Last year was a record year for lenders offering forbearance measures with millions having been granted a payment holiday in some shape or form since the start of the pandemic. This has not only shone a spotlight on how such forbearance measures (however temporary) should be reflected on an individual's credit file going forward, it has also raised general questions around whether or not these forbearance measures are sufficiently clear and consistent or if the Financial Conduct Authority (FCA) needs to bring in new regulation in this area.
Christopher Woolard, the former interim chief executive of the FCA, in his review of change and innovation in the unsecured credit market highlighted the need for the UK regulator to adapt its approach to forbearance. Although the Woolard Review, which was published on 2 February 2021, doesn’t make any changes to FCA regulation, it sets out 26 high-level recommendations for the FCA and government, including the need for more clarity and consistency around forbearance.
What is forbearance?
The phrase "treating a borrower with forbearance" has no legal definition, but regulated lenders are required to do so under FCA rules when a borrower is "in default or arrears difficulties".
Treating a borrower with forbearance may involve the lender waiving its right to enforce the full terms of the loan or it may mean the lender contractually varying the terms of the loan, in either case with a view to supporting the borrower through their financial difficulty. Examples of forbearance would include reducing or waiving interest, allowing the borrower additional time to pay or permitting the borrower to take a payment holiday.
In the past, forbearance was exercised by lenders only once a borrower had gone into arrears, so it was not necessary to record the fact that forbearance was being exercised at the credit reference agencies (CRAs). In those circumstances, the key information that needed to be recorded was that the relevant borrower was in arrears.
However, for several years, lenders have been required to monitor their borrowers' repayment records and "take appropriate action" where there are signs of actual or possible repayment difficulties. In practice, this means exercising forbearance before a customer is in arrears, but this has not been something that has been recorded at the CRAs.
The pandemic has exposed this as a serious gap that needs to be filled. Early on in the pandemic, the FCA recognised the need to focus on the temporary financial impact that Covid-19 could have on people through no fault of their own. It, therefore, put in place temporary measures and guidance for lenders which required them to exercise forbearance by permitting payment holidays while ensuring that the relevant borrowers' credit ratings were not affected. For those individuals who sought short-term forbearance as a result of temporary cash-flow issues, this masking of the technical arrears on their credit files was not only beneficial, but also meant that they were more likely to request the temporary help.
The review acknowledges, with hindsight, that this approach may have been a blunt instrument. There is no doubt, for some, that the economic impact of the pandemic has been severe and will not be temporary, and that there will be increased need and demand for suitable debt solutions to help them recover. For these borrowers, there is a concern that short-term masking could even be detrimental to their recovery in the short term, as some firms may be less willing to lend if they don’t have the full picture of the consumer.
However, it is clear that there are important issues to be resolved about how forbearance is reflected in credit information, and the role that this plays in decisions made by lenders and consumers. There is currently no way of recording short-term forbearance at the CRAs. This is just one of the ways in which, according to the review, credit information needs to be able to respond in a more nuanced way to borrowers' changing circumstances (see our previous Insight on the deficiencies identified by the review in relation to how credit information is shared, used and regulated).