Response to consultation on creditworthiness assessment
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BEUC supports the EBA proposal, but considers the requirements need to be more detailed and go further.
BEUC considers that all creditors should be obliged to engage with borrowers and ask appropriate questions in order to evaluate their level of income and request the necessary supportive documents issued by reliable external sources (for example: salary sheets, bank statements, income tax returns of the past years, certificates from social security on the labour history of the borrower, work contracts) and any other extra documentation which they may deem necessary to verify the borrower’s income. In any case ‘Low doc’ or ‘No doc’ loans should be prohibited.
Assessment of the capacity to repay should always and mainly focus on borrowers’ incomes. Except pensions and child benefits, including revenues such as government or social support payments is not a good idea when such revenues are temporary and never guaranteed – conditions of their allocation can change over time.
2. Documentation and retention of information
BEUC fully supports these requirements, but the record should also include all the criteria and considerations used by the creditor in making their decision. Considering that granting of credit is not always transparent (e.g.: borrowers who accept to take out additional financial contracts are more likely to have their loan application granted), this requirement should also give the opportunity to the competent authorities to check whether the creditworthiness assessment has been based on principles of responsible lending.
3. Identification and prevention of misrepresented information
BEUC considers that in any circumstance a loan application should not be only based on a questionnaire, but be always based on reliable and external sources of information, which would avoid misrepresented information.
4. Assessment of the consumer’s ability to meet his/her obligations under the credit agreement
BEUC supports the requirements which need to be completed.
As mentioned above, creditors should favour direct contact with borrowers by asking relevant questions and request necessary documents in order to assess their professional and financial situation and their financial objectives.
Loan-to-income and debt-to-income ratios are of primary importance in that respect and should be universally used by lenders and intermediaries. Acceptable levels of these ratios should be defined at national level, by national authorities, in accordance with national specificities, economic indicators and costs of living. As an average, consumer organisations consider that periodic instalments of the loans (principal and interests) for a consumer should not exceed 33% of his monthly net income, which is of common practice in some countries like France and Belgium.
In addition, in the Member States where loan-to-value ratios are used, we believe that consumers should not be lent more than 100% of the value of the property they are intending to buy.
BEUC strongly supports the fact that loan-to-value (LTV) ratio should never substitute for loan-to-income ratio for thorough assessment of a borrower’s repayment capacity. Indeed, a low LTV ratio does not mean the borrower will be able to repay the loan. Therefore, loan-to-income is more important, while LTV ratio may serve as a complementary tool. In addition, assessment of creditworthiness should not rely on prospects of house price increase.
BEUC considers that in order to avoid excessive or disproportional use of personal data and comply with Article 20 stating that the “request for information shall be proportionate and limited to what is necessary to conduct a proper creditworthiness assessment”, the proportionality of the use of data used to assess creditworthiness has to be subject in each Member State to the approval of representatives from financial institutions, data protection authorities and consumer/civil society representatives, and fully complies with the EU rules on personal data protection.
Furthermore, we believe that should be clearly defined some criteria for what can be considered invitation to irresponsible borrowing, thereby making it possible to be able to blame the credit institutions when such limits are exceeded and even so the credit is granted.
5. Allowance for the consumer’s committed and other non-discretionary expenditures
BEUC supports the requirements. In order to better identify the consumer’s actual obligations, in particular those related to recurrent contracts, the creditor should ask the consumer to provide 3 monthly bank statements.
6. Allowance for potential future negative scenarios
BEUC supports the requirements.
7. Identification of groups of loans with higher risk profiles
BEUC is not in principle opposed to this requirement which is particularly relevant in some Member States where consumers are proposed more risky loans. However we are concerned that the identification of risk groups of loans may create a discriminatory treatment on the basis of criteria whose definition should not be entirely left to the credit institutions. Furthermore, this information to should be upgradeable and always be updated in order to prevent discrimination.
Question 2: Are there any additional requirements that you would suggest adding to the Guidelines? If so, outline the reason(s) for each proposed additional requirement.
1. Verification of the consumer’s incomeBEUC supports the EBA proposal, but considers the requirements need to be more detailed and go further.
BEUC considers that all creditors should be obliged to engage with borrowers and ask appropriate questions in order to evaluate their level of income and request the necessary supportive documents issued by reliable external sources (for example: salary sheets, bank statements, income tax returns of the past years, certificates from social security on the labour history of the borrower, work contracts) and any other extra documentation which they may deem necessary to verify the borrower’s income. In any case ‘Low doc’ or ‘No doc’ loans should be prohibited.
Assessment of the capacity to repay should always and mainly focus on borrowers’ incomes. Except pensions and child benefits, including revenues such as government or social support payments is not a good idea when such revenues are temporary and never guaranteed – conditions of their allocation can change over time.
2. Documentation and retention of information
BEUC fully supports these requirements, but the record should also include all the criteria and considerations used by the creditor in making their decision. Considering that granting of credit is not always transparent (e.g.: borrowers who accept to take out additional financial contracts are more likely to have their loan application granted), this requirement should also give the opportunity to the competent authorities to check whether the creditworthiness assessment has been based on principles of responsible lending.
3. Identification and prevention of misrepresented information
BEUC considers that in any circumstance a loan application should not be only based on a questionnaire, but be always based on reliable and external sources of information, which would avoid misrepresented information.
4. Assessment of the consumer’s ability to meet his/her obligations under the credit agreement
BEUC supports the requirements which need to be completed.
As mentioned above, creditors should favour direct contact with borrowers by asking relevant questions and request necessary documents in order to assess their professional and financial situation and their financial objectives.
Loan-to-income and debt-to-income ratios are of primary importance in that respect and should be universally used by lenders and intermediaries. Acceptable levels of these ratios should be defined at national level, by national authorities, in accordance with national specificities, economic indicators and costs of living. As an average, consumer organisations consider that periodic instalments of the loans (principal and interests) for a consumer should not exceed 33% of his monthly net income, which is of common practice in some countries like France and Belgium.
In addition, in the Member States where loan-to-value ratios are used, we believe that consumers should not be lent more than 100% of the value of the property they are intending to buy.
BEUC strongly supports the fact that loan-to-value (LTV) ratio should never substitute for loan-to-income ratio for thorough assessment of a borrower’s repayment capacity. Indeed, a low LTV ratio does not mean the borrower will be able to repay the loan. Therefore, loan-to-income is more important, while LTV ratio may serve as a complementary tool. In addition, assessment of creditworthiness should not rely on prospects of house price increase.
BEUC considers that in order to avoid excessive or disproportional use of personal data and comply with Article 20 stating that the “request for information shall be proportionate and limited to what is necessary to conduct a proper creditworthiness assessment”, the proportionality of the use of data used to assess creditworthiness has to be subject in each Member State to the approval of representatives from financial institutions, data protection authorities and consumer/civil society representatives, and fully complies with the EU rules on personal data protection.
Furthermore, we believe that should be clearly defined some criteria for what can be considered invitation to irresponsible borrowing, thereby making it possible to be able to blame the credit institutions when such limits are exceeded and even so the credit is granted.
5. Allowance for the consumer’s committed and other non-discretionary expenditures
BEUC supports the requirements. In order to better identify the consumer’s actual obligations, in particular those related to recurrent contracts, the creditor should ask the consumer to provide 3 monthly bank statements.
6. Allowance for potential future negative scenarios
BEUC supports the requirements.
7. Identification of groups of loans with higher risk profiles
BEUC is not in principle opposed to this requirement which is particularly relevant in some Member States where consumers are proposed more risky loans. However we are concerned that the identification of risk groups of loans may create a discriminatory treatment on the basis of criteria whose definition should not be entirely left to the credit institutions. Furthermore, this information to should be upgradeable and always be updated in order to prevent discrimination.