Understanding The Principles Of Responsible Lending

In the wake of the global financial crisis, responsible lending is increasingly becoming popular in relation to regulatory reforms in consumer credit regulation. It is the sole responsibility of those policymakers in financial service sectors that specialize in offering loans and credit to consumers to ensure that their consumers get the best lending services they deserve.

Ranging from financial consumer protection and the integrity of the financial services provided to ensure stability in the financial sector and other financial inclusions, it is the responsibility of these policy makers operating in the sector to focus on balancing every policy objective of the sector. Generally, all these are aimed at inducing responsible behavior of market participants.

What is responsible lending?

Consumers need to be protected against over-indebtedness particularly now that there is a need for the financial sector to be “responsible.” Generally known as “responsible lending,” this policy term is mostly used to denote a range of regulatory tools or measures. It is a system that requires lenders to act in the good interest of borrowers.

Basically, responsible lenders need to ensure that borrowers get a full understanding of the loan’s terms and conditions. It is common for loan consumers to experience some kind of difficulty during loan repayment. Typically, responsible lending is designed to provide them with the support they need while ensuring adequate affordability of the loan.

Becoming a responsible lender

There are certain obligations lenders are required to meet before they can be termed as responsible. In other words, only lenders that meet the responsible lending obligations are recognized as “responsible lenders.” Below are some top principles of responsible lending that lenders are required to observe.

–              Regular meetings with the Administrator are highly recommended so as to enable lenders explain how the guaranteed loan is being serviced.

–              There are several types of loan proposals. However, it is best for lenders to recommend only those that are financially feasible for their loan consumers.

–              It is necessary to ensure that borrowers are capable to repay the loan amount on or before the due date.

–              The best way to effectively determine the lending decision of the borrower is by taking an account of the borrower’s actual monthly income.

–              While ensuring that the loan deal is suitable for the borrower, lenders should always ensure that they make an initial estimation about the loan consumer’s credit condition.

–              There is every need for lenders to ensure that they carry out standard verification processes on the financial situation of their borrowers.

–              Before even lending credit or loan to borrowers, it is, imperative for lenders to conduct reasonable enquires about their client’s (loan consumer) financial condition.

Whether it’s an overdraft, mortgage, credit card or personal loan, when it comes to responsible lending, lenders have a responsibility to be open and honest to their customers while striving to treat them fairly.