What is a Creditworthiness Assessment?
Have you ever applied for a loan and had your application refused?
It can be disappointing and upsetting, especially if you have no outstanding debts and are up to date with all your payments.
However, whereas in the past refusals may have been based solely on your credit score, these days, even having a good credit score may not be enough.
Lenders now also have to assess your creditworthiness, which is your ability to repay any money that you borrow. This means obtaining information about your income and expenditure, and also carrying out a search with credit reference agencies.
If lenders fail to carry out a proper creditworthiness assessment before they lend to you, this can have serious consequences for them and you, especially if you fall into financial difficulties and cannot afford the debt repayments.
You may also have grounds to complain to the firm and even take your complaint to the Financial Ombudsman Service (FOS). The FOS may then order all the interest you have paid should be repaid, or where you have acted as a guarantor for someone else, that you should not be held liable for the debt at all.
When Should Lenders Perform a Creditworthiness Check?
Creditworthiness assessments should always be carried out before you borrow money or whenever the firm is considering significantly increasing the amount you are borrowing.
Even if the amount they are increasing your borrowing by is not significant, they may still have to do an affordability check.
If the firm has previously made a number of small increases to your borrowing limit, which when looked at individually are not significant, but as a whole are significant, then they must repeat the creditworthiness assessment.
Even if it is not you that is borrowing the money, and you are only acting as a guarantor, an affordability check should still be carried out to ensure you can afford the repayments, if the borrower cannot.
What Information should a Lender Consider?
There is no prescribed list of information a lender must consider when carrying out a creditworthiness assessment. However, they would normally be expected to obtain information from both you and from a credit reference agency, and also get you to complete an income and expenditure.
This would mean taking reasonable steps to accurately record how much you have coming in and how much you need for essential living expenditure. They should also consider any pre-existing debt repayments you have.
Lenders should also, where it is known, consider what effects any anticipated drop in your income will have on your ability to repay debts.
Where you have a previous borrowing history with the firm, they should also consider this information.
So if you had to borrow from them before and experienced problems, or have multiple loans running at the same time, or are borrowing to pay off existing loans, these are all red flags that you may be struggling.
They should also consider the reasons why you are borrowing.
So, for example, if they know you are borrowing to gamble or to pay essential living costs, then this would suggest the borrowing may pose a material affordability risk to you.
How do you complain?
If you believe a lender acted irresponsibly in lending to you, the first thing you should do is make a Subject Access Request under the Data Protection Act 2018.
This involves just sending a letter or email to the firm, requesting they provide you with copies of all the of information they hold on you. Ask they treat the request as a request under the Data Protection Act 2018. There should not be a cost to you in doing this.
What Information do you Want?
You want to obtain copies of all the information they used to assess whether the borrowing was affordable.
If they do not have any information that relates to your income and expenditure, this will be a strong indication that they did not carry out an affordability check.
Also if they do send you an income and expenditure and you do not recognise the information, ask them where they obtained it. It is not unusual for firms to sometimes fill in gaps with what they considered to be reasonable.
As this often means not allowing enough for certain expenditure items, the effect is borrowing that is not affordable looks affordable. When this happens you should be prepared to challenge the firm on whether a proper creditworthiness assessment was carried out.
It can also help if you have your own documentary evidence and benefit award letters, bank statements and wage slips etc. that show what you were really receiving or spending.
Once you have collated this information, you will want to put in a letter of complaint to the firm.
When drafting a letter of complaint you want to make it clear that it is a complaint that you are making and what it relates to: the unaffordability of your borrowing.
You should make it clear that you believe the firm has failed in its duty to carry out proper affordability checks and ignored possible evidence, or made certain assumptions about your income and expenditure that were not reasonable.
If it is the case you had existing loans with the firm, you may also want to reference that fact, particularly if you had missed or were late with payments in the past. Also if the firm did not carry out an affordability assessment, you may want to point out they should have and should have considered the totality of your borrowing.
You should also make it clear that you are seeking some degree of restitution.
You could argue that your liability for the full debt should be written off, but usually where they uphold your complaint, they may offer to refund any interest that you have paid. Where you are a guarantor for someone else’s loan, and they uphold your complaint, you should insist your liability for the debt is removed.
Where the firm does not uphold your claim, you should be provided with information as to the next step that you can take. This is to the Financial Ombudsman Service. You should be prepared to take it to the next step, as the process is free and many decisions are reversed only when they are escalated to the FOS.
If you are struggling with debts and want holistic advice on all your options, speak with a Creditfix Money adviser on 0808 2234 102.