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New bill will have a profound impact

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The Department of Justice and Constitutional Development recently published a general notice in the Government Gazette, inviting interested parties to comment on the proposed Debt Collection Amendment Bill. Comments are due before 30 November 2015.
Peter Rafferty, CEO of debt collection company FutureSoft, says the bill must be deemed as “profoundly controversial” as it seeks, amongst other things, to make the Act, once promulgated, applicable to attorneys as well. This is a market first.
Rafferty says that, without diminishing the ambit of the amendments, the bill further expands on the codes of conduct and creates the capacity for an inspectorate.
One specific amendment (contained in Section 15 of the Bill) deals with improper conduct by debt collectors (and attorneys); and sub-section (1) (g) is the subject of this specific article, which reads as follows:
“Section 15(1). “A debt collector may be found guilty of improper conduct if he …
(g) charges collection costs, and initiation fees, service fees, default administration charges or other charges which exceed the unpaid balance of the principle debt at the time of default.”
“Many aspects of the Bill, and Section 15(1)(g) specifically, remind me of many ‘one-page’ contract that I have seen as a lawyer; that were completely inadequate as far as stipulating rights and obligations of the contracting parties going forward,” Rafferty says.
“How many times have we seen that a poorly drafted contract that contains far too little information creates a problem later on, when parties disagree on the aspects – which were not included on paper? Numerous times,” he adds.
“This bill is, in my mind, is exactly the same – and could have a calamitous effect on attorneys.”
He says the new bill will adversely affect attorneys and, while they will do everything in their powers to sideline the bill, it will ultimately be passed.
This will leave them in a potentially parlous state, as their fees will diminish.
Rafferty would not estimate the damages faced by attorneys, but says the amount of the “crash” cannot be quantified at this point.
He adds that the laymen reading Section 15(1)(g) may not identify the massive problem created by it, as the essence of the section creates the impression that it is consumer-orientated and therefore to be deemed a good thing.
“While I agree fully with the intention of protecting consumers against abusive debt recovery practices, I am acutely aware of the impact that poorly drafted legislation has on credit providers and consumers alike.
“We need to step back in time for a second in order to see what chaos will ensue if the Bill, in its current form, is promulgated.”
Common Law In Duplum Rule

Many years ago the common law In Duplum Rule had become entrenched in our law. The intention of the rule was to prevent interest from accruing to unpaid debt without limit. The essence of the rule was good, but it had its downfalls.

Summarised in laymen’s terms, the rule provided that interest on a debt will cease to run when the total amount of arrear interest has accrued to the point that it was equal to the outstanding principal debt, i.e. the amount that was originally owed.
An example would explain it better. For example:
Joe Soap lends R100 000 from his bank. Going forward, the bank is entitled to calculate interest on the outstanding amount – and to add to it if need be. Joe Soap makes payments towards the loan and, over time, pays back more that the initial R100 000 lent, as he is expected to repay interest as well.
According to the common law In Duplum rule, the arrears interest (i.e. the portion of interest that has not yet been paid) cannot exceed R100 000. Many people mistakenly believe that the total debt repaid over time may therefore not be more than R200 000.

The fact is that Joe Soap could repay much more than R200 000 if the loan repayment period is long enough and the interest rate is high enough- and there is nothing wrong with this.

Rafferty said the secret lies in the use of the term ‘unpaid interest’. As Joe makes payments towards the debt, a portion of each payment is allocated to the outstanding interest. The portions allocated towards interest reduce the unpaid interest and therefore the total interest accrued to the account over time – and may be more than the initial debt.

The effect is that, if interest reaches its maximum and is capped; and a payment is received – and a portion thereof is allocated towards the arrears interest- interest may accrue once again, until it reaches the maximum.

This continues to happen as long as Joe makes payments towards his account.

The National Credit Act

Section 103(5) of the National Credit Act 34 of 2005 brought about a number of changes to the common law In Duplum Rule.

It provides as follows:

Section 103(5): “Despite any provision of the common law or a credit agreement to the contrary, the amounts contemplated in section 101(1)(b) to (g) that accrue during the time that a consumer is in default under the credit agreement may not, in aggregate, exceed the unpaid balance of the principal debt under that credit agreement as at the time that the default occurs”

Section 101(1)(b) to (g) loosely include initiation fees, service fees, interest, cost of any credit insurance, default administration charges and collection costs.

This is a departure from the common law In Duplum Rule as it contains the following three changes:

Firstly, it no longer only includes interest in the calculation. It includes additional charges of which some typically accrue to the credit provider (like administration charges).

Secondly, it provides that, if the sum of these charges (which include interest) reach their maximum after the debtor defaults and are subsequently capped, those charges may never again start accruing on the account.

And thirdly, Section 103 provides that one uses the amount outstanding at the moment of default together with the actual date of default as the two anchors for calculating the maximum.

An example, once again:

Joe Soap lends R100 000 from the bank and agrees to repay the loan off over 20 years. He also agrees to pay interest at the rate of 10% per year. The bank is allowed to charge an administrative fee of R50 plus Vat per month.

After ten years of faithfully repaying the loan Joe misses a payment and the account goes into a state of default. At that moment, the outstanding balance is approximately R73 000.

According to Section 103, the amounts accruing to the account from that point onwards, may not exceed R73 000.
The two examples above clearly indicate the different results achieved by the common law In Duplum rule and Section 103 of the National Credit Act.
There is one complication, however, which relates to the fact that the National Credit Act only applies to certain types of debt. Therefore, it is very possible that one of Joe Soap’s outstanding debts are subject to the workings of the National Credit Act while another is subject to the common law In Duplum rule.

This happens in practice, on a daily basis.
So much for the history lesson … what about the future?

Debt Collectors Amendment Bill, 2016

If we assume that the Debt Collection Amendment Bill is enacted in its current form, the mechanisms of Section 15(1) (g) will effectively create a third way of capping additional charges.

On a close inspection of the section, one will note that the word ‘interest’ has been omitted from the text. In other words, where the common law In Duplum rule uses only interest; and Section 103 of the National Credit Act uses interest combined with other charges; Section 15(1) (g) of the Debt Collection Amendment Bill ignores interest.

In addition, the Debt Collection Amendment Bill will be applicable to all debt recovery agents and attorneys who collect unpaid debt on behalf of their clients.

“In a strange twist of events, this completely nullifies the application of the common law In Duplum rule … even in as far as it is currently applied to debts which are not subject to the National Credit Act.” said Rafferty.

The Bill, in its current form, will create confusion. If experts at the law, such as attorneys and debt recovery specialists, are unable to apply these rules correctly; how much more will the consumer lacking the legal skills to apply the various rules struggle to apply the correct formulae?

Clearly, the confusion should be obviated by aligning the Debt Collection Amendment Bill with all other credit-related legislation – and more specifically, the National Credit Act, before promulgating it.
This can be achieved by the removal of Section 15(1)(g) from the Debt Collection Amendment Bill or by referencing Section 103 of the National Credit Act.

In the latter instance, it will still signal the death of the common law In Duplum rule.

Peter Rafferty
Chief Executive Officer
FutureSoft
www.futuresoft.co.za