What is sustainable and why does this matter?

There was no set list of checks a lender needed to complete. But the checks should have been proportionate to the circumstances of each loan – which might include considerations about the amount borrowed and the prospective borrower’s borrowing history. Section 4.12 of the Irresponsible Lending Guidance gave examples of the types and sources of information a lender might want to consider. In 2011 an assessment of creditworthiness also came into force in the CCA.

The Financial Conduct Authority (FCA)

The FCA took over the regulation of consumer credit from the OFT in . The Consumer Credit Sourcebook (CONC), part of the FCA’s handbook refers to various sections of the OFT Irresponsible Lending Guidance.

CONC is clear about the need to complete a “creditworthiness assessment”, considering the potential for the lending commitment to “adversely impact the consumer’s financial situation”. (CONC R 5.2.1 (2)). CONC replaced the sections of the CCA highlighted above.

CONC 5.2.3 [G] outlines that the assessment the lender needs to complete should be dependent on, and proportionate to, a number of factors – including the amount and cost of the credit and the consumer’s borrowing history. CONC 5.2.4 [G] provides guidance on the sources of information a lender may want to consider as part of making a proportionate assessment. And CONC rules specifically note and refer back to sections of the OFT’s Irresponsible Lending Guidance.

Reasonable and proportionate checks

There has never been a “set list” of checks that lenders needed to carry out. But given the relevant law and regulation, regulators’ rules, guidance and standards, codes of practice, and what we consider to be good industry practice at the time we’d typically reach the view that a reasonable and proportionate check would usually need to be more thorough:

• the lower a customer’s income (reflecting that it could be more difficult to make any loan repayments to a given loan amount from a lower level of income);
• the higher the amount due to be repaid (reflecting that it could be more difficult to meet a higher amount from a particular level of income);
• the longer the payday loans and check cashing Delaware term of the loan (reflecting the fact that the total cost of the credit is likely to be greater and the customer is required to make payments for an extended period); and
• the greater the number and frequency of loans, and the longer the period of time during which a customer has been given loans (reflecting the risk that repeated refinancing may signal that the borrowing had become, or was becoming, unsustainable).

So what all of this means is that a less detailed affordability assessment, without the need for verification, is far more likely to be fair, reasonable and proportionate where the amount to be repaid is relatively small, the consumer’s financial situation is stable and they will be indebted for a relatively short period.

But, in circumstances where a customer’s finances are likely to be less stable, they are being expected to repay a larger amount for a longer period of time. There the other potential factors (such as the borrower losing any security provided, or a guarantee could be called on), it’s far more likely that an affordability assessment will need to be more detailed and contain a greater degree of verification, in order for it to be fair, reasonable and proportionate.

The relevant rules, regulation and guidance all refer to a borrower being able to sustainably repay any credit provided. And being able to sustainably repay credit is described as doing so without undue difficulty, while being able to meet other commitments and without having to borrow further.