It is very easy to understand the attraction for borrowers applying for a payment deferral in the aftermath of Covid-19. With many people struggling to deal with the impact of furlough, salary or income reductions, asking for payment deferrals will in many cases have been a no brainer or even a necessity.
However, there will also have been individuals who chose to take payment deferrals when not strictly necessary. Information in the media on payment deferrals focused very much on the upside and not on the downsides. Customer information on payment deferrals given by the FCA and in the media stated that there would be no negative impact on credit ratings.
Open Banking has made available to lenders a treasure trove of information about a customer’s income and expenditure. Lenders have more information than ever to assess affordability and many will be aware that a borrower’s income has been reduced as a result of Covid-19 and that a borrower has taken a payment deferral. In a world where the media is reporting every day on the potential onset of a second wave, it is perfectly reasonable for a lender to be more reluctant to lend to an individual whose income was affected in the first wave. But, this contradicts what many borrowers have been told or are expecting.
It is clear that a majority of borrowers applying for payment deferrals did not take these potential consequences into account when applying for payment deferrals. Indeed, warnings around lenders taking a payment deferral into account for future lending decisions were not widely discussed until around three months after payment deferrals were mandated when the FCA updated its information to borrowers and lenders.
So what happens to borrowers who apply for credit after a payment deferral and are declined? Understandably they may feel aggrieved, but where should the blame lie? Any complaints directed to credit reference agencies will be passed to the relevant lender. Borrowers may complain to their lender that the consequences of a deferral were not adequately explained to them.
Lenders have a duty to treat customers fairly and highlight risks to a customer to allow the customer to make an informed decision. But, how much can be expected of lenders who were fast tracking the introduction of payment deferrals (in many cases prior to the publication of FCA guidance) to help their customers whilst working with very limited resources?
It seems likely that lenders will be the people to receive these complaints and it is critical that they are geared up to deal with them. Even more importantly, lenders must make sure that payment deferral scripts, websites and correspondence are now updated to inform borrowers of the risks surrounding payment deferrals
I hope that any future complaints on this subject are viewed by the Financial Ombudsman in light of a lender’s attempts to assist borrowers through this period. In a period where confusion has been rife in the media and amongst politicians, lenders who have acted with good intent should not bear the brunt of these complaints.
This also serves a timely reminder of the importance of borrowers taking time to make considered financial decisions.
But some are worried that borrowers may have mistakenly assumed an unchanged credit score made taking a payment holiday a safe choice.