Are credit providers over-charging on the credit they provide?

21 Aug 2018

An application was brought forward in the Western Cape High Court (“Application”), where the Stellenbosch University Law Clinic (“SULC”), Summit Financial Partners (“SFP”) and 10 other applicants sought relief from the court to prohibit creditors from adding unlawful costs onto their accounts.

The Application brought forward was centred on the so called in duplum rule (“in duplum”), which was written into the National Credit Act 34 of 2005 (“NCA”) in the year of 2007. The in duplum rule means, literally translated, ‘double the amount’. The rule has been entrenched in our common law since the early 1800s. It specifies that interest on a debt will cease to run when the total amount of arrear interest has accrued to an amount equal to the outstanding principal debt. By way of an illustrated example, the in duplum rule means that if you borrow R10 000 (“Initial Debt”), repay R5 000 of the Initial Debt and then default on the remainder of the Initial Debt, you should not be liable to pay more than double the amount of the Initial Debt based on interest accrued (i.e. not more than R10 000 in this example), no matter how much interest has accumulated over such period.

In a developing economy such as South Africa, where lending has become so easily accessible, the courts and the legislature are now obliged to develop the common law so as to afford greater protection to the debtor. For this very purpose, the legislature promulgated the NCA.

However, credit providers have found a loophole to side step the in duplum rule and began charging ‘fees’, which fell outside of the scope of the NCA. By adding such ‘fees’ to the outstanding amount, for example, administration and legal fees (as opposed to excessive interest), the result is that the person in default (“Borrower”) ends up having to pay more than double of the amount of the Initial Debt.

A recent example where the in duplum rule was relevant is in the case of Edgar Arnolds (“Arnolds”), one of the applicants in the above-mentioned Application. He loaned R12 000 from Bayport Financial Services (“BFS”) in April 2011 at an interest rate of 34.4% per annum payable over 36 months. This meant he had to repay R745 per month in interest for 36 months, totalling R26 837. In 2011 Arnolds defaulted and BFS secured an Emolument Attachment Order (“EAO”) against his salary. The effect of this was that Arnolds’ employer was ordered to deduct R732 a month until the outstanding debt of R11 685, plus costs, was extinguished.

The EAO was strangely obtained in the Randburg Magistrates Court, in Johannesburg, Gauteng, even though Arnolds lives in the Western Cape. This is further unlawful, as EAO must be obtained in the jurisdiction in which the borrower lives or works according to the Courts of Law Amendment Act 7 of 2017. In 2017, 6 years later, Arnolds wondered why his employer was still deducting R732 a month from his salary. BFS informed him that he still owed more than R7 400. Arnolds discovered that after 6 years of dutifully paying his monthly debt, he still owed more than half the original amount borrowed. In addition to the interest charges of R21 019, BFS had loaded services, legal and other charges of nearly R6 500 onto his account. Had he paid this outstanding amount, he would have paid a total of R33 000, almost three times the initial loan. South Africa still awaits judgement in this matter.

Clarity is therefore required on the true definition of the in duplum rule and that the rule should be clear on what it includes thus prohibiting unlawful fees as well as excessive interest.

The NCA determines that the amounts contemplated in section 101(1)(b) to (g) of the NCA that accrue whilst the consumer is in default under the credit agreement, despite any provision of the common law or credit agreement to the contrary, may not exceed the unpaid balance of the principal debt under the credit agreement as at the time that the default occurs.

Under the common law, the in duplum rule was confined to arrear interest only. Section 103(5) of the NCA expanded the scope of the double rule mean all types of consideration. For example, a credit agreement may often require consumers to pay service fees, initiation fees, collection costs, cost of credit insurance and administration charges, in addition to interest.

Section 103(5) of the NCA provides that the total of the amounts contemplated in Section 101(1)(b) to (g) may not exceed the unpaid balance of the debt up until which time the in duplum rule will apply.

Thus, the courts need to provide clarity in order to determine what the in duplum rule consist of and what is excluded.

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)