Responsible lending - what is responsible lending?
Banks and building societies who give out loans are obliged to demonstrate what is regarded as responsible lending under the Banking Code.
The Banking Code is a self governed set of rules adopted by banks and building societies. These rules relate to their alliance with personal customers and include various commitments which aim to ensure that a thorough credit assessment will prevent borrowers from getting into further financial difficulties after taking a loan and that customers are treated fairly throughout the process.
The responsible lending code specifies the loans pre sale and post sale code of conduct. The code calls to providing exact, complete information which includes a clear and concise description of the loan in advance. The financial situation of the borrower must be assessed based not only on payment history but mainly on the concrete ability to repay the loan based more on credit commitments and income.
Another important aspect the code requires is transparency of information. Key information needs to be grouped, highlighted and clearly explained including examples. This includes all the different charges, APRs while providing the customer the ability to compare between products. The code requires that there should be a single method for calculating the levels of APR and a standard way of calculating interest rates.
Responsible lending includes notifying the customer as to all the pros and cons of the offered financial product including actual warnings such as early settlement costs etc. The responsible lending code also details the desired post-sale approach. Banks are required to use systems that limit automatic, unsolicited credit such as to limit increases or checks.
In cases at which borrowers experience financial difficulties the lender must be committed to seek genuine solutions which include proportionate and reasonable measures, to reschedule payments when possible and to co-operate with money advisers in order to find the best solution for the problem.
The need to determine a best practice code for responsible lending has never been greater. The debate is ongoing and continuous changes are made to the Consumer Credit Act and the Banking Code as the industry attempts to master the formula for the ideal lender-borrower relationship.
The global banking industry has been revising its codes following the recent events experienced by less creditworthy US mortgage customers, many of whom were offered cheap home loans which they were not able to repay. This mortgage crisis has had a global effect on economies worldwide and threatens to lead US and UK economies into recession.
The revised code commits banks to tighten their credit checking procedures prior to loan approval and to be able to provide more assistance to customers who find themselves in financial trouble.
