New Rules on Consumer Credit Marketing and Management
The Bank of Israel recently published a draft directive on proper banking management. It details various provisions in favor of changing the conduct patterns of consumer credit providers toward their clients, both from the perspective of credit marketing and the prevention of problematic practices in this context, and from the perspective of proper credit and underwriting policy designed to prevent credit risks not tailored for the client.
In parallel, the Capital Market, Insurance and Savings Authority published an amendment to the consolidated circular applicable to financial services providers licensed to provide credit, to offer deposit and credit services, and to operate credit-brokering systems.
Since these two regulators oversee the offering of bank and non-bank credit, respectively, in order to create a set of unified regulations on consumer credit in the financial system and to prevent regulatory arbitrage, they cooperated to create a similar set of rules.
The goal of the new provisions is to ensure proper and fair conduct of credit provision to private persons, thereby minimizing the credit risks to which customers are exposed. This will encourage the development of competition between credit providers and strengthen public trust in the financial system as a whole.
The provisions, which consider only “consumer credit,” require that the lenders set minimum criteria for affording household credit. These entities must also abide by proper conduct toward the client and avoid wrongful practices, both from a proper marketing practice perspective and from a credit approval process perspective.
The new rules stipulate, inter alia, that a corporation’s board of directors is responsible for designing a strategy for consumer credit management, with an emphasis on consumer aspects. It also establishes that the corporation’s management must oversee the implementation of strategy and compliance with the credit policy and underwriting protocols. The consumer credit policies and credit approval processes should lead to a match between the amount of credit and the client’s financial ability, in order to reduce the risk of an excessive debt burden being imposed on the client.
The policies and processes should also include, inter alia, instructions on the following matters:
- The discretion to be exercised and the information required for underwriting processes, in an attempt to ensure an efficient and cost-effective examination.
- Matching the type of credit offered to the purpose for which it was provided and to the borrower’s ability to make payments, as well as the borrower’s age.
- Setting mandatory criteria for affording credit, including assessing the borrower’s financial stability, rating, and cumulative experience with them; gathering financial information about the borrower from external and internal sources; and considering the quality of the information and how updated it is.
- Setting quantitative measures and a minimum standard for the assessment of the borrower’s ability to pay. These include minimum disposable monthly income, maximum ratio between monthly payments and disposable income, maximum ratio between total debt sum and yearly income, the state of the borrower’s assets, unutilized credit frameworks, collateral, and guarantors.
- Using an automatic model for rating the borrower’s risk, protocols, and appropriate operating systems for supporting the analysis of the information, as well as cautious credit decisions in the course of the underwriting process.
- Securities and guarantees shall not serve as substitutes for assessing the borrower but shall be added to the assessment, subject to rules and methodologies to assess value and safety cushions, legal conditions, and processes to ensure realization of the securities if need be.
In addition, a corporation providing consumer credit must determine who the target demographic for unsolicited marketing is (i.e., reaching out to a client with a credit offer) and determine clear characteristics of client groups that shall not be targeted for such marketing.
The directive provides that aggressive marketing and pressuring clients to take credit should be avoided, by taking the following steps:
- Conducting conversations according to scripts prepared in advance and with full, proper, and relevant disclosure, including as to the objective of the conversation.
- Avoiding credit marketing to disadvantaged groups.
- Refraining from repeated contact to a client who has declined a credit offer, for three months.
- Enabling the removal of a client’s name from the marketing list.
- Credit marketing at the point of sale from a designated and clear area and actual provision of credit contingent upon additional consent granted at a separate time.
Prohibiting the initiation of contact to a “young client” between the ages of 18-21
- Setting guidelines for training, compensation, and evaluation of employees, including outsourcing, so as not to encourage aggressive marketing of consumer credit.
The new regulation further grants borrowers the right to cancel the transaction within three days, under certain conditions, a right not previously granted to them.
The Authority’s amendment adds provisions on the issue of debt collection, while maintaining fairness and transparency in the relationship with the borrower, including the following requirements:
- Supervision of third parties who perform debt collection for the license holder.
- Sending a detailed and clear notice to a borrower in default, including a notice before commencing debt collection proceedings.
- Clarifying the meanings and implications for the borrower in case of a debt settlement.
- Prohibition on the conveyance of rights for repayment of credit with the exception of entities holding a proper license, and subject to an appropriate notice to the borrower (except in cases where the rights’ conveyance was done within a credit-brokering system).
The application of the draft directive on banking corporations and payers who provide credit will take place gradually throughout the first half of 2021. The provisions regarding financial services providers will take effect in nine months, in August 2021. This is a short interim period for entities offering consumer credit.
Our Regulation Department is at your service if you need any advice or guidance in this regard.