Mortgage lending decisions must be undertaken on a sustainable and prudential basis by financial institutions and must conform fully with the regulatory requirements, both in relation to the financial institution itself, and also with regard to the safeguarding of the borrower's interests. The Central Bank of Ireland (CBI) has advised me that the Consumer Protection Code 2012 (CPC) contains important protections for borrowers, by imposing 'Knowing the Consumer and Suitability' requirements on lenders. Lenders are required to assess affordability of credit based on the individual circumstances of each borrower.
The CPC contains provisions relating to assessing suitability and affordability of credit, including for example, a provision which obliges lenders to carry out an assessment of affordability to ascertain the personal consumers likely ability to repay the debt over the duration of the agreement. The affordability assessment must include, inter alia, a test on the basis of a 2% interest rate increase, at a minimum, above the current interest rate offered to the personal consumer.
The CBI has also published internal sustainability guidelines in June 2013 (updated in Sept 2013) which sets out important factors to consider when assessing if modifications proposed by a lender are sustainable solutions for mortgages arrears cases. Included with the guidelines the CBI has set out its expectations in relation to the assessment of borrower affordability of sustainable solutions. Affordability needs to be based on both their current and prospective future servicing capacity for all borrowings. According to the guidance, assumed prospective future increases in the debt servicing ability of the borrower must be credible and conservative.