While an affordability assessment has always been part of the National Credit Act (NCA), recent amendments to the NCA Regulations have introduced a mandatory procedure for affordability assessments in the form of regulation ‘23A – Criteria to conduct affordability assessment application’. This effectively reduces the discretion that credit providers had previously to conduct their own form of an affordability assessment.
In broad terms every credit provider who is obliged to comply with Regulation 23A (note that not all credit agreements require an affordability assessment – see Regulation 23) must conduct an affordability assessment under the following broad headings:
- Assess existing financial means and prospects
- Assess existing financial obligations
- Assess debt repayment history
- Ignore credit agreements that will be substituted
- Disclose the total cost of credit to the consumer
Under the heading of ‘assessing existing financial obligations’ Regulation 23A(8-11) sets out the ‘minimum expense norms’ that a credit provider needs to consider when granting credit to a consumer. Before we explain how this is calculated it is worthwhile to expand on why this section exists at all.
In general any consumer who approaches a credit provider for a loan seeks to portray their financial circumstances in as favourable a light as possible in order for the credit provider to be inclined to grant the loan. What this ultimately means is that the consumer will often be fairly loose with what their actual monthly expenses are – sometimes leading to an absurdity where they claim to have no monthly expenses at all. In order to combat this tendency the Regulations have devised a formula to determine what the statistical minimum monthly expenses of a consumer would be based on their gross income. Thus, for example, we would expect a consumer to have at least R1167.88 in expenses if they earned a gross monthly salary of R6250. This is termed the ‘minimum expense norm’.
When determining the discretionary income available to the consumer (and thus his ability to repay the loan) the credit provider needs to use the following formula:
Monthly gross income
LESS: statutory deductions (tax)
LESS; monthly living expenses
LESS: existing credit agreement monthly repayments
LESS: maintenance obligations for dependants
EQUALS: Discretionary income
The focus of this article is on how the ‘monthly living expenses norm’ in the above formula is calculated.
When a credit provider does an affordability assessment of a consumer it needs to ask the consumer what their monthly expenses are. If those monthly expenses are above the minimum monthly expenses as set out by Regulation 23A then the credit provider is entitled to believe the consumer and must record the total expenses that the consumer alleges that he/she has. Where the consumer alleges that his/her minimum monthly expense are below the minimum monthly expense norm then the consumer must either:
- prove that their expenses are really less than the minimum monthly expense norm by providing all the information required by the new form 48 of the NCA Regulations, or
- accept that the minimum monthly expense norm will be used in their affordability assessment.
In either case the credit provider is obliged to calculate what the minimum monthly expense norm is for the consumer.
Unfortunately the minimum monthly expense norm table as found in Regulation 23A(10) is particularly obscure and needs some explanation. The table reads as follows:
|Monthly Fixed Factor = % of Income Above Band minimum|
The best way to demonstrate how this works is to provide an example:
Joe Soap earns R5000 per month as a gross income. This places him in the R800.01 to R6250.00 bracket (row 2 in the above table). The norm for a person in Joe Soap’s position is for him to have R800 worth of expenses (the minimum monthly fixed factor) PLUS a percentage of the remaining income over the minimum income. In this case this means that his expenses are:
R800 + (6250.00 – R800 x 6.75%) = R800 + (5450 x 6.75%) = R800 + R367.88 = R1167.88
What this ultimately means is that if Joe Soap alleges that his expenses are over R1167.88 per month then (unless you have contrary evidence) you are entitled to believe him. If he says that his expenses are less than R1167.88 per month then you have to ask him to prove that this is true by filling out Form 48, or he must accept that the credit provider will assume his monthly expenses are R1167.88.
In our next edition of consumer law newsletter we will consider how this minimum expense norm integrates with the affordability assessment that credit providers must perform.