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Friday, 24 April 2015

Consumer Credit: Affordability Assessment

The Credit Affordability Assessment Regulations forms part of recent major amendments to the South African National Credit Act and its regulations. Before the amendments the National Credit Act did not prescribe how credit affordability  assessments should look. The Affordability Assessment Regulations intend to bring some clarity on how to calculate whether a consumer can afford credit. In the past many consumers were under-declaring their expenses in order to qualify for a loan causing many consumers to be over-indebted. The Affordability Regulations now set a minimum expenses norm per income category. Apart from that income needs to verified. The aim of the Affordability Assessment Regulations is therefore to prevent over-indebtedness of consumers and to prevent reckless credit granting.
 
The Affordability Assessment Regulations are unfortunately quite technical. The Regulations are summarised below and an example is used in an attempt to explain how an affordability assessment should be conducted (the National Credit Regulator needs to publish an explanation or guidelines).
 
Selected aspects of the Affordability Assessment Regulations under the National Credit Act
The National Credit Regulations including Affordability Assessment Regulations have been published in Government Notice R202 in Government Gazette 38557 of 13-3-2015. Chapter 3 of the Regulations has been amended by the insertion of Regulation 23A which deals with criteria to conduct affordability assessments in terms of the National Credit Act 34 of 2005.
 
Applications of the Credit Affordability Assessment Regulations (reg 23A(1) and (2))
The Regulations apply to current, prospective and joint consumers, credit providers and all credit agreements to which the Act applies.
The Regulations do not apply to a credit agreement in respect of which the consumer is a juristic person. They also do not apply to -
  • a developmental credit agreement
  • a school loan or a student loan
  • a public interest credit agreement
  • a pawn transaction
  • an incidental credit agreement
  • an emergency loan
  • a temporary increase in the credit limit under a credit facility
  • a unilateral credit limit increase under a credit facility
  • pre-existing credit agreements
  • any change to a credit agreement and/or any deferral or waiver of any amount under and existing credit agreement in accordance with section 95 of the Act
  • mortgage agreements that qualify for the Finance Linked Subsidy Programs developed by the Department of Human Settlements and credit advance for housing that falls within the threshold set from time to time.
Framework
The following aspects must be assessed when a consumer applies for credit:
  • Existing financial means and prospects
  • Existing financial obligations
  • Debt repayment history as a consumer under credit agreements 
Existing financial means and prospects (reg 23A(3)-(5) and (7))
  • Practicable steps must be taken to assess the consumer or joint consumer's discretionary income to determine whether he or she has the financial means and prospects to pay the proposed instalments. The consumer has a duty to provide authentic documentation to the credit provider to enable the provider to conduct the affordability assessment.
  • Practicable steps must be taken to validate gross income. If a consumer receives a salary, the latest three payslips or latest three bank statements showing the salary deposits must be considered. If a consumer does not receive a salary the latest three documented proofs of income or the latest three bank statements must be considered. When a consumer that is self-employed, informally employed or employed in a way that the do not receive a payslip of proof of income, the latest three bank statements or latest financial statements must be considered.
  • If a consumer's monthly gross income varies from month to month, the average monthly income of not less than 3 pay periods must be utilised. 
Existing financial obligations (reg 23A (6) and (8)-(12))
  • A credit provider must make a calculation of the consumer's existing financial means, prospects und obligations.
  • The consumer has a duty to disclose accurately to the credit provider all financial obligations to enable the provider to conduct the affordability assessment.
  • A credit provider must utilise the minimum necessary expense norms table (below), broken down by monthly gross income when calculating the existing financial obligations of the consumer.
  • The credit provider must ascertain the gross income, the statutory deductions and living expenses to arrive at a net income, which can be allocated for payment of debt instalments.
  • When existing debt obligations are taken into account, the credit provider must calculate discretionary income to enable the consumer to satisfy any new debt.
  • When affordability is assessed, the credit provider must calculate the consumer's discretionary income and take monthly debt repayments obligations (as reflected on the consumer's credit profile held by a registered credit bureau), necessary expenses and maintenance obligations into account.
  • The credit provider may on an exceptional basis, where justified, accept the consumer's declared minimum expenses which are lower than those calculated in terms of the minimum expense norms table, provided the questionnaire set out in Annexure A to the regulations, is completed by the consumer. 
Example - how to calculate affordability:
If X earns R10 000.00 per month and declares that his expenses are R1300.00 and the he has an existing debt repayment obligation of R2500.00.  The credit provider then has to apply the minimum expenses norms table to determine the consumer's existing financial obligations. When existing debt obligations are taken into account, the credit provider must calculate discretionary income to enable the consumer to satisfy any new debt

Necessary expense norms (the consumer's minimum living expenses as determined in accordance with reg 23A(9):
1. R10 000 (monthly income) – R6250.01 (less minimum income in the relevant band) = R3749.99
 
Monthly gross income Minimum monthly fixed factor Monthly fixed factor + percentage of income above band minimum
R0.00 to R800.00 R0.00 100%
R800.01 to R6250.00 R800 6.75%
R6250.01 to R25000.00 R1167.88 9%
R25000.01 to R50000.00 R2855.38 8.2%
R50000.01 to unlimited R4905.38 6.75%
 
2.   9% on R3749.99 = R337.50

3.   R337.50 + R1167.88 (minimum monthly fixed factor) = R1505.38 (X's minimum expenses in terms of the necessary expenses norm table)
 
4.   Select the highest between the declared expenses (R1300.00) or expenses in terms of the necessary expenses norm (R1505.38) and deduct that from the income less statutory deductions and necessary expenses.
 
5.   R10 000.00 (gross monthly income) – R1500.00 (statutory deductions and other necessary expenses: PAYE, UIF, maintenance, medical aid, pension fund contributions) = R8500.00
 
6.   R8500.00 (monthly income less statutory expenses) – R1505.38 (expenses) = R6994.62 (allocatable income)

Calculating discretionary income
 
7.   Credit bureaux listed debts or debts declared should be deducted from the allocatable income to determine whether the consumer has money available to fund the proposed credit instalment: R6994.62 – R2500.00 (existing debt repayment obligation) = R4494.62 (discretionary income: amount available to fund proposed credit instalment).

Debt re-payment history as a consumer under credit agreements (reg 23A(13))
A credit provider must take a consumer's debt re-payment history as a consumer under credit agreements into consideration. The regulations provide for a relatively long period to conduct a credit check. In terms of the regulations the credit provider most consider a consumer's debt repayment history within 7 business days immediately prior to initial approval of credit or the increasing of an existing credit limit and within 14 business days with regards to mortgages.

Avoiding double counting in calculating discretionary income (reg 23A(14))
Where a consumer applies for on a substitutionary basis to settle on or more of his existing obligations, a credit provider must record that the credit being applied for is to replace an existing obligation(s) and the credit provider must take practicable steps to ensure that such credit is properly used to replace an existing obligation(s).

Outcome of affordability assessment (reg 23A(16)-(20)
If a consumer is aggrieved by the outcome of an affordability assessment, he or she may at any time lodge a complaint in terms of sections 134 or 136 with the credit provider for dispute resolution. The credit provider then has to attempt to resolve the complaint within 14 business days after receiving notice of the complaint from an ombud in terms of section 134. If the credit provider do not address the complaint within the prescribed period of time, the consumer may approach the National Credit Regulator, who must resolve the complaint within 7 business days. If the National Credit Regulator issues a notice of non-referral in response to the complaint, the consumer may refer the matter directly to the National Consumer Tribunal.

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