Changes To Emoluments Attachment Orders: Managing The Impact On Collections
On the 8th of July 2015 the Judge Siraj Desai (of the Western Cape High Court) handed down an important judgement regarding the legality of the way in which Emoluments Attachment Orders (EAOs) are currently being administered. The ruling draws attention to the abuse of the administrative processes surrounding EAOs by unscrupulous collection agencies. It further finds that certain sections of the administrative law around EAOs is unconstitutional. This ruling will almost certainly result in changes to the way that EAOs must be used by debt-collectors. These changes are likely to impose a greater burden on the collection agency, possibly even making the orders unusable as a debt-collection mechanism.
What are emoluments attachment orders
An emoluments attachment order is a court order that compels the employer of a debtor to pay part of the salary of the debtor to the creditor before paying the remainder to the debtor. These court orders are intended as a last resort but many debt collecting entities do not properly pursue alternative collections avenues as they view EAOs as a an easy alternative which is more likely to allow them to successfully collect.
The court case in the Western Cape High Court has brought to light several examples of the misuse of EAOs by unscrupulous micro-lenders and law firms acting on their behalf. Affordability assessments for certain EAOs were missing or incomplete. These incomplete assessments led to orders with monthly amounts greater than 50% of the debtor’s salary being issued. Many of the orders were obtained far from the debtor’s homes and workplaces in courts where the orders were subject to less scrutiny.
Judge Desai’s finding that sections of the Magistrates’ Court Act are “incompatible with the constitution” will need to be tested in the Constitutional Court, however it seems likely that the legislation regarding these orders will be reviewed. What legislative changes will be made is not certain. It could be that EAOs are abolished entirely, but what is more likely is that a greater burden will be placed on the collection agency to prove the affordability of the EAO to the debtor and that the debtor has given informed consent. It is also likely that the EAO process will take longer than it currently does. Both of these factors will result in increased cost to collection agencies using EAOs. If cost increases are large enough EAOs may become uneconomical.
As EAOs become more costly to use or completely unavailable as a collections method, lenders and collection agencies need to re-examine their lending and collections practices. In the case where EAOs are declared illegal there will be large costs associated with adopting and implementing different collections strategies as well as an immediate drop in collections from existing EAOs. Lending businesses that have a flexible and detailed model of their business based on the data at their disposal will be able to conduct scenario analyses to forecast these costs and understand the way in which their cash flows will be affected. The business can then make appropriate capital provisions.
Lenders will need to carefully mitigate the impact of the removal of EAOs as a collection mechanism. In this case, as in many others, the best means of mitigation is prevention. This means managing arrears and non-payment earlier and better. This can be achieved through several simultaneous interventions.
- Improving pricing and vetting when credit is originated. True risk-based pricing can offer better deals to the customers with a higher likelihood of paying which in turn will lead to a healthier credit book that pays better.
- Identifying customers at risk of being settled by competitors offering consolidation loans and taking steps to retain those customers deemed to be a good risk. Using historical settlement data customers at elevated risk of being settled can be identified. Those customers with good payment histories can be offered better deals in line with their up-to-date risk profile.
- Adopting more intelligent collections strategies through targeted collection agent interactions. Models can be built based on historical collection agent performance that can prescribe the best channels to use to contact debtors, when to contact them and even which collection agent will be most effective.
The legal landscape around emoluments attachment orders is shifting. These changes will bring relief to over-indebted consumers but they pose challenges to collections agencies and lenders. Lenders and collections agencies will need improve their businesses just to keep collections the same. However the changes also offer opportunities, those businesses able to leverage the data at their disposal and successfully adapt to these legislative changes will have an advantage over their competitors. They will be able to attract more business by offering better deals to good customers and better returns to their owners or the creditors on whose behalf they act.