Consumer watchdog Summit Financial Partners is at it again – this time regarding attorneys’ fees for collecting bad debts, mostly of micro lenders.
In order to protect consumers, the National Credit Act (NCA) applies the so-called in duplum rule to the collection fees money lenders may claim from debtors. This rule means interest, fees and costs – including collection costs according to article 101(g) of the NCA – charged on a loan can never be more than the original capital amount involved. If someone, for instance, borrows R500, then the total interest, fees and costs charged in terms of the loan agreement, cannot be more than an additional R500 in the end.
“Legal fees are an instruction by a lender to a third party to collect a debt on his behalf, so, in Summit’s view, it should fall within the domain of the NCA and very specifically that of section 101(g),” Clark Gardner, CEO of Summit, told Fin24. “Even big banks stick to the in duplum rule regarding debt collecting on money they have lent out.”
According to Gardner, Summit intends to approach the high court regarding the application of the in duplum rule on attorneys’ collection fees and costs as determined by the NCA when they do debt collecting on a third party’s behalf.
“We do not want lawyers to be incentivised to collect on small debts on loans of, for instance R500, on a regular basis,” explained Gardner. “Why are debt collectors prescribed a maximum fee they can charge, but attorneys can get thousands of rand from the collection process?”
Court precedent desired
Summit has selected Steyn Attorneys in Rustenburg as defendant in a case Gardner says Summit intends to file at a high court “within the next 30 days or so”.
“We believe the regulator and the law makers must protect consumers. We are seeking a court precedent that section 101(g) also relates to attorneys’ debt collection fees,” said Gardner.
Friedl Kreuser of Summit explained this kind of situation – where a debtor can end up paying more than double his original loan amount – even thousands of rand more – happens when the garnishee process is not properly regulated.
He gives the example of a mine worker who borrowed R500 from a credit provider and who has R1 165 deducted from his pay slip every month in terms of a garnishee order. He has already paid R6 751 to Steyn Attorneys – and apparently still owes another R4 117. The VAT charged on Steyn Attorneys’ legal fees alone is more than double the amount the debtor originally borrowed. And this does not include any future legal fees.
Kreuser pointed out the Magistrate’s Court Act clearly sets out the tariffs that attorneys can charge against a consumer when taking legal action to collect on a debt in an undefended matter where the amount owed is less than R7 000: R36 for sending a letter of demand; R121 for issuing summons; R121 for obtaining a default judgment and R37.50 for any additional registered letter sent to the consumer. Total: R315.50.
Many more cases likely
Summit is of the opinion that there are many more such cases in SA today, where default debtors end up paying lots more, due to legal fees and costs, than the original loan amount. Examples in Summit’s possession include a consumer who owed R612. Legal fees charged were R6 909 and the amount already paid was R6 521 and he still owed R1 997. The monthly garnishee deduction is R360.
Another consumer had an original debt of R1 496 and legal fees and costs charged (including VAT) were R6 070. The amount already paid was R6 597 and the amount still owed according to the attorneys is R2 684. The monthly garnishee deduction is R411.
Yet another consumer had an original debt owed of R2 250 and legal fees and costs charged of R5 835 (VAT included). The amount already paid is R4 249 and the amount still owing R6 578. The monthly deduction on his salary is R200.
Not a cut-and-dried case
Christiaan Steyn of Steyn Attorneys told Fin24 the NCA has actually made the processes which have to be followed in court for debt collecting and garnishee orders more expensive and more cumbersome than before.
“The courts are aware of this, but have to follow what the law dictates,” he said.
“From start to finish this process can take between 8 months to 1.5 years in our courts. Sometimes, once we have managed to get a garnishee order in place, the debtor might not even work at the same place anymore. We often have to appoint tracers to try and find bad debtors,” said Steyn. On top of that, a bad debt can prescribe after three years under certain circumstances.
Steyn is adamant that all the collection and legal fees and costs of his firm are correct in terms of the Magistrate’s Court Act and requirements.
Contrary to the view of Summit, Steyn emphasises that the NCA regulates only the relationship between the person obtaining a loan and the lender. The in duplum rule in terms of the NCA – including section 101(g) relating to collection fees – only applies to that relationship and not when the matter is handed over to an attorney. Then the regular Magistrate’s Court procedures and professional attorney’s fees and costs step in, in his view.
“Attorneys are professionals and, therefore, entitled to charge fees accordingly. I challenge Summit to check any of Steyn Attorneys’ bills with the taxing master at the court,” said Steyn.
“You cannot expect an attorney to do a huge amount of work and then not be paid for it. If that is the case no-one will ever lend small amounts to people anymore if they are not able to instruct an attorney to collect the bad debt if need be.”
Culture of non-payment
In Steyn’s view, the problem is a culture of non-payment which exists in South Africa.
“Consumers buy cars they cannot afford, houses they cannot afford. No-one forces you to take out a loan. You have to be aware of how much it is going to cost you in the end and accept the terms,” said Steyn.
He emphasised that if a matter is not handed over to an attorney, then the in duplum rule would stay in place in terms of the NCA.
“A debtor can go and negotiate with the money lender at any point before a matter is handed over to an attorney. Many debtors simply do not pay back the money they lent and when they are finally traced and taken to court, they do not want to pay,” said Steyn.
“In terms of the NCA debtors are afforded opportunities to deal with the matter before it goes to an attorney – they can even approach the Ombudsman or a debt counsellor.”