SA Affordable Housing July - August 2019 // Issue: 77 | Page 33

FINANCE MATTERS
entered into by a person must be in accordance with the
NCA. Simply put, ‘arm’s length’ is a term used to describe
the independent relationship between the lender and the
borrower, for example, a mortgage loan between a bank and
a person is at arm’s length but a loan from a parent to their
child, who is dependent on the parent, would not be an
arm’s length transaction.
The NCA prescribes that an affordability assessment of
the potential borrower is taken prior to a lender granting
credit, with the purpose to prevent reckless lending and / or
creating an over-indebted borrower. Granting credit to
people without doing the necessary affordability
assessment is simply reckless lending, while over-
indebtedness is used to describe a person who cannot
afford to pay back their credit obligations. In addition, the
NCA makes it obligatory on the lender to explain the terms
of the loan and the risks associated with signing a credit
agreement with the borrower.
Extending credit in all three instances constitutes
reckless lending when:
• Lending is granted without an assessment;
• Lending to over-indebted people; and
• Failing to explain the terms and risk of the credit
agreement.
The consequences for reckless lending can range from a
monetary fine to criminal charges and is dependent on the
seriousness of the offence.
When someone applies for a mortgage loan, a mortgagee
(the lender) will conduct an affordability assessment, which
is no different to an assessment that is conducted if the
person was taking any other form of credit. The first step in
an affordability assessment is to determine the applicants
real disposable income, which is calculated by deducting
expenses from the applicant’s gross income. Banks stipulate
that an applicant must provide supporting documents such
as a payslip and three months bank statements to validate
income and expenses.
The second step of the credit assessment is to examine
the applicant’s credit worthiness based on their credit
history. This includes all the debt owed by the applicant, all
the credit facilities that are currently available to the
applicant, the applicant’s detailed credit management track
record (ranging from late payments to default judgements)
and to determine whether an applicant has bad debt, which
a creditor has written off or if they were declared insolvent
by a court.
National Credit Bureaus have access to all the income
and debt records of a consumer, whose information is also
made available to NCA registered lenders. These credit
bureaus are also governed by the NCA and, based on their
comprehensive records, they provide lenders with
consumer credit scores.
A predetermined weighting is assigned to various
categories of credit worthiness criteria and is used to
calculate a credit score for a consumer of between 300 and
850. The higher the score, the higher the credit worthiness
of the applicant.
The score is determined by the following weightings:
• Payment history - 35%
• Debt - 30%
• Length of credit history -15%
• Types of credit - 10%
• New credit - 10%
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There is however no magical credit score number for
lenders. Over and above the calculation of a consumer’s
credit score, banks evaluate the consumer’s behaviour. A
behaviour scoring model examines past behaviour
(information) of the would-be consumer such as the
stability of employment, past credit history, educational
background, previous forms of credit and may include any
other relevant information that may affect the repayment of
the loan.
Some lenders even stress test potential borrowers, a
‘what if’ test, such as would the client be able to service
their debt if interest rates increased by 2%? A lender will
therefore consider both the credit score as well as their
behavioural score when deciding to grant a loan or not and
this may vary from lender to lender.
The behavioural scoring model is unique to each bank,
with its behavioural scoring model its intellectual property.
The model is tweaked to the risk the lender is willing to take
and it is these nuances that create a competitive market.
However, this should not downplay the importance of
having a good credit record, as this is the entry point
for credit.
Everyone can request one free annual credit report from
Credit Bureaus and consumers are encouraged to do so, as it
informs them of their financial wellbeing. Your credit record
will give you an indication of acceptable debt levels, how
you are managing your debt as well as alerting you to any
fraudulent debt that may have been taken out using your
details. This is particularly important as this has a marked
influence on the approval of loans by lenders.
According to the latest report by the National Credit
Regulator, South Africa has 25 million consumers with
active credit of which 10 million (39.3%) have impaired
credit records. Of the consumers with impaired credit
records, 24.1% are more than three months in arrears,
10.1% have adverse listings and 5.1% have judgements
and administration orders against them. An additional
12.6% of consumers that are considered in good standing
are in one to two months arrears and therefore at risk of
being adversely listed if their payment profile does
not improve.
Of particular concern in recent years is the increase in
unsecured and non-mortgage related credit agreements,
while there has been a slowdown in the growth of credit
extended for mortgages. Generally, this indicates that
consumers are increasingly taking out consumption credit
as opposed to wealth creating credit, such as a home loan.
This is supported by the latest South African Household
Wealth Index reports that the nett wealth of households
decreased between 2017 and 2018 by R449-billion.
In conclusion, we suggest that consumption debt is
inhibiting many households from being able to acquire a
home loan, that there is a need for households to reduce
existing debt levels and that many credit active households
need to improve upon their credit track record if they intend
to enter the property market, and in doing so create
generational wealth.
Pierre Venter is the general manager, Human
Settlements in Market Conduct Division at the Banking
Association South Africa.
JULY - AUGUST 2019
31