A declaratory order to determine the interpretation of "collection costs" and what is called 'statutory in duplum' is expected to have far-reaching consequences for the way loans are made and outstanding debt is collected in South Africa.
The order was made by acting judge A J Hack in the Western Cape Division of the High Court on Friday.
The statutory in duplum (double the amount) rule limits all interest and other payments on debt to double the amount of the original debt when someone is in default.
The application relates to what the applicants identified as the unilateral, unregulated manner in which creditors and collection agents add costs, including legal fees, to debtors' accounts both before and after judgement.
According to Stephan van der Merwe, senior attorney at the Stellenbosch University Law Clinic, collection costs often form the bulk of what is eventually collected from consumers, especially in relation to small short-term loans and other short-term credit.
In some instances, the amount of legal fees collected will substantially exceed the original loan amount many times over, he said. Further, these legal fees are charged and collected even though they are never taxed. Effectively, the consumer is devoid of any protection, especially where an emolument attachment order is used as the mechanism to collect.
In the case, the University of Stellenbosch Law Clinic, consumer watchdog Summit Financial Partners and 9 consumers cited the National Credit Regulator, the minister of justice, the minister of trade and industry and 46 other parties, including legal firms and credit providers like banks, as respondents in their application for a declaratory order regarding the interpretation of three aspects of the National Credit Act.
The judge found in their favour on each of the issues.
- First, he declared that collection costs as defined in the NCA must be read to include legal fees incurred to enforce the monetary obligation under the credit agreement, regardless of whether such fees are charged before, during or after litigation.
- Second, the limitation in terms of the act that all amounts - for example interest, fees and collection costs, except the capital amount - cannot exceed the balance of the debt must apply at all times regardless of whether a judgment had been granted.
- Third, legal fees may not be claimed until these had been agreed upon or taxed.
Although the judge has also ordered that an independent expert must be appointed to recalculate the amounts due by the consumers who were applicants in the case, his order now equally applies to all consumers against whom there have been or are legal action taken in terms of a credit agreement.
The applicants hoped that with such a clarification of the meaning and intention of the act when it comes to collection costs, it will force credit providers to properly vet their clients and conduct a proper affordability assessment to ensure that a consumer can in fact repay a loan in that it becomes less lucrative to collect on defaulting debts.
The judge made it clear that the crucial purpose of the NCA is to promote responsible credit granting. While the respondents emphasised the obligation on consumers to be responsible and not seek credit when they know they cannot pay or there is a risk they might not be able to pay, the judge took the view that credit providers, despite also having rights, are attempting to shield themselves from the responsibility imposed on them by the credit act.
"If equality requires all persons an equal right to access to credit but consumers are not equal in their ability to pay, then it must equally mean that the cost of credit must be adapted accordingly. In reality the converse has happened and the cost of credit for small loans is disproportionately higher than for large loans," said Hack.
Regarding relatively small debt incurred by the poor, he said such amounts of indebtedness might be small to many, but they are of great significance and consequence in the lives of the borrowers who are poor. Therefore, in the context of micro loans, for instance, the intention of the act is to protect the consumer from collection costs far exceeding the amount that was initially borrowed.
"If small loans are determined too costly to collect, then credit providers will be forced to ensure that they are extended responsibly to start with. Credit should only be extended to consumers who can afford it and would not become over indebted as a result," said Hack.
"I agree that this might contribute to stopping the conduct of lenders in seducing consumers to obtain credit...(ensuring) that the poor will not be enslaved even further in spiralling debt."
Clark Gardner, CEO of Summit, told Fin24 on Friday that the judgment vindicates their efforts for the past 10 years at stopping what they felt was "abuse" by collectors and lenders via garnishee orders.
"We can now stop all debt related garnishee deductions where the amount paid, or balance outstanding is greater than double the capital outstanding at the time of default. Payment in excess of this can be claimed as a refund for the much-distressed consumer," explained Gardner.
"Also, all attorney and legal fees claimed and paid via these garnishee deductions should be repaid for at least the past 3 years."
Van der Merwe says "this is a victory for the poor, vulnerable and marginalised throughout the country. It reinforces the importance of protecting consumers' basic human rights, including the right to human dignity and the right not to be arbitrarily deprived of one's property. The judgment places South Africa at the forefront of consumer protection internationally".
This is not the first time the University of Stellenbosch Law Clinic and Summit had taken to the courts to protect over-indebted consumers. In 2016 the Constitutional Court ruled that garnishee orders must be issued by magistrate's and not by clerks of the court.