Banks cautioned against reckless lending

26 July, 2006

The Ombudsman for Banking Services is experiencing a slight upsurge of complaints from bank consumers who have run into financial trouble after taking up unsolicited offers of credit from one or more of the major banks, according to Advocate John Simpson, Complaints Investigation Manager for the Banking Ombudsman.

Simpson explained that once people start falling behind on their repayments, the interest and legal costs snowball, often leaving the borrower with a lifelong financial burden.

“We suspect, from what we have heard, that the banks are engaging in an all-out drive to gather as many clients as they can ahead of the National Credit Act coming into force in June 2007,” said Simpson.

Simpson explained that that Act is specifically aimed at stamping out what it calls reckless lending, which includes entering into a credit agreement that would make the consumer over-indebted. Credit providers will not be permitted to merely increase credit limits without first complying with the prescribed formalities. Penalties for non-compliance with the Act range from the suspension of an agreement to an administrative fine of up to 10 per cent of the credit provider’s annual turnover.

What the banks appear to have forgotten, cautions Simpson, is that the Code of Banking Practice currently requires the banks to market and approve credit responsibly. The Code further requires the banks to properly assess a client’s ability and willingness to repay the loan. The Ombudsman for Banking Services is, in effect, the enforcer of the Code.

The banks should view the complaints received by the Ombudsman as an early indication that some borrowers will readily resort to the provisions of the National Credit Act to get off the hook of their financial obligations if they run into financial difficulties.

Simpson advised the banks to review their marketing and loan assessment procedures immediately, to prevent future problems from arising.

Consumers were cautioned, on their part, to be wary of unsolicited loan and credit card offers, particularly in light of the real possibility of further rate increases. Loan applicants are further encouraged to be honest in declaring income and expenditure and to be realistic in assessing their ability to repay a loan.

Some borrowers were flying so close to the wind that the recent half-a-percentage point rate hike was sufficient to capsize them.