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NCA Q's and A's: Credit providers - I

17 May 2007



Questions

Q 1. If a private person signs surety for a bond where the bond is provided to a juristic person, does the bond have to comply with the NCA regulations or is it excluded? (In which connection a bond being provided to a private person and a juristic person as co-principal debtors would presumably have to comply with the NCA insofar as it affects the private person?)

Q 2. Is an acknowledgement of debt an incidental credit agreement if there is interest that is charged in terms of the acknowledgement of debt (normally as you know the statutory rate of interest is 15.5% which is automatically added on in most cases)?

Q 3. Is a bond entered into by two private persons a "partnership" and if it is then would it be excluded from the ambit of the NCA? Put differently how exactly do you prove the existence or non-existence of a partnership when a partnership could be (theoretically) created by a verbal agreement?

Q 4. What is the NCA?

Q 5. What is the purpose of the NCA?

Q 6. Does the NCA affect all agreements?

Q 7. Is a person who lends more than R500 000 required to register as a Credit Provider?

Q 8. What happens if a person lends more than R500 000 in a loan but isn't registered as a credit provider?

Q 9. How can the Credit Provider rectify the problem if he is not registered when granting a loan?

Q 10. If the loan is granted two years ago and the duration is a ten-year term, must the Credit provider still register?

Q 11. Are Micro lenders exempt if they have 99 agreements which in total amount to less than R500 000?

Q 12. If an attorney has a debtor's book and he is not paid back on time must he register as a Credit Provider?

Q 13. If I have a number of incidental credit agreements where the debtor has agreed to pay these accounts off over time (for instance if I am a doctor and have bad debtors), would I have to register as a Credit Provider?

Q 14. What if the bond has been approved and the client is about to sign his bond documents and he says to the Attorney, "I cannot afford to pay this bond."? Should the attorney advise the bank of this?

Q 15. How important is it for the Mortgagor to understand the contents of the credit agreement in his own language (for example in Zulu)?

Q 16. This question relates to Future Choice Bonds or Future Drawdown Bonds. In the case of these bonds it might be five years before the client gets a further advance on the loan. Is the conveyancer obliged to re-assess the risk of the loan as they are now taking a new amount? They may have been granted an initial amount, but does the client have to be re-assessed on the new amount?

Q 17. Private bonds - what are the implications if the interest is capitalised and paid off all at once so it's free of income tax?

Q 18. Is a loan from father to daughter in the form of an Acknowledgement of Debt exempt from the NCA?

Q 19. While a lease of immovable property is exempt what happens if the lessee is in arrears and interest is levied? Is this an incidental credit agreement?

Q 20. If the act is not applicable to a credit agreement in terms of Section 4 (1)(a), must the credit provider still register in terms Section 40? Would the answer be the same in the case of exclusions in terms of Section 4(1)(b) or 4(1)(d)?

The following three questions were put to and answered by the National Credit Regulator - 31 May

Q 1. If a private person signs surety for a bond where the bond is provided to a juristic person, does the bond have to comply with the NCA regulations or is it excluded? (In which connection a bond being provided to a private person and a juristic person as co-principal debtors would presumably have to comply with the NCA insofar as it affects the private person?)

A. The answer is no because in terms of section 8(5) of the NCA, the transaction in question will only be a credit guarantee to which the NCA is applicable if it is given in respect of an obligation of another consumer in terms of a credit facility or credit transaction to which the NCA applies.

Q 2. Is an acknowledgement of debt an incidental credit agreement if there is interest that is charged in terms of the acknowledgement of debt (normally as you know the statutory rate of interest is 15.5% which is automatically added on in most cases)?

A. It will depend on the contents of the acknowledgement of debt: If the wording of the acknowledgement of debt constitutes an account "tendered for goods or services that have been provided to the consumer, or goods or services that are to be provided to a consumer over a period of time and either or both of the following conditions apply: (a) a fee, charge or interest became payable when payment of an amount charged in terms of that account was not made on or before a determined period or date; or (b) two prices were quoted for settlement of the account, the lower price being applicable if the account is paid on or before a determined date, and the higher price being applicable due to the account not having been paid by that date", the acknowledgement will be an incidental credit agreement. Normally, however (and depending on the wording of the document), an acknowledgement of debt will be a credit transaction, as envisaged by section 8(4)(f) of the NCA.

Q 3. Is a bond entered into by two private persons a "partnership" and if it is then would it be excluded from the ambit of the NCA? Put differently how exactly do you prove the existence or non-existence of a partnership when a partnership could be (theoretically) created by a verbal agreement?

A. The relationship between two or more persons in respect of the bond in question will depend on the facts of the matter and may or may not be a partnership. If the relationship is a partnership, the partnership will be a juristic person in terms of the NCA resulting in the NCA not being applicable at all (in so far as the partnership is a consumer) where the asset value or annual turnover of the partnership exceeds R1m (see section 4(1)(a) of the NCA) or, where the asset value or annual turnover is less than R1m, the NCA will only be of limited application to the partnership (in so far as the partnership is a consumer): In terms of section 6 of the NCA Chapter 4, Parts C and D, Chapter 5, Part A - section 89(b)-, Chapter 5, Part A - section 90(2)(o)-, and Chapter 5, Part C, will not apply.



Q 4. What is the NCA? - 26 April

A. The National Credit Act 34 of 2005 ("NCA") was published in 2006 and progressively implemented with three different deadlines - 01 June 2006, 01 September 2006 and 01 June 2007. The most important of these is the final deadline in June 2007 after which the entire Act will be in force.
The NCA regulates credit (see "What is the purpose of the NCA" below) in South Africa and creates the regulatory bodies of the National Credit Regulator ("NCR") and National Credit Tribunal ("NCT") amongst others.

The NCA replaces the Usury Act No 73 of 1980, the Credit Agreements Act No 75 of 1980 and the Integration of Usury Laws Act No 57 of 1996 and is a very progressive and comprehensive piece of legislation which has been likened to the South African Constitution in terms of length and complexity.



Q 5. What is the purpose of the NCA? - 26 April

A. The purpose of the NCA is contained in section 3 to the NCA, but a shortened version of the purpose would be:
  • To protect consumers from unscrupulous credit providers;
  • To regulate credit bureaux and ensure that the correct information is disclosed appropriately;
  • To regulate the way in which debt is recovered.
As a general philosophy, the NCA is focused on natural people and is consumer-centric and it is hoped that this legislation will be able to curb the abuse of consumers that has been occurring in South Africa.



Q 6. Does the NCA affect all agreements? - 26 April

A. No. The NCA specifically excludes agreements that are not credit agreements. Section 8 defines credit agreements as being those agreements where goods and/or services are provided and the consumer's obligation to pay is deferred or is repaid in instalments AND there is a fee that is levied (typically, interest) for the ability to repay later or in instalments.

The NCA also excludes all leases of immovable property (note that movable property is included), credit agreements between people who are not contracting at arm's length (such as a loan by a son to his mother), credit agreements where consumer is a Juristic person whose asset value or turnover is over a million rand and credit agreements where the consumer is the South African Reserve Bank, the state or an organ of the state (note that when the state/Reserve Bank is the lender, the NCA is not excluded).



Q 7. Is a person who lends more than R500 000 required to register as a Credit Provider? - 7 May

A. Yes. Section 40(1)(a) of the NCA requires a person/entity to register as a credit provider if the person/entity has 100 or more credit agreements (loans) or (section 40(1)(b)) the total value of all the loans exceeds R500 000.



Q 8. What happens if a person lends more than R500 000 in a loan but isn't registered as a credit provider? - 7 May

A. Section 89 of the NCA and section 40(4) of the NCA make it completely clear that a credit agreement (loan) entered into by a credit provider who should have been registered with the National Credit Regulator is void. The consequences of this agreement being void are that a court MUST order that:

a) the credit agreement (loan) is void;
b) all instalments (with interest) must be repaid to the consumer (mortgagor); and
c) all the rights that the credit provider had to recover the loan are either cancelled, not cancelled or forfeited to the State.

There was disagreement as to whether the court has the discretion to not cancel the purported rights due to the credit provider in the event that a consumer was unjustly enriched but the National Credit Regulator has indicated that the above interpretation of s89(5) is correct so that the purported right to recover the money is either cancelled or forfeit to the state.



Q 9. How can the Credit Provider rectify the problem if he is not registered when granting a loan? - 17 May

A. If the Credit Provider is required to be registered in terms of s40 of the NCA when the loan is entered into and is not registered as a Credit Provider with the National Credit Regulator then the loan is unlawful and void (not voidable!). However there is an exception to this rule as contained in s89(4)(a), which allows that the agreement will not be unlawful if the Credit Provider applies to be a registered Credit Provider within 30 (presumably calendar) days after entering into the loan agreement.



Q 10. If the loan is granted two years ago and the duration is a ten-year term, must the Credit provider still register? - 17 May

A. Yes, provided the total amount of the loan exceeds R500 000. The duty to register as a Credit Provider in terms of this example would have arisen 40 working days after the implementation date of s40 which was 01 June 2006 (in terms of s2 of Schedule 3 of the NCA). Thus in this example the Credit Provider needed to apply to be a registered Credit Provider by 27th July 2006.



Q 11. Are Micro lenders exempt if they have 99 agreements which in total amount to less than R500 000? - 17 May

A. Yes and no. Yes they are exempt from registering as Credit Providers. No they aren't exempt from complying with the many provisions of the NCA as they are still Credit Providers in terms of the NCA - they simply don't need to register as Credit Providers.



Q 12. If an attorney has a debtor's book and he is not paid back on time must he register as a Credit Provider? - 17 May

No, as it is likely that the debtor's book contains incidental credit agreements which are excluded from s40 which deals with the requirement to register as a Credit Provider. As a general rule of thumb, if the intention of the person was not to levy interest or an additional charge, it will not be seen as a incidental credit agreement. An incidental credit agreement comes into being 20 business days after the consumer was due to pay provided that there is interest being charged if the consumer doesn't pay. For this reason many attorneys have indicated that they would prefer not to charge interest as not charging interest would remove these agreements from the ambit of the NCA and the associated debt collection procedures that must be followed to collect a debt arising from a credit agreement.



Q 13. If I have a number of incidental credit agreements where the debtor has agreed to pay these accounts off over time (for instance if I am a doctor and have bad debtors), would I have to register as a Credit Provider? - 17 May

A. No. The debt still arises from an incidental credit agreement and thus you are exempt from having to register as a Credit Provider (see section 40(1)(b) of the NCA). This does not, however, mean that you do not have to comply with all the sections of the NCA that relate to incidental credit agreements - it simply means you don't have to register as a Credit Provider.



Q 14. What if the bond has been approved and the client is about to sign his bond documents and he says to the Attorney, "I cannot afford to pay this bond."? Should the attorney advise the bank of this? - 17 May

A. Yes. The principle is that your client is the bank and you have a fiduciary duty towards it to inform it of information which could affect its decision to grant the loan or its position vis a vis the loan. The bank will probably cancel the loan as it would be providing credit recklessly if it went ahead with the loan.



Q 15. How important is it for the Mortgagor to understand the contents of the credit agreement in his own language (for example in Zulu)? - 17 May

A. S80(1)(b)(i) of the NCA indicates that a credit agreement would be entered into recklessly if the credit provider knew that the consumer didn't generally understand or appreciate the risks, costs and obligations under the credit agreement. Thus a bond entered into by a Zulu-speaking mortgagor may be written in another language (such as English) but must be explained to the person in Zulu, failing which the loan is very likely to be deemed to be reckless by a court and the loan agreement could be suspended for an appropriate period.



Q 16. This question relates to Future Choice Bonds or Future Drawdown Bonds. In the case of these bonds it might be five years before the client gets a further advance on the loan. Is the conveyancer obliged to re-assess the risk of the loan as they are now taking a new amount? They may have been granted an initial amount, but does the client have to be re-assessed on the new amount? - 17 May

A. No, because the responsibility to do the financial assessment of the consumer rests on the Credit Provider and not on the conveyancer. If the loan agreement was entered into before 01 June 2007 there is no requirement on a credit provider to assess whether the loan was granted recklessly or not. Thus if the bond is of such a nature that the bond can be increased at the mortgagor's instance without registering a new bond or making an amendment to the bond documents then no financial assessment need be made of the mortgagor. However if there is a significant amendment (i.e. increase in loan amount or interest rate etc.) to the bond document or if a new loan is registered then a financial assessment of the applicant/consumer/mortgagor needs to be done by the Credit Provider (i.e. the bank).



Q 17. Private bonds - what are the implications if the interest is capitalised and paid off all at once so it's free of income tax? -17 May
A. The fact that any interest is levied on the debt puts the agreement squarely into the realm of being a credit agreement and thus the Credit Provider (in this case the private person lending the money) will have to comply with the provisions of the NCA and in all likelihood will have to register as a Credit Provider (see the question of "Is a person who lends more than R500 000 required to register as a Credit Provider?").



Q 18. Is a loan from father to daughter in the form of an Acknowledgement of Debt exempt from the NCA? - 17 May

A. In terms of s4 credit agreements where the parties are not dealing at arms length - for example where there is a familial relationship between them such as father and daughter - are excluded from the ambit of the NCA.



Q 19. While a lease of immovable property is exempt what happens if the lessee is in arrears and interest is levied? Is this an incidental credit agreement? - 17 May

A. Since a lease of immovable property is excluded from the ambit of the NCA, any attempt to collect any arrear rental connected to a lease of immovable property would be outside of the ambit of the NCA.



Q 20. If the act is not applicable to a credit agreement in terms of Section 4 (1)(a), must the credit provider still register in terms Section 40? Would the answer be the same in the case of exclusions in terms of Section 4(1)(b) or 4(1)(d)? - 17 May

A. No, the credit provider does not need to register if all his credit agreements are excluded from the ambit of the NCA in terms of s4(a)-(d). Only those credit agreements that are included in the ambit of the NCA should be counted when evaluating whether a credit provider needs to register or not.



NCA Q's and A's: Credit providers - II

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