Responsible Lending
FLA members are committed to undertaking responsible lending. Under the FLA Lending Code, all loan applications must go through a sound and proper credit assessment. This assessment may look at a combination of 14 different features, designed to help the lender check the customer’s ability to repay the loan. These include, for example:
- The customer’s existing credit commitments;
- How they have handled their financial affairs in the past;
- Information from credit reference agencies; and
- Income
Lenders may also consider factors that may suggest a higher risk of the customer experiencing financial difficulty, such as:
- Having four or more credit commitments.
- Spending more than 25% of gross income on consumer credit.
- Spending more than 50% of gross income on consumer credit and mortgages.
The Office of Fair Trading (OFT) is currently drafting guidance for lenders on Irresponsible Lending. All lenders who have a consumer credit licence provided by the OFT will have to comply with the guidance. The Irresponsible Lending Guidance was introduced in March 2010 to complement and further requirements under the Consumer Credit Directive. Lenders implemented the Directive and the Guidance in January 2011, and all lending from 1 February is compliant with its rules.
The FLA Lending Code is currently being updated to take account of the CCD and the Irresponsible Lending Guidance.
EC Developments and the FLA’s view
The FLA responded to a 2009 EC consultation paper on responsible lending and borrowing, which considered responsible lending across all credit markets. The FLA’s view that the EC should restrict the initiative to mortgages and not pre-judge any assessment of the impact of the CCD was reflected in the EC’s draft Mortgage Directive published on 31 March 2011. However the FLA remains vigilant to the possibility that MEPs may wish to review the scope of the EC’s proposals.
