Lawyers wrestle for their lunch

Local banks come out swinging about abusive lending as the courts must decide what charges lenders can load onto defaulters.

Court to decide what charges lenders are allowed to load onto defaulting borrowers’ accounts.

An interesting battle between lenders and the University of Stellenbosch’s Law Clinic, joined by Summit Financial Partners and a number of clients, is to get under way in the Western Cape High Court.

The battle will decide what charges lenders are allowed to load onto defaulting borrowers’ accounts. The National Credit Act (NCA) says lenders cannot recover more than double the outstanding debt at the time of default – an old Roman legal principle known as in duplum.

Banks, represented by the Banking Association of SA (Basa), argue they are within their rights to charge administration, service and legal fees, even when these costs far exceed the in duplum limit.

Not so, says Stephan van der Merwe of the the Law Clinic. “We argue that the intention of the NCA is to provide protection against unscrupulous collection practices for borrowers, especially the poor. The NCA, however, is imprecise in its wording ….”

South Africa’s legal system feeds off the banks … anyone seeking legal representation against the banks is politely informed of the potential conflict of interest in representing anyone challenging the banks in court.

“Most of the cases you see coming before the courts each day involve the banks,” says King Sibiya, head of Lungelo Lethu Human Rights Foundation (LLHRF). “They keep the court system and the law firms financially afloat.”

It’s left to organisations like the Law Clinic, LLHRF and Legal Resources Centre to wage battle on behalf of the poor. Many of their fights involve abstruse arguments over the interpretation of “collections costs” and “administration fees”.

Self-serving interpretation

That’s the fight the Law Clinic is currently waging against lenders.

The banks and their highly paid lawyers have chosen the most self-serving interpretation of these terms, when it’s clear NCA legislators were attempting to curtail lending abuses.

The impact of this self-serving interpretation of the law often has catastrophic effects, says Van der Merwe. Reckless lending was a grievance of the 34 striking miners massacred by police in 2012 outside the Lonmin Platinum mine in the North West.

Many of the minerworkers were left with virtually nothing at month-end after deductions via emolument attachment orders (or garnishee orders).

This prompted then finance minister Pravin Gordhan and Basa to say its members “commit not to use garnishee orders against credit defaulters, as they believe the use of such orders for credit is inappropriate”.

Yet the practice continues, argues the Law Clinic, which summoned major banks and dozens of other lenders before the Western Cape High Court.

The Law Clinic is asking the court to stop banks from sidestepping the in duplum rule. In several cases cited by the Law Clinic, borrowers were being asked to pay up to eight times the original amount borrowed.

In its reply to the Law Clinic, Basa says there’s little uniformity among banks regarding recovering debts from defaulting borrowers. Some banks argue the in duplum rule only applies to debts prior to obtaining judgment – meaning they are free to load additional collection costs and interest after judgment’s obtained.