Independent review and analysis

Lenders Credit Appetite

The Bank of England recently published the results of its quarterly survey of credit conditions for Q4 2014. It shows some interesting responses from lenders as to what happened during the run up to the year end and some views of what may happen in the early part of 2015.

The supply of secured and unsecured credit to households rose during the quarter, but there was a significant decrease in demand for secured loans. However, for unsecured, personal loans and credit cards there was a large increase in demand. Some of that, no doubt, will be seasonal demand but the differences in secured and unsecured reporting are intriguing.

In the secured sector the report shows a tightening of criteria in both LTV (less willingness to lend above 90%) and LTI by lenders, despite loan performance having improved. Some lenders reported limiting LTI for specific types of borrowing.

In the unsecured sector, there is an apparent reversal of that position, with increased appetite for risk and loosened credit scoring, particularly in credit cards, where there has been a decline in credit quality.

We have seen some evidence of that tightening of criteria in recent mortgage lending, when carrying out a due diligence review. In one specific case, a lender, when calculating the LTI on an 80% LTV application for a professional couple, reduced the loan applied for by around £2,000 (on an application for £250,000) which had the effect of reducing the monthly payments by £12 per month (on a monthly payment of £1,110). It is that type of decision that helped create the sub-prime market in the nineties, when new lenders took the view that flexibility was needed in such situations.

Of course we are now in a regulated environment, but still some lending decisions are questionable. The data from the Bank of England shows that some lenders are tightening criteria where they have security and loosening it where they don’t – in both cases often with unsatisfactory results.

Against that background, there is still the need for external audits into credit decision processes to ensure not only compliance with the regulations, but also the adoption of common sense.

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