Reckless credit

Reckless credit is dealt with in the National Credit Act from section 80, and forms part of Chapter 4 Part D.

It should be noted that in terms of Section 78(1), Chapter 4 Part D (which includes the reckless credit provisions) does not apply to a credit agreement in respect of which the consumer is a juristic person. Therefore the provisions in respect of reckless credit must only be considered when the consumer is a natural person.

Definition of reckless credit

A credit agreement is reckless if, at the time that the agreement was made, or when an existing credit facility is increased in a manner other than described in section 119(4):

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

the credit provider, having conducted an assessment as required by section 81(2), entered into the credit agreement with the consumer despite the fact that the preponderance of information available to the credit provider indicated that-

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

(ii) entering into that credit agreement would make the consumer overindebted.

Exclusions from reckless credit

The provisions for reckless credit do not apply when the consumer is a juristic person.

The provisions for reckless credit do not apply where the credit is in respect of:

(a) a school loan or a student loan;

(b) an emergency loan;

(c) a public interest credit agreement;

(d) a pawn transaction;

(e) an incidental credit agreement; or

(f) a temporary increase in the credit limit under a credit facility,

provided that any credit extended in terms of paragraph (a) to (c) is reported to the National Credit Register in the prescribed manner and form, and further provided that in respect of any credit extended in terms of paragraph (b), reasonable proof of the existence of the emergency as defined in section 1 is obtained and retained by the credit provider.

Responsibilities of consumer

When applying 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 as part of the assessment.

If the credit provider establishes that the consumer failed to fully and truthfully answer any requests for information made by the credit provider as part of the assessment and a court or Tribunal determines this materially affected the ability of the credit provider to make a proper assessment, the credit may not be deemed reckless credit.

Responsibilities of credit provider

The credit provider must conduct an assessment of any natural person making application for a credit agreement. This assessment is carried out in accordance with section 81(2).

A credit provider must not enter into a credit agreement without first taking reasonable steps to assess the proposed consumer's:

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;

debt re-payment history as a consumer under credit agreements; (this may effectively require obtaining a report from a credit bureau)

existing financial means, prospects and obligations.

If the consumer is making application to enter into a credit agreement for any commercial purpose, the credit provider must first take reasonable steps to establish whether there is a reasonable basis to conclude the commercial purpose may prove successful.

Consequences of reckless credit

The consequences of reckless credit are set out in section 83 and section 84.

In brief:

A court may suspend the credit agreement during which time:

the consumer is not required to make any payment required under the agreement

no interest, fee or other charge under the agreement may be charged to the consumer

the credit provider's rights under the agreement, or under any law in respect of that agreement, are unenforceable, despite any law to the contrary.

The court must also establish if the consumer is over-indebted.

A summary

The National Credit Act deals very clearly with procedural issues in respect of the granting of credit agreements and reckless credit. It provides little guidance in respect of determining affordability on the part of the consumer. Whilst components of indebtedness to be measured are prescribed, the credit provider is in most instances allowed to apply its own thresholds to assess the advisability of providing credit to the consumer.

If the credit provider has followed prescribed procedures and applies a clear, consistent policy as to what is deemed affordable credit, it should be difficult for a court to declare a credit agreement reckless.

Regardless of whether a credit agreement is deemed reckless credit or not, the debt may be re-arranged if the consumer is determined by a court to be over-indebted.