BLACK SASH INPUT ON THE CONSUMER CREDIT BILL -19 OCTOBER 2004

"Consumer problems relating to over-indebtedness -tackling over-indebtedness is integral to the development of an effective, efficient and inclusive credit market".

Introduction

Financial literacy is the basic knowledge needed to make informed decisions about day-to-day financial transactions. Without this basic knowledge one cannot make informed decisions. The effect on consumers where this is tacking should not be underestimated in any discussion on credit.

Our experience is shaped by the likes of the people who present to our advice office on a daily basis. So secretive, however, is the debt problem that many of the examples I speak of today would not allow me to use their names. Manecia Mankoe has, however, been brave enough to allow me to speak about her case (see appendix 1)

Background

In 1998, our advice office began to pick up problems with clients who had taken out loans from micro lenders. So serious were the abuses that this became a Black Sash campaign. We are talking here about people not knowing what the total cost of their credit is, who don't have access to standardized contracts - so they can't shop around for the best deal- who experience high interest rates from a non-competitive market place, and most significantly, find that creditors are not obliged to assess a person's ability to payback ALL their debts. This was our first exposure to problems regarding credit.

A short while later, the same people started to come to our office with major problems with debt collectors. They were receiving letters of demand, summonses and warrants to have their goods attached. Many of the big retailers we deal with do not deal with registered debt collectors, making recourse for consumers virtually impossible. If they used registered debt collectors we could have recourse through the Debt Collectors Council.

Shortly after that, a new problem presented and that was the same people being placed under administration orders and the myriad of abuses contained therein. We could track their journey of poverty and debt traps as they moved between the world of credit granting and debt recovery. To illustrate a small point, one of our clients took out a loan of R1000 and by the time she had defaulted and came to us, she owed four times that amount. The client is a domestic worker. Meneicia is also an example of accumulated costs amounting from her initial credit when she defaulted.

Black Sash involvement with this work is presently focussing on the SALC examining Administration Orders, we sit on the National loans register of the MFRC, have made a submission on the new proposed consumer credit bill and we are contracted to assist with the pilot Debt Relief Program of the DTI.

The link between micro lenders, retailers, debt collectors and administrators?

Credit granting and debt recovery are part of the same system. One cannot separate the two processes. It is thus a missed opportunity that those representing the powers that be in the Dept Justice are not here today so that solutions may be sought inter- departmentally. We believe that a credit overhaul should be done hand-in-hand with an overhaul of the whole debt recovery system falling under the Department of Justice.

Buying goods or credit is not just about the credit contract; it is about potentially entering a world of complicated legal consequence. All of our work under the present system as paralegals to assist people with these problems is reactive, with slim solutions to get people to a point of being debt free.

For a long time in our office our hands have been tied in dealing with indebtedness. When people come to us we have had to face the devastating realization that in many cases we are unable to help them. They are too far down the road of indebtedness, which could have been prevented if the law was there to protect them. Meneica for example would never have been in this position if the proposed Consumer Credit Bill were in place The basic reality is that clents don't have money to do go court to defend their cases. I don't know if you know what its like to tell someone who has lost their job, their home, their family and their dignity through indebtedness, that you can't help them.

The consequences of increased debt and poverty traps do not make for an efficient and sustainable credit market. Currently people are granted credit, experience problems of paying off their debt, and, subsequently, just get deeper and deeper into debt and are caught tightly in a poverty trap.

Effective credit markets should be
• cyclical processes of credit granting,
• credit being paid off,
• and then the regranting of credit if a consumer so chooses.

There is some light at the moment however. Our biggest success on our debt cases now lies in the fact that we are contracted to the national debt relief program of the DTI. The success stories of our interventions now abound. Creditors very co- operative to negotiate with us because they know that we can give realistic amounts of what people can pay. They will get the direct benefit of that - it seems to be a matter of good business practice! They know they will lose out if clients are sent down the current debt recovery road. This program and process is central to the new consumer credit bill and we give this our full support. It is proactive and contributes to personal financial sustainability because indebted people have to take responsibility for their own indebt ness in a supportive approach. It makes formal debt recovery a last resort.

This program works because it is one-on-one work that challenges on a very practical level, the financial illiteracy challenges I outlined earlier. We have evidence of cases being resolved using this method of non-profit debt counselling. (Casework example)

What is the causal link in this indebtedness problem?

A great concern within the consumer context is that people with too little money are being given too much credit - which results in over-indebtedness.

The problem is that creditors are not obliged to do an assessment of a potential client's ability to pay off the debt before they grant credit. The credit "Market" out there has no interest in the long-term sustainability of not only the economy but of people's jobs and families, it is only interested in meeting monthly target turnover figures.

One of the clients I have with me today has been divorced linked to money and debt, two have left their jobs (One of whom is Menecia) - it is not worth their while to work anymore. We have countless cases of disciplinary enquiries for absenteeism for workers who have to attend court. The time for corporate regulation cannot be overlooked any longer.

And the result of this indebtedness for the credit industry?

Over-indebtedness, in the form of legal process has resulted in a bottleneck in the credit industry. We attribute reckless lending and selling to be the root cause of the bottleneck and the one issue that has the potential to severely hinder the credit industry. It is the primary issue to be addressed in any legislative review.

In order to create an effective credit system the removal of bottlenecks is imperative.
To remove the bottleneck one has to become proactive and start to deal with root causes of the problem. That is to stop reckless lending and selling

Let me give you an example. Menecia, has been given credit recklessly. It is going to take her a minimum of 15 years to pay off her debt, and that is without defaulting even once. Under the present system, she will effectively not get access to credit again.

Just like credit, debt recovery in SA is big business. Remember, those consumers who enter the debt recovery process already can't afford to pay for their primary goods which they bought, let alone the huge added costs which go along with commercialised debt collection. They will again take what they can from consumers. In our town there has been the classic example of businesses following the money, where first they were the moneylenders, they then became debt collectors and now the same company is a debt administrator!

So what if we leave the present system as it is?

•The bottlenecks will increase
•Exploitation of consumers will increase and they will have tittle recourse, hope or chance to actually become debt free.
•People will be prevented from accessing the credit market again.
•Poverty and debt traps will increase
Family structures will break down due to financial stress of not being able to provide for families etc.

So what are we proposing?

1. There must be a legislative commitment to being proactive in tackling indebtedness. Non-profit debt counselling is critical. The MFRC's pioneering legislation on reckless lending and their debt relief program must be given the full support of the government. This is a start in what being proactive is all about?

2. The proposed Consumer Credit Bill has closed many of the gaps that I outlined earlier. There will be precontract agreements, standardized contracts, affordability assessments, fines for reckless selling, etc. The integrity of the bill, however, lies in the comprehensive nature of all the components working together to complement each other. The bill is designed to equally protect the interests of consumers and creditors. In our written submission we have outlined the very areas, which need to remain if we are to make a long-term impact on indebtedness. We do however want to caution: We are certain that creditors are going to attack the bill in a manner to water down its effectiveness. Our prediction is that the areas that will be attacked will be the very areas that are designed to be proactive, and where there will be no direct financial gain or benefit to creditors. The comprehensive nature of the bill is its strength - any watering down of the various components will render it ineffective and will nullify the integrity of the bill. I want to appeal that you not allow this to happen.

3. Comprehensive debt law review - we urge that this happen immediately.
Although the SALC is looking at administration orders (section 74), it is but one small component of the total debt recovery problem. All sections from Section 56 to 74 need to be re-examined. If this is not undertaken we fear that many people will continue to suffer huge financial and personal tosses in the meantime.

In conclusion

The Black Sash supports the Department of Trade and Industry’s ("the DTI") recognition that current credit legislation is outdated, piecemeal and clearly inadequate to cater for the diverse credit needs of our country and what poor people experience in the hands of creditors.

We welcome the replacement of the Usury Act and Credit Agreements Act with an overarching Consumer Credit Act. Every submission by the Black Sash to the DTI as well as the Micro Finance Regulatory Council ("MFRC") has expressed our concern regarding reckless lending and selling on consumer over indebtedness. We are therefore most pleased to see that the concept of affordability assessment is central to the Consumer Credit Bill ("the Bill"). The shifting of responsibility toward creditors with regard to reckless lending and selling is welcomed. This is especially necessary in the context of our country having such high levels of financial illiteracy.

The Black Sash supports the Consumer Credit Bill’s move away from current debt collection practices (as outlined under the Debt Collection Act), and we are pleased that these are to be a last resort for consumers in debt.

Lauren Nott
Black Sash Knysna
October 2004

Copies of Menecia Mankoe gross salary and debt collection amount available from PMG on request.