A new report by the Stellenbosch University (SU) Law Clinic reveals that unscrupulous lenders continue to fleece poor South African debtors with deductions of up to 75% of their monthly wages leaving them with little to no income to maintain themselves and their dependants.

These lenders use a bag of tricks to side-step the legal requirements enforced by 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 pivoted 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 who conducted the investigation and compiled the report upon receiving several requests from journalists, members of the public and professionals working in the debt industry.

He used narrative statements from debtors impacted by these deductions, as well as various documents such as credit agreements, affordability determination schedules, debtor pay slips and creditor statements to investigate the widespread payroll deductions system. 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.

According to Van der Merwe, debtors seem to be lured into debt traps from which they are unable to escape as outstanding loans are simply incorporated into new loans, which opens the way for yet more loans to be extended to these debtors. The availability of the unregulated payroll deduction mechanism seems to encourage this behaviour by creditors.

The report shows that unscrupulous lenders can also count on indifferent or complicit employers who make deductions that are often completely disproportionate to a debtor’s salary.

“In many instances, deductions on loans are made in favour of multiple creditors and for amounts well above 25% of the debtor’s salary. These deductions are so unfettered and egregious that in some cases employees received zero income.”

“For example, in a specific case, a payroll deduction of R11 178 was processed against a debtor’s monthly salary of R15 041. In another case, payroll deductions totalling R14 566 were processed in favour of two creditors against a debtor’s monthly salary of R21 475. In both cases, these debtors received a net pay of zero rand with which to maintain themselves and their dependants for the relevant months.

“There are instances of payroll deductions appearing as misleadingly identified items on a debtor’s salary slip. For example, a deduction on the salary slip of a debtor 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 said union.”

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 this, 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.

“It also doesn’t help that there is no clarity on the content of these agreements between creditors and employers and how they benefit employers,” says Van der Merwe.

“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,” he adds.

Van der Merwe also received assistance from an actuary at SU who lent a hand with the intricate financial calculations related to the deductions.

“What is concerning is 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) added to these loans by creditors 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 – R32 000 insurance cost 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.”

Van der Merwe calls on lawmakers to affect legislative development to protect vulnerable debtors against payroll deductions and unscrupulous lenders.

“We need urgent intervention to veto the prevailing unconstitutional and unconscionable abuse of the payroll deduction mechanism.

“This mechanism should not serve as incentive to unscrupulous creditors to gain financial windfall by inflating reckless loans with disproportionate costs based on inter alia high rates, initiation fees, monthly service fees, and credit insurance. The prevailing lack of regulation in this regard is quite simply irresponsible.”

He 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 and Industry.