Reckless Lending – from Credit Health
In this edition of our Credit Health newsletter our intrepid attorneys provide insight on reckless lending and what it means to consumers as well as to Creditors.
Credit Providers are always looking at obtaining new clients via email, phone calls and website advertising. In some instances the sales person is more focused on their sales target rather than the consumer’s actual financial circumstances.
This becomes a dangerous position for both the consumer and the Credit Provider as it drives incorrect behaviour. For the consumer, access to credit is made easier as they are being given the cash up front and they are able to spend it in any way they deem fit. This cash, however, usually has a long payment term and has a high interest rate attached.
The situation is dangerous for the consumer because they may spend the money and may not be able to afford the repayments to the creditor in the long term.
For the Credit Provider the situation is dangerous because if it can be proven that they did not take reasonable steps to establish the credit worthiness of the consumer, “an application may be made to Court and the Court may declare the credit agreement reckless and set aside all or part of the consumer’s obligations under the agreement or alternatively suspend the force and effect of the agreement” says Natasha La Vita of Berndt and La Vita Incorporated.
This is a mouthful but what does it really mean to Consumers?
Audrey Berndt of Berndt and La Vita Inc. has indicated that when assessing your credit worthiness, a Credit Provider should have the following considerations top of mind:
1. Did the consumer have a general understanding and appreciation of the risks and costs of the proposed credit, as well as an understanding of their rights and obligations?
2. When doing assessments, did the Creditors perform an affordability assessment to verify that the lender can afford the loan or credit that they are applying for?
3. Would entering into the agreement leave the consumer over indebted?
4. If the consumer has a commercial purpose for obtaining credit then the Credit Provider must have a reasonable basis to believe that the purpose will prove successful.
If a Credit Provider did not take the necessary steps and efforts to correctly assess the above, then the Consumer may approach a court to have the agreement declared reckless and void. In other words the credit agreement is no longer enforceable.
Some tips: Berndt and La Vita Inc. have indicated that Consumers should consider the following when establishing if their credit agreements are reckless:
• Did the Creditor conduct a financial assessment of your obligations?
• Did the Creditor obtain a copy of your credit report?
• How was the credit sold to you? Special emphasis should be placed on telephonic sales.
• Could you at the time of obtaining credit afford the credit repayments?
• Were you under administration or debt review?
In conclusion, if a bank or other Credit Provider does not check on a Consumer’s credit history and carry out a proper financial assessment to determine how much credit a consumer can afford prior to granting credit, and in the event that the Consumer later defaults, the agreement can be declared reckless and the Credit Provider forced to write off part of or all of the amount advanced.
For any queries on the topic or any other legal matters, please feel free to contact Berndt and La Vita Attorneys at firstname.lastname@example.org for expert advice.
Also note that you can track if any unauthorised checks were done on your credit report by obtaining a credit report and reviewing the enquiries done on your profile. As Credit Health has the most comprehensive information in our 4 in 1 report, this would be a good place to start: www.credithealth.co.za.