A credit provider’s complete defence against a consumer’s allegation of reckless lending

• Jurisdiction: South Africa
• Author: Michelle Kelly-Louw
• Date: 25 May 2019
• Pages: 24-59
• Citation: (2014) 26 SA Merc LJ 24
• Published date: 25 May 2019

A CREDIT PROVIDER’S COMPLETE

DEFENCE AGAINST A CONSUMER’S

ALLEGATION OF RECKLESS LENDING*

MICHELLE KELLY-LOUW**

Professor, Department of Mercantile Law, University of South Africa

I INTRODUCTION

‘It is universally accepted that moneylending transactions are

susceptible to abuse mainly because borrowers are usually in a

much weaker position than lenders. Moneylenders can therefore

easily exploit this vulnerability of the borrower, and some have been

guilty of serious impropriety so frequently as to give rise to

considerable concern. Moneylending transactions are therefore

legitimately subject to legislative control in most parts of the

world.’

1

South Africa is no exception, and moneylending to consumers is

strictly regulated by the National Credit Act (NCA).

2

The Act applies,

with only a few exclusions, to all consumer credit agreements concluded

between parties dealing at arm’s length and made, or having an effect

within, South Africa.

3

‘The prevention of the granting of reckless credit

is an important lodestar of the NCA.’

4

The NCA aims to encourage

* This article is based on papers delivered at the 14th International Association of

Consumer Law Conference held in Sydney, Australia, on 2–4 July 2013 and the MicroFinance

South Africa’s (MFSA’s) Annual General Meeting and 2013 Conference held in Durban on 12

August 2013.

** BIuris LLB LLM LLD (Unisa) Dip Insolvency Law and Practice (UJ). Professor in the

Department of Mercantile Law, School of Law, University of South Africa.

1

AAA Investments (Proprietary) Limited v Micro Finance Regulatory Council and Another

2007 (1) SA 343 (CC) paras 5 and 6.

2

Act 34 of 2005. Hereinafter ‘the NCA’ or simply ‘the Act’. In this article words in the

singular also mean words in the plural and vice versa, and words in the masculine also mean

words in the feminine and neuter.

3

See ss 4–6 and 8. The application of the Act is fully discussed in Michelle Kelly-Louw

(with contributions by Philip N Stoop) Consumer Credit Regulation in South Africa (2012) ch

2 (hereinafter ‘Kelly-Louw: Consumer Credit Regulation’); M Kelly-Louw ‘Consumer Credit’

in W A Joubert (founding ed) The Law of South Africa vol 5(1) 2 ed replacement volume

(2010) paras 6–20; J W Scholtz (ed) et al Guide to the National Credit Act (2008-; loose-leaf) ch

4 and ch 8; J M Otto & R-L Otto The National Credit Act Explained 3 ed (2013) ch 3; and P N

Stoop ‘Kritiese evaluasie van die toepassingsveld van die ‘‘National Credit Act’’ (2008) 41 De

Jure 352.

4

Desert Star Trading 145 (Pty) Ltd and Another v No 11 Flamboyant Edleen CC and Another

2011 (2) SA 266 (SCA) 272D.

24

(2014) 26 SA Merc LJ 24

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responsible borrowing and avoid reckless lending and over-

indebtedness.

5

In line with these objectives, the Act prohibits a credit

provider from entering into a reckless credit agreement with a prospec-

tive consumer

6

and heavily punishes the credit provider that does enter

into such an agreement.

7

In terms of section 81(2) of the NCA, a credit provider may generally

conclude a credit agreement with a prospective consumer or increase an

amount approved in terms of an existing credit agreement

8

only after it

has done a proper and reasonable assessment and concludes that the

consumer will be able to satisfy all his obligations under all his credit

agreements, including the prospective credit agreement.

9

The compul-

sory assessment requires that a credit provider not only does an

affordability (f‌inancial) assessment of the consumer, but also assesses

the consumer’s debt history and tests the consumer’s general under-

standing of the risks, cost and obligations of the credit agreement.

The most recent f‌inancial crisis, which economies worldwide are still

trying to recover from, clearly illustrates that a wrong appreciation of the

lending risks and a wrong assessment of a borrower’s ability to pay back

a loan can start a chain reaction and endanger economic growth in a

large part of the world.

10

The provisions in the NCA preventing reckless

lending and over-indebtedness are by far the most contentious provi-

sions of the Act.

11

It is these rigorous provisions, many have argued, that

have had the unintended consequence of closing access to credit for

many and have ‘strangled a burgeoning property market’; but these are

also the provisions that, many have said, have cushioned South Africa

from the current worldwide f‌inancial crisis which has shaken most of the

developed world to its core.

12

A f‌inding that a credit agreement constitutes reckless credit has many

adverse consequences for a credit provider.

13

By invoking the reckless-

lending provisions, a consumer is substantially protected, particularly

5

Section 3(c).

6

Section 81(3) provides that a credit provider ‘must not enter into a reckless credit

agreement with a prospective consumer’. See also Desert Star Trading v No 11 Flamboyant

Edleen supra note 4 para 14; and Horwood v FirstRand Bank Ltd (2010/36853) [2011]

ZAGPJHC 121 (21 September 2011) para 2.

7

See, for example, ss 83 and 84.

8

Other than an increase in terms of s 119(4) — see the full discussion in para III below.

9

Read with s 80(1).

10

Kelly-Louw: Consumer Credit Regulation op cit note 3 at 290.

11

Idem at 292.

12

M Currie ‘A hard act to follow’ (January 2010) Indwe 90. See also Kelly-Louw: Consumer

Credit Regulation op cit note 3 at 292.

13

See ss 83 and 84. For a detailed discussion of what the consequences of reckless lending

are and what the powers of a court are when it declares an agreement as constituting reckless

DEFENCE TO ALLEGATIONS OF RECKLESS LENDING 25

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when a credit provider who contravened these provisions tries to

enforce the reckless credit agreement against the consumer. Unfortu-

nately, these reckless-lending provisions carry with them the risk of

abuse by some consumers. To limit this abuse, measures were included

in the NCA to prevent consumers from abusing these provisions.

14

For

instance, section 81(1) requires that when a consumer applies for a

credit agreement, and while that application is being considered by

the credit provider, the prospective consumer must fully and truthfully

answer any requests for information made by the credit provider while

the credit provider is assessing whether to grant the credit. In addition,

section 81(4) provides that it is a complete defence to an allegation that a

credit agreement is reckless, if the credit provider proves that the

consumer failed to answer fully and truthfully any requests for informa-

tion made by the credit provider as part of the compulsory assessment

required by section 81, and if a court or the National Consumer

Tribunal determines that the consumer’s failure to do so materially

affected the ability of the credit provider to make a proper assessment.

This article discusses the requirements that need to be complied with

before this complete defence will be available to the credit provider. For

instance, there is a requirement of materiality involved for this defence

to succeed, and, accordingly, not every failure by a consumer to answer,

fully and truthfully, any requests for information made by the credit

provider as part of the prescribed assessment will necessarily entitle the

credit provider to this defence. Attention is also given to court cases

where credit providers have raised this complete defence. Lastly, the

article brief‌ly considers the draft assessment guidelines that were pub-

lished by the National Credit Regulator (NCR)

15

in May 2013 and the

proposal put forward to approve a credit information amnesty and

discusses how these initiatives are likely to affect the credit provider’s

duty to do a proper assessment before it grants credit to a consumer.

II RECKLESS LENDING

The provisions of the NCA dealing with reckless credit and over-

indebtedness,

16

which commenced on 1 June 2007,

17

apply generally

only if the consumer of the credit agreement governed by the Act is a

credit, see Kelly-Louw: Consumer Credit Regulation op cit note 3 para 12.2.3; and Scholtz op

cit note 3 para 11.4.5.

14

See ss 81(1) and 81(4). See also the discussion in para IV below.

15

Established by s 12 of the NCA, hereinafter referred to as ‘the NCR’.

16

That is, Part D of Chapter 4 of the Act (ss 78–84).

17

See Proc 22 in GG 28824 of 11 May 2006.

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