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Crucial unsecured lending battle heads to High Court

Credit industry eagerly anticipates outcome.

JOHANNESBUG – Representatives from the credit and debt collection industries say a court case taking place in the Western Cape High Court this month will have a significant impact on the future of unsecured lending in South Africa.

The University of Stellenbosch’s Legal Aid Clinic (LAC) is bringing the court action, which among other outcomes seeks to have certain sections of the Magistrates’ Court Act (MCA) declared unconstitutional.

The MCA governs the granting of emoluments attachment orders (EAO).

EAOs, incorrectly termed ‘garnishee orders’, are widely regarded as an effective method of collecting on outstanding legal debt by way of salary deductions. An Econometrix study estimates that banning EAOs could cost the economy as much as R3.2 billion, or 0.1% of GDP. 

While the LAC is not attempting to have EAOs declared unconstitutional, as some media reports suggest, it seeks to tackle their abuse.

Chiefly, the LAC argues that failing to subject EAOs to careful inspection by a magistrate – which results in clerks of court processing EAOs that are invalid, fraudulent or have no regard to a consumer’s income – denies consumers their constitutional rights to human dignity and access to justice.

Among the respondents are 13 credit providers, a law firm, the departments of justice and trade and industry, as well as the National Credit Regulator (NCR).

The Human Rights Commission has, by agreement of the parties, been admitted as a friend of the court. This means it is not a party to the case, but can submit information that bears on the case.

Unsecured lending under threat

Credit providers and debt collectors, however, complain that the courts system is already overburdened and requiring magistrates to oversee every EAO application is impractical, will hamper legal debt collection and force credit providers out of the market.

In a recent interview with Moneyweb, Hennie Ferreira, CEO of MicroFinance South Africa (MFSA), said that if EAOs were scrapped or became impossible to administer, more formal credit supply would exit the market, driving consumers into the hands of unregulated loan sharks.

“If you make it more and more difficult for credit providers to get what is legally owed to them you create a culture of non-payment on the one hand, and on the other hand, you reduce the number of loans granted by credit providers,” agreed Frans Haupt, director of the University of Pretoria’s Law Clinic, which has published extensive research on abuses in the EAO market.

Commenting that EAOs were indeed “widely abused”, Haupt nonetheless described them as a “good mechanism” for collecting on debt. “It saves a lot of time, money and legal costs,” Haupt said. The alternative, execution (where assets are attached) was far more traumatic and expensive, he said. 

It is not true that “all credit providers are rogue, all loans are reckless and the consumer is always right,” said Ferreira, who advocated harsh consequences for abusers at every level.

Acting Credit Ombud, Reana Steyn said her office has had numerous complaints about EAOs where the same abuses listed by the LAC were identified. “The ones we see are often the worst cases, but there may well be many EAOs where there’s no abuse,” she said.

Steyn said the Ombud would welcome proper oversight by a magistrate [to process EAOs]. Although she conceded that magistrates’ courts may lack capacity, she emphasised that this should not determine what was then considered sound law.

Marius Jonker, CEO of the Association of Debt Recovery Agents (ADRA), said the debt collection abuses reported on were “not the industry norm”.

ADRA has about 230 members and represents about 70% of the formal debt collection industry.

Jonker said there were various checks and balances in place, such as requiring multiple documents to be signed by debtors and witnesses when obtaining consent to judgement (which results in an EAO being granted).

“Many of the larger credit providers do follow-ups with consumers to enquire about foul play in the collection process,” Jonker said. “The credit industry does not want to financially ruin the market with whom they are going to do business in future.”

Steyn said this court case was a step in the right direction to hopefully obtain clarity on a number of issues relating to EAOs.

“This is an absolutely crucial court case,” Ferreira said, calling for widespread industry engagement to find lasting solutions, not only to EAOs, but also to problems that exist in the entire credit eco-system

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