Affordability Assessment
Over the last few years the increasing saturation of the unsecured credit market has given rise to concern amongst banking regulators that indebtedness is on the increase. Several cases where over-indebtedness has precipitated consumers to drastic action have received considerable press coverage, placing pressure on regulators and lenders to address the issue.
The DTI’s Task Force on Tackling OverIndebtedness, commissioned to assess the extent of the UK indebtedness problem, gave a clear statement as to what they expect lenders to do to address the issue:
“… lenders need to ensure that they consider all the available evidence about the consumer’s commitments as a whole before extending new credit facilities or increasing the limits on existing facilities.”
In a speech last May, John Tiner, Chief Executive of the FSA, identified the key difference between traditional scoring approaches and the assessment of ability to repay:
“We fully accept that credit scoring systems can provide a good guide to a customer’s propensity to repay a loan, but propensity to repay is not necessarily the same as ability to repay"
This requirement has been re-enforced by the Treasury Committee’s 2nd Report on “Credit card charges and marketing”.
Lenders typically assess propensity to repay by using a scorecard that predicts likelihood to default on an agreement based predominantly on such behaviour being observed previously. However, ability to repay, i.e. an applicant’s ability to service the debt acquired on top of those already held, has historically not received as much attention from lenders.
To help lenders to meet responsible lending requirements, DecisionMetrics has developed AffordabilityMetric to provide a measure of a credit applicant’s ability to service a further debt given their current estimated expenditure-to-income ratio.
Affordability Article
