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Affordability Assessment - How Far Should Credit Providers Go?

A significant number of South Africans are finding it challenging to honour their debt obligations, thereby resulting in some being declared over-indebted. To curtail this state of affairs, the National Credit Act 34 of 2005 (NCA) places an obligation on credit providers to undertake affordability assessments before granting credit to consumers. The question that often arises is, how far should credit providers go when they conduct such an assessment for it to be regarded as adequate? The case of Chaity Investments CC v Schoombie provides a precise guideline in this inquiry.

What is the Purpose of the Affordability Assessment?

Section 80 of the National Credit Act 34 of 2005 (NCA) places an obligation on credit providers to conduct an affordability assessment before granting credit to credit consumers. The main purposes of such an assessment are twofold, firstly to determine whether the credit consumer will be able to repay the credit facility and secondly, to determine if the credit consumer appreciates the terms, conditions and risks of entering into such a credit agreement. The NCA is quite explicit that where the credit provider fails to undertake such an assessment or where the credit provider undertakes the assessment and indications are that the credit consumer will not be able to repay the credit but is granted the loan anyway, such a credit facility may be declared as reckless credit and the court may set aside the obligations of the debtor towards that particular credit agreement in part or in toto.

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Affordability Assessment Regulations

The decision on whether the assessment that was done was adequate and/or sufficient for the purposes of the NCA, is an inquiry of fact, as was held in the case of Chaity Investments CC v Schoombie (case number 26100/2017.

In the case immediately above the respondents had taken a mortgage loan from a bank to purchase an immovable property. However, they encountered challenges with repayment until the bank sold the property to recoup their financial interest. The respondents then convinced the subsequent buyer to sell the house to them, and part of the payment was paid using funds from a pension fund. The respondents then took out a loan from the applicant to settle the other part of the payment. As time went on, the respondents had challenges again to honour their debt obligations towards the loan granted by the applicant. The applicant then instituted legal action to have the property executed to recoup its funds.

The respondents raised a defence that the applicant had failed to conduct an adequate affordability assessment and so they alleged that the loan was granted recklessly. They submitted that they are pensioners and had defaulted on payments towards the mortgage bond which they took out from the bank initially when they purchased the house, therefore the applicant had failed to conduct a proper assessment before it granted the credit. It is not clear whether the applicant was aware of the fact that the respondents had faced challenges towards repaying the bond that was taken out of the bank prior.

The court decided that such an inquiry is one of fact and raises a dispute of facts which would require the matter to be decided after oral evidence, and therefore the matter will have to be decided through a procedure of oral testimony. It must be remembered that where there is a dispute of facts the most appropriate procedure to use is the action procedure, hence why the court decided to refer the matter for oral testimony.  

Turning to the issue at hand, where the credit provider conducted an affordability assessment that is sufficient for the purposes of the NCA, and the consumer did not answer truthfully, then such a credit agreement will not likely be decided to be reckless because the credit provider can rely on the fact that due to the misrepresentation by the consumer, it affected the outcome of the assessment. However, where the assessment was done but the inquiry was not adequate (e.g the credit provider did not request substantiating documents such as payslips, bank statements, or proof of employment from the consumer to verify the information provided in the application) then the agreement may be declared as reckless in the event that the credit consumer defaults on payments.

The NCA and Regulation 23A of the NCA provide a guideline on how the affordability assessment must be done. Further, it provides that the credit provider, to accommodate its peculiar requirements may adopt its own procedures to ensure that their assessment frameworks are firm.

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