Irresponsible lending prohibited by OFT - March 2010

Lenders have been told they must not mislead borrowers and must assess if customers can afford to repay loans.

The new requirements form part of new guidance from the Office of Fair Trading (OFT) to counteract irresponsible lending.

The regulator can ultimately suspend a lender's consumer credit licence.

The OFT has been consulting on its latest guidance since the middle of 2008.

"Today's guidance from the OFT will help to protect consumers and enable it to clamp down on unscrupulous lenders," said Fiona Hoyle of the Finance & Leasing Association, a trade organisation.

'Misleading or oppressive'

Some campaigners have accused the financial services industry of frequently luring people into taking on loans they cannot afford.

A prime example was the common practice of showering borrowers with offers of new credit cards, with minimal checks on individuals' creditworthiness, in the years leading up to the credit crunch and the recent recession.

The OFT does not appear to agree that irresponsible lending is a widespread problem.

But it said that lenders should:

• not use "misleading or oppressive behaviour" when advertising, selling, or enforcing a credit agreement
• make a "reasonable assessment" of whether a borrower can afford to repay their loans
• explain the key features of a credit agreement so borrowers can make an "informed choice".

The charity Citizens Advice welcomed the new rules.

"Irresponsible lending plays a significant part in many of the debt problems we see in Citizens Advice Bureaux," said Peter Tutton of CAB.

"The focus on getting firms' practices and procedures right is a big step towards ensuring consumers are treated fairly and not encouraged into taking out unaffordable and unsustainable credit that lands them deep in debt."

Forebearance

The OFT also said that lenders should monitor repayments being made by borrowers and help them if they appeared to be getting into trouble.

"This guidance helps all lenders avoid the risk of engaging in behaviour or practices" - Ray Watson, OFT

And it said these customers should be treated "fairly and with forbearance" if they experienced difficulties.

"Our guidance makes clear to lenders the sort of practices that will be considered as evidence of irresponsible lending as we monitor businesses and their fitness to hold a credit licence," said Ray Watson of the OFT.

"This guidance helps all lenders avoid the risk of engaging in behaviour or practices which may lead to action by the OFT."

Unenforceable

Recent rules agreed between the government and the credit card industry include, among other things, a ban on people in financial difficulties being offered an unsolicited rise in their credit limit.

In January, the OFT published separate guidance for both lenders and borrowers about when debts can be enforced under the terms of the Consumer Credit Act.

The Regulator warned lenders misleading borrowers by telling them that they might be taken to court to get their money back, when the lenders in fact knew that the loans were not legally enforceable.

Last May, the OFT warned debt collectors not to harass borrowers by telling their neighbours they were trying to collect a debt.

Source: BBC News - March 2010

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