The UK’s Consumer Finance Association (CFA), a trade association of non-bank lenders that represents alternative consumer credit providers, recently questioned whether forbearance during the COVID- 19 crisis should be reflected or shown on credit files.
The Financial Conduct Authority (FCA) has provided guidelines that may be followed during these challenging times. The FCA notes that lenders need not report a worsening status to credit files if borrowers decide to take a payment freeze.
The financial regulator also suggested that lenders may consider using other sources when trying to decide whether to report a borrower’s status.
However, Helen McCarthy, head of policy at the CFA (focused on short-term lending), argues that leaving out skipped payments from borrowers’ credit files (referred to as “masking”) could potentially undermine the integrity or reliability of credit reports.
As first reported by Peer2Peer Finance News, McCarthy noted that many people experience financial challenges due to circumstances that may be outside their control. However, they may not benefit from that information being “masked.”
She added that the current approach raises questions about the fairness of the process. She also noted that someone who has been made redundant in January, for example, may be treated differently when compared to someone made redundant in April or later on in the year. She adds that it’s difficult to “see the justification for this.”
McCarthy further notes that the “real question is how we create a credit market that is sophisticated enough to understand that some people are impacted temporarily and that others will be facing long-term financial difficulty.”
She also pointed out that credit files and records are essential for informed decision-making, and that masking or removing certain information can reduce its reliability or value when trying to determine whether a loan is affordable or feasible.