July 2018 saw the Financial Conduct Authority (FCA) issue a Policy Statement entitled ‘Assessing creditworthiness in consumer credit’, imposing new rules on lenders and peer-to-peer lending firms.
Firstly, regarding creditworthiness assessments, firms must make a reasonable assessment of creditworthiness before they agree to grant credit to an applicant, or to or significantly increase the amount of credit available to an existing borrower.
One of the key things the FCA wants to see is that firms carry out a reasonable assessment of whether customers can afford to make the required repayments without significantly affecting their wider financial situation. Simply assessing whether the customer is likely to make the required repayments is not sufficient, as it may be the case that the customer is making significant financial sacrifices to ensure that their loan repayments are met, or worse, is taking out credit to repay credit.
The FCA does not set out in detail exactly what information a lender should assess when determining affordability, nor does it impose prescriptive rules on whether the lender should verify the accuracy of this information.
The document does stress though that lenders can use non-employment income in affordability assessments, provided that the firm can reasonably expect such income to be available to the borrower for repayment of the credit. The firm should work on the assumption that repayments will be made out of the customer’s own income, unless the customer clearly states that they intend to repay using savings or other assets. Firms will also be able to take account of other income, including from other household members, where they can once again reasonably expect this to be available to the borrower for repayment of the credit.
Unless it is “obvious” that the credit is affordable, the FCA expects firms to take reasonable steps to determine, or estimate, the customer’s income. They are also required to establish or estimate non-discretionary expenditure.
Firms should also consider whether it can reasonably be foreseen that income may reduce, or non-discretionary expenditure might increase, over the period of the credit.
Where running-account credit with no fixed term is offered, the FCA says it is reasonable for firms to assume that the customer will draw down the entire credit limit at the earliest opportunity and repay by equal instalments over a reasonable period.
Guarantor lenders will be required to consider the potential for the repayment obligations to have a significant negative effect on the guarantor’s financial situation.
Firms should undertake periodic reviews of the effectiveness of their affordability assessment procedures, and changes should be made to address any deficiencies.
The new rules come into force on November 1 2018.
In issuing these new rules, the FCA notes that for a number of firms, they have little incentive to assess the effect that granting credit would have on customers’ wider financial situation, as these customers would remain profitable for the firm in any case.
The regulator also acknowledges that some customers are being “granted credit that is predictably unaffordable at the point it is taken out.”
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