The news that a credit amnesty organised by the Department of Trade and Industry (DTI) and the National Credit Regulator (NCR) is likely to become effective before the end of this year has undoubtedly delighted many consumers.
The amnesty, which still has to be approved by Cabinet, would involve the once-off complete removal of all adverse credit information listings by SA’s credit bureaus - irrespective of non-payment - and the on-going removal of all paid-up adverse listings and paid-up judgments.
However, the news may well bring its own set of challenges as banks will have absolutely no way of gauging which clients are a safe bet and which ones have a history of defaulting on payments.
Prospective homebuyers should not be too quick to celebrate, says Rudi Botha, chairman of BetterBond, because the amnesty could actually make it more difficult for them to obtain home loans than is currently the case.
He says that it has been estimated that the amnesty would immediately affect approximately 1.6-million people who have impaired credit records. "Many will no doubt see it as a good move, since many credit applicants – including home loan applicants – have been turned down in recent years for apparently minor ‘black marks’ on their records."
However,it is worth considering that when the amnesty was first mooted by a committee of the National Council of Provinces at the beginning of the year, the banking industry immediately said it was ‘totally against’ the idea and has strenuously maintained this stance to date.
Banking Association MD Cas Coovadia has been quoted as saying that it is unreasonable to expect banks to lend money when there is no information available from credit bureaus, and that their response to all these records being scrubbed will either be not to lend money or to “price for the additional risk”.
Meanwhile, Mark Seymour, chairman of the Credit Providers Association, has warned that removing “blacklisted” creditors from the databases of the credit bureaus will make all credit providers more cautious when lending money because they will find it much more difficult to assess creditworthiness without records.
“And therein lies the potential problem for homebuyers trying to obtain home loans after the amnesty,” says Botha. “Although it is unlikely that the banks will completely shut the doors on borrowers, they will not be able to tell the difference between those who have previously had problems managing their credit and those whose credit records are genuinely clean – and the latter could end up being penalised by having to pay higher rates of interest on their loans as the banks cover their additional lending risk.”
It may be unfair, but the adage 'a leopard doesn't change it's spots' leaps to mind. Sure there are bound to be those who, through no fault of their own, have defaulted on payments and who have been blacklisted. Unfortunately, there are others who seemingly make a career of skipping or defaulting on payments entirely. Banks across the globe use credit bureaus to ascertain what sort of clients they are dealing with and it is somewhat frightening to think that South Africa is going to buck this trend. As pointed out above, the ramifications could affect everyone, including those whose credit record is squeaky clean.
For this reason, Botha says that anyone who has been sitting on the fence about buying a home would be well-advised to make a decision to do so now, before the amnesty is implemented. “If you do have a clean credit history, so much the better, as you will probably be able to secure a loan at a favourable rate, especially if you seek the advice of a good mortgage originator.
“But even if you do have some black marks on your record, now is the time to clear them up and apply for a loan, as you will at least have proof to show lenders that you have done something positive and responsible about putting your finances back on track. And that is likely to impress them a whole lot more than the blank slates they will probably be facing by next year.”