Credit act changes tar­get loan sharks

Amend­ments to the act have been in­tro­duced to force in­for­mal and un­scrupu­lous lenders to reg­is­ter as credit providers, writes Maya Fish­erFrench

CityPress - - Business -

Amend­ments to the Na­tional Credit Act (NCA) will be in­tro­duced to­mor­row and will re­quire any­one lend­ing money to be reg­is­tered as a credit provider. Al­though tar­geted at loan shark ac­tiv­ity, the leg­is­la­tion could have an ef­fect on more in­for­mal lend­ing ar­range­ments. Sec­tion 40 of the NCA 34 of 2005 re­quires a per­son to reg­is­ter as a credit provider if the to­tal prin­ci­pal debt owed to that credit provider un­der all out­stand­ing credit agree­ments ex­ceeds the thresh­old de­ter­mined by the min­is­ter of trade and in­dus­try. Be­fore the amend­ments, a per­son had to reg­is­ter as a credit provider only if he or she was the credit provider of at least 100 credit agree­ments, or if the prin­ci­pal debt owed ex­ceeded R500 000.

This has al­lowed for more in­for­mal lend­ing in com­mu­ni­ties – for ex­am­ple, a spaza shop owner can al­low a run­ning tab for his or her cus­tomers. This type of in­for­mal credit agree­ment is a life­line in many poorer com­mu­ni­ties.

The prob­lem is that the loop­hole has been abused by loan sharks, who is­sue loans out­side of the NCA and charge ex­or­bi­tant fees and un­der­take du­bi­ous col­lec­tion meth­ods such as with­hold­ing an in­di­vid­ual’s bank cards. Be­cause they do not fall un­der the NCA, there is no le­gal re­course and the au­thor­i­ties are un­able to bring them to book.

Le­siba Mashapa, com­pany sec­re­tary at the Na­tional Credit Reg­u­la­tor, says by clos­ing the loop­hole, the reg­u­la­tor will at least be able to in­ves­ti­gate com­plaints and pros­e­cute loan sharks.

“We re­alise we will never com­pletely stop un­der­ground lend­ing. In fact, one of the big­gest chal­lenges is that com­mu­ni­ties them­selves pro­tect these loan sharks be­cause, in this weak­en­ing econ­omy, they of­fer the only ac­cess to credit. How­ever, the change in leg­is­la­tion will make it eas­ier to shut them down and it will be more dif­fi­cult for the loan shark to col­lect their loans as they will be il­le­gal,” Mashapa says.

In fact, as of this past Fri­day, fail­ure to reg­is­ter as a credit provider could re­sult in the credit agree­ment be­ing de­clared void as it will be an un­law­ful agree­ment.

Mashapa says there has been dis­cus­sion around the un­in­tended con­se­quences of the changes, such as the po­ten­tial for some loan sharks to re­sist reg­is­tra­tion and con­tinue to op­er­ate un­der­ground. In many com­mu­ni­ties, there are so­cial net­works of sup­port pro­vid­ing loans to mem­bers such as stokvels and so­cial clubs. These will be dif­fi­cult to de­tect un­less the reg­u­la­tor re­ceives com­plaints or tip-offs from these com­mu­ni­ties.

It is also im­por­tant to note that this amend­ment only af­fects arm’s-length ar­range­ments – in other words, if you do not have a close re­la­tion­ship with the in­di­vid­ual. This means you can still lend money to fam­ily mem­bers and close friends where your in­ten­tion is not to gain the ut­most ad­van­tage from the trans­ac­tion. Loans be­tween share­hold­ers and the com­pany are also ex­empt from the leg­is­la­tion in the NCA.

The changes to the NCA will, how­ever, af­fect crowd lend­ing plat­forms such as RainFin, which act as fa­cil­i­ta­tors be­tween in­di­vid­u­als who want to bor­row money from other in­di­vid­u­als.

Un­der the new leg­is­la­tion, if you lend money to some­one through a lend­ing plat­form, you will have to be reg­is­tered as a credit provider – even if that loan is just R1 000 to help some­one buy a car.

Al­tesh Bai­joo, chief mar­ket­ing of­fi­cer at RainFin, says that the amend­ments will af­fect RainFin’s busi­ness model.

“We are amend­ing our pro­cesses to en­sure that we con­tinue to pub­lish con­sumer loans for our lender com­mu­nity to par­tic­i­pate in, and we are aim­ing to have the re­vised pro­cesses im­ple­mented this month.”

Mashapa says that fur­ther dis­cus­sions need to take place with the in­dus­try as the whole is­sue of crowd lend­ing or peerto-peer lend­ing needs to be re­viewed. The Na­tional Credit Reg­u­la­tor is in­ves­ti­gat­ing the fees and com­mis­sions charged by the plat­forms and whether these are ap­pro­pri­ate and fully dis­closed.

“There are clearly cost sav­ings by pro­vid­ing loans on­line, but are these cost sav­ings be­ing passed on to con­sumers in re­duced credit fees? For ex­am­ple, does the con­sumer have to pay orig­i­na­tion fees to orig­i­nat­ing agents in ad­di­tion to the ini­ti­a­tion fees and ser­vices fees payable to the credit provider? What are they charg­ing for orig­i­na­tion fees? Does it re­ally work out as be­ing more cost-ef­fec­tive, ul­ti­mately, for the bor­rower?” asks Mashapa.

The reg­u­la­tor also wants to un­der­stand who takes re­spon­si­bil­ity for af­ford­abil­ity as­sess­ments and, if the loan is deemed reck­less, who will be ac­count­able – the in­di­vid­ual who lent the money or the en­tity that pro­vides the lend­ing plat­form? What con­tin­gency plans are in place if the plat­form goes bust?

It also needs to en­sure that no money laun­der­ing is tak­ing place through the plat­forms.

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