Another Setback for Banks in High Court

A recent decision from the high court in Pretoria ruled that banks cannot terminate a loan agreement once a consumer opts for debt review.

The Banking Association of SA (Basa) attempted, but ultimately failed, to argue that entering debt review effectively cancels the original loan agreement. This would have allowed them to impose elevated interest rates and additional fees.

Read:

Landmark court case aims to prevent creditors from overcharging [Aug 2018]

Two-thirds of disputes resolved in favor of consumers – Credit Ombud [Jun 2023]

According to legal consultant Leonard Benjamin, this ruling represents a victory for consumers.

“While this case revolved around the ‘in duplum’ rule, it highlights the banks’ exploitative foreclosure methods, showing that for years, banks have been selling homes of individuals who are not truly in default.”

The term in duplum (‘double’) refers to a common-law principle that states interest on a loan halts once the unpaid interest equals the total capital owed.

This principle has been integrated into the National Credit Act (NCA) to protect consumers from accruing interest and fees that exceed twice the amount owed at the time of default.

Benjamin expressed concern over the number of homes and vehicles seized in South Africa due to the banks’ self-serving interpretations of the NCA and the in duplum rule.

Debt counsellor takes action

The case was brought to court by debt counsellor Chantelle Scott against the National Credit Regulator (NCR), Basa, and prominent lending banks.

Scott aimed for a declaratory order clarifying that entering debt review does not cancel the original credit agreement.

She argued that the in duplum rule remains applicable during debt review, inherently limiting how much banks can charge for overdue payments.

Basa and major lending banks joined forces to contest this order, claiming that consumers are no longer in default once they receive a debt rearrangement order (DRO).

Read: How to address issues with debt collectors

The banks contended that the in duplum rule, which restricts charges upon default, no longer applies when a DRO is implemented.

Shooting themselves in the foot

The full bench of the Pretoria High Court sided with Scott and granted her the requested order.

The banks have filed an appeal against the court’s decision.

Benjamin suggests that the banks may not realize they could be undermining their own interests if they succeed in reversing the ruling.

“The banks’ argument is fundamentally based on arrears capitalization, a typical debt relief strategy that allows overdue payments to be addressed over the loan’s lifespan within an adjusted repayment plan,” he clarified.

Adjusted repayment plans are often included in credit agreements, particularly with variable interest rates.

“When interest rates change, the credit provider must adjust the monthly repayment to ensure the balance, along with interest at the new rate, is cleared within the remaining loan period,” Benjamin pointed out.

“Essentially, a new repayment schedule is created each time the interest rate shifts, which means the outstanding balance includes arrears, removing the consumer from default status.”

The banks claimed that a repayment plan derived from debt review typically results in a longer loan term, leading to lower, more manageable monthly payments.

However, arrears can also be addressed without extending the loan term; increased monthly payments can facilitate repayment.

Arrears capitalization occurs by following the terms of the agreement when interest rates fluctuate.

Benjamin commented that most banks automatically recapitulate any arrears whenever interest rates change, distributing them evenly over the remaining loan duration.

However, banks often continue to pursue customers over alleged “arrears” even after having restructured the debt to spread out the arrears across the remaining term.

In reality, customers with arrears face higher monthly payments while banks also attempt to recover the nonexistent arrears, a practice referred to as ‘double-dipping’.

Moreover, some banks explicitly exclude arrears from their calculations of new monthly payments, likely aware of the double-dipping issue. Benjamin argues that this exclusion contradicts the banks’ own loan agreements. “In my extensive review of loan agreements, I have not encountered one that permits this.”

Impact of term extension on monthly payments

Consider a loan agreement requiring the consumer to repay R1,000 over 10 months, with a monthly payment of R100.

If the consumer makes the first three payments but defaults on the fourth and fifth, the outstanding balance becomes R700, resulting in arrears of R200.

The debt is restructured to facilitate easier repayments, reducing the monthly installment to R70; however, this extends the loan term by an additional five months, meaning the R700 still owed must be paid back over the next 10 months.

This adjustment means the consumer will no longer be deemed to be in arrears. The banks in the Pretoria High Court case attempted to argue otherwise.

Arrears can also be resolved without extending the loan term; increasing the monthly payment to R140 will clear the R700 balance, including the R200 in arrears, within five months.

Read:
Standard Bank’s Tshabalala questioned over ‘vindictive’ home foreclosure [Aug 2017]
FNB home repossession goes terribly wrong [Nov 2024]
Standard Bank criticized in court after auctioning Soweto home for R200 [May 2025]
Court finds Absa’s accounting in ‘disarray’, dismisses effort to attach property [Jun 2025]
Standard Bank’s ‘disproportionate’ attempt to foreclose on Vavi’s home fails [Jun 2025]

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