The Irresponsible Lending Guidance puts a new
responsibility on lenders, says Julia Williams.
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In February, the Office of Fair Trading (OFT) revised its
Irresponsible Lending Guidance (ILG) as a result of the Consumer
Credit Directive (CCD) coming into UK law.
The guidance reflects the
considerations applied by the OFT in assessing whether a finance
company should hold a consumer credit licence. Although the ILG is
not currently statute law, it provides clear and concise guidelines
for lenders to follow.
The ILG clarifies the business
practices that the OFT may consider irresponsible for the purposes
of s25 (2B) of the Consumer Credit Act 1974, which may question
lenders’ fitness to hold consumer credit licence.
Parts of the ILG have been
incorporated into statute through the CCD, including provisions
about providing adequate explanations about the credit and any
potentially adverse effects it may have on the consumer. Other
parts, however, haven’t been incorporated into primary legislation,
although this should change. Brussels suggests that soon the ILG
will be incorporated, in its entirety, into primary legislation in
all EU countries.
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By GlobalDataWhile the CCD requires lenders to
assess a borrower’s credit worthiness, which is generally satisfied
by lenders carrying out a credit check, the ILG also recommends an
‘assessment of affordability’, to consider the effect of the
proposed credit on the borrower’s financial position, and which
requires a proper assessment of the borrower’s current and future
commitments. This is classed as a ‘borrower-focused test’ – the
ability of the borrower to sustain the credit commitment in a
manageable way, without resulting in further adverse financial
difficulties. In practice, this should involve looking at a
borrower’s income and expenditure, obtaining evidence in support,
and deciding that the borrower will be capable of sustaining
repayments over the life of the agreement in an affordable manner
‘without undue difficulty’, irrespective of changes in personal
circumstances.
This assessment represents
extension to the factors that lenders need to consider to comply
with the ILG and the OFT’s expectations. And lenders will need to
revise their business practices and procedures to reflect the
requirements and to ensure they lend responsibly.
Attention should be paid to the
handling of default and arrears with the implementation of clear
policies. Failure to treat borrowers with understanding and due
consideration, or to handle appropriately those lacking mental
capacity, will breach the guidance. Information should be
communicated to the borrower in a transparent manner, with
consideration being given to reducing or suspending interest and
further charges, and the acceptance of token repayments, to allow
borrowers time to recover from unexpected income shocks.
The OFT, when exercising its
information-gathering powers, may require evidence of documents,
and information relating to its practices and procedures.
Julia Williams is a partner at
Chafes Solicitors
