What is Reckless Lending?
In line with the National Credit Act 34 of 2005, prior to the entering of a credit agreement between a consumer and a credit provider, the credit provider has an obligation to perform due diligence, by conducting a detailed financial assessment on behalf of the consumer, in order to determine if the consumer qualifies for the credit or not, and whether the consumer can inter alia afford same.
Failure by the credit provider to conduct this such assessment, may result in the credit agreement entered into being classified as reckless lending.
If the credit provider, after having performed due diligence, determines that the consumer does not appreciate the risks, costs and obligations created by the proposed credit agreement, and enters into the agreement with the consumer none-the-less; this such agreement may be classified as reckless lending.
The requirements, and case law in this regard, are abundant, and such claims are extremely technical in nature – they can, however, be successful.
Credit providers have a responsibility towards the consumer, in order to prevent reckless lending, but the consumer also has a corresponding responsibility, which is to truthfully answer all questions and provide all the information required by the credit provider at the assessment stage, as per Section 81(1) of the National Credit Act.
According to Section 83(2) of the National Credit Act, if a court declares that a credit agreement is reckless, the court may make an order:
- Setting aside all or part of the consumer’s rights and obligations under that agreement, as the court determines just and reasonable in the circumstances;
Or
- Suspending the force and effect of that credit agreement.
In ABSA v DE BEER 2016 3 SA 432 (GP), the consumers rights and obligations under a mortgage agreement were set aside due to the credit provider’s reckless conduct, as but one example.
The NCA obliges all credit providers to take all the necessary steps in the application stage of a potential credit agreement, in order to avoid reckless lending – and requires consumers to honestly enter into such assessments and agreements.
Should you wish to discuss the aforesaid topic, you are welcome to contact our office.