Crooked debt collectors and attorneys are pulling in close to R1-billion a year by overcharging often financially illiterate borrowers, estimates a company that helps employers rehabilitate debt-trapped employees.
And there are fears that corruption in the debt-collection system will undermine the good intentions of the National Credit Act, which kicks in on June 1 this year.
Clark Gardner of Summit Financial Partners said that of the 200 000 emolument attachment orders — garnishee orders — his company had audited, borrowers had been overcharged an average of R500 each in debt collection fees and interest.
Given the 1,7-million attachment orders in force in South Africa, Gardner estimated that debt collectors and lenders are earning about R850-million a year in illegal fees.
In some cases, incorrect interest calculations have seen attorneys overcharge by R25 000 on an R8 000 loan.
Overcharging sometimes leaves borrowers trapped in debt their whole lives. At one large company known to the Mail & Guardian, 3 100 workers are toiling under 9 500 emolument attachment orders.
Attachment orders are issued by the courts to enable debt collectors to appropriate some of the borrower’s salary to repay debt. Employers who refuse to collect these debts from payroll face a warrant of execution, allowing the collector to attach the company’s assets.
Most borrowers are low earners who lack financial literacy and the means to challenge abuse. Of the three million employed people who live with a negative cash flow, at least a million borrow money for subsistence and many have fallen victim to corruption in the attachment orders system.
Allister Long, MD of Powerlife, which runs financial literacy courses, said orders were far too easily obtained. Long provides consultancy services to large companies where half the workforce is burdened by orders. Some workers took home as little as R4 after debt collectors had plundered their salaries.
Rudolph Willemse, consultant to the National Credit Regulator, agreed that the attachment order system was highly corrupt. “The system is being abused. From the beginning the lender relies on it as a collection mechanism, using the courts as a standard form of collection.”
Marilyn Budow, African Bank’s consumer advocate, revealed that it was common for lenders to require clients to sign a blanket acknowledgement of debt when taking out a loan. The courts were immediately approached for an order allowing direct salary deductions, rather than using a debit order.
Observers said that overworked clerks of the court were signing piles of court orders placed before them by debt collectors without checking their legality. Some clerks are also said to be on the collectors’ payroll.
In addition, debt collectors and attorneys’ interest-fee calculations are often not checked. As collectors charge a percentage of the instalment as an administration fee, it is in their interests to overstate the total repayment.
Gardner said about a quarter of attachment orders came from unregistered micro-lenders and should never have passed court muster. But his concern is that illegal practices are not limited to small, fly-by-night operators.
Customers of credit providers who do not scrutinise debt collections may also fall victim to overcharging. African Bank cites a case where a client who defaulted on an R8 000 loan would have paid R61 000 in monthly instalments of R700 if the bank had not agreed to a R32 000 overall repayment. The emolument attachment order handed to the employer by the attorney was, incredibly, for R85 743.
George Rossos, African Bank’s head of collections, said the bank instructed attorneys to stop further deductions once the original loan and interest were repaid. The full amount deducted from the borrower’s salary was paid over to the bank, and attorneys were paid commission to guard against overcharging.
Tami Sokutu, executive director in charge of risk at African Bank, said the bank struck an agreement with clients who could no longer service loans, depending on the merits of the case and whether the amount in the original loan agreement had been repaid.
Sokutu conceded, however, that the bank had no way of knowing if attorneys continued to collect money after the loan was paid off. It was up to customers to inform the bank.
Given that many debtors are subject to more than one attachment order, malpractices can fall through the cracks.
JC Janse van Rensburg, vice-president of Limpopo’s law society, agreed that many clerks of the court were inadequately trained and un able to test the legality of documents.
Blanket agreements, including acknowledgements of debt and agreements to judgement, allowed debt collectors and attorneys “to put in whatever figure they like”, Van Rensburg added. And unless debtors complained, no one checked the payment calculations.
To counter abuse, the proposed National Credit Act stipulates that letters of demand must be sent and it provides for registered debt councillors who debtors can consult. Once a councillor has been approached, the creditor can take no further action.
However, Van Rensburg is unsure whether the councillor system will work. On paper, it provided for a “wonderful system. But it will only realise the real change if it can be enforced.”