COSATU’ Submission on Home Loan and Mortgage Disclosure Bill to the Portfolio Committee on Housing, date 26 September 2 000

1. Introduction
COSATU welcomes an opportunity to make submission on the Home Loans and Mortgage Disclosure Bill. We would like to indicate that we have already made submission to the Department of Housing on the 17^th April 2 000. However, after analysing the latest draft Bill, it is clear that that our main proposals were not taken on board. We shall therefore use this opportunity to re-motivate our proposals.

The underlying objective of the Home Loans and Mortgage Disclosure Bill, number 53 of 2 000 (hereafter the Bill) is to require financial institutions to annually disclose reports on their lending patterns both in terms of applicants’ geographic location and income levels. This annual reporting is intended to help government agencies and civil society organisations to identify neighbourhoods or categories of people whose access to credit is unfairly restricted.

COSATU advocates the need for legal intervention to end discrimination against black people and low-income earners. We therefore support the underlying objective of the bill-to force disclosure by lending institutions as a first step towards ensuring access to affordable finance by the poor. The Bill complements the Promotion of Access to Information Act, number 2 of 2 000 and the Promotion of Equality and Prevention of Unfair Discrimination Act, number 4 of 2 000. The former gives effect to section 32 of the Constitution, and inter alia grants everyone access to information held by another person that is required for the exercise or protection of any right. The Equality Act codifies the right to equality as enshrined in section 9 of the Constitution. This legislation prohibits discrimination on the basis of race or any of prohibited grounds of discrimination.

South African financial institutions have a track record of not lending to low-income neighbourhoods and have historically redlined many low-income areas. The commercial sector is not servicing poor communities thereby limiting access to savings, transmission and credit facilities. An effect of this under-servicing is the mushrooming of formal and informal micro-lending practices. In most cases Banks do not provide explanations for rejecting loan applications.

The RDP (section 2.5.15) called for legislation to encourage commercial banks to provide credit and other services in low-income areas.
It further called for redlining and other forms of discrimination by banks to be prohibited. Despite the RDP’s commitments, banks continue to redline poor, low-income and predominantly black communities.

2. Shortcomings of the Bill
While COSATU supports the underlying aims of the Bill, there are a number of serious limitations that should be addressed, failing which the Bill will not be able to achieve its objective.

2.1 Absence of Community Reinvestment Legislation
International experience shows that while access to information is necessary, it is not by itself a sufficient factor, factor in addressing the legacy of discrimination by financial institution. Community Reinvestment type legislation is required to make regulation effective. South Africa does not have such legislation, despite government’s announcement that it was planning such legislation.

The Unites States Community Reinvestment Act (CRA) compels banks to reinvest in communities. It was introduced to deal with discriminatory practices by financial institutions. The CRA requires banks to affirmatively seek out lending opportunities in the local communities they serve. For decades, banks and saving loan institutions viewed with disdain the convenience and needs of certain low-income groups and communities. Although African Americans, Latinos and other minorities deposited savings with the banks, they were still not accessing credit and their areas were redlined. The result was an evolving pattern of disinvestment from low-income areas and discrimination against minority loan applicants.

Grassroots organisations led the drive for legislation similar to the Bill (The Home Mortgage Disclosure Act) mandating disclosure of the geographic location of bank Loans in 1975. Subsequently, after findings that banks continued to redline, the Community Reinvestment Act was introduced in 1977 after pressure from community groups. The CRA played a crucial role in restoring flows of Home Mortgage Bonds to redlined ghettos areas in the United States. Due to this CRA, nearly US $60 billion in credit has been channeled into local banking services, expanded retail services, micro-enterprise finance and support finance and support for community controlled economic development. In the light of this experience, COSATU proposes that Community Re-investment Legislation should be introduced as a matter of urgency.

2.2 Type of Information to be Disclosed and Enforced
Section 2 of the Bill defines the type of information that financial institutions should disclose in their financial statements. However, COSATU in its submission to the Housing Department raised several concerns regarding the provisions of the Bill.
Firstly, most of the information required by the Bill- information in respect of recorded loans- is already available in the Deeds Registry. Secondly, the main form in which banks are now giving housing credit-small unsecured loans which people use for building materials- is completely outside the bounds of the Bill (the Bill requires disclosure only of the loans made for recorded bonds in the Deeds Registry).

Thirdly, the Bill relies on the Banks to disclose information in their annual financial statements in terms of section 2 (1). Without an effective enforcement mechanism, the main critical information- rejected applications and reasons for rejection- is unlikely to be reflected accurately. Provision should be made for an independent audit of the records of the banks by the Office of Disclosure. Section 2 (4) is not adequate to ensure independent corroboration of information supplied by the Banks. Neither is section 5 (2) (d), which empowers the Office to institute proceedings to verify the validity of information disclosed by a financial institution. This clause is post-fact and must be complemented by proactive inspections by the Office.

It is clear that the Bill relies heavily on self-regulation by the Banks to ensure proper disclosure. Self-regulation is not necessarily wrong, but the track record of the finance industry underlines the need for proactive intervention. Banks may be reluctant to reveal information that tarnishes their image. Without proactive state intervention, We are unlikely to see proper disclosure of information indicating banks’ discriminatory practices.

Fourthly, the enforcement mechanism does not provide consumers’ direct access to information from banks. For instance, there is no clarity on how the Office will grant information to communities or publish the information acquired from the banks, nor is there an explicit requirement for the office to produce regular reports to parliament, and the Human Rights Commission. Although the Office must report to the Minister annually in terms of section 5(1)(f), there is no corresponding obligation on the Minister to provide such information to parliament. The US Home Mortgage Disclosure Act grants consumers and the public at large direct access to information from the banks. A similar provision in the legislation is necessary to empower communities that are affected by unfair practices by the banks.

The Bill is silent on what steps will be taken in the event that information acquired from the banks reveals substantive unfair discrimination against particular categories of borrowers. COSATU believes that the Office of Disclosure should be empowered to initiate actions to oblige banks to change their lending patterns, or where information reveals discrimination the office should take any appropriate action, including legal action, to force the affected bank to change its practices. To improve the provisions of the current Bill in relation to information disclosure, we proposed a set of legal amendments to the Department and retable them here as contained in the attached annexure. The amendments relate to inter alia:

· access to information by consumers and the public,
· intervention by the Office of Disclosure in cases where substantial discrimination is revealed,
· a study of the Deeds Registry to ascertain where banks lend,
· to bring small unsecured loans (below R10 000) into the scope of the Bill

We propose a fully-fledged study of the Deeds Registry as a short-term measure. The purpose of the study is to ascertain which banks lend and where, including patterns of redlining. The results of the study should be used to develop a short-term intervention strategy to ameliorate the situation of people currently being discriminated against by the banks.

The main omission of the Bill is the exclusion of a community reinvestment obligation. Our preference would be for the insertion of this obligation in the Bill, which would require a substantial overhaul. Alternatively, a new Bill should be introduced to address this gap.

3. Conclusion
COSATU supports the underlying objective of the Bill. The Bill will assist in improving transparency of the banking sector, with respect to home loans. However, we have noted several weaknesses in the Bill. We have put forward a number of amendments, which address some of our concerns. Nonetheless, it is important that a Community Reinvestment Act should be introduced as a matter of necessity.

4. Annexure: Proposed Legal Amendments

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