Changes to credit rules

There are several changes to credit rules and regulations, which are aimed at ensuring that consumers do not end up indebted, and to prevent credit providers from selling consumers insurance and credit that they do not need or cannot benefit from.
 
However, this may make it more difficult for consumers to access credit as the lending criteria will be much stricter.
 
At the recent Barclays Consumer Conference, Rob Davies, Minister of Trade and Industry, said: “We are concerned about the high levels of debt. Yes, it is very important that people have access to credit, but there is a real prospect of an increase in indebtedness.”
 
1.       Credit life insurance
 
There have been a number of cases in the news lately regarding credit life insurance and the excessive charges that consumers have to pay.
 
“Section 106 of the NCA (National Credit Act) makes specific provision for credit insurance. A credit provider may require a consumer to obtain credit life insurance during the term of the loan. It is a requirement, in terms of the NCA, that the credit life insurance cover may not exceed the total consumer obligations outstanding during the life of the loan, in terms of the credit agreement,” explains KPMG.
 
It has been proposed that caps should be applied to the amount of interest that credit providers can charge on credit life insurance. While there is not currently a cap on the interest that credit providers can charge on credit life insurance, amendments to the NCA state that “The Minister (of trade and industry) may, in consultation with the Minister of Finance, prescribe the limit in respect of the cost of credit insurance that a credit provider may charge a consumer.”
 
The NCA also states that the premiums for credit life insurance should decrease monthly as a consumer pays off their debt. “Credit providers should therefore ensure that this decrease is captured and in line with the outstanding balance,” notes KPMG.
 
2.       Product add-ons for goods on hire purchase
 
In addition to the high charges on credit life insurance, such as those allegedly charged by Finbond, there are also instances where consumers have been sold insurance products that they cannot benefit from.
 
For example, a recent secret shopper experience revealed that staff at Lewis furniture stores were selling customers unnecessary insurance. For example, pensioners and self-employed people were being sold unemployment cover, which they will never be able to claim for.
 
Davies recently highlighted that new regulations will prevent credit insurers from selling inappropriate insurance cover to consumers. In addition, there will also be caps imposed on these interest rates.
 
3.       Affordability assessments
 
Affordability assessments are set to change as well. These assessments are carried out by credit providers prior to granting a person credit, in order to ensure that the person applying for credit can financially afford to pay back the loan.
 
The first step in the new affordability assessment regulations is for credit providers to “take practicable steps to assess the consumer or joint consumer's discretionary income to determine whether the consumer has the financial means and prospects to pay the proposed credit instalments,” explains the Department of Trade and Industry (DTI) National Credit Regulations including affordability assessment regulations.
 
As part of the new affordability assessment regulations, credit providers will be required to have the latest three payslips from the employer for the applicant, or the latest bank statements showing the three latest salary deposits. If you do not receive a salary from an employer, you will be required to provide either the three latest documents of proof of income, or the three latest bank statements.
 
“Where the consumer's monthly gross income shows material variance, the average gross income over the period of not less than three pay periods preceding the credit application must be utilised,” adds the regulations.
 
When applying for credit, you will also be required to fully disclose all of your financial obligations in order to allow the credit provider to conduct the affordability assessment. “The consumer must accurately disclose to the credit provider all financial obligations to enable the credit provider to conduct the affordability assessment,” notes the regulations.
 
When conducting an affordability assessment, the below table is used to determine the minimum monthly expenses that a person may have, based on their income.
 

Minimum	Maximum	Minimum monthly fixed factor	Monthly fixed factor =% of income above band minimum
R0.00	R800	R0.00	100%
R800.01	R6 250	R800	6.75%
R6 250.01	R25 000	R1 167.88	9%
R25 000.01	R50 000	R2 855.38	8.20%
R50 000.01	Unlimited	R4 905.38	6.75%

 
Source: DTI National Credit Regulations and affordability assessment regulations
 
The table has been developed to assist credit providers is determining if a person can afford to take on new debt, while still being able to cover their monthly living expenses and pay off existing debt.
 
“Statutory deductions and minimum living expenses [are] deducted to arrive at a net income, which must be allocated for payment of debt instalments; and when existing debt obligations are taken into account, the credit provider must calculate discretionary income to enable the consumer to satisfy any new debt,” explains the regulations.
 
“When conducting the affordability assessment, the credit provider must calculate the consumer's discretionary income; take into account all monthly debt repayment obligations in terms of credit agreements as reflected on the consumer's credit profile held by a registered credit bureau; and take into account maintenance obligations and other necessary expenses,” reveals the regulations.
 
For more information on the new affordability assessment regulations, click here.
 
What does this mean for consumers?
 
Stricter criteria for affordability assessments may make it harder for consumers to access credit. However, it will help prevent people who are unable to afford credit from accessing it, therefore helping to decrease the number of indebted people.
 
Furthermore, the amendments made to the NCA with regards to insurance and credit life insurance will ensure that people are not paying for insurance products that they cannot claim for. Current legislation allows credit providers to charge the “highest interest rate applicable” for credit life insurance..
 
These proposed caps will reduce the amount of interest payable by consumers. However, KPMG notes: “Should the Minister prescribe a cap, the impact of such a cap on current and future credit agreements will have to be considered.”