NCA Introductory Workshop for BANKSETA and with Institute of Bankers

1. NCA Introductory Workshop for BANKSETA and with Institute of Bankers February – March 2006 SESSION 2 Dr. Penelope Hawkins F E A S i b i l i t Y

2. Sales and marketing practices Pre-agreement, quotes and contracts Interests rates and allowable fees and charges Reckless lending and over-indebtedness Unlawful agreements and unlawful provisions 2. Credit Provision: Agreements and Marketing NCA Workshop: Session 2

3. Aim is to: “curb undesirable marketing and sales practices (including door-to-door solicitation) and regulation of credit intermediaries.” Sections 74-76; 89(1)b; 119(4) 2.1 Marketing Practices NCA Workshop: Session 2

4. 2.1.1 Sales and Marketing Practices: Prohibitions • “Negative option marketing” prohibited • Automatic increases in facility limits prohibited (except for annual increases subject to consideration of monthly cash advances / credits) • Telemarketing and sale of client information prohibited (unless with consent) • Agreements at home only if invited; at workplace only if agreement with employer or union NCA Workshop: Session 2

5. 2.1.2 Sales and Marketing practices: Advertising • Prescribed credit statements; disclosure of cost • Unregistered providers prohibited from advertising • Personal solicitations must include prescribed information • Prescribed cost of credit disclosure where goods sold on credit NCA Workshop: Session 2

6. 2.2 Pre-agreement statements, quotes and contracts • Pre-agreement statement must cover terms and conditions • Quote is binding for 5 business days • Form and content prescribed for small agreements; more flexible for intermediate and large agreements (content not form prescribed) • Small agreements: pawn and small transactions • Intermediate agreement: credit facilities (such as credit card) and mid-size transactions • Large agreement: mortgages and large transactions NCA Workshop: Session 2

7. 2.3 Interest rates, fees and insurance • Minister to impose limits on whole market or sub-sector • Interest rate: Initiation fee • Capped, depending on the nature of the credit, and the size of the transaction • Must be disclosed as a % per annum • Level: slightly higher than usury – but no exemptions • “in duplum rule”: default interest limited to settlement value at time of default. Outstanding interest and costs can never exceed outstanding capital NCA Workshop: Session 2

8. 2.3.1 Fees • Initiation fee • Will be prescribed and limited • Only applicable if application results in a credit agreement • Likely to vary by type of loan e.g. micro loan vs. mortgage • Service fee • Will be prescribed and limited • In most cases a monthly or annual fee will apply • In the case of credit facility (like a credit card), may be per transaction NCA Workshop: Session 2

9. 2.3.2 Fees (cont.) • Allowance made for cost recovery of: • Default administration charge • Collection costs • Extended warranty • Delivery installation and fuelling • Taxes • Charges unrelated to credit provision NCA Workshop: Session 2

10. 2.3.3 Insurance • Only credit life insurance and insurance cover against loss or damages of property pledged as security housing insurance compulsory, rest optional • To cover outstanding debt • Must allow for consumer choice (own or credit providers) • Only recovered via monthly charges (except for large agreements – where an annual charge may be imported) Section 100-106 NCA Workshop: Session 2

11. 2.4 Reckless lending “Focus to shift from price control to protection against over-indebtedness and regulation of predatory lending practices” Section 78-88; S130 NCA Workshop: Session 2

12. 2.4.1 Reckless lending • Reckless credit • Failure to take reasonable steps to assess repayment history and “existing financial means, prospects and obligations” • Extending credit where the “consumer will be unable to satisfy in a timely manner all the agreements to which the consumer is a party” • But: protection only available when consumers disclosed accurately + ‘unjust enrichment’ prevented NCA Workshop: Session 2

13. 2.4.2 Reckless lending • Criteria for recklessness • No assessment of the consumer’s circumstance • Consumer did not understand his/her obligations • Agreement concluded when consumer already over-indebted • Assessment based on information when agreement made; consumer required to “fully and truthfully disclose” • Over-indebtedness applies to individual – reckless lending to the debt NCA Workshop: Session 2

14. 2.4.3 Reckless lending • If reckless: • Magistrates may not issue court orders for debt recovery – but will refer to debt counselor for debt restructuring (and may then approve them) • Agreement may be suspended or obligation reduced by Court or Tribunal (e.g. in extreme cases all fees and interest written –off) • Provider may be prosecuted by National Credit Regulator NCA Workshop: Session 2

15. 2.4.4 Reckless lending • Regulated debt counselors to assist consumers • Assess financial position, may recommend restructuring, suspension of reckless loans … within defined rules • Cannot be approached if debt recovery instigated • Enforced through consent orders by the Tribunal or debt restructuring orders by the court • Credit record “cleaned” if consumer meets commitments NCA Workshop: Session 2

16. 2.5 Unlawful agreements • Unlawful agreements (pawn transactions excluded) • When: minors; mentally unfit; under administration and administrator has not consented; unregistered provider; “negative option credit” • Except if credit provider “induced” or “mislead” into entering into agreement NCA Workshop: Session 2

17. 2.5.1 Unlawful provisions • Unlawful provisions • When: Deceitful; Fraudulent; Defeat Act; Waive prescribed “common law rights”; Automatic increases in credit limit; Alterations without consent; Retains bank Card ID or PiN; Representative is agents of consumer; Pre-authorisation to enter premises for repossession; Power-of-attorney; consent to payment prioritisation; allow general set-off; interest variations NCA Workshop: Session 2

18. 2.5.2 Unlawful agreements and provisions • Agreement becomes void: • Effect: void • Consumer payments to be refunded and either • (i) cancel all rights of credit provider to recover the outstanding monies or • (ii) forfeit to the State if canceling rights would unjustly enrich consumer NCA Workshop: Session 2

19. Session 2 Question and Answer Session NCA Workshop: Session 2