One of the trickiest parts of consumer lending now is assessing the affordability of the loan for the consumer. In an excellent detailed article published today, Sara Williams of Debt Camel, considers this as part of a thorough review of a recent judgement in a case involving Elevate Credit International, the payday lender formerly trading as Sunny.
The article points out that whilst the Financial Services and Markets Act sets out the general principle that consumers should take responsibility for their decisions, the FCA handbook at CONC 5.3.7 states that lenders should not accept an application for credit where they 'know or ought reasonably to suspect' that the customer has 'not been truthful' in providing information. CONC 5.3.1 also notes 'it is not generally sufficient for a firm to rely solely...on a statement [of income and expenditure] made by the customer.
In the Elevate case, some consumers had exaggerated their income or made it up, and many expenditure estimates were found to have been underestimated. The judgement for the case concluded that 'there comes a point' at which lenders should not rely on information from consumers.
The risk mitigation here is to check the figures, whether it is against bank statements, payslips, or statistical data on average expenditures. But is even that enough? What happens when these alternative sources confirm loan affordability, but also identify significant inconsistencies with what the consumer has provided? In those cases, a literal reading of CONC 5.3.7 suggest the application should be rejected (or, at least, the discrepancies should be reviewed with the applicant).
In an example of unintended consequences of regulation, this seems likely to lead to lenders deciding it's better not to discuss affordability with customers - as many currently do very diligently - and instead focus more on statistical data, that is often incomplete or based on averages that are - by definition - unlikely to be accurate for the individual customer.
In my view, the future of affordability is with technology. It's less about the panacea of open banking, and more about having a simple and clear way of collecting data from consumers and asking for clarification where the figures don't appear to make sense. There are already some fintech solutions in the market although I'm not sure any quite hits the mark in providing a 'plug-in' to lenders' application systems for this purpose.
In the meantime, this case confirms that lenders must think about what they do when data from customers appears improbable - with income too high or costs too low. At present, lenders are likely to reach the right outcome in terms of assessing affordability, but the Elevate case suggests they are still leaving themselves open to risk from claims management firms.