This article first appeared in Moneyweb.
Eight years ago debt counsellor Fanie Grové started looking at vehicle loan statements from his clients and was staggered by what he saw: in every one of more than 80 cases he examined where the borrower had fallen into arrears, he says the bank was unlawfully overcharging interest.
In some cases, the overcharge was 40-50% more than the interest allowable in terms of the National Credit Act (NCA), says Grové.
Considering the number of vehicles sold in SA each year – 557 000 last year alone – the implications could be huge. Wesbank, the market leader, reported R2.6 billion in profits from its SA retail activities last year.
The matter was raised with the National Credit Regulator in 2014 over a Standard Bank customer who missed some monthly payments in 2013. The NCR took the view that the bank was not in violation of the NCA and that it had calculated the interest correctly – despite the fact that the bank later reduced the loan amount payable by the client. The NCR’s dismissal of the case is puzzling to some in the debt industry. An actuary who reconstructed the bank statements and applied what he says is the correct interest charge found that the bank had overcharged the customer by 40%.
Standard Bank spokesman Ross Lindstrom says charging interest on interest when a client falls into arrears on a vehicle loan is “in line with the contractual agreement, which complies with all relevant legislative requirements.”
Why did the bank then reduce the client’s loan amount? Is this not an admission of wrongdoing? “Definitely not an admission of any wrongdoing, as this was an attempt by Standard Bank to assist the customer,” says Lindstrom.
The facts are as follows: the client purchased the vehicle through Standard Bank in 2008 for roughly R110 000 and kept up with the instalments for several years. In 2011 he noticed that the outstanding balance on the loan was R203 000, despite having paid R90 000 in monthly repayments. In other words, despite paying off the loan for three years, his statement suggested his outstanding balance had not reduced.
Before 2013, the client had started missing the odd payment. The bank added the arrears amount to the amount outstanding, but here’s where the problem entered, says Grové “A portion of every instalment goes to repay the capital and a portion to repaying interest. In the early stages of a loan term, most of the repayment goes to repaying interest. The problem arises when the client falls into arrears. The arrears amount is added to the outstanding balance. The banks have been charging interest on the arrears, which already includes an interest charge. A plain reading of the law suggests they cannot do this.”
Given the compounding effect of interest, Grové says the difference between what banks are claiming and what is allowable under the law can be huge – more than 40% in the case of the client referred to the NCR in 2014.
Grové looked at more than 80 vehicle loans where the client had fallen into arrears, even for just a few days, and found the same errors in all cases: “Sadly, we are not getting any joy from the regulator, or we have not sufficiently explained how the overcharging works in practice, but if you extrapolate this over the entire universe of vehicle finance sales, we are talking about potentially billions of rands in overcharges spanning back through the years.”
Forensic accountant Andre Prakke came to the same conclusion as Grové after looking at his evidence and that of some of his own clients, though he ascribes the errors to a fault in banks’ systems. The National Credit Act is not specific enough on how to calculate interest payments on arrears – but not everyone believes the banks are entirely innocent.
When financing cars, banks calculate the vehicle cost, plus financing charges over the life of the loan, divided by the number of instalments. So, for example, a R100 000 car financed over 36 months has a total cost of say R150 000. This is divided by 36, giving a monthly instalment of R4 166. This instalment includes a capital portion and an interest portion. The interest portion is calculated based on the full term of the loan. To now add an arrears instalment to the outstanding balance and again charge interest on this amounts to what some believe is ‘double dipping’: charging twice for the same thing.
This becomes more prejudicial when the borrower misses several instalments: “The net effect is that the balance that is owing is not calculated according to the interest rate that is specified in terms of the contract entered with the finance house,” says Prakke. “There will be a portion of simple interest and compound interest.”
Things get further out of hand when the case is handed over to the legal department, and collection and legal costs are added. Legal costs are untaxed [unverified], but banks and their lawyers get away with these charges because so few people contest these matters in court. Says Prakke: “The debtor is already so battered that they will not even be able to look at this issue, and there is no place where they can get assistance.”
Prakke says it gets worse still when insurance premiums are debited. Not only does the finance house get a commission on the insurance, but interest is also calculated on the total premium, including the finance house’s commission. These are sometimes debited sporadically, resulting in automatic interest costs to the borrower, through no fault of their own.
All these ‘little’ additions add up to a tidy sum.
Leonard Benjamin, a legal consultant in the debt industry, agrees: “We may need a high court test case to get the judiciary to adjudicate on this matter since a plain reading of the NCA makes it clear that banks are charging interest on arrears instalments incorrectly.”
Grové says thousands of vehicles may be repossessed unlawfully each year due to the incorrect charging of interest on arrears by the banks. Banks are also accused of sending out repossession agents to recover vehicles without the necessary writ of attachment issued by a court. Grové says one client who was in arrears on his vehicle loan had his car repossessed by a sheriff and sold two days later – all without a writ of attachment, as required by law.
Benjamin advises never to surrender a vehicle to anyone claiming to represent the bank unless they have a valid writ of attachment, signed by a judge and stamped by the court.
“Section 127 of the NCA deals with the voluntary surrender of goods that have been attached by a court. If you are approached by a sheriff, ask to see his appointment card and politely ask to take a photo of it. Even then, you are under no obligation to surrender the car. They will attempt to get you to sign a voluntary surrender document, but the NCA makes it clear that the act of voluntary surrender must be initiated by the debtor,” says Benjamin.
“There are a lot of so-called repo agents running around pretending to be sheriffs and earning R4 500 to R5 000 for every vehicle they repossess. In such a case, I would again ask to take a photo of their appointment card, record the conversation, and then politely refuse to hand over the car. Only a sheriff is authorised to repossess the vehicle, provided he has a valid court order. The recorded conversation can then be sent to the bank so they know who is purporting to represent them.
“Before surrendering the car, I would want to do a forensic audit of the bank statements to make sure interest is not being charged incorrectly. There are too many errors, deliberate or otherwise, in these bank statements.”