Ombudsmen Tackle Reckless Lending

Clive Pillay, the Ombudsman for Banking Services and Nicky Lala-Mohan, the Credit Ombud have taken a stand against reckless lending. Consequently, many consumers are having their interest and fee inflated debts written off. The Credit Ombud makes mention of five case studies in their annual report, two of which involved reckless lending. Moreover, the Ombud settled 50 cases involving reckless lending last year.

Ms Z

The first case study refers to a single mom called Ms Z working for the public sector, who is a year away from retirement. Though she earns a decent income, her family is completely dependent on her as the sole breadwinner. Her adult son suffers from a psychological disorder and her parents are sickly.

Ms Z starts to struggle with her bills and, accordingly, begins to take out loans. Over seven months, she takes out five loans totalling R76 000, from one creditor. Due to her situation, she makes payments irregularly. So, by the time she goes to the office of the Credit Ombud for assistance, her creditor has already commenced legal proceedings 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,” reads the report.

Ms N

The second case relates the story of Ms N, who took out four loans from one lender. Soon it dawned on her that she could not maintain her overall instalment of R4 535 monthly. This is because she was “already paying previous loans via an emoluments attachment order”. An emoluments attachment order, often incorrectly referred to as a ‘garnishee order’, compels your employer to make monthly deductions from your salary to go to a creditor you owe money to.

Subsequently, the Credit Ombud approached the creditors in question. “We realised the loans had probably been granted recklessly.” The creditor 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.”

Reckless Lending, Feckless Spending

The annual report released by the Ombudsman for Banking Services refers to a case study, namely “Reckless lending, feckless spending”. The case refers to a consumer with an overdraft limit of R10 000, whose limited was increased by R100 000 more, due to a bank ‘system error’.

The consumer did not request to have his limit increased temporarily and no agreement was put in place to restore his credit limit following the transactions, says the report. “The granting of the additional credit amounted to reckless lending,” the reports says. The reason being, an affordability assessment must be conducted prior to any credit limit increase.

Then again, the consumer had made use of and benefitted from the limit increase, in the knowledge that he had overshot his overdraft tenfold. Accordingly, the Ombudsman ordered the consumer to repay the capital spent surplus to his overdraft limit. However, the Ombudsman also instructed the bank to write off accompanying fees and interest.

Ombuds Lack Independence

Lala-Mohan and Pillay were asked by Personal Finance if it was their duty to report incidents of reckless lending to the National Credit Regulator (NCR). Furthermore, voluntary banking and credit Ombud schemes were criticised for lacking independence, as they are loyal to the industries funding them. The Ombudsman for Banking Services does not record statistics on the cases of purported reckless lending, nor does it refer members to the NCR, said Pillay. However, it does report consumers to the regulator.

“[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 said.

Ombuds should be referring cases of reckless lending to the NCR, particular where a pattern of abuse is clear, says Stephen Logan, an attorney specialising in credit law. Self-regulation should not be allowed to undercut the National Credit Act, Logan says. The Credit Ombud only refers cases to the regulator where the creditor isn’t a member of the scheme and those relating to debt review complaints.

Report Systemic Abuse

Many more reckless lending cases are investigated by the Credit Ombud, than are referred to in the annual report, says Deputy Credit Ombud Reana Steyn. Reckless credit granting is hardly ever proven convincingly, nor acknowledged by the credit provider. “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’,” said Steyn.

The National Treasury’s chief director of financial sector conduct, Katherine Gibson contends that voluntary Ombuds handling reckless lending cases is not problematic. Ombuds assist consumers, ensuring they are dealt with justly and legally. Ombuds are able to refund consumers losses suffered case-by-case, where the creditor has acted unfairly or illegally. “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,” says Gibson.

Financial Sector Regulation Bill

The Financial Sector Regulation (FSR) Bill, anticipated to be announced this year, will consolidate all of the Ombuds under a ‘Super-Ombud’. The bill will establish a ‘best-of-breed’ standard 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 expected. This will help consumers, who are confused as to which Ombud has jurisdiction, by narrowing the scope for arbitrage. Banks will still be answerable to the regulator, but will be bound by the new market conduct authority. The new market conduct regulator won’t perform the same duties as the NCR, but will support and complement it.

If you suspect that you or someone you know has been a victim of reckless lending, please get in touch via our contact form immediately for help.