Affordability assessment regulations
On 1 August 2014, the Department of Trade and Industry (DTI) published draft regulations to the National Credit Act (NCA) for public comment (Draft Regulations). These Draft Regulations include provision for a standardised approach to credit affordability tests that may introduce a new business process in the hands of credit providers.
The Draft Regulations arise out of the powers created in the National Credit Amendment Act 19 of 2014 (NCAA), which amended the NCA to give the Minister of Trade and Industry the power to make affordability assessment regulations with a view to standardise affordability tests in the industry.
Currently, credit providers determine the models for affordability assessments based on their business processes and procedures as well as the different products offered by them. The National Credit Regulator declared that once the affordability assessments regulations become binding there will be more consistency, and monitoring will be easier.
At present, the NCA requires only that a credit provider must not enter into a credit agreement with a proposed consumer without first taking reasonable steps to assess:
- the proposed consumer’s general understanding and appreciation of the risks and costs of the proposed credit agreement, and of the rights and obligations of a consumer under a credit agreement;
- debt repayment history as a consumer under a credit agreement; and
- the existing financial means, prospects and obligations of the prospective consumer.
The NCA states that a credit provider may determine for itself the evaluative mechanisms or models and procedures to be used in meeting its assessment obligations above, provided that any such mechanism, model or procedure results in a fair and objective assessment.
Until now, the Regulator has not issued any guidelines in this regard. The proposed guidelines contained in the Draft Regulations introduce a number of new concepts into the affordability assessment. These are summarised hereunder.
Subject to exceptions, the Draft Regulations are stated to apply to :
- current and prospective consumers;
- all credit providers; and
- all credit agreements to which the Act applies.
A credit provider will be required to take practical steps to assess existing financial means and prospects by assessment "allocatable income" and "discretionary income" to determine whether the consumer has the financial means and prospects to pay the proposed credit instalment.
In order to do this, the Draft Regulations require that gross income is validated by referring to :
- recent three months’ consumer payslips;
- recent three months’ bank statements; or
- any other similar credible confirmation thereof.
On the other hand, the Draft Regulations oblige consumers to disclose all financial obligations to facilitate an accurate affordability assessment and to disclose authentic documentation to the credit provider to assist with facilitating the affordability assessment.
Existing financial obligations are to be taken into account not only when granting credit, but also upon the extension of an existing credit agreement (subject to exception).
In addition, when conducting the affordability assessment, a credit provider will be required to:
- calculate the consumer’s allocatable and discretionary income;
- take into account all debts, including monthly debt repayment obligations in terms of credit agreements as reflected on the consumer’s credit profile held by a registered credit bureau; and
- take into account maintenance obligations arising from statutory deductions or necessary expenses.
When looking at debt repayment history, a credit provider must ensure the requirement is performed within seven days immediately prior to the granting of credit or increasing an existing credit limit (14 business days with regard to mortgages).
Where a credit agreement is entered into on a substitutionary basis in order to pay off one or more existing credit agreements, commonly known as consolidation, the credit provider must record that the credit being applied for is to replace other existing credit agreements and take practical steps to ensure that such credit is properly used for those purposes.
The concept of a credit cost multiple has been introduced into the Regulations. The idea here is that the credit provider must :
- disclose to the consumer the credit cost multiple in the pre-agreement statement and quotation;
- ensure the credit cost multiple disclosures for credit facilities are based on one year of full utilisation up to the credit limit proposed;
- ensure the attention of the prospective consumer is drawn to the credit cost multiple and that it is understood.
A credit provider must also :
- disclose the total cost of credit including the principal debt, interest, initiation fee, if any;
- service fee, aggregated to the life of a loan; and
- credit insurance depending upon discretion of the consumer aggregated to the life of the loan.
Comments to these draft Regulations were required by 30 August 2014 and we await the outcome thereof.