The Cape High Court on Friday delivered a damning judgment against credit providers for overcharging on legal fees and interest in contravention of the National Credit Act (NCA) which came into force in 2007.
The case was brought by Stellenbosch University’s Law Clinic and Summit Financial Partners on behalf of several customers of loan providers who ended up owing several times the initial sum borrowed after falling into default.
One of the applicants, Jenina Matthys, borrowed R5 600, repaid R13 000 and still owes R13 300.
Another applicant, Frans Saulus, borrowed R16 000, repaid R19 000 and still owes R37 000.
The majority of the applicants represented by the Law Clinic are poor, over-indebted and sinking deeper into financial distress.
The nearly 50 respondents in the case included credit providers Bayport, Finbond, Full House Retail and numerous law firms involved in debt collection.
Also cited as respondents were the country’s various law societies, which came out swinging on behalf of their members and their right to continue gouging the poor and those in financial distress.
Debt collection has become a thriving business for many law firms, and this judgment could put some of them out of action.
The Law Clinic asked the Cape High Court for a declaratory order confirming the NCA’s so-called statutory in duplum (‘double’) rule – meaning a borrower may not be charged more than double the amount of the loan outstanding at the time of default – including all costs associated with the collection of the outstanding amount as well as legal fees.
For example, let’s say you borrow R500 and, once finance and other legally allowed costs of credit are added, you are required to repay R700 over a two-year period. You repay R400 of this and then default. The outstanding amount is R300. You can never be charged more than double this amount (R600) even after interest, admin and legal fees have been added, as long as you remain in default.
The Cape High Court has now confirmed this is the intent and the effect of the NCA.
Opt-out class action suit
Senior Law Clinic attorney Stephan van der Merwe says while he would not be surprised if the credit providers appeal the case, an opt-out class action suit is now being planned for early in the New Year to recover what could be billions of rands in overcharged interest and fees.
An opt-out class action suit means you are automatically included in the case (provided you have suffered from the abuses argued in this latest case) unless you specifically opt out.
Should the losers appeal the Cape High Court judgment, it will delay but not derail the class action suit.
“We are planning to institute a class action suit early in the New Year because we want to interrupt prescription [running out of time] on behalf of all borrowers across the country who have been prejudiced by the behaviour of unscrupulous credit providers,” says Van der Merwe.
The Prescription Act sets time limits for the legal claims related to loans. In the case of micro loans, credit card and overdrafts, it is three years. Any claim brought after this time period is generally invalid, unless there are exceptional circumstances.
Acting Judge Bryan Hack of the Cape High Court was clearly incensed at the behaviour of credit providers who ran up interest as well as legal and admin fees, and loaded these onto the accounts of the borrowers to the point where they were repaying many multiples of the original amount borrowed.
Credit providers exploited what they claimed was loose wording of the NCA to add legal and other fees to the borrower’s outstanding amount.
This explains how Jenina Matthys ended up repaying R13 000 on a loan of R5 600 and was still being hounded for a further R13 300.
Credit providers and their lawyers relied on the previous common law interpretation of in duplum, which allowed them to load additional costs of debt collection onto the account of the borrower.
They tried to claim that once litigation had commenced, the credit agreement was cancelled and they were no longer limited in running up the costs of collection.
They argued that once judgment was issued against a borrower in default, a new “cause of action” had commenced and that legal fees accumulated thereafter were not collection charges as defined by the NCA.
The judge was buying none of this. The NCA was clear enough and there was no need to further develop the existing law.
“It is contrived to try to distinguish legal fees which are part of collection costs and legal fees which are part of litigation costs … ,” reads the judgment. “It is a continuation of one cause of action and is simply a further procedural step to enforce the claim.”
Choice quotes from the judgment
- “The crucial purpose of the [NCA] is set out in the long title of the act in the words ‘to promote responsible credit granting’. The respondents have emphasised the obligation on consumers to be responsible and not seek credit when they know they cannot pay or there is a risk that they might not be able to pay. I am of the view that the credit providers are thereby attempting to shield themselves from the responsibility imposed on them by the credit act.”
- “The question is whether in the seven years since the Sebola judgment [which argued that the credit market must be competitive and sustainable] credit providers have shown the responsibility called for to balance the respective rights and responsibilities of credit providers and consumers. The facts of this case suggest no. The escalation of indebtedness as a result of costs set out (by the applicants) suggest the credit providers are not even paying lip service to the need for fairness and equity.”
- “I take judicial notice of the notorious fact that consumers are constantly being cajoled and encouraged [to apply] for credit.”
The judgment declared that the NCA’s definition of collection costs included all fees, as well as legal costs. The total amount claimed from a defaulting borrower may not exceed double the outstanding amount at the time of default, even after accounting for collection costs.
The losers in the case were ordered to appoint an expert to determine how much the applicants were overcharged and to refund them.
The losers were ordered to pay the costs of the case.
This is another victory for over-indebted consumers, coming just weeks after the Grahamstown High Court ordered banks to bring their cases before magistrates’ courts rather than high courts. This will drastically lower the legal costs for those in financial distress, and will curb the appetite of banks and their highly paid legal teams to litigate rather than seek accommodation with customers.
Another aspect of the judgment that will bring relief to borrowers is that any legal costs associated with collection must be “taxed” (or agreed with the debtor).
“This is an important improvement as it will bring some oversight to creditors’ unilaterally loading debtors’ bills with their costs,” says Van der Merwe.