Ombudsmen take on reckless lenders

Consumers who have been granted credit recklessly are getting relief from the Ombudsman for Banking and the Credit Ombud. Both ombuds’ annual reports, released this week, show how they have dealt with cases of reckless lending. Angelique Ardé reports

The Ombudsman for Banking Services, Clive Pillay, and the Credit Ombud, Nicky Lala-Mohan, have taken on credit providers for prime facie reckless lending, and as a result of their interventions, consumers have had their principal debts or interest charges and fees written off.

The Credit Ombud’s annual report carries five case studies, two of which relate to reckless lending. The Credit Ombud closed 50 cases relating to reckless credit in 2015.

The first case study tells of the experience of Ms Z, a single mother one year from retirement from the public sector. Although she earns a reasonable salary, she is the sole breadwinner in her family, which consists of her adult son who suffers from a psychological disorder and her sickly parents.

The reports says that when Ms Z found herself struggling to pay her bills, she started taking out loans. Within seven months, she had acquired five loans amounting to R76 000 from one credit provider.

She was an irregular payer and by the time she approached the office of the Credit Ombud for help, her creditor had started legal action against her.

“We found Ms Z could not afford to pay the loans. Greater consideration ought to have been given [by the credit provider] to her additional expenses when conducting the affordability assessments. In light of these factors, the credit provider agreed to write off the five loans to the value of R140 554.”

The second case concerns Ms N, who was granted four loans by one lender. She soon realised she could not afford her total instalment of ■ For banking complaints, contact the office of the Ombudsman for Banking Services, Clive Pillay, on 011 712 1800 or email your complaint to info@obssa.co.za. Website: www.obssa.co.za ■ For credit-related complaints, contact the office of the Credit Ombud, Nicky Lala-Mohan, on 011 781 6431 or email your complaint to ombud@creditombud.org.za. Website: www.creditombud.org.za R4 535 a month. The report says she was “already paying previous loans via an emoluments attachment order”. (An emoluments attachment order, also referred to as a “garnishee order”, is a court order compelling your employer to deduct from your salary money you owe to a creditor that has taken default judgment against you.)

The Credit Ombud’s office took up the matter with the lender. “We realised the loans had probably been granted recklessly,” the report says. The lender was “most accommodating and … willing to write off substantial amounts in respect of service fees and interest. Ms N had only to repay the capital on all four accounts. Through our intervention we saved the consumer almost R117 520 and she was very grateful.”

The Ombudsman for Banking Service’s annual report contains a case study titled “Reckless lending, feckless spending”. It tells of a consumer who had an overdraft limit of R10 000 yet was able to access more than R100 000 as a result of a “system error” at the bank. The consumer never asked the bank to increase his limit temporarily and nor was there an agreement to restore his credit limit after the transactions, the ombudsman’s report says.

“The granting of the additional credit amounted to reckless lending,” the reports says, because any credit limit increase other than a temporary one is subject to an affordability assessment.

However, the ombudsman could not overlook the fact that the consumer had used and derived benefit from the funds, knowing he had exceeded his overdraft limit tenfold. Therefore, the ombudsman decided the consumer should repay the capital used in excess of the agreed limit, and that the bank should write off associated fees and interest, which it agreed to.

REPORTING TO THE REGULATOR

Personal Finance asked Pillay and Lala-Mohan if it was incumbent on them to report members or cases of reckless lending to the regulator.

One criticism of voluntary ombud schemes, such as the banking and credit ombud schemes, is that they lack independence and do the bidding of the industries that fund them.

Pillay says his office does not keep statistics on the cases of alleged reckless lending, nor does it report members to the National Credit Regulator (NCR). But it may refer a consumer to the NCR.

“[A reckless lending complaint] is an untested allegation made by the client. What we do is to say to the client ‘you may have a claim against your bank. Should you wish to pursue the matter, the correct forum is the NCR’. We furnish the client with the contact details of the NCR. It is then up to the client to decide what, if anything, he (or she) wants to do,” Pillay says.

Stephen Logan, an attorney who specialises in credit law, says ombuds should be reporting cases to the NCR, especially where there is a pattern of abuse. Self-regulation must not be allowed to undermine the National Credit Act, he says.

The only cases that the Credit Ombud refers to the regulator are debt counselling complaints and where the credit provider is not a member of the scheme.

Deputy Credit Ombud Reana Steyn says her office investigates many more cases of reckless lending than those classified as such in the annual report. However, the fact that the credit was granted recklessly is almost never proved conclusively, nor confirmed by the creditor. “But if the consumer receives a refund or his balance is written off and he is satisfied with the outcome, we do not proceed ... to try prove reckless credit. Many of these cases are closed as ‘service disputes’.”

It is not a problem that voluntary ombuds are dealing with reckless lending, Katherine Gibson, the chief director of financial sector conduct at the National Treasury, says. Ombuds help individual consumers ensure they are treated fairly and within the law, and can give consumers back losses suffered, on a case- by- case basis, when the provider has treated that person unfairly or broken its contract or the law. “Contraventions of the law and systemic abusive practices should be reported to the regulator for enforcement – this serves to protect the integrity of the market as a whole and therefore consumers,” Gibson says.

The Financial Sector Regulation (FSR) Bill, which is expected to be promulgated this year, provides for the consolidation of all ombuds under a “super-ombud”.

Gibson says the bill seeks to develop a “best-of-breed” standard and minimum standards for all ombuds, “with a strong data component for reporting purposes. The super-ombud will need to have a strong relationship with the new market conduct regulator and a strong data chain [for the sharing of information between the two].”

A “rationalising of ombuds” is likely. This should be good for consumers, who often don’t know which ombud has jurisdiction, and will narrow the scope for arbitrage.

Banks will continue to be subject to the credit regulator, but will be subject to the new market conduct authority. Gibson says the new market conduct regulator won’t duplicate the work of the NCR, it will complement and support it. ■ Mr N contacted the office of the Credit Ombud, Nicky Lala-Mohan, for help getting his vehicle back after he had voluntarily surrendered it to the credit provider that provided his vehicle finance. Although he had brought the arrears on his account up to date, his vehicle was sold on auction by the credit provider. He had remained in constant contact with the credit provider, yet he had not been notified by the credit provider that it had decided to sell his vehicle. He was aggrieved because he had not been given the opportunity to prevent this from happening. He owed the balance on the account but did not have the vehicle.

Mr N wanted the credit ombud to help him regain ownership of the vehicle or help him settle the shortfall that arose from its sale.

The ombud’s investigations found that Mr N was heavily in arrears on his instalments when he voluntarily surrendered the vehicle to the credit provider.

The credit provider told the ombud that it had notified the consumer of the valuation of the vehicle via registered post and, when there was no response from him – to arrange for settlement of the outstanding balance – the credit provider proceeded to sell the vehicle on auction.

When the ombud called for a copy of the letter and proof of the despatch to the consumer, it was established that Mr N had not received proper notification in respect of the valuation of the vehicle or the amount the vehicle was subsequently sold for. In light of this, the credit provider and Mr N entered into a voluntary agreement that the shortfall amount of R107 095 would be written off and Mr N’s profile at the credit bureaus would be updated. ■ The ombud’s office received a complaint from Ms B disputing a bank account [in her name] on the grounds that it had been acquired fraudulently. She noticed the existence of the account in her credit report. In accordance with the credit ombud’s normal dispute processes, it notified her that there were other accounts reflecting negatively on her reports. As a result, these accounts were also placed in dispute due to fraud.

The ombud asked the banks to investigate. The first bank confirmed that Ms B was indeed the victim of fraud. As a result, the information was removed from her profile at the credit bureau and she was no longer held liable to pay the R52 000 owing in the account.

The second bank also confirmed that two accounts had been opened fraudulently. Ms B was not liable to pay the R19 000 in loans, which were acquired fraudulently. ■ When Ms M’s parents died in 2003, the outstanding balance of their home loan with the credit provider was about R37 000. Although there was credit life insurance on the account, it paid out only R33 000. There was thus a small shortfall of about R4 000 on the account.

Ms M inherited the property. She lodged a complaint with the credit ombud when she received a letter of demand many years later for the shortfall on the account, together with accrued interest.

The credit ombud negotiated on behalf of Ms M and an affordable settlement was reached. A few months later Ms M received her title deed.