Reckless Credit: Obligations of the Credit Provider and Consumer

The National Credit Act No. 34 of 2005, as amended from time to time, (hereinafter called “the Act”) first introduced the concept of reckless credit or lending in South Africa. The Act aims to promote responsible credit granting and use, and for that purpose prohibits reckless credit granting by credit providers.

Upon reading the preamble of the Act briefly, it seems as if there is a one sidedness in that obligations exist only for the credit provider, however, the fact that it mentions “…granting and use,” (own emphasis), clearly indicates that certain obligations exist for the prospective consumer as well. All of this forms part of the elaborate objective and purpose of the Act: to promote responsibility in the financial and credit market by encouraging accountable lending or borrowing, the avoiding of over-indebtedness and the opportunity for consumers to fulfil their financial obligations.

There are certain measures in place to prevent reckless credit. These place obligations on both credit provider, as well as the consumer. The most important obligation the Act placed on a credit provider, is by making the conduction of a pre-agreement financial or affordability assessment on behalf of the consumer compulsory. If the credit provider fails to conduct such assessment, the credit agreement entered into between the credit provider and the consumer is classified as reckless lending or reckless credit, irrespective of what the outcome of the assessment might have been. Furthermore, in the event that the credit provider conducts an affordability assessment, as is required by the Act, and the outcome of the assessment indicates that the consumer does not understand the risks, costs, or commitments made in terms of the agreement, the agreement will also be classified as reckless lending or credit. A bad debt repayment history, for example judgments due to non-payment of debt, might serve to expose the consumer as a possible reckless credit risk in the sense that entering into a credit agreement with him or her might lead to the consumer’s over-indebtedness.