Central Bank proposal would force lenders to explain decisions

Banks will have to increase the amount of information they give to small and medium-sized enterprises looking for credit under proposals from the Central Bank.

The bank has published a paper as part of a review of the Code of Conduct for Business Lending to SMEs, which was introduced in 2009, and is inviting submissions with a deadline of April 13th.

Among the changes being looked at are requiring lenders to provide reasons for declining credit that are specific to the application that was refused.

A review conducted by the Central Bank found that lenders typically used standard letters that provided limited information as to why an application was declined.

Furthermore, when it was said that more information had been supplied verbally, it was sometimes the case that no record of these discussions existed within the lender.

The bank is proposing changing the code so that the appeals provisions are expanded to include decisions on declining or withdrawing credit and decisions regarding terms and conditions.

Information

It is also proposed that lenders provide information to customers on Government supports available from or through the lender, of the lender’s appeal process, of the role of the Credit Review Office and of the complaints process, including, where relevant, to the Financial Services Ombudsman.

In contacts with a range of stakeholders the bank found that the concerns that existed among SMEs and Government agencies included the communication to customers of information about lenders’ application processes and timelines, clarity as to what information was required, the need for more transparency as to how ability to repay is determined, reliance on personal guarantees and appeals.

Lenders and their representative bodies expressed concerns that any changes to the code might affect efficiency and increase complexity. They also said that timeframes for assessing applications might not be appropriate, particularly with complex applications.

Financial difficulty

Credit unions might want time for applications to be considered by their boards. It was also said that it can be difficult to determine when a customer is no longer in financial difficulty and that there can be a lack of clarity in cases of joint commercial borrowings that fall into financial difficulty, where one party is co-operating and the other is not.

The Central Bank is also looking at extending the code to credit unions and to business credit cards, and that the “smaller enterprises” provisions in the code would be extended to all SMEs.

The consultation paper sets out proposals on requirements to be placed on lenders when dealing with SMEs seeking to access credit or when in arrears or financial difficulties, according to Bernard Sheridan, director of consumer protection with the bank.

“SMEs perform a significant role in our economy and it is important that they can deal with regulated lenders with confidence that the process is transparent and their interests are protected. We would encourage submissions from all interested parties.”