Who needs an amnesty?

by Illana Melzer, Eighty20

Published: November 18th, 2013

Recent documents and proposals on the credit amnesty have caused a predictable and not unjustified flurry of concern from lenders and investors. Indeed, tampering with data used by lenders to grant credit could have all sorts of unintended consequences, not least of which might be the end of the line for customers with insatiable appetites for credit, and the lenders who are only too happy to oblige.

The documentation supporting the amnesty proposals highlights the impact of negative data held by credit bureaus on access to credit, and raises concerns about recessions and job losses on adverse indicators contained in the data. This is potentially significant. Data from the Labour Force Survey indicates there are over 1.4 million workers who lost jobs over the past five years who remain unemployed. We cannot establish how many job losers have been re-employed and should arguably regain their place among the credit worthy.

The analysis underlying the amnesty proposals highlights the importance of access to credit. It is a critical enabler of much of the consumption expenditure that drives our economy. It is also critical to foster the growth of small and micro enterprises; although access to credit alone will do nothing if other serious barriers to growth remain in place.

Only in passing does the documentation mention the most critical category of consumer credit; the mortgage. While there are problems of access to credit across other classes of consumer credit, they would be better characterised as a problem of too much access, rather than too little. In contrast, in the case of mortgages the numbers speak volumes. In 2008, admittedly coming at the end of what could be described as a bit of a mortgage bubble in South Africa, mortgages accounted for roughly half of all new consumer credit granted in South Africa. In 2012, this had declined to a quarter. Over the same period unsecured credit increased from 10% of consumer credit granted to 24%. While growth in unsecured credit extension has been brisk across the market (with the exception of very low income segments) it has been particularly fast in higher income segments of the market which in the past would have had access to mortgages but no longer do. That this has occurred at the same time as the growth in black middle class is tragic.

Developers, estate agents and mortgage originators, particularly those who operate in the so-called affordable housing market are nothing short of exasperated by banks’ strict lending criteria and limited granting of mortgages. Aside from challenges associated with affordability (described by industry participants years ago as a case of too much access to unsecured credit causing too little access to mortgages) potential buyers must have perfect records to get a mortgage. And there are very few of those buyers around. Arguably it is in the market for mortgages where bureau data has the most profound impact on access.

But the story is not so simple. Even if that data were to be removed or cleaned, access problems would still remain as the problems with mortgages do not reflect demand side issues alone. There are serious constraints on supply. Indeed, credit granting criteria are used to ration credit – to ensure that the best risks are selected for the little funding that is available. The key problem is that the availability of funding is severely restricted in the first place. Why this is the case should be the primary focus of investigation.

That said there are other issues with bureau data; this is acknowledged by the Credit Providers Association and is the focus of much of their efforts.

But perhaps more problematic than the data retained by bureaus are the underlying processes that generate the data. I refer in particular to the data on judgements, comprised in the main by what are known as garnishee orders.

In 2012 the forensic audit division of the law firm ENSafrica investigated the garnishee orders at a mining company employing 45 000 workers. Thirteen thousand workers had garnishee orders. On investigation, a staggering 59% of these orders had not been authenticated; and 39% were summarily cancelled as soon as they were investigated. According to Peter Allwright, who led the investigation when he was still at ENSafrica, when the law firm started making enquiries it was found that those orders had in fact been paid previously and the poor employees had been repaying that debt several times over.

This is nothing short of disgraceful.

There is no data to determine whether this is but one isolated incident, but on the balance of probabilities that would be highly unlikely. Indeed given the extent of irregularities uncovered by this investigation the burden of proof should be on debt collectors to show that this is an exception rather than on the regulator to prove that it is not.

Beyond this, the investigation clearly raises serious concerns about the data on judgements, that on the face of it would justify their complete removal; not so much on the grounds that they limit access to credit but more so because they are unjust. Indeed, it makes you wonder who the amnesty should be for.

More generally, a reflection on the content and duration of past debates suggests that we probably need to do things differently in credit markets.  Debates about things that might or might not happen, such as this debate about the amnesty, often tend to be a little unproductive and difficult to resolve.  Of course where this relates to regulations the prolonged uncertainty can be very unsettling to markets and investors, and tends to amplify any tendencies to short termism in profit-driven entities. In the world of consumer credit the discussions on the amnesty add to an already uncomfortable environment, with uncertain changes to credit life and affordability guidelines that have been imminent for years now.

Arguably in resolving these issues, there is too much focus on analysing the past and too little on experimenting to predict the future. Indeed it is odd that lenders do not advocate for ‘champion-challenge’ methodologies in assessing proposed regulations; if these are so useful in assessing lending criteria surely they would help to resolve debates about the impact of removing data.

Should you require assistance in improving your credit score and proving affordability to own your own home, feel free to contact Juanita at Oosthuizen and Co Meyer de Waal on 021 461 0065 or admin@budgetfitness.co.za.