The Danish Consumer Ombudsman and the Danish Financial Supervisory Authority have issued guidelines to assist consumer loan providers in assessing consumers' creditworthiness prior to granting a loan.
The duty to assess loan applicants' creditworthiness follows from s. 7 c of the Danish Credit Agreements Act (kreditaftaleloven) and s. 9 of the Danish Act on consumer loan providers (lov om forbrugslånsvirksomheder). The provisions include a duty to assess creditworthiness on the basis of adequate information obtained from the consumer and, if relevant, from database searches.
In numerous cases, the Danish FSA and the Consumer Ombudsman have found that lenders do not sufficiently comply with the duty to assess loan applicants' creditworthiness. In 2020 the Consumer Ombudsman declared a number of loan agreements invalid as a result of this. Bech-Bruun has previously published newsletters about this; find them here and here.
To further clarify the requirements for adequate assessment of creditworthiness, the Danish FSA and the Consumer Ombudsman have now issued guidelines for enterprises that need to perform credit assessments. The guidelines are available here.
Various trade organisations have consulted on the guidelines, and on this basis the guidelines have been adapted within the legislative framework.
The guidelines include practical examples of the specific information to be obtained in connection with assessment of creditworthiness, and how to sufficiently document such information. The guidelines also list the financial aspects to which loan providers should pay specific attention when assessing creditworthiness. However, the guidelines do not set out specific methods to be followed by all loan providers when performing creditworthiness assessments.
Main contents of the guidelines
In connection with credit assessment, the loan provider must assess whether the consumer will be able to repay the loan applied for, prior to granting the loan. Assessment of creditworthiness must always be based on the individual consumer's financial situation, including on the basis of adequate information about the consumer's income, expenses and debt.
Simple, undocumented declarations from consumers do not in themselves qualify as adequate information that may form the basis for the loan provider's credit assessment.
More specific information, which the loan provider must obtain about the consumer according to the guidelines, in order to adequately assess creditworthiness, must include:
- Information about the loan applicant's personal situation
- Information about and documentation for the loan applicant's income
- Information about and documentation for the loan applicant's debt
- Information about and documentation for the loan applicant's expenses
Information about the loan applicant's personal situation is marital status and number of resident children, etc.
Information about the loan applicant's income must be based on the consumer's net income for a sufficient number of months and may be documented, for instance, through eSKAT and/or copies of pay slips.
Information about the loan applicant's debt may be documented, for instance, through eSKAT and/or copy of latest annual tax assessment notice. However, the loan provider must investigate whether new debt has been accumulated since the latest tax assessment notice, for instance through copies of credit agreements, tax files and/or by using, for instance, KreditStatus or the Debt Register.
Information about the loan applicant's expenses must be the consumer's actual fixed expenses. Documentation for fixed current expenses may be obtained, for instance, from own or external registers and/or from the consumer in the form of payments service statements, bank accounts or similar. The loan provider must ensure that the information provides an adequate picture of the consumer's financial situation.
The loan provider must assess whether the loan applicant's disposable income is sufficient for the consumer to be able to make the payments on the loan or credit in due time. As regards the amount of disposable income, as a rule of thumb the loan provider should apply the rates set out in the current, applicable executive order on debt rescheduling.
Comments by Bech-Bruun
In recent years, the Consumer Ombudsman has focused intensively on the area of loan agreements and has several times in recent years found a number of loan agreements invalid due to lack of credit assessment. Moreover, in June 2020 the Danish parliament adopted stricter rules for concluding agreements on and promoting instant loans. Bech-Bruun has previously published a newsletter about this; find it here.
The new guidelines emphasise that even though stricter rules concerning instant loans have been introduced, enterprises still need guidance on how to comply with the duty to perform credit assessment.
Thus the guidelines were anticipated, and they do provide more clarity for loan providers in relation to the specific requirements applying in connection with assessment of creditworthiness. As such, the guidelines will offer a useful credit assessment tool.
The guidelines recommend performing a thorough assessment and allocating considerable time and resources to the performance of credit assessment, as adequate information must be obtained and appropriately documented.
Our experts are ready to assist if you need to discuss the interpretation of the rules and how to ensure in practice that credit assessment is performed in compliance with legislation.