A seminar arranged by credit
reference agency Callcredit presented an opportunity for lenders to
consider the new Consumer Credit Directive.
Go deeper with GlobalData
New credit regulations and licensing rules,
resulting from the European Consumer Credit Directive (CCD), will
be coming into force over the next 10 months. One of the difficult
compliance issues surrounds a statutory requirement for responsible
lending.
The CCD does not explain exactly what responsible
lending means. At the same time it is a ‘maximum harmonisation’
directive, giving very little discretion for the UK statute to
define it more clearly. Yet the implication is that the
enforceability of contracts could be in jeopardy where the
courts find that lenders have advanced credit irresponsibly.
A seminar arranged in March by Call-credit
presented an opportunity for lenders to consider the new rules, and
for that credit reference agency to set out its own wares.
David Philpott, deputy director of consumer credit
at the Office of Fair Trading, said: “Responsible lending is not
quite the same as creditworthiness viewed from the lender’s
standpoint. It is about affordability for the customer.”
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By GlobalDataAndy Lloyd, Callcredit’s director of product
strategy, warned: “Many customers who default on a loan will have
had no record of default at the outset. Yet the warning signs of
over-indebtedness are often there to be found if you have the right
tools. You need data relating to personal income as well as
existing debts.”
Callcredit’s Affordability Suite of products draws
on current account banking data to estimate the income of credit
applicants. The major UK clearing banks have agreed to feed current
account turnover data into Call-credit’s system, in such a way as
to produce meaningful estimates of debt/income ratios.
The closed user group of this system extends to
lenders who are not providing current account services. To this
extent, it goes beyond the traditional reciprocity principle in
credit reference. The Callcredit Affordability Flag signals
exceptionally high indebtedness ratios, while a generic
over-indebtedness score is designed to be predictive of
defaults.
Lloyd said: “The clearing banks are happy for other
types of credit provider to have access to affordability indicators
derived from their own data. All lenders benefit from avoiding
exposures to over-indebtedness. We worked with the banks to develop
this unique product.
“It does not support the positive targeting of
over-indebted consumers, by consolidation lenders, for example, but
gives an extra dimension to credit reference to lenders in
point-of-sale and other finance products aimed across the
market.”
A sample survey of 2,000 UK consumers conducted by
Callcredit at the end of February throws some light on the problem
of over-indebtedness. For example, it found that 6% of all
respondents admitted to having taken out a loan they knew they
might not be able to repay.
Michael Middlemass, head of credit risk for
Sainsbury’s Bank, said: “Callcredit’s Over-Indebtedness Score gives
something that other bureaux do not.”
Middlemass also stressed the advantage of using all
three of the bureaux for conventional credit searches.
“We estimate that only 27% of relevant publicly
available information appears on all three of the search files,” he
added.
“While in most cases all three will come up
with the same default information, there are significant numbers of
cases where material CCJ or other information is missing from at
least one of the three.”
