Too much subjectivity could lead to lenders’ nightmares,
warns Nicola Hoskins.
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The
Consumer Credit Directive (CCD) has been with us for a good few
months now, but does familiarity promote understanding? Not
necessarily.
Take adequate explanations as an
example. This requirement, courtesy of the CCD via the new section
55A of the Consumer Credit Act 1974, imports massive subjectivity
into the decision-making process. It’s a simple matter to
demonstrate that an explanation can be given, but what about an
adequate one?
Among the elements of the
explanation is the need to highlight if the credit being sought is
unsuitable for its intended use. It’s not easy to see how this
fits, particularly in motor finance situations, where the credit is
specifically aligned to the acquisition itself.
So, perhaps, this is one aspect we
don’t need to be overly concerned about?
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By GlobalDataUnfortunately the same is not true
of the requirement to explain the features of the proposed credit
with adverse effect, which the debtor may not foresee.
This requirement is deeply
subjective because it assumes that the creditor will foresee
adverse effects which the debtor does not, and also that the
creditor will realise that the debtor hasn’t foreseen them.
Confused yet?
Perhaps the approach here is to
have a list of scenarios where such situations might arise, for
example, how is a balloon payment to be made at the end of the
term? Has the applicant been told that refinancing may be
necessary? This may not be obvious to all of them.
This requirement links into another
horror story born of the CCD – that of the right of withdrawal from
the credit agreement by the debtor. It does not affect the
existence of any related hire contract.
Does that mean a creditor needs to
point out financial ruin may accompany exercising the right of
withdrawal? Not many consumers will foresee that adverse
consequence.
In any event it seems that the
creditor needs to go a bit further than just working through a
checklist of questions and getting the debtor to sign at the end to
say that the explanation was adequate.
Indeed, the Irresponsible
Lending Guide categorically states this is not necessarily
enough.
Perhaps a way to deal with this is
to have a pro forma – because some degree of consistency is
important – but then have blank sections at the end for ‘any other
issues’ and note something specific to this particular applicant so
that, for the sake of compliance, it can be shown that the approach
taken wasn’t ‘one size fits all’.
Compliance and evidence of
compliance remain as important as ever, and it’s not just for the
regulators’ benefit. It’s entirely possible that this will be the
entry route by the claims management companies once things bed
down, because it is so subjective, and can fit in so nicely with
other debt avoidance mechanisms, such as unfair relationship and
general unenforceability.
Here we go again.
The author is a professional support lawyer at Optima
Legal
