Tony Marshall is managing director of Equifinance
Underwriting has always been a balancing act between the application of lending criteria and the importance attached to customers’ circumstances, their history, and how it informs their potential as good payers.
In these days of lending by algorithm, it is refreshing to see more lenders across the spectrum no longer being reliant on the ‘computer says no’ school of underwriting. In the second charge sector particularly, underwriting generally remains a human-dominated experience, with the accent on looking at the client’s individual experience as much as slavishly following the criteria.
Leaving aside the property being sound and valued correctly, underwriting still boils down to two main elements: ability to repay – namely affordability – and intent to repay, which looks at past and present creditworthiness.
In a post-lockdown world, lenders face a new challenge. With a buoyant property market and many prospective buyers, a proportion of whom are coming off furlough or had elected to take a break from monthly payments, lenders have to make decisions based on a new demographic which has not existed before.
Are payment deferrals and holidays a sign of unaffordability, or of employment instability? The fact is that it will raise questions. Lenders must satisfy themselves that not only has the customer the ability to repay, but also the intent to do so.
Deferrals must be taken into consideration in the underwriting process, even though taking a payment break might just be something a customer simply did because they were allowed to. In fact, might this in itself indicate a behavioural issue that might come back to bite in the future?
Then, let’s look at whether or when it is OK to lend to a person who has been, or is, on furlough.
Lenders not only have to consider normal affordability protocols, but also how that might change with the current circumstances of furlough or payment deferral applicants.
We have to predict how this extra dimension feeds into the likelihood of future negative events, and might affect affordability going forward.
At the same time, we need to look at the historical credit profile of the applicant and see what – if anything – caused them to seek a deferral.
Level playing field
There is an argument that, provided the customer qualifies on current surplus requirements and stress tests, the lender is theoretically entitled to lend, with all else being equal and without a foreseeable event that may cause financial distress.
But it’s not as simple as that. Lenders see many cases where customers can evidence affordability in both circumstances – even with furlough and payment holidays – but the fact remains that furlough was introduced to avoid redundancy, and payment holidays to ease financially stressed consumers at a time when they potentially faced redundancy or were on reduced income.
If the lender was to lend under either of the above circumstances, blindly based on affordability tests, there is a high probability that it would be challenged at a later date for irresponsible lending and, as such, face the penalties for doing so.
If ever there was a case for levelling the playing field in respect of a customer’s responsibility for their decision to borrow, this situation sums up how the scales are currently tipped against the lender.
This is a common challenge for all lenders presently, and is already creating financial exclusion, not only for those that are currently furloughed or on a payment holiday, but also for those that have recently returned to regular employment.
It could be argued that this is a clear indication of financial stress or instability in employment.
However, the further lenders go down that particular rabbit hole, the more there is a danger that perfectly good cases might get flushed away along with the ones that really might cause problems further down the line.
Our attitude is to take a common sense approach and rely on the experience and knowledge of our underwriters, backed up by the increasingly effective credit checking facilities available to lenders.
By not relying solely and slavishly on affordability tests, we can steer a more consistent course.
Advisers can therefore feel that their clients are being assessed fairly, without compromising our underwriting integrity.