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Lawyers fight for their lunch in abusive lending case

The banks have come out swinging, defending themselves against accusations of abuse and overcharging.

An interesting battle between lenders and the University of Stellenbosch’s Law Clinic, joined by Summit Financial Partners and a number of clients, is about to get underway in the Western Cape High Court.

The case will decide what charges lenders are allowed to load onto the accounts of defaulting borrowers. The National Credit Act (NCA) says lenders cannot recover more than double the outstanding debt at the time of default – an old Roman legal principle known as in duplum (‘double’).

For example, assume you borrow R1 000 and are expected to pay back R1 300 after interest, administration and other charges are added. You then default after repaying R600, leaving an outstanding debt of R700. The law says the lender may only recover double this amount, or R1 400, regardless of the amount of interest, administration and other fees accumulated from the time of default.

The banks, represented by the Banking Association of SA (Basa), have come out swinging, arguing that they are within their rights to charge administration, service and legal fees, even when these costs far exceed the in duplum limit.

Not so, says the Law Clinic’s Stephan van der Merwe. ”We argue that the intention of the NCA is to provide protection against unscrupulous collection practices for borrowers, especially the poor. The NCA, however, is imprecise in its wording, clearly intended to include legal and other fees as part of collection costs in the in duplum limit.”

Read: Landmark court case seeks to stop overcharging by creditors 

What’s really happening here is that lawyers are fighting for their lunch.

SA’s legal system feeds off the banks, to the point where anyone seeking legal representation against the banks is politely informed of the potential conflict of interest in representing anyone challenging the banks in court. To do so would kill the law firms’ meal ticket.

“Most of the cases you see coming before the courts each day involve the banks,” says King Sibiya, head of the Lungelo Lethu Human Rights Foundation (LLHRF), which fights unlawful evictions by banks around the country. “They keep the court system and the law firms financially afloat. They have captured the justice system.”

It is left to organisations such as the Law Clinic, LLHRF and Legal Resources Centre to wage battle on behalf of the poor, and many of their fights involve abstruse arguments over the interpretation of what constitutes ‘collections costs’ and ‘administration fees’.

Self-serving interpretation

That’s exactly the fight the Law Clinic is currently waging against lenders. The banks and their highly paid lawyers have chosen the most self-serving interpretation of these terms, when it is clear the legislators who drafted the NCA were attempting to curtail lending abuses.

The impact of this self-serving interpretation of the law often has catastrophic effects, says Van der Merwe. Reckless lending was one of the main grievances of the 34 striking miners massacred by police in 2012 outside the Lonmin Platinum mine in North West Province.

Many of the miners were left with virtually nothing at month-end after deductions in the form of emolument attachment orders (also called garnishee orders) were taken from their salaries.

This prompted the then minister of finance and the Banking Association of SA (Basa) to issue a statement saying that its members “commit not to use garnishee orders against credit defaulters, as they believe the use of such orders for credit is inappropriate”.

Making a mockery of the Credit Act

Yet the practice continues, argues the Law Clinic, which decided to summons the major banks and dozens of other lenders before the Western Cape High Court. The Law Clinic is asking the court to stop banks from sidestepping the in duplum rule. In several cases cited by the Law Clinic, borrowers were being asked to pay up to eight times the original amount borrowed because of these unlawful charges. This makes a mockery of the NCA.

In its reply to the Law Clinic, and after canvassing its members, Basa says there is little uniformity among banks with regard to recovering debts from defaulting borrowers. Some start with various in-house collection methods, and where these fail, hand the accounts over to external debt collectors. If that also fails, the account is handed over to attorneys for collection. Some banks argue that the in duplum rule only applies to debts prior to obtaining judgment – meaning they are free to load additional collection costs and interest after judgment is obtained.

Lack of uniformity

Van der Merwe points out that this lack of uniformity in applying the in duplum principle by the banks is concerning, as debtors of certain banks will unfairly be expected to pay more that those of other banks or lending institutions. “It shows why this application is so vital to bring certainty to the SA credit industry,” he says.

Basa argues that banks are entitled to add attorneys and advocates’ fees once judgment has been obtained against a defaulting client, as these fall outside the NCA’s definition of collection costs. To count legal fees as collection costs limits the banks’ ability to pursue legal action against the defaulting client, and removes any incentive for the borrower to repay the outstanding debt. The banks argue that once judgment has been taken against a defaulting borrower, a new debt is created, and the costs of recovering this new debt include interest, tracing and legal fees.

The Law Clinic replies in its court papers that the purpose of the NCA is to protect lower income borrowers, and that the poorer the borrower, the greater the protection that is needed.

Adding fat legal fees onto a R10 000 loan in default neuters the NCA and provides virtually no protection for the poor.

Unsecured loans to the poor are inherently risky, and lenders are rewarded for this risk through the right to charge higher interest rates. Part of the risk to which banks are exposed is denying them the right to fully recover their legal costs in the event of default.

Basa argues that the Law Clinic’s interpretation of the NCA – counting legal costs as part of ‘collection fees’ – curtails the banks’ ability to recover loans and limits the courts’ discretion to award cost orders against defaulters. It also inhibits the banks from approaching the courts for recovery of loans.

The Law Clinic replies that the banks are attempting to change common law to suit their arguments, and to continue sidestepping the NCA.

The case is expected to be heard in the middle of the year.

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This way of dealing with differences of opinion is so tiresome.

When are we going to change our tune and take heed of the pointer from Ben Carson, renowned retired neurologist, famous for his groundbreaking work separating conjoined twins at Johns Hopkins Hospital. “What do lawyers learn in law school?” he posed. “To win? No ways. Get rid of it. Rather learn….how do we solve problems? We need smart people who care about other people.”

The last sentence says it best. I sense a massive lack of morals in the financial industry from every aspect of banking and insurance to investment “advisers”. The customer is there to be milked, again and again by fair means or foul.

Lawyers are the kapo’s of the system as they get paid handsomely, win or lose.

Yes, we need fresh thinking. Fact: There are unscrupulous practices in debt collection. Fact: All of the defaulting debtors took the money and did not pay it back. Fact: Many low income defaulting debtors are difficult to trace.
The conundrum is how do we find a solution that is fair to all parties. Uncontrolled uncollected debts mean each consumer will pay more.

Rather uncontrolled lending causes the problem – banks don’t do affordability tests, they just lend …

Of course When everything else fails blame the “lawyers”. But such thinking is typical of the shallow twitter millennial generation with their 4 second attention span and inability to distinguish their virtual social media world from facts and reality. They also vote ANC.

Old times. The currency Rand, inflation, an the Reserve bank, worked for country and men, again all odds. Resulting in lenders seeing two things happening. Less buying power and diminishing debt. The one in balance with the other. Tricky thing, but worked fine. Thanks to world finance in tune with each other. Today wise men have clamped themselves on the value of bank accounts they posses. Comes hell or high water the currency strength is declared holy. Non possessors are today lenders who face no relief the old times way.

Bas is some sort of bot

Thanks! Always wondered why I don’t have a clue as to what Bas is trying to say.

Sad that neither of SA’s two financial sector market conduct regulators – FSCA and NCR – have done anything to address the shocking consumer abuse in debt collection. It takes an NGO and private sector firm (and Wendy Appelbaum previously) to ensure customers are treated fairly …

This is very real ch coming from an organization where they only lend you 10% of their money and create the other 90% out of thin air and get you to pay interest on this created part out of thin air. A bizarre system and an abusive one!! And then still have the audacity to want to defend it on entitlement and moral grounds ??
The theatre of the absurd!

Ja, it’s the same with those retailers, who take other people’s products, double the price and sell them to their customers for cash BEFORE they’ve even paid for them!

Then again Another OMG x2, you might want to get some very basic level of understanding about how things work before making such embarrassing comments.

Lending is investing, you take a risk to get a reward.

The higher the risk the higher the reward.

Unfortunately most banks are of the opinion that they are above the law. They all should be put in jail for causing the 2007 crisis and the new 2021 crisis.

But I guess they are too big to fail… somethings just need to fail so that something better can take it’s place

This is were Bitcoin comes in, it’s fixed and you cannot have a negative amount.

If I were to try and protect the customer, I would take a different approach.

Instead of fighting in the courts, I will campaign to inform/educate the masses who take out these personal loans. Rather try and educate people on the dangers of accepting credit at 20% +

Banks run significant add campaigns on the amazing benefits of personal loans, so why not spend this money lost in the courts on educating the public!

It is deeply regrettable that the world of business, and certainly much of the finance industry where I have forged an international career over many years, have developed an overly aggressive culture driven from the top and based on bonus calculations and career advancement . This short term reward cerates a divisive win/lose style to business – when the only sustainable, ethical and professional approach should be seeking a win/win outcome… a strive to “win” at all costs often results in lose / lose longer term! If we want to create employment, build sustainable team-based business practices, treat clients fairly, reduce stress and mental health issues in the workplace we need a seismic cultural shift – in which all business professionals have a role to play – from the leadership level right down to the coal face… But are we capable and up to the challenge…? This article is just a reflection of a small element of a systemic problem – the dark side of capitalism perhaps….

Bravo the University of Stellenbosch Law Clinic, bravo. Proud to have walked through those doors all those years ago. BTW, most lawyers and bankers are greedy, capricious vacuum cleaners

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