Darrell Beghin

“Amnesties…, Credit…?  We live in interesting times…”

Recently the question was posed of what the difference is between the various categories of credit amnesties, the categories being:

• credit amnesty
• credit information amnesty and
• bureau amnesty

This question set me thinking – in fact, what is an amnesty?  A quick web search reveals the following definition:

Noun:  “An official pardon for people who have been convicted of political offenses”

Verb:  “Grant an official pardon to”.

So then in fact the question posed around the current intention by the Department of Trade and Industry and the National Credit Regulator( NCR) to implement a credit information amnesty becomes even more worthy of serious review.

The reasons given by the Regulator for the credit information amnesty is apparently the stimulation of the economy, an increase in employment and a lowering of the cost of credit to low income consumers.

The current proposal as communicated by the NCR details the following two options for the removal of information from the credit bureaus within South Africa:

Option 1:

For the period 1 September 2006 to 31 December 2011:

• Removal of all dormant accounts older than 24 months (last update) from effective date of amnesty
• Removal of defaults listed on prima facie evidence of settlement
• Defaults caused by a payment profile status code W (written off) or J (repossession)
• Defaults not caused by payment profile
• Payment profile with an I (credit card revoked) or L (handed over for collection) and a subsequent paid up / closure code (P, C, T, V, G & H) in the Payment Profile line before December 2011.
• Removal of judgments granted in the period which are less than or equal to R10 000, irrespective of non-payment or quantity of judgments per consumer
• Removal of judgments granted in the period for values which are more than R10 000 on prima facie evidence of settlement

Option 2:

For the period 1 September 2006 to 31 December 2011:

• Removal of all dormant accounts older than 24 months (last update) from effective date of amnesty
• Removal of defaults listed on prima facie evidence of settlement
• Defaults caused by a payment profile status code W (written off) or J (repossession)
• Defaults not caused by payment profile
• Payment profiles with an I (credit card revoked) or L (handed over for collection) and a subsequent paid up / closure code (P, C, T, V, G & H) in the Payment Profile line before December 2011
• Removal of judgments granted in the period which are less than or equal to R5 000, irrespective of non-payment or quantity of judgments per consumer
• Removal of judgments granted in the period which are between R5 000 and R50 000 on prima facie evidence of settlement.

The above options relate to the removal of information (credit information amnesty) from the bureau databases and not to the pardoning of existing debts (credit amnesty), or to the operations of credit bureaus generally (bureau amnesty).

Furthermore the communication received from the Regulator’s office is that the amnesty in some form will definitely go ahead and industry can only inform the options, not remove or negate the intention to remove data. The question then must be posed as to why the Regulator is so adamant about something which from past experience (the 2006/7 credit information amnesty) and the reasons indicated below will not promote the best interests of all affected parties?

The stark reality is that a removal of current default data would effectively hamper the ability of lenders, particularly smaller operators, to distinguish between “good” and “bad” payers. This will cause a constriction in credit extension and an increase in the overall price of credit as credit providers attempt to mitigate their risks though conservative lending and maximised pricing.

So one has to ask how the removal of information can be the right action to take?

Consider this:

• The data which is to be removed is a critical component of a credit provider’s armoury in that distinguishing between “good’ and “bad” payers allows for decisions to be made on which credit applications to accept and which to decline. It also indicates the level of pricing to charge for any credit extended.
• Consumers, who are to be the recipients of the amnesty, are already indebted and have defaulted, and they will still owe the monies which they have already contracted to.  In addition, because of the inability of credit providers to properly identify high risk credit applicants, these consumers will possibly have access to even more credit (but at higher prices), which they still cannot afford as nothing will have changed in regard to their income and financial standing. The only difference in their lives will be that their credit profiles will indicate “all positive” performance to credit providers who access only portions of the credit information at bureaus. The “all positive” reflection is a factually incorrect reflection of these consumers’ credit standing.
• If the NCA requires that credit bureaus must “take reasonable steps to verify and validate the information they publish”, how can they be expected to publish profiles which they know to be incorrect?
• The previously identifiable “good payers” will have to pay higher prices for credit because credit providers will be hampered in that they will not be able to properly distinguish “good” and “bad” payers, nor assess their risks through gaining an understanding of the real credit standing  of credit applicants.  Since the financial risks cannot be adequately quantified or rooted in the principles of responsible lending practices, everyone in the credit cycle will be negatively impacted.
• The final contradiction to the stated intentions of the amnesty is that credit providers, who have more than one product line to sell, i.e. the larger providers, will probably be more conservative in their risk policies, resulting in constricted credit extension, which will force lower income consumers, who absolutely need credit to survive from month to month, to use the services of informal credit providers. The irony of this means that these consumers will not enjoy any protection in terms of the NCA. Informal credit providers are notoriously difficult to identify from a regulator’s perspective and furthermore resource constraints within the Regulator’s office will result in these informal credit providers not being effectively monitored and regulated.
• As a result of all of the above factors, really vulnerable consumers will be exposed to higher risks and more costly credit options.

That consumers are defaulting on their credit commitments is undeniable. Statistics derived from statutory reporting  submitted  by credit providers and bureaus to the NCR, reveal that of the 19,6 million credit-active consumers, just under 50% are reflecting some form of default status. And yes, some of this may be due to over-extension and uptake of credit, but the considerations that matter are the causes of uptake of credit by consumers.  These factors range from not earning enough, to being totally or partially unemployed, the rapid and steep rising cost of living, and the culpability of the consumers themselves who are often driven by “wants” and not “needs”. Also, the practices by credit providers will influence consumers – both positively and negatively – and this is where the Regulator absolutely needs to play the role of enforcer to eliminate illegal and to question unethical practices.

In considering consumers’ culpability in their credit standing, it’s revealing to consider the NCR statistics which indicate that less than 1% of credit-active consumers have availed themselves of the free credit reports the NCA affords them.  The validation and understanding of one’s own credit profile and performance is the as yet unrecognised golden key to a more secure credit standing, and too little attention is given to this cause by both the supply and demand sides of the credit sector.

So in summing up – considering the definition of the word “amnesty” as indicated at the start of this article – what is it that the Regulator and the Department of Trade and Industry wish to pardon? An automated and regularised removal of information is already built into the NCA in the form of the data retention specifications.  On average each month around 2,2 million enquiries, 144 000 default indicators and 40 000 judgments are removed from bureau databases.  This is already a levelling of the playing fields and one is left with the question of whether the political aspect referred to in the definition of “amnesty” is then a factor in the current amnesty developments?