Pre-agreement assessment as a measure to prevent reckless credit granting

Abstract

The central thesis of this dissertation is that efficient pre-agreement assessment is a primary and effective means of preventing reckless or irresponsible lending which is one of the root causes of consumer over-indebtedness. Accordingly an examination of best practices in pre-agreement assessment of credit consumers with a view to preventing reckless lending and the resultant over-indebtedness is paramount to engaging in a meaningful discourse on the role of pre-agreement assessment in a responsible lending regime and desirable scope and extent of such assessment so as not to have a too paternalistic ?Nanny-style? mode of regulation that stifles the credit market and puts access to credit out of reach of many consumers . The 2012 Financial Stability Board Principles for Sound Residential Mortgage Underwriting Practices and the 2013 World Bank Report on Responsible Lending is used to provide a framework of what would constitute broad best practices in the context of pre-agreement assessment as a responsible lending practice focused on the prevention of consumer over-indebtedness. A discussion is provided of the EU approach to creditworthiness assessment as set out in the 2008 Consumer Credit Directive and the very recent and more progressive 2014 Mortgage Credit Directive as it is submitted that especially the 2014 Mortgage Credit Directive provides a good example of creditworthiness assessment trends that are aligned with the observations made in this regard by the World Bank and Financial Stability Board as international standard setting bodies. On the African continent South Africa can be regarded as a developing jurisdiction that has made significant strides in establishing a well-regulated credit market by introducing a comprehensive legislative framework for credit regulation in 2007 by means of the National Credit Act (NCA) 1. This piece of legislation has introduced the novel concepts of ?over-indebtedness? and ?reckless credit? into South African law and makes extensive provision for debt relief to over-indebted credit consumers. The dissertation examines the evolution of pre-agreement assessment in terms of the South African National Credit Act in detail and also comments on some challenges to proper pre-agreement assessment. Chapter 4 examines the progress made in Lesotho in the context of pre-agreement assessment, remarking that a major drawback in this regard is the lack of a comprehensive legislative framework for credit regulation. Ultimately best practices are extracted from the discussion in Chapter 2 to benchmark the pre-agreement procedure mandated in the South African National Credit Act 34 of 2005. The dissertation further considers any insights for Lesotho on whether it is appropriate to follow the South African example, given that it appears to follow in the footsteps of South Africa insofar as its endeavours to address reckless lending through pre-agreement assessment is concerned.