You know the saying, 'If it's too good to be true, it usually is' — and this certainly applies to Rudco Finance. Rudco has promised home owners to fix your home loan at six percent per year for up to 20 years if you already have a mortgage and are looking to switch.

At iafrica.com, we've received a number of questions with regards to Rudco. According to one reader, Rudco asks for R5700 plus your first bond repayment up front once the bond has been approved. After that it will take up to three months to register the bond.

So what are the problems with Rudco? Well, it just does not make sense for someone to offer a loan less than the repo rate (currently at 10 percent). So one can only assume that something is amiss... and it is. At the end of last week the National Credit Regulator (NCR) released its findings after investigating Rudco. They were found to be in contravention of more than one of the provisions of the National Credit Act.

Lacking register

The act mandates that lenders are limited to charging R50 per month as service fees — but Rudco charges up to R1500. Although they have pre-agreement contracts as per the act, they do not fully comply with the conditions.

The NCR also found that their advertisements were misleading and that they contravened the National Credit Act. Rudco’s agents were also not provided with identification cards, nor did they receive adequate training. The NCR also found that Rudco did not keep an adequate register of its agents. Moreover, it found that before 1 June 2007 (the date on which the NCA was introduced) Rudco had contravened various sections of the Usury Act. The NCA replaced the Usury Act.

In addition, Rudco solicited management fees from borrowers before the loans were paid out — this is in contravention of the Usury Act; they did not disclose finance charges and the annual finance charge rate in the required manner that the Usury Act prescribed and they also failed to provide borrowers with copies of their agreements.

Deadline given

As a result, the NCR has instructed Rudco to stop soliciting service fees before advancing loans and to stop charging service fees exceeding R50 per month. Rudco must retrospectively issue pre-agreement statements and quotes and deliver copies of the documentation to borrowers who already have loans. They have to cancel all advertisements that contravene the act.

According to the regulator, Rudco must also come up with a way to reimburse borrowers for the amounts charged in contravention of the NCA and the Usury Act. They have been given until 3 September 2007 to do this.

The NCR said that they wish to draw the attention of consumers and agents to the fact that section 89(2)(e) of the National Credit Act determines that if Rudco Finance continues entering into credit agreements which do not adhere to the requirements of the Compliance Notice, such agreements will be unlawful.

How do they do it?

So in short it would appear that Rudco have more than had their knuckles rapped. However they are still in business.

And the NCR's findings still don't address the question: how can they do it? The CEO Rudi Visagie is not divulging where he gets his money from. Some sources are saying that he cross-subsidises the rates from a micro loan book that he is running.

According to an agent, he gets private funding — but why would anyone be happy with a six percent return when they can get nine percent in the money market.

No risk?

Another agent told me he is sourcing cheap money overseas. This in itself is hugely risky, because to try and predict what will happen to overseas rates and currencies for the next twenty years is pretty much impossible. He would have to forward purchase currency to manage his risk and that would cost billions of rands, that he himself has admitted he does not have.

If you are thinking 'I don’t care, as long as I get this great rate while my money is not at risk', then beware: should the company go belly up, don’t think for one second that you will walk away with a free home bond.

There will be plenty of takers to buy the home loan book should that happen, and for sure, your new mortgage owner is not going to be as generous. If a bank takes over your loan, chances are it will be at prevailing rates. So if you can’t afford a six to eight percent increase in your rate, then you may need to re-evaluate your strategy.