BANKS WILL be required to impose considerably stricter financial stress tests on mortgage applicants if new rules on lending, which the Central Bank proposed yesterday, are adopted.
The proposals are aimed at toughening up the four-year-old Consumer Protection Code. It is based on a series of principles rather than rules but the Central Bank believes those principles have not succeeded in halting the exploitation of vulnerable people, particularly the elderly.
If the new rules are adopted, following a consultation period which will continue until early in the new year, financial institutions will have to assess a consumer’s ability to repay borrowings in considerably greater detail than has been the case before they approve a loan.
They will also have to assess the impact of a 2 per cent interest rate rise on a consumer’s ability to repay.
Bernard Sheridan, the assistant director general at the Consumer Protection division, accepted that this could make the process of getting a mortgage for a would-be home owner even more difficult than is currently the case. “Whether or not it should be higher than 2 per cent is open to debate. The higher you go the less likely a mortgage is going to be affordable. We are pitching it at 2 per cent because we believe it would be imprudent not to ask lenders to factor in potential ECB rate rises over the next two years.”
When a consumer is availing of an introductory interest rate, the financial institution’s calculations will in future have to be based on the lender’s standard variable rate or fixed rate, whichever is to be applied after the introductory period.
As part of the proposals, the characteristics of a vulnerable consumer have been clearly outlined for the first time. A person will be deemed to be vulnerable because of “mental or physical infirmity, age, circumstances or credulity”.
If the rules are adopted, financial institutions will have to carry out a range of detailed checks and if a vulnerability listed under the new code is identified they will be obliged to provide that potential customer with a greater level of care and protection than is currently the case.
The proposals also introduce a range of measures designed to increase protection for small investors.
The Central Bank said consumers placed a “great deal of reliance and trust” in what they are told during a financial sales pitch.
To ensure consumers are not misled it says a “contemporaneous record of the verbal interactions must be maintained”.
Financial institutions that have made errors will also have to resolve them within a timeframe of no longer than six months, the new rules state.
