2018-09-04
T. Garbaravičius: People should not be punished for looking for best credit offers
Upon receipt of signals that, due to active interest in credit offers and their comparison, borrowing may become more expensive, a clear message is being sent: creditors and credit rating agencies must assess customers objectively and not punish them for looking for the most favourable borrowing terms and conditions.
‘If a person looks for the best credit conditions, he/she should not be punishable for that. Otherwise this would infringe consumers’ rights as it would limit the opportunities for finding the best offer. This particularly applies to so responsible a decision as a housing loan that people normally take for a long term and for which they pay tens of thousands euro interest. Grabbing the first offer provided would be irrational,’ says Tomas Garbaravičius, Member of the Board of the Bank of Lithuania.
Information appeared in the public domain that frequent reference to credit possibilities potentially reduces the person’s credit rating and increases the cost of borrowing. The information provided to the Bank of Lithuania by UAB Creditinfo company which calculates the credit ratings of banks and persons shows that part of creditors, in assessing a person’s creditworthiness, indeed one way or another take into account how actively the person’s financial position was referred to by querying databases. A large number of queries, however, not always has a significant or direct influence on credit rating or the cost of a loan: firstly, creditworthiness assessment models are usually comprised of a number of variables; secondly, the number of queries about a particular person is compared with the average usual number of queries in the market, deeming the repeating queries of one and the same creditor as one query; thirdly, sometimes this is only used as a signal that the creditor should analyse the borrower’s financial position more closely.
‘Creditors that apply creditworthiness assessment models of their own or those created by other companies when the number of queries is taken into account should seek that, even if it is a significant indicator of credit risk in statistical terms, it does not limit competition and the person’s right to search the best credit offer. Taking interest in credit offers and comparing them is a natural, logical action to be encouraged,’ claims Mr Garbaravičius.
In the solution of the conflict between the credit assessment model quality (when, considering the number of queries, a better model is derived) and the consumer’s right to compare and select the best credit offer, the US practice could be relied on – setting a certain relief period during which the number of queries would not affect a person’s credit rating. Such period of, e.g. 45 days, should be long enough for the person to collect creditor offers and compare them.
‘A housing loan offer is valid for 30 days, hence all creditors and creators of the ratings of natural persons would be recommended that the period for the person to choose and compare credit offers without the impact of the number of queries on credit rating and the cost of borrowing should be no shorter than 30 days,’ says Mr Garbaravičius.
The Law on Real Estate Related Credit which came into force last year encourages consumers not to take prompt decisions regarding conclusion of credit agreements, apply to several creditors and compare their offers as well as credit terms and conditions, to seek the best offer in the interest of the consumer, and to refinance existing credits under more favourable conditions (see here). Moreover, creditors have been obligated to provide basic information on housing credit in the standard form so that simple and easy comparison of offers is possible.
Prior to entering into a credit agreement (no matter if it is a loan for house purchase or consumer credit), every creditor (a bank, credit union, leasing company, etc.) must carry out a comprehensive assessment of the consumer’s creditworthiness provided for in legislation. The main information which must be gathered and assessed by creditors is as follows: consumer’s income, financial liabilities, credit history (timely or untimely payment of contributions, etc.) as well as compliance with the Bank of Lithuania-approved Responsible Lending Regulations.