National Credit Regulator v Mortgage Secured Finance (Pty) Ltd and Others (NCT 84832/2017/140(1)) [2019] ZANCT 41 (5 April 2019)

IN THE NATIONAL CONSUMER TRIBUNAL

HELD AT CENTURION

Case number: NCT 84832/2017/140(1)

In the matter between:

NATIONAL CREDIT REGULATOR APPLICANT

and

MORTGAGE SECURED FINANCE (PTY) LTD

RESPONDENT

GERT COLLINS

FIRST INTERVENING PARTY

JENNIFER COLLINS

SECOND

INTERVENING PARTY

Coram:

Mr T Bailey – Presiding member

Adv J Simpson – Tribunal member

Adv F Manamela – Tribunal member

Date of hearing – 7 March 2019

Date of judgment – 5 April 2019

JUDGMENT AND REASONS

APPLICANT

1. The Applicant is the National Credit Regulator (the applicant), a juristic person established in terms of section 12 of the National Credit Act, 2005 (the Act) to regulate the consumer credit market and ensure compliance with the Act, with its principal business address at 127 - 15th Road, Randjespark, Johannesburg, Gauteng.

2. Mr E Nel, who is an attorney at Hogan Lovells (South Africa) Incorporated, represented the applicant at the hearing of this application.

RESPONDENT

3. The Respondent is Mortgage Secured Finance (Pty) Ltd (the respondent), a company duly registered in terms of the company laws of the Republic of South Africa under registration number 2009/005118/07, whose physical address is First Floor, Oxford House, Wellington Road, Durbanville, Western Cape.

4. The respondent is an erstwhile registered credit provider in terms of section 40 of the Act under registration number NCRP4865. The respondent voluntarily deregistered as a credit provider on or about 24 March 2016.

5. The respondent opposed this application but elected not to attend the hearing of this application.

FIRST AND SECOND INTERVENING PARTIES

6. The first intervening party is Gert Collins (the first complainant). The second intervening party is Jennifer Collins (the second

complainant). They are adult consumers, married in community of property to each other, and resident at 28A Koringblom Street,

Groenheuwel, Western Cape (the complainants).

7. Advocate D Lubbe represented the intervening parties at the hearing of this application.

JURISDICTION

8. Section 150 of the Act empowers the Tribunal to make orders in relation to a registrant who contravenes the Act or fails to comply with a condition of its registration as a credit provider. More specifically, section 150 gives the Tribunal the power to make an appropriate order concerning prohibited or required conduct in terms of the Act or the Consumer Protection Act, 2008.

9. This power includes declaring conduct to be prohibited in terms of the Act; interdicting any prohibited conduct; confirming an order against an unregistered person to cease engaging in any activity that is required to be registered in terms of the Act; requiring payment to the consumer of an excess amount charged together with interest set out in an agreement; or any other appropriate order required to give effect to a right in the Act.

10. A section in this judgement refers to a section in the Act. Similarly, a reference to a regulation in this judgement refers to the National Credit Regulations, 2006.[1]

ISSUES TO BE DECIDED

Applicant

11. The applicant requires the Tribunal to determine whether the respondent has engaged in prohibited conduct by having entered into reckless credit agreements with consumers; charged fees other than what the Act permits; and failed to disclose to consumers the cost of credit in the prescribed manner and form. The Tribunal is also required to determine whether the respondent should be directed to submit a report compiled by an independent auditor confirming the amounts owed to consumers; and should refund the consumers for having overcharged fees.

12. The applicant also submits that the Tribunal ought to declare that the respondent granted a mortgage loan agreement recklessly to the complainants, which entitles the complainants to an order that cancels the mortgage loan agreement and the subsequent mortgage bond registered over the applicants’ immovable property.

13. The applicant sought two additional orders that did not form part of the original referral. First, despite having deregistered as a credit provider the respondent has contravened section 54 (1) by continuing its activities as a credit provider because it continues to charge interest and prohibited fees on existing loans and to recover those amounts from consumers. Second, the respondent violated section 126A (3) by charging fees for credit repair services before it rendered the service.

14. The Tribunal’s jurisdiction to adjudicate contraventions of reckless credit and prohibited conduct is beyond question. The

Tribunal is authorised to adopt an inquisitorial approach to a hearing. Our courts have held that confining a hearing to matters

raised in a referral would undermine an inquisitorial enquiry.[2] Rule 3 (2) (c) of the Tribunal’s rules (the rules)[3] also empower the Tribunal to consider applications to amend documents. The Tribunal is therefore satisfied that it is empowered

to consider the additional orders the applicant seeks in this application.

Complainants

15. The complainants require the Tribunal to determine whether the respondent engaged in prohibited conduct by extending reckless credit to the complainants in terms of a mortgage loan agreement (the loan agreement); set aside the complainants’ obligations in terms of the loan agreement; direct the respondent to take all necessary steps within 30 days of the Tribunal granting the order that the respondent cancel the first covering mortgage bond (the mortgage bond) over the complainants’ property; and should the respondent fail to cancel the mortgage bond within 30 days, the sheriff of the high court be directed to take all necessary steps to attend to the cancellation of the mortgage bond.

16. The allegations of prohibited conduct and the granting of the mortgage loan agreement will become apparent in the course of this judgement.

RESPONDENT’S POSTPONEMENT APPLICATION AND SUBSEQUENT ABSENCE FROM THE HEARING OF THE MERITS OF THIS APPLICATION

17. The hearing of this application was set down for 7 March 2019. At the commencement of the hearing the respondent’s counsel, Advocate Karolia, made an application to postpone the hearing of the main application or to remove it from the roll. He handed up an affidavit of the respondent’s managing director, Etienne De Beer (De Beer), to support the respondent’s postponement application.

18. De Beer states in the affidavit that a creditor of the respondent, a Mr Peploe, had instituted an application to liquidate the respondent in the Western Cape High Court (the high court) under case number 11228/2018 together with the support of another of the respondent’s

directors, Willem van der Vyfer. The liquidation application is due to be heard on 9 May 2019. The liquidation application will determine whether a liquidator is to be appointed or whether De Beer, as the respondent’s managing director, will continue to act with authority.

19. There are also two other matters pending before the high court, which includes the action the respondent has instituted against the complainants under case number 1803/16 (the high court action). A trial date has not been set for those matters, in which the questions of affordability and reckless credit are specifically addressed. The factual and legal aspects have been pleaded; and will be ventilated in the high court. The process of pre-trial dates has been delayed because the high court requires the liquidation application to be heard first.

20. Moreover, the respondent has been cautious to incur legal costs and a postponement will not prejudice any party to the proceedings before the Tribunal.

21. The Tribunal handed down an ex tempore ruling in which it rejected the application. Both the applicant and the complainants opposed the application. The test for a postponement is the interests of justice and a party seeking a postponement must show good cause for the postponement.

22. In the Tribunal’s view, the respondent had not complied with rule 18 (3) of the rules concerning an application for a postponement; the liquidation application was not determinative of this application, which concerns prohibited conduct; the high court has not allocated dates for the hearing of the high court action and has not ruled that the Tribunal may not hear this application; the affected consumers will continue to be prejudiced in the absence of the Tribunal determining this application; and it is therefore in the interests of justice that the hearing of this application on the merits should proceed as scheduled.

23. Advocate Karolia then took instructions from the respondent and requested to be excused. The hearing then proceeded in the respondent’s

absence.

BACKGROUND

Initial complaint

24. On 26 September 2014 the Legal Aid Clinic of the University of Stellenbosch lodged a formal complaint on behalf of the complainants

that the respondent had allegedly contravened the Act.[4]

25. The complaint can be summarised as follows:[5]

25.1. on or about 6 December 2013 the complainants concluded the loan agreement with the respondent that consolidated all the complainants’

debt;

25.2. the complainants had debt obligations amounting to R184 800.00 when they concluded the loan agreement with the respondent. The respondent required an additional amount of R75 675.68, which constituted debt consolidation administration fees, to cover the debt consolidation. The complainants’ obligations under the loan agreement therefore increased to R260 475.68;

25.3. the respondent would settle all the complainants’ debt under their credit agreements owing to other credit providers;

25.4. the loan entered into with the respondent was secured against the complainants’ immovable property of which the original title

deed was being held by the bond registration attorneys, Bornman and Hayward Attorneys, who were also the respondent’s attorneys of record; and

25.5. the respondent’s attorneys withheld an amount of R11 900 .00.

26. The complainants were concerned whether the provisions of the loan agreement and the fees being charged under the loan agreement were lawful.[6]

Applicant’s investigation

27. The applicant authorised an investigation in terms of section 139 (1) (c) into the conduct of the respondent as a credit provider and the fees the respondent charged when it granted credit.[7] On 7 November 2014 the applicant appointed two inspectors, Kgadi Sepuru and Mojalefa Lekoko (the inspectors) in terms of section 25 to investigate the respondent’s operations.[8]

28. On 17 November 2014 the inspectors conducted an on-site investigation at the respondent’s premises. They interviewed De Beer; Zelda Lamprecht, the office manager and senior credit controller; and Olga du Plessis, the credit controller and debit order manager. During the meeting the inspectors obtained a sample of files pertaining to 10 consumers and the complainants (the consumers).

29. During the interview De Beer explained that the respondent is a subsidiary company of Loxfin (Pty) Ltd, which recruits clients for the respondent and sources funding for the loans extended to clients. De Beer also explained the following concerning the respondent’s financial model:[9]

29.1. the respondent provides mortgage loans to consumers who have immovable property and who are in financial distress. The aim is to provide interim financial relief to enable the consumer to return to the mainstream banks within one year;

29.2. the respondent does so by providing a mortgage loan that is secured by the consumer’s property equity. If a consumer still has credit obligations under a consumer’s home loan, then the respondent takes over the credit obligations under the home loan together with the consumer’s other debts;

29.3. the respondent also provides additional services to consumers by removing adverse judgements against a consumer’s name with the credit bureaus;

29.4. the respondent charges the consumer:

29.4.1. an initiation fee of R5 700.00 on each new mortgage loan credit agreement (initiation fee);

29.4.2. an income protection fee as insurance on the consumer’s income to provide for payment if the consumer is retrenched (income protection fee);

29.4.3. a home insurance fee against damage or destruction of the immovable property (home insurance fee;

29.4.4. a credit life insurance fee on the loan amount if the consumer dies (credit life insurance fee);

29.4.5. an investor’s or capital raising fee of 7.5% of the total loan amount to pay brokers to secure investors to fund the transactions

(investor’s raising fee);

29.4.6. a Loxfin agent’s fee for each loan granted. This fee concerns, amongst other things, sourcing consumers; cost of travelling to the consumer; time spent investigating the consumer’s debts; conducting an affordability test; and calculating whether the consumer qualifies for the credit agreement. This fee amounted to R18 000.00 in the complainants’ case (Loxfin agent’s fee);

29.4.7. a monitoring fee of R625.00 per month for the duration of the agreement (monitoring fee);

29.4.8. a fee to rescind judgements against a consumer that is calculated on the number of judgements to be rescinded (judgement fee);

29.4.9. a default fee of R850.00 per default listing on a credit bureau for the removal of adverse information (default fee);

29.4.10. a consumer credit agreement fee of R300.00 per account for various attendances including telephone calls, emails; correspondence with credit providers, settlement, and finalisation of accounts with credit providers (consumer credit agreement fee); and

29.4.11. a debit order handling fee of R150.00 per month for a year, which amounts to

R1 800.00 (debit order fee); and

30. In a letter dated 21 July 2014 the respondent’s attorneys explain the reasons for the investor’s raising fee as follows:

“In order to fund the transaction, our client requires investment from third-party investors. The Brokers who acquire these investors charge a certain fee for their services. The relevant portion of this fee is charged to the Agreement, as without this investment, the Agreement would be impossible”.[10]

31. The inspectors compiled an investigation report (the investigation report) and attached the sample files to the investigation report,

which they signed on 17 April 2015.[11] The investigators found, amongst other things, that:[12]

31.1. all the consumers did not qualify for loans and were in fact over-indebted because their respective income was less than their monthly obligations; and

31.2. the respondent had recorded that the consumers had no debts when entering into the loan agreements with the consumers. De Beer had justified the respondent’s actions because the respondent would pay all the consumers’ debts once the loans were granted.

32. The investigators concluded that the respondent had repeatedly contravened provisions in the Act and thereby committed conduct that

is prohibited in terms of the Act.[13] The investigation report details the alleged contraventions. The 11 sample files are annexed to the investigation report to support the conclusions in the investigation report[14].

33. The applicant elected to attach the first five of the sample files to its founding affidavit in order not to burden in the Tribunal with a huge volume of papers. However, it undertook to make the remaining files available to the Tribunal if required to do so. The Tribunal has made its findings based on the five sample files.

The high court action against the applicants

34. On or about 10 February 2016 the respondent launched an action in the high court against the complainants for breach of contract. The respondent claims payment of R284 192.49 (being the amount due in terms of the loan agreement) together with interest of 18.2% per annum; and an order declaring the complainants’ home, Erf 19271 Paarl, to be executable.[15]

35. The complainants have filed a plea and counterclaim to the high court action.[16] The complainants have also raised a special plea of Lis pendens in which they request that the high court proceedings be stayed until the proceedings before the Tribunal had been finally determined. The complainants have also raised the issue of reckless lending and prohibited charges as a defence to the respondent’s claim.

Compliance notice

36. Consequently, on 12 September 2016 the applicant issued a compliance notice against the respondent in terms of section 55 (1).[17] The compliance notice requires the respondent to:

36.1. cease charging and/or imposing a monetary liability on the consumers concerning a credit fee or charge prohibited under the Act by 15 October 2016;

36.2. submit an audit report to the applicant that the fees charged to consumers were in accordance with section 100 (1) (a) of the Act; and

36.3. reimburse consumers who were overcharged fees by 10 November 2016.

37. The respondent filed an application to review the compliance notice. On 27 September 2018 the Tribunal handed down a judgment[18] in which it confirmed the compliance notice and ordered the respondent to take steps to:

37.1. discontinue charging consumers the prohibited fees within 30 days of the date of having received the order; and

37.2. submit an audit report within 45 days of having received the order reflecting that the respondent’s business had been audited; the fees complied with law; the amounts ‘consumers’ had been overcharged or charged for the prohibited fees; and ‘consumers’

had been refunded the amounts that they had been overcharged or charged for the prohibited fees.

RESPONDENT’S BUSINESS MODEL

38. The respondent’s answering affidavit[19] reveals that its business concerns only consumers that own immovable property. The consumer is assessed to determine affordability and an ability to service repayments by applying the identical standards that recognised financial institutions in South Africa apply to grant mortgage loans. The respondent values the immovable property and the potential loan amount is determined at a maximum of 70% of the value of the immovable property.

39. The purpose of the process is to “cleanse” the consumer’s credit record so that the consumer can re-enter the economic market with only a bond registered over the immovable property with a recognised financial institution. The consumer does so with a repayment obligation that is significantly less than the consumer’s obligations to credit providers before the debt consolidation bond registration.

40. The estimated time for the process is approximately six months. The bond is registered for a

12-month period to allow for delays. The respondent only requires payment of the interest component over the 12-month period. The

capital repayment takes place when the mortgage bond in favour of the respondent “switches” to the recognised financial

institution.

41. As part of the process it is necessary for the respondent to, amongst other things, estimate the required short-term insurance cover over the immovable property together with disability and life insurance cover for the 12-month period. The respondent must also estimate third-party charges to rescind judgements, remove defaults, monitor debt order payments and negotiate settlements of debt. The consumer mandates the respondent to undertake those aspects of the process.

42. The respondent does not render these charges as a credit provider. Rather, they are charges that third parties charge to the consumer to ensure that the process takes place effectively. The only costs the respondent charges in terms of the Act is the initiation fee.

43. Although the consumer’s monthly debts and repayments may exceed the consumer’s income, the “trigger event” is the registration of the mortgage bond. This is when the respondent effectively lends the funds that are paid directly to the consumer’s creditors in accordance with the loan amount. The consumer then moves immediately from a potentially over-indebted situation to no longer being over-indebted.

COMPLAINANTS’ COMPLAINT

Application to intervene

44. On 6 November 2017 the complainants commenced proceedings before the Tribunal for an order to permit them to intervene in this application. On 18 December 2018 the Tribunal handed down a ruling[20] permitting the complainants to intervene and joined them as the first and second intervening parties in this application. The complainants

then filed an affidavit.[21] It is appropriate to record its contents in some detail.

Complainants’ affidavit

Advertisement in Die Son newspaper

45. The affidavit reveals that by December 2013 the complainants were struggling to pay their monthly credit obligations. They responded to the respondent’s advertisement in Die Son newspaper by telephoning the respondent’s office. The respondent’s

employee specifically asked the first complainant whether he had property and if there was a mortgage bond registered over the

property. The first complainant replied that the complainants had a property without a mortgage bond. The respondent’s

employee then asked the first complainant to send through a list of the complainants’ bad debt obligations.

First meeting with the respondent

46. The complainants sent a list of their debt obligations to the respondent and subsequently met with the respondent’s representative (the representative). The representative explained to the complainants that the respondent would pay off all their debts and the

complainants would in turn repay a smaller, more affordable monthly amount to the respondent. The respondent would help the complainants

to obtain a bank loan or a mortgage bond. The complainants would be required to put up their house as security and if the complainants

did not pay the respondent then the complainants could lose their house.

47. The complainants were so desperate and happy that the respondent would pay off all their debt and help them obtain a bank loan that they never discussed the terms of the loan from the respondent or any other terms. The representative convinced them that the granting of a bank loan to repay the respondent would be a mere formality. They would not have risked their house on this scheme if it was not the case. The possibility that a bank would reject the first complainant’s application for a mortgage bond as a pensioner

was never discussed with him.

Affordability assessment

48. the first complainant is a pensioner. At the time he received a monthly pension of R6 697.09. The second complainant was employed as a general assistant and earned a monthly salary of R1

918.66. Their joint income was R8 615.75. The complainants’ declared living expenses were approximately R3 510.00 and their

existing monthly credit obligations “as per the bureau” were approximately R8 135.00.

Signing of bond documents

49. The respondent sent the complainants to the respondent’s attorneys. The complainants were presented with documents to sign, which were all written in English. The attorney present was English and explained the documents to the complainants in English. The complainants informed the attorney that they were Afrikaans and their understanding of English was limited. The attorney replied that she could not speak Afrikaans and the respondent would give the complainants an Afrikaans version later.

50. The complainants did not receive the Afrikaans version. Nor were the documents explained to them in Afrikaans. They were desperate,

intimidated and signed the documents without understanding them.

Default on the agreement

51. Subsequently a dispute arose between the complainants and the respondent concerning the debts that should have been paid. The respondent

failed to pay a significant debt owed to Standard Bank that led to the complainants defaulting on the loan agreement within three months of concluding it with the respondent. The dispute led to the respondent instituting the high court action against the complainants.

52. The first complainant is a pensioner with no prospect of earning other income. He would not have concluded the agreement if he had known that he had to pay back the full capital balance (the deferred capital) within 12 months because the complainants’ financial prospects were not going to improve over a period of 12 months.

53. The first complainant has since been advised that the loan agreement does not oblige the respondent to assist him obtain a mortgage bond. If Collins could not pay the deferred capital and the respondent’s fees after 12 months, then the respondent could terminate the loan agreement and he could lose his house. Moreover, the first complainant’s age and income make it unlikely that a bank would have granted him a mortgage bond. The respondent ought to have known that he would not be able to pay the deferred capital amount and fees.

Respondent’s failure to respond to the complainants’ affidavit

54. The respondent elected not to file an affidavit to dispute the contents of the complainants’ affidavit. The contents of the

complainants’ affidavit are therefore undisputed,[22] and the Tribunal accepts those contents.

CONTRAVENTIONS OF THE ACT

Introduction

55. The applicant asserts that the respondent has repeatedly contravened the provisions of the Act as is fully set out in the investigation

report. The Tribunal proceeds to consider the contraventions that are alleged in the investigation report and in the complainants’

affidavit.

Reckless credit and the prevention of reckless credit

The Act

56. Section 80 deals with reckless credit. Section 80 (1) provides that a credit agreement is reckless if, at the time the new agreement is made:

(a) the credit provider failed to conduct an assessment as required by section 81 (2) irrespective of what the outcome of such an assessment might have concluded at the time; or

(b) the credit provider having conducted the assessment as required by section 81 (2), entered into the credit agreement despite the available information having indicated

that:

(i) the consumer did not understand or appreciate the consumer’s risks, costs or obligations under the credit agreement; or

(ii) entering into the credit agreement would make the consumer over-indebted.

57. Section 81 deals with the prevention of reckless credit. Section 81 (2) (a) provides that a credit provider must not enter into a credit agreement without first taking reasonable steps to assess the proposed consumer’s:

(i) general understanding and appreciation of the risks and costs of the proposed credit, and of the rights and obligations of a consumer under a credit agreement;

(ii) debt repayment history as a consumer under credit agreements; and

(iii) existing financial means, prospects and obligations (in relation to the credit to be granted).

58. Regulation 23A deals with the criteria to conduct an affordability assessment. Regulation 23A (8) deals with the consumer’s existing financial obligations. It provides that a credit provider must calculate the existing financial means, prospects and obligations as envisaged in section 78 (3) and section 81 (2) (a) (iii).

59. Section 82 (1) provides that a credit provider may determine the mechanisms, models and procedures to be used in meeting its assessment

obligations under section 81 provided that the mechanism, model or procedure results in a fair and objective assessment.

60. Section 81 (3) precludes a credit provider from entering into a credit agreement that is reckless.[23]

Summary of the applicant’s submissions

61. Mr Nel submitted that the respondent contravened section 80 (1) (b) (i) because it concluded credit

agreements with the consumers without ensuring that they understood the risks, costs or obligations under the proposed credit agreements, and knew they would become over-indebted.

62. Second, the procedures the respondent applied to assess affordability did not result in a fair and objective assessment under section 82 (1) because the respondent stated that the consumers had no debts “at the time of” granting the applications for credit, which was not the ‘’true state of affairs’’.

63. Moreover, the respondent contravened section 80 (1) because the respondent concluded the agreements without conducting an assessment in accordance with regulation 23A to determine whether the consumers could afford to service their debts under the agreements.

Summary of the complainants’ submissions

64. Advocate Lubbe advanced a further ground under section 80 (1) (a) upon which the Tribunal should declare the respondent’s extension of credit to be reckless. He submitted that where a credit agreement fails to provide full repayment of the entire principal debt during the term of the credit agreement, the outstanding principal debt due at the end of the agreement must be accounted for and factored into a consumer’s affordability assessment. A failure to do so necessarily renders an affordability assessment irrational and invalid. An irrational and invalid assessment does not comply with section 81 (2). Consequently, the extension of credit is reckless regardless of what the outcome of a valid assessment would have been at the time of the assessment.

Analysis

65. Section 81 (3) precludes a credit provider from entering into a credit agreement that is reckless. Section 81 (2) imposes an obligation on the credit provider to conduct an affordability assessment to determine whether the credit to be granted would be reckless.[24] When conducting the affordability assessment, the credit provider must take reasonable steps to assess the proposed consumer’s

appreciation of the risks and costs of the proposed credit, and the consumer’s rights and obligations under a credit agreement. The credit provider must also assess the consumer’s existing financial means, prospects and obligations concerning the credit to be granted. Section 81 (2) is read together with regulation 23A. Regulation 23A (8) requires the credit provider to calculate the existing financial means, prospects and obligations when conducting the affordability assessment.

66. The respondent did not dispute the material facts and instead relied heavily during the investigation and in its answering affidavit on its business model to support its position that it had not acted unlawfully. The first question to be decided is whether the

respondent correctly assessed that the consumers were able to repay the preferred capital and within 12 months of concluding the

agreement. It also begs the question whether the consumers generally understood the risks, costs and obligations under the agreements.

Section 80 (1) (b) (i): Did the consumer generally understand or appreciate the consumer’s risks, costs or obligations under the proposed credit agreement?

67. The affordability assessment must determine whether the consumer will be able to afford the proposed credit and not make the consumer

over-indebted. The respondent’s position is that it consolidates the consumer’s debt to provide a form of debt relief by requesting payment of a reduced amount over 12 months. The deferred capital, which includes all fees, is to be paid when the

12-month period (which is calculated from the date the loan was advanced) expires in a 13th instalment. The 13th instalment is not factored into the repayment schedule of 12 months.

68. In the Tribunal’s view, it is self-evident that the consumers did not appreciate the risks, costs or obligations of the credit

agreements because the highly prejudicial nature of the agreements required them to pay the deferred capital in a 13th instalment. No reasonable person who is over-indebted, seeking debt relief, and made aware of such highly prejudicial terms would agree to concluding such an agreement.

69. This is abundantly clear in the complainants’ case. They stated under oath that they did not understand the risks, costs and obligations under the loan agreement. They are Afrikaans speaking and have a very limited understanding of English. The loan agreement is a long and complicated document, is drafted in legalese, and was never explained to the complainants in Afrikaans. Moreover, an exclusively English-speaking attorney explained the loan agreement to the complainants and failed to provide the complainants with an Afrikaans version of the loan agreement. The complainants’ failure to understand the risks is clearly brought out by the statement that they were convinced that the granting of a loan to repay the respondent was a mere formality and they would never have risked their house “on the scheme” if this was not the case.

70. This is borne out by the complainants’ perilous financial situation. They had debt obligations of R184 800.00, which they were struggling to pay when they concluded the loan agreement. Their joint monthly income was R8 615.75 and they had monthly debt obligations of R8 135.00. The first complainant was a pensioner and the second complainant earned a monthly salary of R1 918.66 when they concluded the loan agreement. The complainants’ obligations under the loan agreement required an additional R75 675.68 to cover the debt consolidation. The complainants’ obligations under the loan agreement therefore increased to R260,475.68 when they had little or no prospects of earning additional income to pay the monthly interest due under the loan agreement.

71. Not surprisingly, the complainants were unable to pay the deferred capital when the 13th instalment became due. The respondent therefore instituted the high court action to recover the deferred capital of R284 192.49 from the complainants and to declare the complainants’ property executable.

72. The Tribunal is satisfied that the only reasonable conclusion to be drawn is that the complainants were completely unaware how highly

prejudicial the agreement was to them. Moreover, the complainants, like the other consumers, were over-indebted when they applied for the loan and the respondent should never have granted them the loan in the first place.

73. Consequently, the Tribunal is satisfied that the respondent contravened section 80 (1) (b) (i) because it concluded credit agreements with the consumers without ensuring that they understood the risks, costs and obligations under the proposed credit agreements (when it assessed the proposed consumer’s general understanding of the proposed loan agreement as envisaged in section 81 (2) (a) (i)).

74. This means that the respondent granted credit recklessly and contravened section 81 (3) by entering into a reckless credit agreement with the consumers.

Section 80 (1) (a): Did the credit provider first conduct an assessment as required by section 81 (2), irrespective of what the outcome of the assessment might have concluded at the time?

75. A second reason is that the affordability assessment also falls foul of section 80 (1) (a). Although a credit provider may under section 82 (1) determine the mechanisms, models and procedures under section 81, they must result in a fair and objective agreement. In the Tribunal’s view, the model the respondent applied to assess affordability did not result in a fair and objective assessment because the respondent stated that the consumers had no debts when it granted the applications for credit. The respondent’s statement is not borne out by the facts. The inspectors found that all the consumers did not qualify for loans because their income was less than their monthly obligations when they concluded the agreements. The consumers were therefore not debt free and were, in fact, over-indebted.

76. The respondent also granted credit to the consumers without conducting affordability assessments in accordance with the regulations.

Regulation 23A (8) obliges the respondent to calculate the consumer’s existing financial means, prospects and obligations as envisaged in terms of section 78 (3) and 81 (2) (a) (iii). When calculating the consumer’s existing financial obligations, the regulations compel the respondent to utilise the minimum expense norms table contained in the regulations. The regulations oblige the respondent to follow the methodology when using the table. This includes assessing the consumer’s gross income as well as statutory deductions and minimum living and other expenses to calculate the discretionary income for the consumer to satisfy new debt. The consumer’s monthly debt repayment obligations in terms of credit agreements that a registered credit bureau may reflect on the consumer’s credit profile is included in this calculation.[25]

77. There is no evidence on which the Tribunal can rely that the respondent calculated the consumers’ discretionary income in accordance with the expense norms table. If the respondent had complied with the regulations when assessing the consumers affordability, it would not have concluded that the consumers qualified for loans.

78. Consequently, the Tribunal is satisfied that the respondent contravened section 80 (1) (a) because the respondent failed to conduct an assessment as required in section 81 (2).

Cost of credit

79. Section 100 deals with prohibited charges. Section 100 (1) (a) provides that a credit provider must not charge an amount to or impose a monetary liability on the consumer concerning a credit fee or charge prohibited by the Act.

80. Section 101 deals with the cost of credit. Section 101 (1) stipulates the fees that a credit provider is permitted to charge, being:

80.1. the principal debt plus the value of any item contemplated in section 102;

80.2. a service fee which must not exceed a prescribed amount;

80.3. interest which must not exceed the maximum prescribed amount;

80.4. credit insurance which may include credit life insurance and insurance cover in respect of immovable property;

80.5. default administration costs; and

80.6. collection costs.

81. Section 102 deals with fees or charges. Section 102 (1) provides that the credit provider may in the instance of a mortgage

agreement (amongst others) include the initiation fee, cost of extended

warranty, taxes, levies and registration fees and credit premiums.[26]

Alleged contraventions

82. The applicant alleges that the respondent contravened section 100 (1) (a) read together with section 102 (1) by charging fees that are prohibited under the Act.

83. The evidence reveals that the respondent charged the following additional fees, namely an investor’s raising fee; Loxfin agent’s

fee; judgement fee; monitoring fee; debit order handling fee; consumer credit agreement; and a default fee (which is different from a default administration fee that is permitted under the Act). None of these additional fees are permitted under the Act.

84. The evidence also reveals that the complainants paid R19 535.68 as an investor’s raising fee and R27 040.00 as “other costs to settle the borrower’s debts”. Clearly, these additional costs placed the affected consumers, who were already over-indebted, into further debt.[27] The respondent’s allegation that these fees are paid to third parties for services rendered does not provide a defence to the charge. The Act prohibits the charging of any fees beyond those prescribed. Whether these fees are intended for third parties is not relevant.

85. Consequently, the Tribunal is satisfied that the respondent has contravened section 100 (1) (a) read together with section 102 (1) by charging fees that are prohibited under the Act.

Credit insurance

86. Section 106 deals with credit insurance. Section 106 (5) (b)(i) and (ii) and (c) requires a credit provider to disclose to the consumer the cost of any insurance supplied; and the amount of any fee,

commission, remuneration or benefit the credit provider has received in relation to the insurance. The credit provider is also required to explain the terms and conditions of the insurance policy to the consumer and provide the consumer with a copy of that policy.

Alleged contravention

87. The applicant alleges that the respondent contravened section106 (5) (b) (i) and (ii) and (c) because it failed to explain the terms and conditions of the credit life, income protection and home owners’ insurance policies which it supplied to the affected consumers.

88. The evidence reveals that the respondent provided the consumers with credit life, income protection and home owner insurance. However, the consumers’ files did not contain insurance policy documents that disclose the cost, fees and commissions.[28] The respondent did not dispute that the consumers had been provided with the insurance. It also stated in its opposing affidavit that “not all documentation pertaining to each specific consumer had been included”. However, it did not state what documents had been omitted. Nor did it discharge the evidentiary burden on it by attaching the relevant documentary evidence to its answering affidavit or produce evidence at the hearing of this application to counter the findings in the investigation report.

89. It also does not help the respondent to state, as it did in its opposing affidavit, that it is not the insurer; cannot explain the terms and conditions of insurance to the consumers; and it is not for the credit provider to provide the insurance policies to the consumers.

90. Consequently, the Tribunal is satisfied that in the absence of the credit life, income protection and home owner insurance policy documents, the respondent contravened section 106 (5) (b) (i) (ii) and (c) by failing to disclose to the consumers the cost of insurance; and the amount of the fees, commissions and remuneration or benefits the credit provider received concerning that insurance.

Forms of credit agreement

91. Section 93 deals with the form of credit agreements. Section 93 (1) requires the credit provider to deliver a copy of the credit agreement, whether transmitted in a paper form or in a printable electronic form, to the consumer.

92. Regulation 31 (1) (a) requires all the information that is disclosed in the credit agreement to be comprehensive, clear, concise and in plain language. Regulation 31 (2) (b) and (c) requires that an intermediate and a large credit agreement must contain the respondent’s registration number with the respondent; the proposed distribution of the principal debt; and details concerning the fees to be charged; and dispute resolution mechanisms available to the consumer.

93. The applicant alleges that the respondent contravened regulation 31 (1) (a) and 31 (2) (b) and (c) because the credit agreements did not contain the information in accordance with regulation 31.

94. The evidence reveals that the credit agreements failed to record the following information in the loan agreements: the respondent’s

registration number with the applicant; the number and frequency of repayments; the due date of the first payment; the rand amount of interest charges over the term of the agreement; whether interest is fixed or variable; and a statement informing the consumer of the consumer’s rights concerning a complaint or dispute resolution, which includes the right to file a complaint with the respondent and make an application to the Tribunal.[29]

95. Consequently, the Tribunal is satisfied that the respondent contravened regulation 31 (1) (a) and 31 (2) (b) and (c) because the loan agreements did not contain the information required by regulation 31.

Restricted activities by unregistered persons

The Act

96. Section 54 deals with restricted activities by unregistered persons. Section 54 (1) empowers the respondent to issue a notice to any person, who engages in an activity that requires registration and is not registered under the Act, requiring that person to stop engaging in that activity.

97. The applicant alleges that despite having been deregistered as a credit provider, the respondent contravened section 54 (1) because it continues to charge interest and prohibited fees on existing loans; and to recover such amounts from consumers.

98. It was common cause between the parties that the respondent deregistered as a credit provider on or about 22 March 2016. The respondent stated in its answering affidavit that it had not advanced further loans since deregistering because the respondent is dependent on investor funds to provide further loans and the economic climate has not encouraged further funding.

99. Significantly, the respondent did not state that that it no longer charges interest and prohibited fees on existing loans. It also became apparent during the respondent’s application to postpone the hearing of this application that the respondent is continuing with the high court action to recover the deferred capital from the complainants.

100. Consequently, the Tribunal is satisfied that the respondent has contravened section 54 (1) because despite its deregistration, it has engaged in an activity that requires registration as a credit provider and continues to do so.

Restrictions on certain practices concerning credit agreements

101. Section 126A (3) provides that a person who supplies a service to improve a consumer’s credit record or cause a credit bureau to remove credit information regarding that consumer, may not charge for the credit repair service until that service has been fully performed; and must provide the consumer with a disclosure statement in the prescribed manner and form.

102. The applicant alleges that the respondent contravened section 126A (3) because the respondent charged fees to repair the consumers’

credit records (the credit repair fees) when concluding the mortgage loan agreements, which was long before it rendered the service. The respondent also failed to provide consumers with the required disclosure statements.

103. The Tribunal is satisfied that the respondent charged the credit repair fees when it concluded the mortgage loan agreements with the consumers. The respondent had not rendered the service when the mortgage loan agreements were concluded. Moreover, there was no evidence to show that the respondent had provided consumers with the required disclosure statements.

104. Consequently, the Tribunal is satisfied that the respondent contravened section 126A (3) by charging the credit repair fees before it had rendered the service.

CONCLUSION

105. Consequently, the Tribunal is satisfied that the respondent engaged in reckless lending and other prohibited conduct by contravening the sections referred to in the preceding paragraphs and has therefore repeatedly contravened the Act.

106. The Tribunal proceeds to consider an appropriate order.

CONSIDERATION OF AN APPROPRIATE ORDER

Applicant’s requested orders

107. The applicant requests the Tribunal to make an order in terms of section 150 (a) and (i) as follows:

107.1. declaring that the respondent has entered into reckless credit agreements with consumers in terms of section 80 (1) (b) (i) and (ii);

107.2. declaring that the respondent has contravened section 102 (1) by charging fees other than what is permitted in section 102 (1)(a) to (f);

107.3. declaring that the respondent contravened section 126A (3) because the respondent charged fees to repair the consumers’ credit records before it rendered the service and failed to provide the consumers with a disclosure statement in the prescribed manner and form;

107.4. declaring that the respondent has contravened section 106 (5)(b) (i), (ii) and (c) and regulation 31 (1) and (2) because the respondent has failed to disclose the cost of credit to the consumer in the prescribed form and manner;

107.5. directing that the respondent at its own cost submit a report compiled by an auditor that verifies and confirms the amounts owed to ‘consumers’;

107.6. directing that the respondent, based on the auditor’s report, to refund ‘consumers’ for overcharging fees to ‘consumers’;

107.7. declaring that the respondent has contravened section 54 by engaging in an activity that requires registration as a credit provider in terms of the Act; and

107.8. interdicting the respondent from engaging in the activity of a registered credit provider.

Complainants’ requested orders

108. In addition, the complainants request the Tribunal to make an order in terms of section 150 (i) as

follows:

108.1. declaring the extension of credit under the loan agreement as reckless in respect of section 83 (2), as read with section 80 (1) (a) (i), alternatively section 80 (1) (b) (i);

108.2. setting aside the complainants’ obligation in terms of the loan agreement;

108.3. directing the respondent to take all necessary steps within 30 days of the granting of this order, to cancel the mortgage bond B694/2014 that is registered over Erf 19721 Paarl in the City of Cape Town, Division Cape, Western Cape Province;

108.4. directing that should the respondent fail to cancel mortgage bond B694/2014 within 30 days, the sheriff of the high court for the relevant district of the Western Cape be directed and authorised to immediately take all necessary steps and sign all documents to attend to the cancellation of mortgage bond B694/2014; and

108.5. ordering the respondent to pay the costs occasioned by either one of paragraphs 108.3 or 108.4.

109. The Tribunal proceeds to consider each request in turn.

Reckless credit

110. The Tribunal has found that the respondent has engaged in reckless credit and is satisfied that it is appropriate to declare that the respondent has contravened sections 80 (1) (a) and 80 (1) (b) (i).

Other prohibited conduct

111. The Tribunal has found that the respondent has engaged in other prohibited conduct and is satisfied that it is appropriate to declare

that the respondent has contravened the relevant sections.

Auditor’s report

112. The Tribunal is aware that the investigation that led to this application comprises a small sample of

the respondent’s consumer files. The Tribunal has found that the respondent has charged a range of unlawful fees. The evidence placed before the Tribunal means that it is not possible for the Tribunal to establish the extent of the respondent’s practice. In the Tribunal’s view, it is therefore appropriate to appoint an independent auditor to assess the situation and establish the true facts.

Respondent’s continued activities as a credit provider

113. Although the respondent has deregistered as a credit provider, the Tribunal has found that the respondent continues to engage in an activity that requires it to be registered as a credit provider. The Tribunal is therefore satisfied that the respondent should be interdicted from engaging in the activity of a registered credit provider.

Setting aside the complainants’ obligations in terms of the loan agreement and cancelling the mortgage bond

114. The Tribunal has found that the respondent extended credit recklessly in terms of the loan agreement. The complainants request the Tribunal to make an order in terms of section 150 (i) to set aside the complainants’ obligations in terms of the loan agreement and that the respondent cancel mortgage bond B694/2014 failing which the sheriff of the high court be authorised to do so.

115. It is appropriate to consider the Tribunal’s powers to grant such relief. Section 150 deals with the powers of the Tribunal. Section 150 (i) empowers the Tribunal, in addition to its other powers in that section, to make any other appropriate order required to give effect to a right as contemplated in the Act.

116. Section 83 deals with declarations of reckless credit agreements. Section 83 (1) empowers any court or Tribunal to declare that a credit agreement is reckless. Section 83 (2) (a) provides further that if in any court or Tribunal proceedings in which a credit agreement is being considered, the court or Tribunal declares that the credit agreement is reckless in terms of section 80 (1) (a) or 80 (1) (b) (i), then the court or Tribunal may make an order that sets aside all or part of the consumer’s rights and obligations under that credit agreement that is just and reasonable in the circumstances.

117. Section 152 deals with the status and enforcement of orders. Section 152 (1) provides that any decision, judgement or order of the Tribunal may be served, executed and enforced as if it were an order of the high court.

118. The Tribunal is a creature of statute. Although the Tribunal’s powers under section 150 (i) are wide, they must nevertheless be interpreted restrictively. Credit providers have an obligation to extend credit responsibly and not recklessly. The Tribunal has declared the loan agreements as reckless in terms of section 83 (1). The Tribunal is therefore empowered by section 83 (2) (a) to set aside the complainants’ obligations under the loan agreement.[30]

119. The Tribunal has set out the reasons earlier in this judgement why the loan agreement was reckless. Moreover, the complainants are elderly and the property the respondent seeks to have declared executable is their only and thus primary home. For those reasons, the Tribunal is satisfied that it is just and reasonable to set all the complainants’ obligations under the loan agreement aside and cancel mortgage bond B694/2014, which the respondent holds as security for the credit that the Tribunal has found to be reckless.

120. Since section 152 (1) specifically ranks and assimilates an order of the Tribunal to that of the high court, the Tribunal may authorise and direct a sheriff of the high court to execute an order should a party not comply with that order.

121. The complainants’ request for such an order should not come as a surprise to the respondent. The complainants have filed a special plea in the high court action that the complainants’ complaint of reckless lending, which arose from the loan agreement, is pending before the Tribunal. By contrast, the respondent has not filed a special plea of Lis pendens in these proceedings and Advocate Karolia requested to be excused after the Tribunal had handed down an ex tempore ruling rejecting the respondent’s application that the hearing of this application be postponed.

122. Consequently, the Tribunal is satisfied that it is entitled to grant an order to set aside the complainants’ obligations in terms of the loan agreement and cancel mortgage bond B694/2014.

ORDER

123. Accordingly, the Tribunal makes the following order:

123.1. the respondent has concluded loan agreements that are reckless with the consumers as provided for in section 80 (1) (a) and 80 (1) (b) (i) of the Act;

123.2. the respondent has contravened section 100 (1) (a) read together with section 102 (1) by charging fees other than what is permitted in section 102 (1) (a) to (f) of the Act;

123.3. the respondent has contravened section 106 (5) (b) (i), (ii) and (c) by failing to disclose the cost of insurance and the amount of the fees, commissions and remuneration or benefits the credit provider received for the insurance;

123.4. the respondent has contravened regulation 31 (1) (a) and (2) (b) and (c) because the loan agreements did not disclose to the consumers the cost of credit in the prescribed form and manner;

123.5. the respondent has contravened section 126A (3) by charging credit repair fees before it rendered the service;

123.6. the respondent is:

123.6.1. within 30 days the date of this judgement to appoint an independent auditor at its own cost to determine and compile a list of all the consumers the respondent has overcharged fees, amounts or charges;

123.6.2. within 30 days of the independent auditor having compiled the list to refund the amounts the respondent received in the form of fees or charges to which it was not entitled or exceeded the prescribed maximum amounts stipulated in the Act;

123.6.3. within 120 days of the Tribunal’s order to provide a written report to the applicant that details the consumers’ identities and the refunds made to the consumers; and

123.6.4. pay any funds intended for consumers whom the respondent cannot trace into a trust account held by the independent auditor;

123.7. the respondent has contravened section 54 of the Act by engaging in an activity that requires the respondent to be registered as a credit provider in terms of the Act and is interdicted from engaging in an activity of a registered credit provider;

123.8. the loan agreement the respondent concluded with the complainants is declared as reckless in terms of section 80 (1) (a) and 80 (1) (b) (i) of the Act;

123.9. the complainants’ obligations in terms of the loan agreement are set aside;

123.10. the respondent is directed to take all necessary steps within 30 days of the granting of this order, to cancel the first covering mortgage bond B694/2014 registered over Erf 19721 Paarl in the City of Cape Town, Division Cape, Western Cape Province;

123.11. should the respondent fail to cancel the mortgage bond B694/2014 within 30 days of the granting of this order, the sheriff of the high court for the relevant district of the Western Cape is directed and authorised to immediately take all necessary steps and sign all documents to attend to the cancellation of mortgage bond B694/2014;

123.12. the respondent is to pay the costs occasioned by either one of paragraphs 123.10 or 123.11; and

123.13. There is no order as to costs.

Tribunal member

With members Simpson and Manamela concurring.

NCR.MortSecuredFinance.84832.17.140(1)

[1] National Credit Regulations, 2006 published under Government Notice R489 in Government Gazette 28864 of 31 May 2006.

[2] Competition Commission of South Africa v Senwes Ltd (CCT 61/11) [2012] ZACC 6; 2012 (7) BCLR 667 (CC) (12 April 2012), paragraphs 49 and 50.

[3] Regulations for Matters Relating to the Functions of the Tribunal and Rules for the Conduct of Matters before the National Consumer Tribunal published in Government Notice 789 of 28 August 2007. See also Yara South Africa (Pty) Ltd v The Competition Commission and Others in re Competition Commission v Sasol Chemical Industries Ltd and Others; Omnia Fertilisers v Competition Commission [2011] ZACAC 9; [2011] ZACAC 2 (14 March 2011), paragraph 39.

[4] Founding Affidavit para 7, page 7. See also Annexure "NM2" pages 22 to 66.

[5] Founding Affidavit, para 8, page 8.

[6] Founding Affidavit, para 9, page 8.

[7] Founding Affidavit, para 10, page 9.

[8] Founding Affidavit, para 11, page 9.

[9] Founding Affidavit, para 14, page 10.

[10] Annexure "NM5", page 227.

[11] Annexure "NM6", page 240.

[12] Annexure "NM6", page 235.

[13] Annexure "NM6", pages 239 and 240.

[14] Annexure "NM6", page 233; see also Annexures B1 to B5 of the investigation report.

[15] Annexure "NM7", page 241 under case number 1803/2016.

[16] Annexure "GC7", page 467

[17] Section 55 (1) (b) empowers the National Credit Regulator to issue a compliance notice to a person or registrant whom the Regulator believes has failed to comply with a provision of the Act or conditions of registration. See Annexure "NM8", page 251.

[18] NCT/88262/2017/56(1).

[19] Answering Affidavit, page 366.

[20] NCT/84832/2017/140 (1)R12.

[21] Complaints’ Affidavit, pages 425 to 507.

[22] Edcon Holdings Ltd v National Consumer Tribunal and Another 2018 (5) 609 (GP) at paragraph 4.

[23] See also National Credit Regulator v Standard Bank of South Africa Limited (NCT/29041/2015/140(1) NCA) (2017) ZANCT 118 at paragraph 78.

[24] Standard Bank, Ibid at paragraph 78.2 and National Credit Regulator v Mobimoola Financial Services (Pty) Ltd NCT/18256/2014/140 at paragraph 53.

[25] Regulation 23A (10) read with regulation 23A (12)

[26] Section 102 (1) (a)-(f) of the Act.

[27] Annexure "NM6", paragraph 3.1.2, page 237

[28] Annexure "NM6", paragraph 3.1.3, page 238.

[29] Annexure "NM6", paragraph 3.1.3, pages 238 and 239.

[30] Absa Bank Limited v De Beer and Others 2016 (3) SA 432 (GP) paragraph 64.