How R50,000 loan became a R1.4m debt
Absa is claiming it is owed R1.4-million by a consumer whose outstanding balance on his personal loan was R52,000 at the time of going into debt review seven years ago.
The consumer, Herman van Zyl, is a 58-year-old electrician in Welkom, in the Free State. In 2009, he fell on hard times when the mine he was working for stopped paying salaries and closed. In a bid to save his house from repossession, Van Zyl, who is married in community of property, went into debt review with this wife, Willene.
The loan was taken out in October 2008 to help the couple's son fund his studies and to do some home improvements, Van Zyl says.
He was obliged to pay off the loan in instalments of R1550 a month over 60 months. The total cost of credit, including repayments, fees and interest, was about R93,000.
Van Zyl had paid 10 instalments before he lost his job, and in the six months that he was unemployed was unable to service the loan.
Ever since then he has been in debt review and has never missed a payment. To date he has paid Absa R102,828 towards his debt, according to the bank.
Debt counsellor Bernidene Thieroff said it could not be right that her client, who turned to her after his first counsellor had absconded, owed Absa R1.4-million. She turned to fellow debt counsellor Michelle Barnardt for help in dealing with Van Zyl's conundrum.
Barnardt said if there had "not been a miscalculation, it is a travesty of justice; it was never the intention of the National Credit Act for debts to escalate in debt review".
She questioned why statutory in duplum (Latin for double the amount) had not come into play. In terms of the rule, interest, fees and all costs on the debt are capped at double the outstanding balance at the time of defaulting on repayments.
But Tejal Desai, head of debt review at Absa retail and business banking, said there had been no error. A "suboptimal" debt-review court order was the reason Van Zyl's debt had escalated while in debt review.
In terms of the court order, the personal loan was extended to 25 years with a R400 monthly instalment. Desai said such court orders led to "negative amortisation, where the consumer's revised repayments fail to cover both the capital and interest obligations, resulting in the ballooning of the outstanding balance over time".
The R1.4-million outstanding balance thus included projected interest over the remaining term of the loan up to March 2038, in terms of the court order. The debt in review attracted interest of 15.5% over the 25 years.
Tejal said the in duplum rule did not apply because Van Zyl had never been in default. Absa was bound by the court order, but would accept a "variation of the court order'', as well as help Van Zyl by charging no interest. That was if the debt-review proposal was revised and the court order amended.
Refinancing vs rearranging a debt
Debts in debt review are being refinanced instead of rearranged, to the detriment of overindebted consumers.
This is according to Michelle Barnardt, a Nelspruit-based debt counsellor who is an outspoken critic of the way debt counselling is being done.
"The National Credit Act makes a clear distinction between the rearrangement of debt and the recalculation of debt," she said.
The "only time a debt counsellor is permitted to do recalculations is when incorrect interest or fees have been levied on the consumer. However, debts in debt review are routinely recalculated. Built into the software programs used by debt counsellors to produce proposals are calculations that effectively refinance the debts of overindebted consumers. These programs are endorsed by the National Credit Regulator."
Barnardt wrote an open letter to the regulator last year, raising this and other deviations from the act.
National Credit Regulator CEO Nomsa Motshegare declined to comment on the matter this week.