Before granting credit, a credit provider is required to assess whether a consumer can afford the proposed credit.

This is not supposed to be a box-ticking exercise.

Section 81(2) of the National Credit Act requires a credit provider to take reasonable steps to assess, amongst other things, a consumer’s existing financial means, prospects and obligations. Regulation 23A goes further by prescribing requirements for affordability assessments, including the assessment of a consumer’s discretionary income, existing debt obligations, maintenance obligations and other necessary expenses. But an affordability calculation can only be as reliable as the information on which it is based.

The problem with asking for one “monthly expenses” figure

In a recent matter reviewed by Summit Financial Partners, we identified a concern with the way a consumer’s expenses had been obtained during the credit application process.

The consumer was essentially asked to provide one total figure for monthly expenses. The guidance accompanying the question required the consumer to combine a wide range of expenditure, including items such as payroll deductions, housing, water and electricity, clothing accounts, debt-related expenses and maintenance.

The difficulty is that these are not all the same type of expense.

An affordability assessment needs to distinguish between matters such as:

• actual living and household expenses;
• existing credit repayments;
• maintenance or other committed obligations; and
• statutory or payroll deductions.

Indeed, the affordability methodology itself distinguishes between these categories when calculating a consumer’s discretionary income. In the matter we reviewed, the credit provider’s subsequent calculation separately reflected statutory deductions, pension contributions, minimum living expenses and existing debt obligations — despite the consumer initially being asked to combine different types of expenses into one figure.

This raises an important question: How accurately can a credit provider assess affordability if it has not first established what the consumer’s actual living expenses are?

Minimum expense norms are not necessarily your actual expenses

Regulation 23A provides for minimum expense norms that form part of the affordability assessment process.

However, a prescribed minimum should not simply be confused with what a particular consumer actually spends.

This becomes particularly important when considering Regulation 23A(11). The Regulation provides that, in exceptional and justified circumstances, a credit provider may accept a consumer’s declared minimum expenses where they are below the prescribed norm, provided the prescribed questionnaire is completed.

For this process to operate meaningfully, the credit provider needs to know what the consumer’s declared minimum expenses actually are.

If the consumer has only provided one combined figure containing living expenses, debt repayments, payroll deductions and other obligations, it may be difficult to determine what portion of that amount represents the consumer’s actual living expenses. This was one of the principal concerns identified in our review.

Why an itemised budget can tell a very different story

The matter reviewed by Summit provides a useful practical example.

At a later stage, when the consumer applied for debt review, he was required to complete a detailed, itemised budget. Once individual expenses such as groceries, electricity, transport, insurance, accommodation and telecommunications were separately identified, a much clearer picture of the consumer’s actual monthly living costs emerged.

We do not suggest that a budget completed at a later date proves what the consumer’s expenses were when the earlier credit was granted. Circumstances and expenses can change.

It does, however, illustrate an important point:

Asking a consumer to identify individual living expenses is capable of producing substantially more meaningful information than asking for one combined “monthly expenses” figure.

 What have the courts said?

The courts have made it clear that the existence of an affordability assessment does not necessarily end the enquiry.

In Absa Bank Ltd v Benade and Another, the Western Cape High Court confirmed that a credit provider is required to take reasonable steps to meet its assessment obligations under sections 81(2) and 82(1) and that this must be determined objectively according to the facts of each case.

More recently, in Seniors Finance (Pty) Ltd and Another v Rosen N.O and Others, the Western Cape High Court explained that the enquiry concerns the adequacy of the assessment, proportionate to the agreement, rather than simply asking, with hindsight, whether granting the credit was advisable.

That distinction is important.

The question is not simply:

“Did the bank perform an affordability calculation?”

The more meaningful question is:

“Did the information-gathering process provide the bank with sufficiently reliable information to conduct an adequate affordability assessment?”

Larger credit deserves a meaningful assessment

The importance of a proper affordability assessment becomes even more apparent where substantial amounts of credit are being advanced, particularly where several credit facilities are granted within a relatively short period.

An affordability assessment is not merely an administrative formality. It is one of the safeguards built into the National Credit Act to promote responsible lending and protect consumers against reckless credit.

The Seniors Finance judgment is particularly useful in this regard because the Court expressly recognised that the adequacy of an assessment should be considered in proportion to the particular credit agreement.

What could credit providers do differently?

The solution does not have to be complicated.

Instead of asking consumers for one combined “monthly expenses” figure, an affordability questionnaire could separately ask for the consumer’s:

1. actual living and household expenses – groceries, housing, electricity, transport and similar necessities;
2. existing debt repayments;
3. maintenance and other committed financial obligations; and
4. payroll or statutory deductions, where relevant.

The credit provider could then compare the consumer’s actual living expenses with the applicable minimum expense norm, reconcile disclosed debt repayments against credit-bureau information and calculate discretionary income using a much clearer picture of the consumer’s financial position.

The real issue: quality of information

The concern identified by Summit is therefore not simply whether an affordability assessment form could be designed better.

It goes to the quality of the information on which the affordability assessment is based.

A sophisticated affordability calculation cannot compensate for incomplete, ambiguous or poorly categorised information supplied at the beginning of the process.

Credit providers are required to take reasonable and practicable steps when assessing affordability. In our view, obtaining clear and appropriately categorised information about a consumer’s actual expenses is an important part of ensuring that the resulting affordability assessment provides a fair and meaningful picture of what that consumer can genuinely afford.

Summit Financial Partners

At Summit Financial Partners, we review credit agreements and affordability assessments to identify potential reckless lending and other credit-related irregularities.

If you are struggling with debt or believe that credit may have been granted without a proper assessment of your financial circumstances, our team can review your credit agreements and help you understand the options available to you.

Email protect@summitfin.co.za for assistance.