In 2016 I wrote an article detailing how to calculate the minimum expense norms in terms of Regulation 23A(9) of the National Credit Act Regulations. In essence, the table creates a table of minimum ‘deemed’ expenses that a debtor has in order to combat the problem of debtors lying about what their monthly expenses were (in order to get the credit provider to give them a loan).
At a high level, the table was intended to follow three steps:
- Determine the income band where the debtor fits in. There are 5 separate bands which are:
- Earning R800 or less
- Earning between R800.01 and R6250.00
- Earning between R6250.01 and R25 000.00
- Earning between R25 000.01 and R50 000.00
- Earning more than R50 000.01.
- Once you know which band the debtor falls in you know what the ‘minimum monthly fixed factor’ is. Like the income bands there are five of them:
- R1 167.88
- R2 855.38
- R4 905.38
- The final step is to add a percentage amount to the sum based on the amount of income which exceeds the minimum amount. The way this was intended to work (and how I set it out in the original article) is as follows:
- Income of R20 000 means the debtor falls within bank d) above which means that their minimum expense is R 2 855.38.
- The amount of income above the minimum bank is R20 000 – R6250.01 = R13 749.99.
- 8.2% of R13 749.99 is R1 127.50.
- R1 127.50 + R2 855.38 = R3 982.88
- SO: The debtor either has:
- a minimum monthly expenditure of R3 982.88, OR
- He must prove that his expenses are less than R3 982.88, OR
- He has expenses greater than R3 982.88.
All of that is necessary to bring us to the problem which is a tiny little typo in Table 1’s last column. At present the column reads:
‘Monthly Fixed Factor = % of Income Above Band Minimum’
What it should have read is:
‘Monthly Fixed Factor + % of Income Above Band Minimum’
Obviously, this is easy to miss as the only change is replacing the ‘=’ with a ‘+’ sign.
So what does this mean? Right now there is a good argument that credit providers can rely on the Minimum Monthly Fixed Factor alone and do not have to add the Monthly Fixed Factor percentage. In my example above what this would mean is that the creditor would be allowed to accept a debtor alleging that their minimum expenses were R2 855.38 rather than the higher bar of R3 982.88.
While this may seem to be a trivial point, the issue really becomes emphasised in the largest income threshold. For example, a person wishes to get a loan of R20 million. He approaches a bank who asks him what his monthly income is. He says it is R100 000 per month. In terms of the way the Regulations are currently published the bank would be entitled to assume that his minimum expenses per month are R4 905.38 rather than the R8 280.38 which the legislature (presumably) intended.
While there may be an argument that the Regulations must be interpreted to correct the obvious error, in the meantime a gap has been created for debtors to lie about their monthly expenses and for credit providers to validly grant loans by assuming a lower minimum expense norm. This also means that credit providers who granted loans when the debtor had too many expenses may just have a way to avoid the loan being declared reckless.
Finally, if this article seems complicated that is because it actually is (and that is the fault of the Regulations!). Please contact us if you want to discuss what this means for you.