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How to Avoid unlawful Credit Agreements

The National Credit Act 34 of 2007 (the Act) is broadly divided in four parts, namely:

  1. The application of the Act;

  2. Afford rights to credit receivers and confer obligations on credit providers;

  3. Impact on Credit Agreements; and

  4. Enforcement of the Act and credit agreements.

In this article, we will only focus on the most common portions of the Act that will be applicable in the day to day operation of a business that sells goods or provides services on credit. This is by no means an exhaustive explanation of all the provision that may be applicable to credit agreements and the reader hereof is encouraged to familiarise itself with the Act or to obtain legal advice before entering into any credit agreements. This article is for informational purposes only and does not constitute legal advice.


The Act refers to the credit receiver as “consumer”, but for convenience, we will refer to credit receiver.


APPLICATION OF THE ACT

The Act is only Applicable to specific credit transactions as defined in the Act, but the two main groups are the following:

  • Payment is deferred and any charge, fee or interest is payable; or

  • A lower price is payable if payment is made before a specified date (discount transactions).

Apart from a few exceptions, the Act applies to every credit agreement between parties, dealing at an arm’s length (independent parties) and concluded in or having an effect in South Africa.


The exceptions are:

  1. The receiver of credit is a juristic person (includes a partnership, association or other body of persons, corporate or unincorporated, or a trust if there are three or more individual trustees or the trustee is itself a juristic person), with an asset value or annual turnover in excess of R1 million, the state or an organ of the state;

  2. The receiver of credit is a juristic person and the credit is a large agreement (more about this later);

  3. The credit provider is the Reserve Bank;

  4. The credit provider is outside South Africa and the Minister of Trade and Industry, on application by the receiver of credit, exempted the agreement from the Act.

The most common exceptions are where the credit receiver is a juristic person and has an asset value or annual turnover in excess of R1 million, or concludes a large agreement.


CATEGORISATION OF CREDIT AGREEMENTS

Credit agreements are categorised as small, intermediate or large agreements, each with their own set of requirements.


  • Small Agreements are all pawn transactions (irrespective of the amount of principal debt), and other transactions (except mortgage agreements) where the principal debt is R15 000.00 or less;

  • Intermediate Agreements are all credit facilities above R15 000.00, and other transactions where the principal debt is between R15 000.00 and R250 000.00; and

  • Large Agreements are all mortgage agreements (irrespective of the amount of principal debt), and other transactions where the principal debt is in excess of R250 000.00.

Now that we have explained to which transactions the Act is applicable and how the agreements are categorised, we can set out the statutory requirements for each of the categories.


OBLIGATIONS ON CREDIT PROVIDERS

Pre-agreement disclosure

For every small agreement, the credit provider must provide the credit receiver with a pre-agreement statement and quotation in the prescribed form.


For intermediate and large agreements, the credit provider must provide the following to the credit receiver:

  1. A pre-agreement statement in the form of the proposed agreement or in another form addressing all matters required in terms of section 93; and

  2. A quotation in the prescribed form, setting out the principal debt, the proposed distribution of that amount, the interest rate and other credit costs, the total cost of the proposed agreement, and the basis of any costs that may be assessed under section 121 (3) if the consumer rescinds the contract.

Credit assessment:

Before entering into a credit agreement, the credit provider must do an assessment to establish:

  • whether the credit receiver, understands and appreciates the risks and costs of the proposed credit agreement as well as his rights and obligations;

  • the debt re-payment history of the credit receiver under credit agreements (credit check with credit bureaus); and

  • the credit receiver’s existing financial means, prospects and obligations (payslips, sources of income, etc).

This assessment is not required for pawn transactions, incidental credit agreements, temporary increase in a credit facility or any transaction where the credit receiver is a juristic person.


The credit provider may only enter into a credit agreement with the credit receiver if the credit provider did the assessment, is convinced that the credit receiver understands the implications of the agreement and that the additional credit will not cause the credit receiver to be over-indebted (not able to fulfil his obligations under credit agreements).


If the credit provider enters into a credit agreement without meeting these requirements, the Court may suspend the credit agreement or even declare it void.


Registration requirements

Every credit provider must register as a credit provider with the National Credit Regulator before it may conclude credit agreements to which the Act applies. Before recent amendments, there were a certain threshold before a credit provider was obliged to register as a credit provider, but recently this threshold was reduced to R nil (R0).


Incidental credit agreements do however not trigger this registration requirement. An incidental credit agreement is best explained by an example. X provides a service to Z at R100 per month. Z fails to pay, and X sends him a letter advising him that if he doesn’t pay by a certain date, interest will be charged on the overdue amount at 10% per annum. As soon as interest is charged, this becomes an incidental credit agreement, but the credit provider need not be registered as a credit provider before or after he charges interest.


The sanction for not complying with the registration requirements, is that the credit agreement is unlawful and void, and the common effect of this is that the credit provider will not be entitled to the interest in terms of the agreement.


CONCLUSION AND CHECKLIST

When you intend to sell goods or provide services on credit and charge interest, you need to register as a credit provider, unless the Act is not applicable to the transaction or agreement.


Here is a quick checklist to determine whether the act is Applicable or not. If any item is checked as “NO”, the Act is not applicable. Then it is fair game and the credit agreement will be no different from any other agreement.



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