As lenders, the ultimate goal is to increase profit by growing revenues, while controlling risk and costs. Many lenders have generated good returns by ensuring interest income tracks well ahead credit losses and costs. However, in recent years we have witnessed an increasing focus on responsible lending to the extent that some types of lending have become untenable.
The need to get this right is significant for consumers and lenders alike. 6.3 million adults in the United Kingdom currently have a personal loan and the average amount of debt per person is £9,000[i]. Without the proper checks and processes in place, organisations can develop lose-lose situations for themselves and the borrower.
What is Responsible Lending?
According to the FCA Handbook, a lender must not enter into a new credit agreement or increase the amount of credit under an existing agreement unless they have undertaken a creditworthiness assessment and had proper regard to the outcome of that assessment in respect of affordability risk[ii]. This builds on the Consumer Credit Act to protect consumers when applying for credit cards, personal loans and most point of sale finance but not currently buy now, pay later. Lenders are required to: make reasonable inquiries about the consumer’s financial situation, requirements, and objectives, take reasonable steps to verify the consumer’s financial situation, and make a preliminary assessment of whether the credit contract is suitable for the consumer.
Responsible lending has become top of mind for banks, building societies, and other lenders as they cannot operate without abiding by these regulations.
Best Practices & Why Lenders Should Implement Responsible Lending
Many think that responsible lending only benefits the customer, but that is not the case. Implementing responsible lending builds trust between the lender and the customer. Taking a customer’s affordability into account reduces the amount of risk the lender is taking on. The right checks have been made to ensure the loan is within this customer’s budget. For some customers, it may be as easy as checking their credit report from one of the top three bureaus, but for others, it may be beneficial to check their banking data or performing other checks. If their requested loan amount exceeds their monthly income and expenditure, they may be a potentially vulnerable customer. Providing a loan within a customer’s means reduces consumer vulnerability, which is a top priority of the FCA. The FCA expects all lenders to provide guidance throughout the borrower’s process while paying attention to signs of vulnerability. Here are some best practices:
- Implement an affordability assessment when reviewing a borrower’s application
- Check various data sources to assess the borrower’s creditworthiness
- Provide transparency throughout all steps of the borrower’s journey
- Act with appropriate care towards potentially vulnerable customers
It is relatively straightforward to implement a credit assessment and affordability process which minimises risk. However, such a process can be onerous on both the lender and the borrower and may fail to reflect the true disposable income of a borrower. At GDS Link we work with our clients to ensure that the credit policies and rules that are implemented into the decisioning platform are transparent and fully compliant. However, we also optimise the use of data remove friction from the process, reducing the burden on borrowers and operational cost on lenders. We use advanced analytics to ensure no borrower is over committed yet give them access to the credit they can afford. While much of the focus is on ensuring responsible lending at the outset, GDS Link’s Modellica solution provides frictionless support across the entire credit customer lifecycle, from originations, to cross-sales and retention, and active management of vulnerable customers. Responsible lending is staying one step ahead of your customer and GDS Link’s Modellica solution can help you do just that.
