This article first appeared at Moneyweb.
Seventy-seven-year-old former stockbroker and debt counsellor Fanie Grove has spent most of his life in financial services, but what he saw as a debt counsellor turned him against credit forever. His advice: avoid credit altogether, but if you must dip your toes in this sewer, be aware of the scams and tricks.
Seventy-seven-year-old former stockbroker and debt counsellor Fanie Grove has spent most of his life in financial services, but what he saw as a debt counsellor turned him against credit forever.
One client borrowed R4 000 from a cash loan company and ended up paying back more than R60 000. That wasn’t the end of it. Lawyers for the loan company still pursued the client for a further R29 000, until Grove told them to take a hike.
After nearly a decade as a debt counsellor, Grove has become a whistleblower against abusive lending practices. He has written scores of complaints to the National Credit Regulator (NCR) since 2007, detailing how creditors are miscalculating interest on car loans and other debts, as well as loading unauthorised insurance charges onto clients’ accounts.
“People are living from pay cheque to pay cheque. More than 80% of their working lives go to repaying debts. What worries me is where we will be in 50 years’ time unless we change people’s spending and savings habits, and bring greater accountability to the lending industry.”
The country is swimming in debt, he says. It usually starts with a month-end cash crunch. The first port of call is the bank. When that source of credit is tapped out, people move onto the loan sharks and things rapidly spiral out of control.
Lawyers involved in debt recovery also see an opportunity for illicit profit. In one case lawyers attempting to recover debt on a R3 000 fridge claimed the purchase price was R18 000. “I have seen numerous instances where lawyers inflated the capital amount of the loan by 50%, and then added 30% a month interest on top of that.
“People are encouraged to borrow without asking too much about the interest rate. This is the first mistake. Once they enter the debt system they are trapped, having to borrow more to cover the interest bill. There are hordes of vultures, many with bibles under their arms, that are making fortunes in the cash loans business. In hundreds of cases I have seen, people end up in the hands of the debt counsellors, a new concept introduced under the National Credit Act (NCA), to assist debtors to reschedule their debts and gradually pay them off.”
The banks have learned to game this system, declaring the very act of going under debt review as an act of insolvency – precisely what the act was intended to prevent. The result was that banks were foreclosing on people’s houses and cars as soon as they went under debt review.
“Fortunately, the act was amended a few years ago to prevent creditors from doing this. In other words, it is no longer an act of insolvency to go under debt review, but it speaks volumes about the ethics of banks that they would circumvent the spirit and intent of the NCA, knowing that it was attempting to protect debtors from such predatory behaviour,” adds Grove.
Out of this melee arose the garnishee crisis, throwing millions of people in SA into a debt crisis. This is when lenders extended credit and obtained court orders to deduct repayments from workers’ monthly salaries – known as garnishee or emolument attachment orders (EAOs).
According to NCR figures, more than four out of ten people in SA have impaired credit records. The Magistrates Court Act was amended in 2017 so that no more than 25% of a worker’s salary may be garnished (deducted from the payroll). Another change to the law requires magistrates rather than court clerks – as was previously the case – to authorise emolument attachment orders.
The Magistrates Court Act requires that EAOs are issued in the jurisdiction in which the employer resides. To get around this, lenders simply apply for a garnishee order in another jurisdiction far from the borrower’s place of work. “We see many instances where people borrowed in Cape Town but the creditor approached a magistrate in Joburg or Polokwane for judgment. Such judgments are in fact illegal, but again, it shows the deviousness of those engaged in this kind of reckless lending and recovery. Loan sharks have their own Magistrate’s Court and sheriff’s stamps so they can create fraudulent court orders.
“Sadly, most people do not check the correctness of their account statements. Some years ago I started to interrogate close to 100 vehicle purchase statements that clients had asked me to look at. I ran my own reconstruction of the statements and found staggering errors. In virtually every case, the accounts were wrong. Interest was miscalculated and unauthorised charges were added on top,” says Grove.
“Here’s the problem with vehicle purchases. Firstly, more than half the vehicle purchase agreements I have seen are not signed by the purchaser, something the courts tend to overlook, probably out of laziness. Secondly, the car salesman is not authorised in terms of the NCA to offer financial advice. This is often when the problem starts. Buyers are taking the car salesmen at their word when they ask what the monthly repayments will be, but then the actual bank statement arrives and it reflects a different amount. The salesman tells the car buyer he is free to choose an insurance provider of his choice, but then the bank statement shows an unauthorised deduction for insurance from a provider of the bank’s choosing.
“People will first borrow from the banks, then when that source is exhausted they start borrowing from loan sharks. I had one client earning R55 000 a month who was so deep in debt he was approaching me at the end of every month to pay his electricity bill.”
In another case, a client borrowed R3 000 from a loan shark at 30% monthly interest. When the borrower could not keep up with the repayments, the loan shark then offered an even larger loan of R10 000 to cover the outstanding loan. The client accepted, and the situation repeated. “It was at this point that he approached me to bail him out,” says Grove.
“Once these matters go legal, the lawyers are next in line to claim their share. Here it starts getting ridiculous. I have seen numerous cases where lawyers’ fees were larger than the original capital amount borrowed.
“Government needs to realise [this] debt recovery business is rotten with vultures and scammers.”
Suggestions for reversing this debt spiral:
- Monthly salaries to be paid weekly, in ratio of 20% in the first two weeks, and 60% at the end of the month. This spreads cash flow through the month.
- Only registered credit providers to be allowed to issue garnishee orders (to eliminate the loan sharks).
- Once a consumer is placed under debt review, attorneys and debt collectors should be prohibited from adding legal and collection charges.
- Establish a dedicated tribunal, separate from the National Credit Regulator and ombud, to rule on cases of reckless lending.