Credit regulator probes shady property practice

2009-10-10 13:14

THE National Credit Regulator (NCR) is in the midst of a probe to uncover a reverse mortgage scheme that is stripping homeowners of their properties and turning them into tenants in their own homes.

Peter Setou, a senior manager at the NCR, said the regulator was working closely with the SA Police Service to get to the bottom of the practice, which allegedly involves mortgage originators and some lenders.

Setou declined to finger the lenders or say how many homeowners had fallen victim to the practice, which borders on downright fraud.

“This is one of the big investigations we are currently carrying out. It is a complex case but we are uncovering some very interesting stuff,” he said.

Setou said some “rogue elements” in the financial services industry were approaching over-indebted consumers to consolidate all their loans, which they aggregate into a single amount. They then offer a loan to the homeowner, which is used to clear all the other outstanding debts. The catch in the arrangement, which is embedded as fine print in the contracts, is that borrowers unwittingly sign over their homes to the lenders.

“The homeowners unknowingly sign over their homes and become tenants in their own houses. This problem is prevalent and we have identified it as a priority. The case is sensitive because it involves millions of rand,” said Setou.

Reverse mortgages are very popular in the United States. Under the reserve mortgage, the homeowner’s obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner moves into an old-age home.

Sim Tshabalala, the chief executive of Standard Bank’s South African operations, said the lender does not provide reverse mortgages.

“We don’t do reverse mortgages whereby we advance loans to borrowers whose homes have been fully paid up, on the expectation that no repayments will be made until their estates are wound up,” Tshabalala said.

He added that Standard Bank would co-operate with the NCR’s probe.

This week, the NCR published a yearly report which showed that it had carried out 99 investigations to March this year, bringing to 326 the number of investigations it has conducted since its inception in 2006.

The investigations by the NCR are far-ranging and cover issues such as:

Failure by debt counsellors to adhere to prescribed time limits or charging excessive fee charges; various obstructions by credit providers and payment defaults by payment distribution agencies.

The retention of bank cards, saving books, pension cards or identity documents.

Pre-agreement quotes and disclosures which do not permit consumers to correctly compare costs of different credit providers and come to an informed decision; and

Loan splitting by lenders who want to take advantage of exemptions that permit higher interest rate charges.

The NCR launched an investigation that led to the arrest of three lenders in North West who had contravened the National Credit Act (NCA) by withholding consumer bank cards, bank books and ID books, and bank card PIN numbers. These lenders had kept these items to force borrowers to cough up.

The regulator cancelled the registration of Northern Cape credit provider Frabert, trading as Cash Wise, for a similar offence. The lender had a loan book of R3.1 million and 9 900 borrowers.

The NCR also went after credit provider Chatspare Financial Services for committing loan-splitting and granting loans against life policies. The lender was ordered to pay back R1.3 million to affected consumers.

Loan splitting was widespread before the NCA was introduced in June 2007.

Prior to the phasing in of the act under the Usury Act Exemption Notice legislation, microlenders could charge whatever interest rate they chose, sometimes up to 100% on loans of up to R10 000.

If a consumer had borrowed R20 000, the lenders would split the loan into two R10 000s in order to benefit from the exemption notice, which allowed them to charge obscene interest rates.

Although the NCA has put an end to this practice, borrowers who took these loans prior to 2007 are still haunted by the greed of the old loan sharks. In the yearly report, NCR chief executive Gabriel Davel raised concerns about the pace at which debt counselling was being implemented in South Africa.

A legal wrangle between debt counsellors, the banks, and the NCR has stifled the process, resulting in only 6 000 of the 112 000 debt counselling and debt restructuring matters going through the magistrates’ courts.

Banks have been accused by the NCR of stalling the court process by arguing that magistrates had no authority to hear debt review cases involving loans of more than R100 000. Many car owners and home owners owe banks amounts greater than R100 000. The High Court has since ruled that the NCA allow magistrates to rule on debt restructuring regardless of the loan amounts.

South African consumers owe credit providers about R1.12 trillion in household debt.

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