irresponsible lending consultation response 200909

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Urban Forum has responded to the Office of Fair Trading's consultation on 'Irresponsible Lending - guidance for creditors'.

A response by Urban Forum

About Urban Forum
Urban Forum is a national charity and a membership organisation that supports communities to have a greater say over decisions that affect them. We work with our 250 members to influence government policy and by supporting them to influence decision-making locally. By gathering evidence and feedback from our members we act as a bridge between policy-makers and community groups operating on the ground.

Basis of our response
Our consultation response is based on widespread discussion and consultation with members, partners and other stakeholders on banking reform and related issues. Our response draws on recently published research conducted jointly with the Centre for Local Economic Strategies (CLES) and previous work Urban Forum has undertaken on poverty and inequality.

We welcome the proposed OFT guidance, which we see as a significant improvement to protect the rights and interests of consumers. There is an acute need for a more responsible credit market in the UK and better regulation of the financial services sector in light of the recent financial crisis.

Four overarching aims underpin our response:
1. To restore public confidence in banks and the financial services sector
2. To tackle financial exclusion which continues to undermine efforts to regenerate deprived communities
3. Addressing problems in the availability of affordable credit
4. Eliminating discrimination in financial service provision and ensure financial institutions are serving the needs of all communities.

The recent financial crisis was clearly fuelled, in part, by irresponsible lending by financial institutions, with lenders failing to take account of the financial position of borrowers. Many consumers have found themselves extremely vulnerable to rising food or energy prices and facing significant problems maintaining loan repayments. The financial crisis has not reduced this problem and it remains particularly evident in the practice of lenders that target low income households.

We therefore particularly welcome the principles set out in the OFT guidance and strongly support these being retained in their current form in the final published guidance. We are equally supportive of the proposals concerning assessments of affordability, which must also be retained to be effective.

However, the guidance appears to allow lenders, such as Home Credit companies, to offer unaffordable loans on a regular basis provided they do not make additional penalty charges for defaults. This undermines the principles of assessing affordability set out in earlier paragraphs. The Competition Commission's inquiry into Home Credit illustrated that these companies assume four defaults will be made over the lifetime of the loan, and build in costs to cover these into the basic price. Consumers are therefore being charged additional amounts for ‘assumed default', but this is not transparent. We therefore recommend the removal of this paragraph from the guidance. The guidance sets out clearly when a loan is affordable or not, regardless of the policy of the lender concerning default charges, and it is counter-productive to allow exceptions to this assessment process. We support the aim of ensuring lenders have suitable business procedures in place to ensure compliance, as set out in the guidance, however we have concerns that these will not necessarily be accessible to consumers. Increasing transparency by publishing this information would help to better inform borrowers understanding and where failures in business practice do occur is also likely to lead to a higher level of reporting. We recommend a strengthening of the guidance to promote increased transparency, and specifically for lenders to be required to publish their policies and procedures for the assessment of affordability.

Small amounts, in real terms, can constitute a significant proportion of financial burden for a low income borrower. Therefore it is not desirable for the level of transparency to be determined by the amount of the credit provided, as suggested in the guidance. It should not be the amount of credit in absolute terms, but the amount of credit relative to income which is the most important. We therefore recommend the use of a ratio of credit to income be used by the OFT in the application of the guidance, and that all lenders must therefore establish this ratio of total borrowing to income in assessing affordability.

The issue of roll-over lending and constant refinancing are rightly recognised as a significant consumer issue and evidence of irresponsible and unfair lending practice. Credit dependency is a common problem faced by low income borrowers, as a result of regular refinancing in order to release funds to meet essential costs. We believe that this type of lending has become a key part of irresponsible and predatory lender business models in recent years and welcome OFT action to address it.

We also welcome the strong recognition of the need to address the handling of default and arrears, the emphasis placed on creditor forbearance and the importance of clear policies and procedures being adopted. These proposals could, as set out earlier in our response, be strengthened by requiring creditors to publish their policies relating to handing of arrears to better inform consumers. We strongly support the proposal in the guidance that creditors should delay recovery action where they are aware that a borrower lacks the capacity to make decisions for themselves, until such time as someone else is granted power of attorney over their affairs.

We believe it would be desirable to clarify the links between the OFT guidance and the activities of the Financial Services Ombudsman, in order to ensure that procedures of consumer redress are consistent with the guidance.

In order to ensure that consumers are well informed and able to make sensible decisions about financial products, we would encourage the production of accessible information for citizens once the final guidance has been published.

Toby Blume
Urban Forum
October 2009