A recent high court case in Pretoria ruled that banks have no right to cancel a loan agreement once a consumer goes under debt review.
The Banking Association of SA (Basa) tried to argue, without success, that a consumer under debt review has cancelled the original loan agreement. That would allow them to charge more interest and other charges.
This is a victory for consumers, says legal consultant Leonard Benjamin.
“While the case dealt with the application of the so-called ‘in duplum’ rule, it lays bare the banks’ abusive and deceptive foreclosure practices and shows that for decades the banks have been selling the homes of people when they are not, in fact, in default.”
In duplum (‘double’) is a common-law principle that says the interest on a loan stops running when the unpaid interest equals the amount of the outstanding capital.
This was later written into the National Credit Act (NCA) as a way to stop lenders clocking up interest and other charges beyond double the amount that was outstanding when the consumer first fell into default.
Benjamin questions how many homes and vehicles have been repossessed in SA due to the banks’ self-serving interpretation of the NCA and the in duplum rule.
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Debt counsellor takes action
The case was brought by debt counsellor Chantelle Scott against the National Credit Regulator (NCR), Basa, and the major lending banks.
Scott asked the court for a declaratory order that an application to go under debt review does not mean the original credit agreement has been replaced.
She argued that in duplum continues to operate while consumers are under debt review – effectively placing a cap on how much banks can charge on arrears.
Basa and the major lending banks joined forces to oppose the granting of the order, arguing that the consumer was no longer in default once placed under a debt rearrangement order (DRO).
The banks argued that in duplum, which caps the amount they can charge in the event of default, stops operating the moment a DRO comes into effect.
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A full bench of the Pretoria High Court agreed with Scott and granted her the order.
The banks have taken the judgment on appeal.
Benjamin contends that they may not realise they are shooting themselves in the foot if they succeed in reversing the judgment.
“The banks’ argument, in fact, relies on arrears capitalisation, a debt relief measure commonly used to eliminate arrear repayments. It involves an adjustment to the existing repayment plan to allow arrears, made up of overdue repayments, to be repaid over the term of the loan as part of an adjusted repayment amount.”
Adjusted repayment are commonly used in credit agreements, particularly where variable interest rates are involved.
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“When the interest rate changes the credit provider is obliged to also adjust the monthly repayment amount to ensure that the outstanding balance, together with interest at the new rate, will be repaid over the remaining term of the loan,” says Benjamin.
“In effect, a new repayment schedule, which supersedes the previous one, is set up each time the interest rate changes. Since the outstanding balance will include any arrears, the arrears are purged, and the consumer will no longer be in default.”
The banks argued that a repayment plan that is put into place under debt review typically involves a term extension. A longer term results in a lower, and more affordable, monthly repayment.
However, arrears can be purged without extending the term. The debt will also be repaid by increasing the monthly payment amount instead of the term.
Arrears capitalisation occurs by adhering to the terms of the agreement when there is a change in interest rates.
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Benjamin says most banks automatically recapitalise any arrears amounts each time there is a change in interest rates, spreading the arrears over the remaining term of the loan.
But in many instances, banks continue to hound customers over alleged “arrears” when in fact the bank has purged the arrears through recapitalisation – spreading the arrears over the remaining term of the loan.
What’s happened in practice is that customers in arrears are being charged a new, higher monthly instalment while the banks also bring legal action for recovery of the now non-existent arrears – a practice known as ‘double-dipping‘.
In other cases, banks specifically exclude arrears in determining the new monthly repayment method since they appear to be aware of the double-dipping trap. Benjamin says this exclusion violates the banks own loan agreements. “In the many years that I have looked at loan agreements, I have yet to come across one that allows for this.”
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Impact on term extension on monthly repayments
Assume a loan agreement says the consumer must pay back a loan of R1 000 over 10 months. In other words, a monthly repayment of R100 is required.
The consumer makes the first three payments and then falls into default by failing to make the fourth and fifth payments. The outstanding balance of the debt is R700, leaving an arrears of R200.
The debt is rearranged to make the payments more affordable by reducing the monthly repayment to R70, but the term of the loan must be extended by a further five months. This means that the outstanding balance of R700 must be repaid over the next 10 months.
The rearrangement means the consumer will no longer be in arrears. In the Pretoria High Court case, the banks tried to argue otherwise.
Arrears can also be purged without extending the term. The debt will also be repaid by increasing the monthly payment amount instead of the term. In the above example, if the instalment is increased to R140 a month, the outstanding balance of R700, which includes the arrears of R200, will be repaid over five months.
This article was republished from Moneyweb. Read the original here.
