The court challenge was brought by AAA Investments, a micro-lending operation in the Eastern Cape, which is registered with the MFRC. The microlender argued that the MFRC rules were tantamount to regulations and the council had assumed legislative powers in introducing these rules, which was unconstitutional and unlawful.
The MFRC took the case to the Supreme Court of Appeal. While the appeal was pending, some of the MFRC's powers were curtailed - specifically its rule against reckless lending which requires microlenders to use the National Loans Register before authorising a loan.
The National Loans Register is a database of consumer credit information to which all registered lenders must contribute information on loans they grant.
Last month (on September 21), the Supreme Court of Appeal in Bloemfontein unanimously decided in favour of the MFRC, upholding its appeal against the Pretoria High Court's decision.
The Supreme Court of Appeal found that the MFRC, in exercising its function to regulate microlenders, does not purport to be exercising legislative or other public powers which require a constitutional or legislative source.
Gabriel Davel, the chief executive of the MFRC, says that the council's efforts to stamp out reckless lending were hampered by the legal uncertainty. With the validity of its rules - including those regarding reckless lending - confirmed, the MFRC will step up its efforts to root out reckless lending and similar unscrupulous practices.
The Supreme Court of Appeal judgment means that the MFRC rules have been declared valid and that the legal and regulatory framework has been declared legal and enforceable.
The judgment ensures that the MFRC can protect borrowers against unscrupulous lending practices. It similarly creates certainty for lenders who comply with the MFRC Rules and the Exemption Notice.
Some changes were also introduced. Microlenders are now by regulation, required to give potential borrowers a quotation on a loan, which must be valid for five business days. This allows the borrower to shop around for the best deal.
Moneylenders are required by law to register with the MFRC if they want to charge interest rates greater than that those allowed by the Usury Act.
The lender may not charge a consumer any fee if the loan is not granted; except where the fees are for developing and evaluating a business plan.
Consumers must be given reasons as to why their loan applications have been rejected. If the reasons include a bad credit record from a credit bureau, then the lender must provide details of the credit data so that the information can be verified.
The lender must always provide the consumer with written information on the loan agreement, including the loan amount, annual rate of interest, total amount repayable, amount and number of instalments, nature and amount of any insurance, and penalty interest in case the borrower defaults.
The borrower must be given an opportunity to read and understand the contract before signing and be provided with a copy after signing. The lender should also explain essential parts of the contract in a language best understood by the borrower.
The lender must - on demand - provide the borrower with a statement setting out the charges levied, the amount already paid and the outstanding balance.
The lender must allow for three working days within which the borrower can cancel the contract and return all money that has been advanced to him or her.
If the repayment period is longer than 12 months, the lender may require up to 60 days written notice, but only if this is stipulated in the loan agreement.
Lenders must consider the applicant's level of indebtedness, their ability to re-pay the loan and other commitments (for example, municipal service payments and family maintenance payments).
The MFRC was set up by the Minister of Trade and Industry to regulate the activities of the microlending sector and to protect consumers against deceptive and unfair lending practices in terms of the Usury Act Exemption Notice of June 1999.
Microloans are money lending transactions where the loan amount does not exceed R10 000 and which are repayable within three years of the loan being made.
Normal bank loans are regulated under the Usury Act, which, among other things, caps the interest that you may be charged on a loan. Some banks do having microlending divisions.
However, microlenders operate under the Usury Act Exemption Notice, which allows them to charge any rate of interest that they choose. In other words, microloans are not subject to a maximum.
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