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Two important issues on short-term credit transactions clarified by the courts

The issue of charging interest on initiation fees levied in terms of short-term credit transactions and unsecured credit transactions have long been debated within the credit industry. On the one hand, the industry accepted that it is permitted and on the other hand, the Regulator, through a non-binding guidance note, contended that it is not.

However, on 14 August 2020 the High Court of South Africa, Gauteng Division, Pretoria (“the High Court”), finally handed down a judgment in the matter of Micro Finance South Africa & One Other vs National Credit Regulator (“NCR”), Minister of Trade and Industry (“DTI”) & One Other. In this matter, the Applicants, namely Microfinance South Africa (“MFSA”) and the Banking Association of South Africa (“BASA”) brought an application seeking two declaratory orders, pertaining to:

the charging of interest on the deferred initiation fees; and
the charging of a full-service fee in the final month of a loan agreement.

Can deferred initiation fees attract interest?

In respect of the first question, Judge Davis noted that although the deferred initiation fees may not form part of the principal debt of unsecured loans in terms of section 101 as read with section 102 of the National Credit Act, 34 of 2005 (“the NCA”), the question remains what happens where, in the case of an unsecured loan or an exercised option to pay the initiation fee separately, that fee is not paid “upfront” or immediately when the credit or loan is taken up, but only later, that is when payment thereof is “deferred”? Can such a deferred fee attract interest?

It is important to note that Judge Davis once again emphasised the “numerous drafting errors” in the NCA, which led him to consider the rules of legal interpretation when interpreting the NCA. He specifically considered both the rights and responsibilities of consumers and credit providers, and noted that, insofar as the balancing of interests go, the monetary implications are rather marginal to each individual consumer (should interest be levied) but may be substantial for the credit provider, depending on the volume of consumers to which such credit and deferment is granted. He further noted that the NCR’s one-sided contention that the adding of interest on a deferred payment of initiation fees would make the cost of credit too expensive for consumers, is not justified.

The Applicants’ interpretation was therefore declared to be preferred in order to give a business-like and purposive interpretation on the issue of the charging of interest on deferred initiation fees in the context of the NCA as a whole, in respect of short-term unsecured loans.

Accordingly, it was declared that the charging of interest on short-term and unsecured transactions on initiation fees where such fee is deferred, i.e. where a consumer cannot pay the fee upfront, is permitted.

Full service fee in the final month

Insofar as the question pertaining to pro-rata services fees is concerned, Judge Davis considered regulation 44(4) which provides that “a service fee must be charged for a calendar month in which it is due and payable and on a pro-rata basis where the credit agreement was concluded during the course of that calendar month”. In this regard, he noted that the regulations are silent on what happens to a fee where the agreement terminates during the course of the last calendar month of the agreement’s lifetime.

Judge Davis held that, had if it had been the intention of the Minister to formulate a general principle of pro-rata payment of the service fee, there would have been no need to refer to the aspect of commencement of the agreements. Therefore, after the first month of a credit agreement, credit providers are entitled to charge the full maximum prescribed service fee per month for the lifetime of the agreement, including the calendar month during which an agreement terminates.

The MFSA also confirmed on 31 August 2020 that it had not received a notice of appeal from the NCR or the DTI, which appears to be a great win for the MFSA, its members and all other unsecured credit providers.

Please click here to download a copy of the full judgment.

Should you have any queries, please contact Mieke Whitehead from Moonstone Compliance’s NCA department on 021 883 8000 or by email nca@moonstonecompliance.co.za.”

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