtor (interest/charges/fees etc)
- The State protects consumers by establishing ground rules for lending, in SA = National
Credit Act 34 of 2005 (NCA)
- Transformative constitutionalism = the democratic marked a shift to a fairer law of
contract (and entails changes to the existing law to better encapsulate the rights and values
of the South African Constitution)
- Regulating access to credit = important bc inability to borrow in a safe and affordable
manner = form of financial exclusion
- Financial inclusion (opposite of financial exclusion) defined in Section 1 of the Financial
Sector Regulation Act 9 of 2017 (FRSA) as “Financial inclusions means that all persons have
timely and fair access to appropriate, fair and affordable financial products and services”
and bc the FRSA sets the tone for financial services law as a whole, it is safe to say that
financial inclusion is a general regulatory goal of the South African government

1.2 The National Credit Act 34 of 2005

- Fully in force 1 June 2007
- Always make sure that you work from the latest version of the statute
- NCA ONLY applies to CONSUMER credit agreements, where the borrower is not a
consumer, residual common law rules apply
- Consumer credit laws should protect consumers from having to borrow on unfair terms
and from having loans offered to them which they cannot afford to pay and should they lose
control, there also needs to be a safety net to cure ‘over-indebtedness’
- Getting the balance between consumer and credit provider rights is key to effective
consumer credit protection

- Aims of the NCA:

- promote the development of a credit market which is accessible to all South Africans,
particularly those who historically lacked safe access to credit (that is: promote financial
inclusion through access to credit)
- promote responsible borrowing to avoid over-indebtedness of consumers
- prevent reckless lending by credit providers to consumers who can’t afford the debt
- balance the rights and duties of consumers and credit providers. The rights and interest of
creditors and debtors will often be in conflict with each other. NCA seeks to balance this
through regulating for fair procedures
- address imbalances in negotiating power between consumers and credit providers (that is:
protect weaker parties)
- improve access to information by consumers (for e.g. from the credit bureaux to find out
why a loan was declined or what credit history exists on the national database)
- promote better dispute resolution between consumers and credit providers

1.3 Who is a ‘Consumer’ under the NCA

- Natural Persons who borrow under a ‘credit agreement’ are ‘consumers’

- All ‘natural persons’ will be consumers and if the borrower is a natural person, then the Act
probably applies.

- In the NCA, juristic persons include companies, partnerships, larger trusts BUT NOT STOKVELS

- Very small juristic persons are treated as consumers (and hence are protected under the NCA) =
the asset value AND annual turnover of juristic person must BOTH be below R1 million at the time of
the loan

- Also, the State and an ‘organ of State’ is NEVER a consumer

1.4 Who is a ‘Credit Provider’ under the NCA?

- Anyone who lends to a ‘consumer’ in a ‘credit agreement’ is a credit provider for the purposes of
the NCA.

- A credit provider does not need to lend as part of its business, nor to be a registered credit
provider, for the NCA rules to apply to it.

- BUT credit providers who are not registered will not be able lawfully enforce a credit agreement
against a consumer. Since 2016, a credit provider who has leant more than R 0 to a consumer must
register with the National Credit Regulator (where there is a cost to this credit in the form of
interest, fees, charges).

- If the credit provider is not registered, this makes the credit agreement unlawful and hence void.
[These rules only apply when lending to consumers in credit agreements which are subject to the
NCA]

1.5 What is a ‘Credit Agreement’ under the NCA?

- Must meet certain criteria in order for the NCA to apply it

- As a general rule: it is a loan to a consumer (defined in 1.3) at arm’s length (defined in 2.1) where
there is a cost of credit (interest, fees, or charges) will be covered.

2. WHEN DOES THE NCA APPLY TO A CREDIT AGREEMENT?

2.1 General Rules

- Time Factor – NCA fully in force 1 June 2007 (when was the credit agreement entered
into?)
- Parties – For that statute to apply, parties must meet the definitions of ‘credit provider’
and ‘consumer’
- Credit Agreement – contract between credit provider and consumer must meet the
definition of ‘credit agreement’ in NCA (see topic 3 below)
- ‘Arm’s length’ requirement – NCA does not define arm’s length but provides examples
which are NOT considered ‘at arm’s length’
- A loan between natural person family members where there is a relationship of
dependence by one party on the other
- A loan by a company to a shareholder
- A loan by any juristic person to someone who is able to control that juristic person
- A loan by a shareholder to a company (which qualifies as a consumer)
- A loan by a person who can control a juristic person to that juristic person (which must
qualify as a consumer)
** Catch all provision: both parties must have looked after their own interests in in
negotiating the credit agreement and there must be no control of one party by the other.
[Use this general rule]

- Territoriality Requirement – NCA applies to agreements (1) made in, or (2) having an effect
within in South Africa. [Both requirements DO NOT have to be met]. Also, the consumer may
apply for exemption of the credit agreement when credit provider located outside SA.
** General Test: will the performance of any of the terms of the contract take place in SA?
[E.g. debtor lives in SA and will repay the loan from her bank account there]

2.2 Exceptions to the Rules: Excluded Agreements

- The following contracts are NOT considered credit agreements under the NCA
▪ - Insurance Polices
▪ - Credit extended by insurer to consumer insured solely to maintain payment of
premiums
▪ - Leases of immovable property
▪ - Transaction between a stokvel and a member of that stokvel in accordance with the
rules of that stokvel
▪ - Agreements that provides that a supplier of a ‘utility’ bill defer payment for that utility
(e.g. water, electricity, refuse collection)
▪ - A loan to a juristic person which is classed as a LARGE credit agreement under the
NCA: (i) the amount lent is R250 000 or more; (ii) the loan (of any amount) is secured by
a mortgage bond over immovable property [The above rule even applies when the
juristic person has an asset value and annual turnover below R1 m]

2.3 Unlawful Credit Agreements

- This deals with general rules with regard to what happens to a credit agreement if the NCA
DOES APPLY.

- The ENTIRE credit agreement will be considered unlawful when:

a) The credit provider is not registered with the National Credit Regulator N.B. if an unregistered
credit provider lends to a consumer, the NCA will still apply, with the consequences. One cannot
escape the NCA by choosing not to register.

b) The consumer is an unemancipated minor, not assisted by a guardian

c) The consumer has been declared mentally unfit by the High Court

- If a court finds a credit agreement to be unlawful then: court must declare agreement void and
court may make any additional order which is just and equitable

- If courts declare the agreement void, this would mean that the only way in which the credit
provider could get its money back is through unjustified enrichment.

2.4 Unlawful Provisions in Credit Agreements

- Consumer credit laws also regulates the type of clauses which the parties may insert into their
credit agreement

- Some types of clauses are recognised by the NCA as being unfair to the consumer and open to
abuse. Therefore, there are general rules on what is or is not allowed.

- Here, the entire credit agreement is not unlawful, but just a PARTICULAR PART (or clause) of it.

- For example, when:

a) A provision in a credit agreement defeats the purpose of the NCA [For example, a clause in the
credit agreement where the parties agree that the NCA does not apply to their contract. It is not
possible to contract out of the NCA].

b) A provision that requires a consumer to renounce her consumer rights under the NCA [The NCA
gives certain parties certain consumer rights, such as, the rights to have agreements written in plain
and understandable language, or for the consumer to receive regular statements. The credit
agreement cannot require the consumer to give up these rights which the NCA gives her].

c) A provision in a credit agreement is intended to deceive the consumer, or to expose her to fraud.

- If a court finds a provision in a credit agreement to be unlawful, then it must:

- remove that provision (if the credit agreement will work without it) OR

- declare the entire agreement void (if it won’t work without the unlawful provision)

- court may also make any further order which is ‘just and equitable’

**General questions on application of the NCA: 1. Mr X lends R5 000 to Mr Y on 1 August 2020. Mr X

is not in the business of lending to consumers and is not a registered credit provider. The parties are
at arm’s length and both live in South Africa. • Is there any way that Mr X can structure the loan so
that it remains enforceable in a South African Court (without registering as a credit provider)?

Hints: Remember that a natural person is always a consumer. We need to find some other way to
avoid the application of the NCA. Have a look at the general advice given in topic 1.5 above: is there
a cost of credit here (ie: interest, fees, or charges)? Is this a way to avoid the NCA? When dealing
with a problem like this, you also need to have a look at the other rules on application: we are told
the date of the transaction, that it is at arm’s length, and that the agreement will have effect in
South Africa. Also does the agreement fall into one of the excluded categories? By working through
this checklist, you should be able to arrive at an answer.

3. Mr X lends R100 000 to ABC (Pty) Ltd on 1 August 2020. ABC (Pty) Ltd has its registered head
office in Cape Town. • What further details do we need to know about (a) Mr X; (b) ABC (Pty)
Ltd; and (c) the terms of the credit agreement, in order to determine if the loan may be
enforced in a South African court of law (in terms of the NCA)?
4. Hints: here we are dealing with a borrower which is a juristic person. The first thing we will
need to know is whether ABC (Pty) Ltd is a ‘consumer’ (check asset value and annual
turnover). Then we will need to know if this falls into the category of excluded agreements
(remember a LARGE loan to a juristic person is one of these). Finally we need to work
through the other rules on application (check the rules on the arm’s length requirement –
what do we need to know about Mr X to answer this question?). And does it matter if Mr X
is a registered credit provider? (This depends on whether ABC (Pty) Ltd is a consumer. What
if it is and Mr X is unregistered?)

CONSUMER CREDIT WEEK 2

3. TYPES OF CREDIT AGREEMENTS UNDER THE NCA

- 3 high level categories

~ Credit Facility

~ Credit Transaction (with various sub-categories)

~ Credit Guarantee

3.1 Credit Facility

- A credit agreement where the credit provider supplies goods or services to the consumer OR pays
money to the consumer OR pays money to a third party as directed by the consumer AND a)
payment for the above is deferred, b) there is a cost to this credit in the form of interest, fees or
charges.

- Examples include; credit cards from the bank, retail store cards, bank overdraft facilities

- Essentially, the consumer is provided with a mechanism in order to access credit on a revolving
basis

3.2 Credit Transaction – includes several specific types of credit agreements and some overlap

- Pawn Transaction – Money is lent to a consumer by a pawnbroker, who takes an item of the
consumer’s movable property as security. The property is returned when the loan is repaid or sold if
it is not.

- Discount Transaction – goods or services are provided over a period of time AND a discount is
offered if payment is received before a certain date. [The higher price charged after a particular date
indicates the cost of credit, bringing this within the general definition of credit agreement provided
above].

- Incidental Credit Agreement – Similar to a discount transaction (larger amount payable after a
specified date), but the consumer receives an account from the credit provider (setting out the
relevant charges). If payment is not received by the specified date, then interest, fees or charges
becomes payable (example: cell phone contract). [Note: This contract only becomes an ‘Incidental
Credit Agreement’ once the relevant date has passed and interest begins to accrue. Because before
this date, there is no cost of credit, hence leaving the agreement outside of the general definition of
‘credit agreement’].

- Instalment Agreement – Movable property is sold to a consumer and the price is paid in
instalments over a period of time. Interest, fees, and charges are added to these instalments.
Sometimes the consumer only becomes the owner of the goods once the price is paid in full, but this
depends on the specific contract terms. [This is common for vehicle finance arrangements. If the
credit provider reserves ownership in the goods until the last instalment is repaid, it provides it with
a measure of security: if the consumer defaults on the repayments, the credit provider may cancel
the agreement (for breach) and thereafter obtain a court order to repossess the goods]. Used to be
known as ‘hire purchase’ agreements.

- Mortgage Agreement – A credit agreement where the consumer borrows money from the credit
provider and there is a mortgage bond registered over immovable property belonging to the
consumer in order to secure the loan. Interest, fees, and charges are levied on the consumer as part
of the credit agreement.

- Secured Loan – A credit agreement where the consumer borrows money from a credit provider;
interest fees, and charges are payable on the and the credit provider takes security over one or more
items of the consumer’s moveable property.

- Lease – MOVABLE property is rented to the consumer, who pays rent in instalments over time. At
the end of the lease, ownership in the property passes to the consumer. There is a cost to this credit
in the form of interest, fees or charges. [NB: this is different to a lease at common law (which
involves temporary use of property). Instead this is similar to what is known as ‘rent-to-own’ and
also overlaps with an instalment agreement]. [Also, NB: Movable property does not include land or
premises in which to live. A lease of accommodation is classed as a lease of IMMOVABLE property,
and is an example of an excluded agreement, not covered by the NCA].

- Other agreement with credit + fee/charge/interest: section 8(4)(f) – Any credit agreement where
money is lent to a consumer and there is a cost to this credit. A catch all provision is intended to
capture those types of agreement where money is lent to a consumer at a cost but the credit
agreement in question does not fit one of the recognised categories. In order to avoid a situation
where such consumers are not protected, the NCA includes this general category.

3.3 Credit Guarantee

- An agreement where a consumer undertakes to settle an obligation owing to a credit provider by

another consumer in terms of a credit agreement subject to the NCA. This includes a suretyship,

- Both the party providing the credit guarantee and the underlying debtor must be consumers AND
the underlying debtor must be subject to the NCA.

Example 1: Party A ‘Credit Provider’ is Big Bank Ltd; Party B ‘Underlying Debtor’ is Mr Jones; and
Party C ‘Surety’ is Mrs Smith. Does the NCA protect the surety, Mrs Smith?

Answer: We need to check the above facts against the rules of application stated above. The
underlying debtor, Mr Jones, and the surety, Mrs Smith, are both natural persons and hence
‘consumers’ for the purposes of the NCA. In order for the suretyship agreement between Big Bank
and Mrs Smith to be protected as a ‘credit guarantee’ under the NCA, we now just need to know if
the underlying credit agreement between Big Bank and Mr Jones is subject to the NCA. Assuming
that this loan involves a cost of credit (interest, fees, or charges) the NCA will apply to it. This then
means that suretyship agreement between Big Bank and Mrs Smith is covered by the NCA and
constitutes a ‘credit guarantee’. [This would mean that the various protections which the NCA
provides to consumers would be available to Mrs Smith.]

Example 2: Party A ‘Credit Provider’ is Big Bank Ltd; Party B ‘Underlying Debtor’ is ABC (Pty) Ltd;
Party C ‘Surety’ is Mrs Smith, who is a director of ABC (Pty) Ltd. Does the suretyship agreement
between Big Bank and Mrs Smith constitute a ‘credit guarantee’ for the purposes of protection by
the NCA?

Answer: Mrs Smith (the surety) is a natural person and hence a consumer under the NCA. But is the
underlying debtor ABC (Pty) Ltd a consumer? ABC (Pty) Ltd is juristic person, so we need to know its
asset value and annual turnover in order to answer this. [As above, both must be below R1m.]
Assuming that ABC (Pty) Ltd is a consumer, we then need to know the size of the credit agreement
between Big Bank and ABC (Pty) Ltd. [Remember, large credit agreements (= loan of R250 000 or
more; or = any credit agreement secured by a mortgage bond) where the borrower is a juristic
person will never be protected by the NCA.] Assuming that ABC (Pty) Ltd is both a consumer and that
the credit agreement is not a large one, the NCA would apply to the loan between Big Bank and ABC
(Pty) Ltd. Only if this is true would Mrs Smith as surety be protected by the NCA (that is, the
suretyship agreement between Big Bank and Mrs Smith = ‘credit guarantee’)

3.4 Credit Agreement Size Classifications

- 3 size classes

a) Small = less than or equal to R15 000

b) Intermediate = between R15 000 and R250 000

c) Large = R250 000 or more

- Irrespective of the amount: pawn transaction ALWAYS = small and mortgage transaction ALWAYS =
large

- This is because there are particular rules and exclusions that apply according to size like, even a
juristic person which qualifies as a consumer is only protected under the NCA if capital amount
borrowed is below R250 000 and there is no mortgage securing the loan. [In other words, a ‘large’
loan to a juristic person is never subject to the NCA].

5. OTHER RELEVANT NCA ACTORS

4.1 National Credit Regulator (NCR)

- The NCR is an independent juristic person, set up under the NCA to promote and support its broad
aims.

- The NCR regulates the consumer credit industry.

- It also maintains a register of credit bureaux; credit providers; and debt counsellors. [they must
register with the NCR].

- The NCR promotes informal dispute resolution by investigating and dealing with complaints by
consumers.

4.2 Credit Bureaux

- These are independent repositories of consumer credit information

- They must register with the NCR and may not be a natural person [i.e. must be incorporated as a
juristic person].

- They investigate consumer credit records and maintain data on these.

- The NCA aims to make these information repositories more transparent and to establish
procedures to challenge incorrect information.

4.3 Debt Counsellors

- These are natural persons who have registered with the NCR.

- They must have certain required qualifications and experience as stipulated in the National Credit
Regulations

- They must also pass a dedicated debt counselling training course.

- Their function in the credit market is to assess consumers for ‘over-indebtedness’ as part of the
debt review process under the NCA

- They must at the same time investigate whether credit was extended recklessly to the consumer

4.4 Magistrate’s Courts

- Both Magistrate’s Courts and High Courts can hear matters relating to the NCA.

- Note: the normal monetary limits do not apply to Magistrate’s Court jurisdiction when dealing
with NCA matters.

- They play a role in restructuring consumer debts under debt review.

4.5 National Consumer Tribunal (NCT)

- This is an administrative tribunal with adjudicative function – specifically consumer complaints

- It functions like a court and can make various orders

- NCT orders have the status of High Court orders, but it is a separate body from the courts, and it
can only hear certain types of matters.
5. RECKLESS CREDIT

5.1 Reckless Credit Under the NCA

- Reckless credit occurs when

a) Credit provider fails to assess whether the consumer can afford the credit or;

b) Credit provider fails to ensure that the consumer understands the risk, costs, or obligations
involved in entering into a credit agreement; or

c) Credit provider contracts with consumer despite evidence that this will cause the consumer to
become over-indebted

- The rules on reckless credit do not apply to all types of credit agreements, such as:

a) A student loan;

b) A pawn transaction;

c) An incidental credit agreement;

d) Any agreement where the consumer is a juristic person (regardless of asset value or turnover)

- Before entering into a credit agreement with a consumer, the credit provider must assess:

a) Consumer’s understanding of the related risks and costs;

b) Consumer’s understanding of rights and duties under the contract;

c) Consumer’s ability to afford the credit now and in the future;

d) Consumer’s debt repayment history;

e) [For business loans:] Prospects of success of the business

- If a court later finds that the credit provider failed to do a proper reckless credit assessment, or
that it entered into a credit agreement with a consumer when this was reckless then:

a) Obligations of consumer may be set aside if this is ‘just and reasonable’; or

b) Consumer’s obligations may be temporarily suspended. During this time no interest/fees may be
charged, and the debt is unenforceable by credit provider.

c) Court may at the same time rule on whether consumer is over-indebted and make an order
restructuring her debt.

- We see that where the credit provider is found to have lent recklessly to a consumer, there will be
sanctions on the credit provider involving loss of income.

- Either the amount lent may be forfeited (if the credit agreement is set aside), or there may be a
loss of interest income while the loan is suspended
- A consumer who has received reckless credit may well also be over-indebted, hence the court may
at this point want to consider using its power under the review provisions of the NCA.

5.2 National Credit Regulations: Affordability Assessment

- NCA is original legislation. The National Credit Regulations is delegated legislation, created by the
Minister of Trade and Industry acting under powers to do so conferred on him/her by the NCA.

- This affordability assessment was added to the National Credit Regulations by amendment in 2015.
The relevant provision is 23A.

- The assessment works as follows: Regulation 23A sets out the relevant criteria which the credit
provider must use to confirm the consumer’s gross income, namely by checking:

a) Where salary is paid: latest 3 payslips & latest 3 bank statements showing salary deposits

b) Where self-employed: latest 3 months’ bank statements & latest business financial statements

- Credit providers can then determine discretionary income, using the formula in the regulations
and working backwards from gross income.

- Discretionary income is the money available each month to pay new debt.

- It is calculated as follows:

Monthly gross incomes

LESS: statutory deductions (e.g. income tax/UIF)

LESS: monthly living expenses (accommodation/food/transport)

LESS: existing credit agreement monthly repayments

LESS: maintenance obligations for dependants

EQUALS: discretionary income