lender to demonstrate they’ve made appropriately.
THe Wording seems To suggesT crediT scoring may become comPulsory? JC: I don’t think lenders will be forced to use credit scoring, they will still be able to use whatever means they want to assess the borrower’s ability to repay. MS: Whether it becomes compulsory depends on whether we end up with maximum harmonisation. Maximum harmonisation says we will have to implement to the letter of what’s in the directive and you cannot go any further or fall any way short. Minimum harmonisation means you have to meet a minimum threshold but you can exceed that threshold if you choose. We’re unsure about which parts of the directive will be minimum and maximum but it’s possible to take guesses. Around the issue of credit scoring we still don’t know whether it will be a case of member states, should, shall or must comply. These are key words. RS: Whichever we end up with there’s already a contention in the paper on credit scoring as it argues that if a borrower is rejected on a credit score they can appeal the decision and request manual underwriting. MS: The wording of this directive also reflects MMR on the issue of repayment of a loan over the term – that suggests interest-only mortgages will have affordability assessed on a capital and repayment basis as the MMR would like. The Oxera research the CML had
undertaken as part of our MMR response concluded that assessing affordability over the lifetime of a loan included negative impacts on affordability such as having children and sending them to school. But it also included positive impacts - for example if you’re a trainee solicitor and will almost certainly see your wage go up significantly. This sort of positive impact isn’t considered under the second part of the creditworthiness assessment where the lender has a duty to decline if the borrower fails. Assessing someone’s creditworthiness
mortgage introducer MAY 2011 41
over the lifetime of the loan should allow the lender to take into account both positive and negative impacts on affordability. Otherwise you have a situation where lenders are rejecting good prospective borrowers and accepting borrowers who don’t have improving creditworthiness. I’d also add that it’s welcome to see
the credit score identified as a positive and scientific determinant of creditworthiness, because that’s absent from the MMR. Of all the assessment factors identified, credit score is the strongest indicator of default. RB: That’s only true for certain types of borrowers because first-time buyers for example haven’t built up enough credit. The whole principle is that you’re guilty until proven innocent. If you’re a regular saver but not a borrower you’ll fail the credit score similarly. MS: I think that’s where the Commission’s intention to allow consumers to appeal if they’re rejected on a credit score basis comes in. Lenders will be required to disclose
their logic for rejecting a borrower. Is this likely to increase appeals and complaints, and therefore cost? Will it reduce the credit black box problems that some brokers complain about? JC: Yes and no. In that order. If people can appeal they will and you can understand why but lenders won’t reveal the dark science behind those black
boxes. The more they reveal the easier it is for people to game the system and that increases the likelihood of fraud and decreases the value of their models. The detail will probably show by how much a borrower failed the credit score, not the exact reason they failed. AM: I think it would be dangerous for lenders to start revealing too much. Everyone wants a proper system and proper understanding of why they’ve been declined but if people know too much we run a serious risk of fraud.
inTermediaries Will Have resPonsibiliTy To assess THe borroWer’s abiliTy To rePay THeir loan, HoW Will THis balance WiTH fsa ProPosals To make THe lender resPonsible for THis assessmenT? RS: The FSA’s appropriateness test will include some measures that the lender’s affordability criteria will be met by the borrower. I think there is some confusion in this directive surrounding the integration of appropriateness and affordability. Everyone thinks the lender should be
ultimately responsible and accountable for affordability and the decision to lend. The role of the intermediary is to ensure the customer understands the implications of affordability and that the product they get is appropriate to their ongoing
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60