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Urgent intervention is needed to stop loan sharks from having up to 75% of vulnerable people’s wages deducted. While these unscrupulous lenders continue to fleece vulnerable debtors, consumers have no money to buy food for their children.
A new report by the Stellenbosch University (SU) Law Clinic comes shortly after a mother from Butterworth in the Eastern Cape killed her four children before committing suicide because she had no money for food. Grants for children in a poor household are often taken up by paying debt to loan sharks.
The report reveals that unscrupulous lenders use a bag of tricks to side-step the legal requirements of the emolument attachment order (garnishee order) system, which limits the amount that can be deducted from an employee’s salary to a maximum of 25%.
“While garnishee orders remained a potentially lucrative and secure collection instrument, it is now considerably more difficult to issue them. Consequently, creditors turned to alternative methods to keep expanding their lucrative business enterprises by extending reckless loans while continuing to reap the benefits of wage garnishment,” says senior attorney and lecturer at the SU Law Clinic, Dr Stephan van der Merwe.
He conducted the investigation and compiled the report upon receiving several requests from journalists, members of the public and professionals working in the debt industry. Using narrative statements from debtors affected by these deductions, as well as documents, such as credit agreements, affordability determination schedules, debtor pay slips and creditor statements, he investigated the widespread payroll deductions system.
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This system allows creditors to enter into credit agreements with debtors on the basis that the loan, interest and fees will be collected from the debtor’s employer.
Van der Merwe says it seems that vulnerable people are lured into debt traps they cannot escape as outstanding loans are simply incorporated into new loans, which opens the way for yet more loans to be extended to the unfortunate consumers.
He says the availability of the unregulated payroll deduction mechanism seems to encourage this behaviour by creditors.
The report also shows that unscrupulous lenders can count on indifferent or complicit employers who make deductions that are often completely disproportionate to someone’s salary.
“In many instances, deductions on loans are made in favour of multiple creditors and for amounts well above 25% of the consumer’s salary. These deductions are unrestrained and shocking. In some cases, employees received zero income,” says Van der Merwe.
He says in one case, a payroll deduction of R11 178 was processed against a consumer’s monthly salary of R15 041. In another case, payroll deductions totalling R14 566 were processed in favour of two creditors against a consumer’s monthly salary of R21 475. In both cases, these debtors received a net pay of zero rand to feed their families and pay for their other expenses.
“There are instances of payroll deductions appearing as misleadingly identified items on a consumer’s salary slip. For example, a deduction on the salary slips of a consumer who is a member of the South African Municipal Workers Union (Samwu) is identified as ‘X Finance SAMWU’, while the particular creditor had no affiliation to this union.”
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The report also reveals that when employees query salary deductions with their employers, they are told that employers are obliged to keep deducting amounts as long as the creditor insists on it, based on the credit agreement and the debtor’s irrevocable instruction for an amount to be deducted from their wages to repay their debt in terms of the garnishee order.
“In addition, it does not help that there is no clarity on the content of these agreements between creditors and employers and how they benefit employers. It is also troubling that the credit agreements considered do not contain details demonstrating the escalating effect that missed payments will have on the outstanding balances of loans,” Van der Merwe says.
An actuary at the university helped Van der Merwe with the intricate financial calculations related to the deductions. “It is concerning that the actuary found that the cost of the credit insurance (in the case in point stipulated as R5.50 per R1 000 of the deferred amount) creditors added to these loans is based on the full initial loan amount and not the decreasing outstanding balance.
“As a result, the total insurance premium is excessive relative to the size of the loan, such as credit life insurance costing R32 000 for a loan of R97 000. Had the premiums been based on the decreasing outstanding balance of the insured loan, the total cost would be R19 000 instead of R32 000.”
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Van der Merwe calls on lawmakers to develop legislation to protect vulnerable debtors against payroll deductions and unscrupulous lenders. “We need urgent intervention to stop the prevailing unconstitutional and unconscionable abuse of the payroll deduction mechanism.”
He says the garnishee order mechanism should not serve as incentive for unscrupulous creditors to get a financial windfall by inflating reckless loans with disproportionate costs based on among other aspects, high rates, initiation fees, monthly service fees and credit life insurance.
“The current lack of regulation about this is quite simply irresponsible.”
Van der Merwe says the findings and recommendations of the report have already been shared with the National Credit Regulator, the Credit Ombud and the department of trade, industry and competition.
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