Irresponsible lending – OFT draft guidance published
30/07/2009
The OFT has published draft guidance today on what constitutes irresponsible lending. The guidance had been on hold from earlier this year pending clarification on related areas of the Consumer Credit Directive.
As had already been indicated, the scope covers not only consideration of affordability in the lending decision but dealing with all prospective and existing customers responsibly. Existing customers should be proactively monitored for signs of difficulty, while prospects must not have products promoted to them that the lender should realise to be inappropriate.
The Consumer Credit Act 2006 introduced irresponsible lending to consumers as a business practice that might affect the OFT’s assessment of fitness to hold a consumer credit licence. The OFT’s draft guidance on this area, issued today for consultation, aims to outline what will be considered to constitute irresponsible lending, making it important reading for all engaged in extending credit.
Consumer Affairs Minister Kevin Brennan said:
“We are determined to tackle irresponsible lending. Lenders which fail to follow the OFT's guidance face being stripped of their credit licences.”
The OFT believe that while irresponsible borrowing can occur, it is facilitated by the effectiveness of the lender’s policies and procedures, for example how ability to repay is assessed, including its “procedures for considering the integrity of information supplied by potential borrowers”.
The document reiterates an expectation similar to that in the Financial Services Plan yesterday that consumer credit businesses should “fully comply with both the word and spirit of this guidance”.
Amongst other key points, the draft guidance would expect creditors to:
- Consider the suitability of a product to borrower needs and circumstances
- Assess ability to meet payments sustainably
- Monitor credit agreements and contact borrowers who show indications of being in difficulty
- Take responsibility for actions of third parties (such as brokers and debt collection agencies) on their behalf
- Explain the key aspects of credit agreements, highlighting warnings such as risks of not maintaining repayment
- Treat borrowers with consideration and forbearance, with action in respect of arrears always being fair and proportionate
- Not target ‘vulnerable’ potential borrowers – such as the over-indebted or those with a history of not managing credit well - for inappropriate credit products
Key themes include assessment of creditworthiness/affordability and explanations to be made to the borrower, as also highlighted in the general requirements of the Consumer Credit Directive. The guidance outlines some specific examples that the OFT will hold to be poor practice, such as:
- Failing to undertake a reasonable assessment of affordability in individual cases
- Restricting affordability assessment to the ability to repay one loan when the borrower has other credit commitments
- Failing to take adequate steps to ensure that all information relevant to an assessment of affordability is complete and correct
- Failing to proactively and regularly monitor a borrower’s repayment record
- Raising credit limits without notifying the borrower or obtaining their consent
- Promoting a particular credit product where the creditor ought to suspect that the product is clearly inappropriate to a borrower's circumstances
The OFT says it has sought to take into account the economic downturn and the need to maintain “the supply of sustainable credit, particularly to those most in need”. The guidance will be reviewed within 6 months of its final publication, due early 2010, to ensure it is adjusted if appropriate. A compliance review will also be undertaken to establish how effectively the guidance is working to create the desired behaviour in businesses.
Consultation on the draft guidance, which can be found here, closes on 21 October.
The Irresponsible Lending Guidance appears at first sight more stringent than many will have anticipated, with few punches being pulled on what is likely to be expected of business, despite the OFT having noted the need to ensure continuing availability of credit. Creditors who clearly and effectively plan their approach to implementing the final guidance will be in a position to win competitive advantage over their peers.
Requirements to take affordability into consideration were signalled in advance, but the need to take steps to verify the information used in affordability assessment will make matters more difficult for many. Lenders who have already taken steps to use data and tools to help avoid lending to the over-indebted may well find this transition easier than others. Maximising possible automation within the process through the use of powerful and innovative affordability solutions will hold the key to minimising the impact on operational spend and maintaining margins.
The need to proactively identify consumers getting into difficulty and contact them echoes the provisions of the 2007 revision of the Banking Code. Consumers facing genuine problems may well appreciate such approaches, and speed could be of the essence with timely intervention preventing an accumulation of loss. Using data to segment customers ‘of concern’ then offers the potential to distinguish those who forgot to post the payment before they went on holiday from those who are showing signs of real distress, supporting targeted contact.
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