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Civil society decimates aberrant EAO industry
By Malcolm Rees*
Over the last decade South Africa’s domestic credit markets have gone through a fundamental transformation which has had profound consequences for consumers and the economy alike.
Alongside the birth of the unsecured lending industry, over nine million first-time borrowers have opened credit accounts with the formal financial sector since the beginning of the global financial crisis in 2007. This is an explosive 53% growth in South Africa’s credit-active population in little over a decade, according to analysis of data published by the National Credit Regulator (NCR).
This new borrowing population may largely be described as a historically disenfranchised black citizenry which had been denied access to the commercial credit markets during apartheid.
Morbidly, as these markets opened in the turn to Democracy, many of these people were then targeted by “unscrupulous and reckless credit providers” which charged “exorbitant interest … with disastrous consequences for debtors who perpetually remain in the hold of debt,” according to a 2016 Constitutional Court judgment on Emolument Attachment Orders.
In an effort to curb these abuses, government promulgated the National Credit Act (NCA) in 2007 which, in turn, catalyzed the unsecured lending boom .
As such, one might at first glance praise the expansion of the domestic credit markets as a progressive process of ‘financial inclusion’: as vulnerable borrowers are brought into the fold of a well-regulated financial sector, they might be protected from the predatory practices of the ruthless micro-lender and the informal loan shark – the villainized ‘mashonisa’.
The reality, however, is far less rosy.
The first-phase of South Africa’s ‘unsecured lending boom’ peaked between 2009 and 2012 during which the quarterly values of unsecured credit granted to consumers increased by near 300%, to over R30bn, as compared to 2007.
As the quarterly rates of unsecured credit granted remain at roughly this level today, the boom has effectively transformed the credit landscape with unsecured and short-term credit growing to represent 11% of all outstanding domestic credit in the economy, from as little as 3% prior to the financial crisis.
Yet this explosion in the extension of unsecured credit has coincided with an over-indebtedness epidemic in South Africa which has seen scores of consumers buckling under the weight of an unaffordable debt burden.
By the peak of the unsecured boom in 2012 and 2013 nearly half of all South African borrowers were in debt distress and were reflected as having an ‘impaired’ credit record. This as compared to the already chronic impaired record proportion of just over one third of the credit-active population recorded in 2007.
Our population has paradoxically become substantially more over-indebted following the promulgation of legislation put in place with a specific intention of curbing over-indebtedness.
Impaired records also have the effect of financially disempowering consumers from accessing positive use credit such as mortgage and vehicle finance, thus making them ever more-reliant on predatory credit.
The situation was so severe that by 2015 the World Bank stated that South African consumers had become the most over-indebted in the developing world, according to a leading global critic on micro-finance, Milford Bateman.
The indebtedness epidemic has undoubtedly been primarily caused by the reckless granting of credit, the extremely high costs of unsecured and short-term credit and bundled products such as credit insurance.
And while these indebtedness figures in themselves have been cause for both local and international alarm, evidence describing a far more sinister trend in debt collections is buried deeper within the NCR data.
The EAO Plague
By the time of the Marikana Massacre, in August 2012, another debt-related epidemic had reached its zenith.
In the third quarter of that year 2.82 million South African borrowers were recorded as having an active ‘Judgment’ or ‘Administration’ order affected against them.
By-and-large this figure is derived from records of consumers which had been affected by the now notoriously ripe-for-abuse Emolument Attachment Order (EAO), although less common credit judgments such as maintenance orders would be included in the figure.
An EAO, known colloquially but inaccurately, as a ‘garnishee order’, is an order made by a Magistrates Court, following an application by a debt-collections attorney, whereby a portion of a borrower’s salary is deducted by his or her employer for the repayment of unpaid debt.
By the time of the Marikana massacre nearly one million more borrowers were affected by such judgments as compared to 2008, representing a 45% increase from already high levels. Of the entire borrowing population, near 15% had been recorded as being affected by such a judgment.
Evidently, as consumer over-indebtedness soared in the wake of the unsecured boom, so too did the debt-collections industry.
Summit Financial Partners was the first to flag a systematic abuse of borrowers through the EAO system, which it had identified during its audits of employer payrolls on the Rustenburg platinum belt.
Such abuses included massively inflated loan repayment amounts, unaffordable instalments, egregious legal fees bundled into EAOs, excessive interest charged on such legal fees, dubious interpretations of the EAO laws, abuse of court jurisdiction and outright fraud.
As these abuses had the effect of forcing financially illiterate miners into inescapable debt spirals, one of Summit’s field investigators told the finance website, Moneyweb, that “I am absolutely sure that is why they strike, it’s not a political issue, it’s financial”.
In one of the most egregious examples of such excess, highlighted by Summit, law firm Steyn Attorneys charged a miner R9 934 in legal fees, excluding VAT, in addition to a collection commission of R1 140 for the recovery of a R1 000 loan.
As Steyn then charged excessive interest on those excessive fees the platinum miner had repaid R11 690 on his R1 000 loan but still sat with an outstanding balance of R3 084.
In another example, a miner had paid R6601 towards a R2000 debt but still owed R2398.
Civil Society Fights Back
The egregious abuses identified in the wake of Marikana inspired sustained media investigations, notably at Moneyweb, with Summit providing much of the evidence and technical expertise.
Within less than a year, far-reaching EAO malpractice had been uncovered with major lenders and the country’s largest debt collections law firms being held to account while being implicated in a systematic exploitation of the most vulnerable of consumers.
The exposés first attracted the attention of National Treasury with then chief director for Financial Sector Development, Ingrid Goodspeed, stating at an industry summit on EAOs in November 2012 that “we are engaging with the Department of Justice to shut-down EAOs for everything except maintenance, because we see no other solution”.
To drive home her point Goodspeed referenced the Steyn case identified by Summit: “We can have a show of hands of who believes that this is acceptable behaviour. But it must be seen as abuse. This is where we need to shut down what’s happening,” she added.
Then, in 2013, then Finance Minister Pravin Gordhan stated in his budget speech that government is “concerned by the abuse of emolument attachment orders that has left many workers without money to live on after they have serviced their debts every month.”
Gordhan added that employers should assist their workers to manage their finances and to interrogate all EAOs to ensure that they have been properly issued.
Just following his announcement, the office of the Credit Ombudsman announced that a special task team had been established, which includes a wide range of industry bodies, to deal with the abuse.
The battle against the EAO epidemic reached a climax with an application brought before the High Court, and subsequently to the Constitutional Court, by the University of Stellenbosch Legal Aid Clinic and Others.
The case had been initiated by businesswoman and philanthropist, Wendy Applebaum, after she became aware that one of her employees had been targeted by the now notorious debt collections law firm, Flemix and Associates. Applebaum then brought in industry experts such as the Legal Aid Clinic while Summit signed surety for all potential legal costs brought against the applicants.
“While there are a host of problems with the EAO and court process, there were two main issues that we decided to focus on,” says Odette Geldenhuys, a Webber Wentzel attorney who represented the applicants.
“The first was a problem with the legislation itself which allowed a clerk of the court to issue an EAO against a consumer. Our argument was that when someone is deprived of a constitutional right, that should happen through a court supervised process, it should not be in the hands of a non-legally trained administrator”.
“The second issue which we focused on was the legal provisions that determine which courts must be used to obtain the EAO. This was a problem as the debt collecting industry incorrectly interpreted the law to mean that creditors could go to any court in the country to get the clerk to issue such an order,” she says.
By the time of the application it had become common practice for collection attorneys to apply for EAOs at courts which had become notoriously lax and which were in jurisdictions far out-of-reach of the affected borrower. In effect, the duplicitous practice provided vulnerable borrowers with no chance to oppose the EAOs, denying them a basic human right.
The judgments handed down by the High Court in July 2015 and subsequently in the Constitutional Court in September 2016, put an end to the ‘forum shopping’ malpractice while also ensuring that EAO court approvals became far more stringent.
A Profound Impact
The sustained and still ongoing efforts by value-driven business, civil society and the media to combat the abuse of consumers via the EAO system has had a systemic and profound impact on borrower wellbeing as evidenced by analysis of NCR data.
The revelations of EAO abuse in the wake of the Marikana Massacre placed significant pressure on credit providers to clean up their act which, alongside state pressure and auditing of employee payrolls, resulted in a notable decline in the prevalence of such orders.
Between Q3 2012 and Q2 2015, over 450 000 fewer consumers were recorded as being affected by a judgment or administration order. This brought the proportion of the credit active population affected by such judgments down from 14.3% to 10.1 %.
Then, following the initial High Court judgment on EAOs in July 2015, their prevalence plummeted.
Over one million fewer consumers are today affected with adverse judgments as compared to Q2 2015, bringing the proportion of the credit active population affected by such orders down to just 5%.
Today, the prevalence of judgments and administration orders has been slashed by half as compared to during the financial crisis and by two-thirds as compared to at the time of the Marikana Massacre.
A 2015 study by Edward Nathan Sonnenberg found that of a sample of 45 000 employees of a major SA company, 13 000, or 29% had been affected by EAOs. On average, each of those consumers had been affected by 2.3 EAOs while 59% of all the orders had been found to be illegal or irregular.
From this we can estimate that by reducing the number of consumers affected by such judgments by 1.52 million since the Marikana Massacre, roughly 3.5 million EAOs have been removed from the financial system.
Clearly, the EAO industry has been decimated. In its wake major and hugely controversial debt-collections empires such as Bridge Loans have collapsed while predatory debt collections attorneys and the unscrupulous lenders which relied on them have suffered major losses. As a result, millions of consumers have been spared the debilitating effects of such orders.
The figure below graphically illustrates these trends, with the red line tracking the absolute number of consumers affected by judgment and administration orders against the left index. Against the right index the green column tracks the percentage change in the proportion of consumers affected by the judgments as compared to the base period of Q2 2007 and the blue column describes the proportion of the credit active population affected as a percentage of total.
Critically, the data line for ‘judgment and administration orders’ is one of the components that makes up the statistics for ‘impaired’ credit records – the most commonly cited metric for consumer over-indebtedness in South Africa.
As the EAO industry has been decimated, this is the primary, and perhaps only, reason that the country has seen an improvement in the overall levels of consumer over-indebtedness as described in NCR data.
Ahead of the Marikana Massacre ‘judgments and administration’ orders accounted for 30.6% of ‘impaired’ consumer records. Today it accounts for just 12.8% of the figure.
Accordingly, the proportion of the credit active population recorded with an impaired record has declined from highs of 48.1% in 2013, less than a year before the collapse of African Bank, to lows of 37.3% by Q3 2018.
This brought the proportions of consumers with impaired records back to levels last seen in 2007.
Were it not for the impact of the campaign against EAOs, we would today see at least 45% of borrowers described as ‘impaired’ – close to the worst of the over-indebtedness epidemic.
The trends are illustrated in the figure below which tracks the proportion of consumers described as impaired in the red line against the left index. The proportion of that figure comprised by ‘judgment and administration orders’ is tracked in the blue column against the right index.
Summit Financial Partners with the Stellenbosch Law Clinic and Others have again teamed up and applied to the High Court to challenge what they describe the ‘over-charging of vulnerable consumers’.
They are challenging the notorious ‘ultra in-duplum’ provisions in S101 and 103 of the NCA, which they argue should include all legal fees incurred by a credit provider in recovering an unpaid debt. In effect this would mean that a consumer could not be held liable for more than double the outstanding principal debt as at date of default.
The most egregious cases of EAO abuse, such as the Steyn matter cited in this article, are realised by grossly overcharging consumers in the collection of debt thus effecting a debt balance far in excess of the original amount the consumer had borrowed.
“Almost every judgment collected via EAO deductions has breached one of the laws being challenged meaning almost every consumer in this position could be due a refund. This is a game changer,” said Summit CEO, Clark Gardner.
Should the case be won, it will likely be the final nail in the coffin of the aberrant EAO industry.
- Malcolm Rees is a freelance investigator specialising in the South African credit markets. All views expressed remain his. This article has been supported financially by Summit Financial Partners.
 According to NCR data which records an additional 8.92 credit active consumers by Q1 2019 as compared to June 2007.
 Ellyne, M. J., & Jourdan, B. M. (2015). Did the National Credit Act of 2005 facilitate a credit boom and bust in South Africa? Paper presented at the African Finance Conference, Cape Town, South Africa.
  Bateman, M. (2018). Microcredit as post-apartheid South Africa’s own US-styled Sub-prime crisis. In M. Bateman, S. Blanckenburg, & R. Kozul-Wright (Eds.), The rise and fall of global microcredit (pp. 230–253). London, England: Routledge.
 See: Ellyne, M. J., & Jourdan, B. M. (2015). Did the National Credit Act of 2005 facilitate a credit boom and bust in South Africa? Paper presented at the African Finance Conference, Cape Town, South Africa.
 Other such ‘judgments and administration orders’ might include maintenance orders.
 While the line for ‘judgment and administration’ orders in the NCR data includes other orders such as maintenance orders, garnishees are by far the most common.
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