What is irresponsible lending?

Whilst the new National Consumer Credit Protection Bill seeks to define and mandate "responsible lending" the UK Office of Fair Trading (OFT) has issued a consultation on draft guidance setting out practices the OFT considers constitute irresponsible lending.

The guidance covers each stage of the lending process and a range of potential issues in a credit transaction including advertising, account management and handling of arrears.

The draft guidance identifies types of policies and procedures that the OFT would expect lenders to put into practice. These include:

  • Ensuring all key information provided to prospective borrowers is clear and easily understandable and properly explained to them.
  • Assessing a prospective borrower's ability, in the context of their overall financial circumstances, to afford to meet repayments in a sustainable manner.
  • Dealing with borrowers in default or arrears in a fair and proportionate manner, seeking to repossess a borrower's property only as a last resort.

The document also sets out some specific practices that the OFT considers to constitute irresponsible lending. These include:

  • Encouraging borrowers to increase existing debt when borrowers may face difficulties clearing their debts.
  • Targeting specific groups of vulnerable borrowers with credit products that are likely to be inappropriate for them.
  • Using high-pressure selling techniques or inappropriate inducements.

From 1 January 2011 the National Consumer Credit Protection Bill will prohibit loans which are unsuitable for consumers and specify the steps lenders need to take to verify information.

Whilst individual lenders will be able to determine their own credit policies, areas such as refinances and "low doc" loans will need particular attention.

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