High Court deems micro lenders? collection practices illegal

The collection of debts by micro lenders based on letters of demand and consents to judgment that were signed by borrowers before the relevant debts are due and wherein uncompleted documents are used, are unlawful and are illegal collection methods, the Pretoria High Court has found.

In October 2005 the Micro Finance Regulatory Council (MFRC) received a complaint from an employer in Cullinan, who was perturbed by the high number of emolument attachment orders obtained by a certain lender, Everett Financial Services against his employees.

In October and November 2005 the MFRC conducted investigations on the collection practices of Everett and its collection agency Topale Financial Services CC.

According to Jan Augustyn, Head of Investigations at the National Credit Regulator, the investigation revealed that Everett as a practice relies on letters of demand and consents to judgment that are signed by the borrowers simultaneously when the loan agreements are entered into. ?That means before any debt becomes due and payable. These documents are then used in order to obtain judgments and emolument attachment orders against debtors,? he added.

Everett is a lender registered with the MFRC and as such is allowed to charge interest rates higher than prescribed by the Usury Act, provided that the lender complies with the relevant Exemption Notice and rules.

Augustyn pointed out that ?it is only fair to mention that Everett and Topale have been most accommodating in the investigation. They immediately changed their collection practices and provided full cooperation during the investigation?.

The Magistrates? Court Act clearly provide for a sequence of events that have to be followed before a lender becomes entitled to take judgment against a borrower without the necessity of having to issue summons and before a lender can obtain an emolument attachment order, explains Augustyn.

He says the MFRC was of opinion that Everett?s collection practices contravened this sequence and approached the High Court for an answer to a stated case.

?The procedure in the Magistrates? Court Act that allows for judgment without summons is far-reaching and can be exploited to the detriment of borrowers,? adds Augustyn. ?The MFRC has consistently been of the view that a collection method that perverts the method in the Magistrates? Court Act has no standing in law and is simply illegal.?

Augustyn also reveals that in early 2006 Everett indicated that they no longer wished to oppose the matter and wished to settle it amicably. ?As this practice is of concern, the MFRC still pursued the stated case in order to have clarity on the legality of the collection practice and the effect should the practice be illegal.?

On 1 June 2006 the National Credit Regulator was established through the National Credit Act, 34 of 2005. The NCR receives its mandate from the National Credit Act, which is to regulate the whole credit market including the micro lending sector. The NCR usurped the mandate of the MFRC and proceeded with the case against Everett and Topale.

On 10 August 2006, the High Court found in favor of the NCR and ordered that:

• The collection of debts by micro lenders based on letters of demand and consents to judgment that were signed by borrowers before the relevant debts are due and wherein uncompleted documents are used, are unlawful and are illegal collection methods;

• The scheme employed by Everett is illegal and unlawful; and

• Everett is not entitled to collect interest from borrowers in excess of the rates determined in the Usury Act, 1968 in respect of collections made in terms of the scheme.

Augustyn said that the NCR hopes that the judgment would put an end to these collection practices and that all credit providers would realise that engaging in such practices may have dire financial and legal consequences.