A Reckless Lending Case Study

The reckless lending case of Merle Colinette Horwood vs First Rand Bank Ltd (FRB), which took place on 1 June 2011, in the South Gauteng High Court, Johannesburg, brought a relevant argument to our attention, which could be used in favour of certain cases against reckless lending. The credit agreements in question related to credit that the respondent, FRB had granted to the applicant, Horwood, consisting of two personal loans, two credit card loans, and a loan secured by two mortgage bonds, over an immovable property owned by Horwood.

The main claim of Horwood’s case is that FRB failed to conduct a proper assessment of her financial ability to pay the credit back and that, if they had conducted a proper assessment, the loan secured by the two mortgage bonds, for more than R215 000, would not have been approved and the credit, under the other agreements, would not have been granted to her.

Horwood sought out an order that each one of the five credit agreements she entered into with FRB be declared as reckless, according to the relevant sections of the National Credit Act (NCA) and that set aside part of her rights and obligations under each agreement – meaning some of her debts would be written off.

Under the NCA, the consumer is required to fully and truthfully answer any requests for information that the credit provider makes, as part of an assessment. Thus, it is considered a complete defence to an allegation of reckless lending, if it can be proven that the consumer failed to do so, materially affecting the ability of the credit provider to make a proper assessment.

On the other hand, though Judge P.A Meyer dismissed Horwood’s application in his final judgement, he thereafter made an important point, ‘…an important issue that was not raised or argued by counsel is what test for materiality is enacted…? I leave this question open.’

A credit agreement is not reckless if the credit provider took the required ‘reasonable steps to assess’ the consumer’s financial situation, regardless of whether or not the assessment was affected by the consumer’s incomplete or untruthful answers. In this case, FRB raised a complete defence, in addition to the defence that its assessment obligations were met.

However, the requirement of materiality implies that not every failure by a consumer to fully and truthfully answer the credit provider’s requests for information entitles them to this complete defence. FRB claims it took reasonable steps to assess Horwood’s debt repayment history and credit agreements, as well as assessing her financial obligations, means and prospects, before entering into the credit agreement with her.

Horwood took issue with the accuracy of the income and expenses information that FRB alleged it used for its assessment of her ability to pay back the loan. She denied that she provided FRB with incorrect information and pointed out that her signature did not appear on the relevant documents, which FRB produced as part of its evidence.

Horwood asserted that FRB was not allowed to solely rely on the information she provided it with. She suggested that FRB was required to verify the information that was supplied to it, on her behalf.

Therefore, the above argument could be used to prove cases of reckless lending by making averments to the credit providers and the Tribunal that the credit providers failed to act reasonably, as they simply accepted the information provided to them, without questioning it. Our common law and certain statutes impose the ‘reasonable person test’.  This test could be used to support the claim that it’s  reasonably expected of a credit provider to question information, as well as explain the details of the credit agreement to the consumer.

After all, the credit provider is ‘in the know’ and the consumer is not.

The consultants who process credit applications manipulate figures and make adjustments to budgets, so, in many cases, the credit provider is actually guilty of compelling the consumer to answer the pre-requisite questions partially and untruthfully. When searching for proof as to whether or not the assessment was properly conducted, the facts and circumstances must be considered objectively. In short, the suitability of the assessment must be determined by the Tribunal on a case-to-case basis.

For instance, if an accountant or financial advisor successfully applies for credit, the likelihood that the agreement they’ve entered into is reckless would be extremely low, as people from a financial background would know and understand the risks, obligations and costs involved. These circumstances differ from a situation where a less educated person, without much financial knowledge, makes an allegation of reckless lending. This example illustrates how one person can be considered as more reasonable than another, based on the expectations placed upon them.

In view of this, a case can be made against the response of a credit provider, who asserts that they were not provided with the relevant information fully and truthfully. In actuality, many banks are guilty of reckless lending in countless cases, which can be illustrated to the Tribunal case by case.