How risk control and lending management has changed after the EU Consumer Credit Directive

An analysis of the questionnaires showed a second key point: the majority of those questioned, 89%, use rating systems based on internal data for the assessment of creditworthiness; 74% of these supplement this with external credit bureau data, but only 22% have redeveloped rating their systems to incorporate financial sustainability indicators.

A substantial difference in the interpretation of trends in the credit market emerged from the questionnaires, a contrast that can be attributed to different business specialisations; differences emerged between lenders with predominantly mortgage loans in their portfolios versus those with largely consumer loans. Compared to 2009, in 2010 it was recorded a drop in demand mainly for credit to finance services (loans for travel, education, personal care), whereas there was a positive trend for loan applications for the purchase of cars and homes, as well as loans for cash flow purposes.
Lending policies also reflect the specialisation of the business; among those lenders predominantly managing mortgage loans, as many as 60% indicated that they applied more conservative criteria in 2010, whereas for those managing mainly consumer credit the percentage was 35%.

 

The addition of external data, including for example those held in credit bureaus, which reveal information on borrowing habits, overall borrowing levels, and debt management profiles, is crucial for a complete assessment of the overall indebtedness of customers and their ability to sustain medium term financial commitments.

Overall, 55.6% of those questioned recorded an increase in lending in 2010 compared to 2009, and some lenders indicated that 2011 has begun with fair expectations in terms of growth in volume, which will be sustained by the recovery in credit demand, especially in the mortgage loan segment.
In the recent past, the growth rate of new credit volumes was able to withstand, within certain limits, some inefficiencies in the managerial practices of banks and financial institutions. Today the costs of risk have made it necessary for financial intermediaries to optimise their credit processes by introducing new measures to assess financial sustainability to guarantee those parameters necessary to profitably operate in the market and to strengthen a customer relationship characterised by long-term satisfaction.

The Consumer Credit Directive has pushed banks and financial institutions towards sustainable lending tools and practices:

Despite the firm adherence to the principles ratified in the legislation, some lenders reported that the impact of implementing the legislation will not be negligible due to the organisational complexity of the process, including for example the potential revision of marketing policies and structure of the offering, to the reformulation of contractual documentation to be provided to the customer.

Due to differences in interpretation of the Consumer Credit Directive, as well as pre-existing structural differences in the regulatory frameworks, a common view on creditworthiness assessment in consumer credit throughout Europe is still far from being achieved. Though generally lenders have witnessed that no substantial changes in their internal processes were introduced, data sources are necessary and shall be available in all Member States in order to properly perform the creditworthiness assessment and fulfil the obligation set in article 8 of the directive.

 

Patrick Desmarès, Secretary General of EFMA, said, “Efma and CRIF are pleased to present this research work aimed at examining the retail consumer finance market. It seems that an understanding of the fundamental difference between the dimension of risk and that of sustainability is not yet widespread; the two concepts are certainly correlated, but require specific analytical tools. The processes put in place by European lenders for the restructuring and revision of credit policies is seeing a gradually increasing use of new metrics for assessing financial sustainability.”

“For better assess customers and measure their financial sustainability, CRIF has also developed an index to measure the levels of consumer financial stress in Italy based on the data held in EURISC, the CRIF credit reporting system”, said Simone Capecchi, Finance Corporate Offer Italy and Western Europe at CRIF. The financial stress index identifies subjects that adopt a “reckless” attitude to borrowing and demonstrate “aggressive” characteristics in the use of all types of financing, even the most innovative and expensive. These consumers have a natural propensity to credit mobility and credit shopping, and more generally, tend to finance their current consumption with debt. The financial stress index is essentially complementary to rating systems, resulting in a more effective assessment of the creditworthiness of the borrower. The use of indexes measuring financial sustainability helps the lender comply with the principles of the Consumer Credit Directive, and facilitates a dialogue with the end-consumer that is marked by principles of transparency, based on objective assessments, and describes his/her real capacity to honour the debt, thus reducing the margins of subjectivity.”

 

The detailed findings, along with charts, are available on request.