Borrowers were not warned for months that taking a payment holiday during the coronavirus pandemic could deny them future loans — potentially leaving millions to apply for temporary relief thinking their creditworthiness would be unaffected.
Payment holidays for mortgage borrowers who were in difficulty due to the virus were first announced by chancellor Rishi Sunak on March 17. A day later, Alok Sharma, the business secretary, reassured those seeking a three-month payment break that it would not impact their credit record — which lenders use to assess future loan applications.
Similar payment holidays for personal loan and credit car borrowers were then announced on April 2 — with these borrowers also told by the FCA that they “should not have their credit rating affected because of this”.
However, the FCA did not tell borrowers at this point that payment holidays or deferrals could still influence banks’ willingness to lend to them — even if their credit scores or ratings were unchanged.
The FCA has since clarified that “banks and lenders take into account a range of information beyond a credit score and will need to assess the affordability of loans . . . The intent of deferrals is to allow those temporarily affected by the economic effects of Covid-19 to recover. It cannot be a reason to allow lending on an unaffordable basis to those with a long term loss of income.”
But warnings about this were not added to the FCA’s consumer advice web pages for months.
It was not until May 22 that the FCA added these words to its mortgages advice page: “There are other ways lenders can tell whether you have taken a mortgage holiday, which could impact future creditworthiness assessments.” By that time, 1.82m mortgage payment holidays had already been granted, based on figures from banking industry group UK Finance — suggesting roughly one in six mortgage borrowers had applied for one.
It took until July 1 for a similar warning to be put on the FCA’s loans, credit card and overdrafts webpage: “Credit files aren’t the only source of information . . . lenders may take into account your bank account information, or consider your use of credit products or how much you are in debt, when making a lending decision.” By then, UK Finance members had provided 686,500 payment deferrals on personal loans, 992,400 payment deferrals on credit cards and more than 27m interest-free overdrafts.
Banks and consumer advisers were informed of the other ways in which payment holidays could impact creditworthiness. “[The FCA] had been having conversations with both firms and consumer groups before these dates relaying these messages,” a person familiar with the regulatory process said.
But some are worried that borrowers may have mistakenly assumed an unchanged credit score made taking a payment holiday a safe choice.
Jason Wassell, chief executive of the Consumer Finance Association,
said the FCA's actions could lead to financial exclusion for some
borrowers. “Lenders . . . will be able to find data from credit files, or
seek out new sources of information such as bank statements showing
payment holidays . . . some lenders will need to tighten their lending
criteria. That could mean that many more excluded from prime credit,
and with concerns around the approach of the FCA . . . that predate the
pandemic, it is unclear who will lend to them in the future.”
Labour MP Siobhain McDonagh, who is a member of the Treasury select committee, has written to the chancellor asking him to explain how the confusion came about. A report in the Mail on Sunday quotes her letter as saying: “It was insisted by the government there would be no repercussion for those who used these schemes. I would be grateful for your comments . . . as to why there are repercussions when it was pledged there would not be.”
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