Talk of credit amnesty raises alarm
An amnesty for blacklisted consumers might be on the cards early next year but if implemented poorly, it could be bad for borrowers and lenders alike.
Parliament’s select committee on trade and international relations wants a credit information amnesty for blacklisted consumers to address the failures of an amnesty implemented in 2006.
The initial amnesty allowed a once-off removal of some information but it was not extensive enough. Although it had a wide scope, it had little impact because the acceptance rate of credit applications grew by only 3.2%.
The purpose of the proposed credit information amnesty, according to the National Credit Regulator, would be to provide a new credit opportunity, reduce the cost of credit repair and help consumers to pay less for their credit.
A credit information amnesty removes records relating to a debt but does not remove the debt itself.
The regulator initially felt extreme caution was needed in this matter, but agreed, after debate, to reconsider it, Nomsa Motshegare, the regulator’s chief executive, said at a public hearing on the matter last month.
Many in the credit industry are concerned that, if adverse credit information is removed, it will affect the lenders’ ability to price the risk. Furthermore, if credit is based on incorrect data and extended, this will affect both consumers and credit providers negatively.
Mark Seymour, chairperson of the Credit Providers’ Association, said that the amnesty is of great concern to the association because “it takes away the credit providers’ ability to identify those who have the propensity to pay”.
Creditors would not be able to distinguish between good and bad credit behaviour, and they would be much more cautious, which would result in less access to credit.
“If credit data did not give a true reflection of actual performance, it would lead to an irresponsible credit environment, reduced consumer protection with a higher level of reckless lending,” the Credit Bureau Association said at the hearings.
But a bad credit record has far-reaching effects and may even limit job opportunities.
Stephen Logan, a consumer advocate and consultant to the regulator, said that, although inappropriate, frequently the credit records of job applicants are checked, which meant they might not get the job if their credit was impaired.
Diane Terblanche, chairperson of the National Consumer Tribunal, said many people are paying debts that they did not owe but for which they are blacklisted. That is an important consideration regarding an amnesty, she said.
Many consumers are also listed for debts they are not legally obliged to pay, because they had been overcharged.
But the Credit Bureau Association warned that consumer defaults are habitual and education is needed to change the behaviour of consumers to achieve better results.
Frank Lenisa, director of credit bureau Compuscan who represented the Credit Bureau Association at last month’s hearing, said that most consumers had handled their credit badly after the 2006 amnesty.
Information provided by a bank showed that, after the amnesty, consumers were more than twice as likely to end up with another bad credit profile.
Although credit bureaus, which had to expunge some credit information by June 2007, did not record the identification numbers of consumers who benefited from the amnesty, a sample of 600000 consumers was identified. Of these, 64% had taken up more credit and 74% of those ended up having bad accounts, 44% had judgments and adverse records, and 19% had judgments against them in the past five years. The default figure for the credit they had entered into amounted to R33-billion, and R14-billion of judgments were recorded.
Logan said another credit amnesty, unless handled very carefully, could cause substantial harm. Countervailing measures, such as effective affordability guidelines, should be binding and included in legislation.
He said all stakeholders would have to be included to ensure that their concerns about a credit amnesty are properly addressed, and to find consensus on the way in which an amnesty might work properly.
Logan said the intention of the regulator and the department of trade and industry is to minimise the cost and adverse effects to business, but the credit industry has to understand that it too wis responsible for the current state of consumer debt.
Some cost will accrue to all parties, and the industry as a whole will have to work out a fair way to ensure that whatever credit information is retained is for the benefit of consumers, and that consumers with good credit histories are not adversely affected.
He said a blanket amnesty could undermine the industry as a whole as well as the economy, because it could write off billions of rands of debt.
The National Credit Tribunal said that, even if a listing was removed, some consumers who should benefit from the proposed amnesty will not have access to credit because they are under debt review, which prevents all lenders from lending to them.
The department has been mandated to consult all stakeholders about the amnesty and present a final document to the committee by the end of February next year.
Regulator puts two proposals on the table
At a public hearing last month on a proposed credit information amnesty, the national credit regulator suggested two proposals about the shape it could take.
The first proposal is wide in scope and intended to have a large impact, but it is not a blanket amnesty. It suggests that:
- Any dormant account information be removed;
- Any adverse information listing be removed on evidence of settlement;
- Any judgment granted from 2006 to 2011, and equal to or less than R10 000, be removed (but not written off), irrespective of non-payment; and
- That judgments granted on amounts of more that R10 000 and between 2006 and 2011 be removed from all credit records on submission of evidence of settlement.
The regulator said dormant account information should be removed, because it had been covered by the first credit information amnesty, and that would affect payment profile information.
But, when an account was active, the regulator believed that the payment profile information needed to be retained to enable credit providers to price properly, and to differentiate between good and bad consumers of credit.
The regulator’s alternative proposal related to smaller debt levels. It also proposed:
- Any dormant account information be removed and that any adverse listing be removed on evidence of settlement;
- Any judgment granted between 2006 and 2011 and equal or below R5 000 be removed (but not written off), irrespective of non-payment; and
- Judgments on amounts between R5 000 and R50 000, and granted between 2006 and 2011, be removed from all credit records on the submission of evidence of settlement.
But because the alternative proposal was narrower in scope, it would have less impact, the regulator said.
In both cases, consumers with more than one judgment against them would not qualify for an amnesty.
Whatever the decision, the regulator said a detailed impact assessment study, using predictive scoring technology to indicate the impacts of each proposal, was necessary.
The impact of an amnesty could also be reduced by countervailing measures, such as drawing up effective affordability guidelines.
The regulator proposed the period of amnesty should start from January 5 2006, but would only be effective in 2013.