| Relief
for sureties is on the way The National Credit Act (the Act) that came into force on 1 June 2006 will bring a neglected group of consumers in from the cold. They are the people who stand
as sureties (or as guarantors, to use the term used in the Act) for the
debt or obligations of others. Typically, they are parents assisting their
children with student loans ("emotionally transmitted debt");
company directors who, sometimes unwittingly, accept liability for debts
run up on the company credit card; and small business owners who make
themselves personally liable for the credit facilities of the business.
When one spouse acts as surety for the other, what results is what is
colloquially referred to as "sexually-transmitted debt". The Act accords credit guarantors the same status and protection as it does credit consumers (debtors/borrowers). Thus, they too will be protected against over-indebtedness and reckless credit. The Act enables a court to set aside a consumer's obligation under a reckless credit agreement and to reconstruct the consumer's obligations. Suretyship-related complaints, which encompass credit guarantees, may only account for 1% of the workload of the Ombudsman for Banking Services (OBS) but they give rise to a number of concerns. Chief of these is the use by the banks of universal (unlimited) suretyship agreements. Often signed by a consumer as a matter of routine, these agreements entitle the bank to hold the surety ("guarantor" in the Act) liable for any of the debts of the person for whom they stand as surety in the event of that person's default, no matter how or when the debts were incurred. Many a home has been repossessed and livelihood ruined because of universal suretyships. The OBS is strongly against this practice and has decided against the banks in several matters involving universal suretyship agreements over the years. In one instance, the bank sought to hold a mother who had signed as surety for her son's student loan (which was repaid) liable for his business debts incurred years later. The banks did not accept the OBS's recommendation that the use of universal suretyship contracts be outlawed in the Code of Banking Practice. In the Ombudsman for Banking Services' interpretation of the Act, this type of contract is prohibited by implication. In general, the Act treats credit agreements in the same fashion as credit guarantees. The regulations promulgated under the Act require that the total value of a credit facility be disclosed to the consumer (and likewise to the credit guarantor). An open-ended liability would thus not be permitted. The Ombudsman, Advocate Neville Melville, has said that he was glad that the inherently unfair practice of requiring that universal suretyship agreement be entered into is drawing to a close. Melville commented further: "This is an unexpected and perhaps even unintended windfall from the National Credit Act. It is a pity, however, that it took legislation to bring about the change. The banks wasted the opportunity of been seen to be acting consistently with their undertaking in the Code of Banking Practice to act fairly and reasonably, by voluntarily scrapping universal suretyships." Another problem area of suretyships that will be addressed by the Act is the practice of requiring customers to waive their common law defences and remedies. This practice will be prohibited by the Act. Regrettably, these and certain other provisions that give consumers new rights are only scheduled to come into effect in June 2007. Melville has suggested that the banks voluntarily implement the impending provisions of the Act before June 2007. |