Unsecured lenders, credit retailers will take a big hit

THIS week’s ruling by Judge Siraj Desai does not ban the use of emolument attachment orders (EAOs) to secure unsecured loans. It also does not attempt to relieve any borrower of the obligation to repay debt.

But if the ruling is not overturned on appeal and is confirmed by the Constitutional Court, it will cause a massive disruption to the unsecured lending market.

This, in turn, will disrupt retailers that rely directly or indirectly on unsecured lending.

Also coming down the track are the Department of Trade and Industry’s (DTI) proposed reductions in the rates charged on short and unsecured loans, store cards and credit cards.

The reductions will adversely affect the margins of all credit providers, including banks and large retailers.

Deborah Solomon, the founder of the Debt Counselling Industry portal, said while the DTI’s rate cuts were important, the court ruling was more significant for consumers who were subject to EAOs.

“The ruling aims to stop the abuse of EAOs that force consumers to pay much more than the legal limits.”

Desai signalled the possible implications when he called on the ministers of justice and trade and industry, and the National Credit Regulator, “to take what steps they deem necessary to alert debtors as to their rights in terms of this judgment”.

Not everyone agrees on how bad or widespread the EAO problem is.

Some warn that restraining use of the orders will allow informal, more unscrupulous moneylenders to flourish.

There are no official figures on EAOs issued, and banks and retailers are reluctant to disclose details about their use of debt collectors and EAOs.

Marius Jonker of the Association of Debt Recovery Agents, one of the respondents in the case, said the problem was exaggerated. He referred to 2013 data indicating there were fewer than 1 million EAOs in existence.

“The majority are against middle-income consumers. The Stellenbosch applicants [in the case this week] are extreme instances and don’t reflect the average.”

Jonker said requiring a magistrate to issue EAOs would cause a two- to three-year delay because of the already overloaded court system.

A more common estimate of the number of EAOs, based on the number of debt judgments granted each year, is 2.5 million.

Clark Gardner, the CEO of Summit Financial Partners, reckoned if the Constitutional Court confirmed the ruling, about 1.9 million of these would be deemed flawed. Cleaning up would result in a substantial redistribution of wealth from debt collectors to debtors.

Gardner believes 40% of EAOs have been issued in the wrong jurisdiction. An additional 40% may have been issued without the judicial oversight Desai said was necessary for their validity.

Wendy Appelbaum, the businesswoman who led the court challenge, dismissed claims the ruling would have a devastating effect on the economy.

“People who provide credit into this market [loans of less than R8 000] will still be able to charge interest rates of over 50% a year; if they can’t make money out of that …”