PRA has carried out a review of consumer credit lending, looking at asset quality of PRA-regulated firms and their lending practices in respect of credit cards, unsecured personal loans and motor finance.
PRA is concerned that interest margins have fallen as a result of rapid growth in consumer credit, and that some aspects of underwriting show weaknesses that mean lenders may be more vulnerable to stresses. Overall, this means it thinks the resilience of consumer credit portfolios is reducing. It comments on some overall risks caused by firms’ attitudes and practices, and some product-specific risks.
As a result of its concerns, PRA is requesting evidence from all firms that have material exposures to consumer credit of how they will ensure that:
- credit scoring adequately captures medium-term risk
- stress-testing approaches do not under-estimate potential downturn risks
- any loss-leader segments are explicitly reported and monitored
- they consumer whether to apply a “prudent add-on” at the cut off point for new business
- they have interpreted CONC prudently in underwriting
- a borrower’s total debt, including secured debt, is taken into account in the underwriting process and
- their risk appetite, MI and governance frameworks properly oversee consumer credit portfolios, including controls to prevent unintended drift in underwriting, overall asset quality or pricing-for-risk standards, with board oversight of the controls.
It also wants firms to ensure they can provide their supervisor with evidence (where appropriate) that:
- they can justify the assumptions and time periods used for forecasting the net present value of new 0% credit card offers
- their underwriting assessment and pricing of long-tenor or higher-amount loans takes into account consumers’ motivation for borrowing and borrowers’ overall indebtedness when offering unsecured personal loans and
- guaranteed future values are set in a prudent manner compared with the expected future value of the car in motor finance.
