The European Banking Authority identified inconsistencies in supervision and deficiencies in creditworthiness assessments among non-bank lenders, raising concerns about consumer protection in Europe. These conclusions came from the regulator’s first fact-finding exercise on the creditworthiness assessment (CWA) practices of non-bank lenders (NBLs) across the European Union. Published on 7 August 2024, the results are based on an in-depth analysis of the methods NBLs use to evaluate borrower creditworthiness, with a focus on how these practices may contribute to consumer over-indebtedness and arrears.
Creditworthiness assessment practices
The EBA’s investigation, which was a follow-up to the consumer trends report from April 2023, revealed that while some non-bank lenders serve segments of the population with limited access to traditional banking services, a significant number of NBLs were found to employ inadequate practices in their CWAs. Specifically, these lenders often demonstrated poor information gathering and verification processes, raising concerns about the effectiveness of their assessments and the potential risks posed to consumers.
Regulation and supervision
One of the key findings of the EBA report was the lack of a harmonised definition and authorisation framework for NBLs across the EU. This regulatory inconsistency has led to a situation where similar types of non-bank lending entities are supervised differently across member states. As a result, the rules governing these entities vary widely, potentially leading to uneven levels of consumer protection and market stability within the EU, said the EBA.
Despite these challenges, the report noted that many national competent authorities have taken supervisory actions against NBLs. However, the rapid growth and increasing significance of the non-bank lending sector have highlighted the need for more specialised resources to monitor these activities effectively. The EBA stressed the importance of dedicated oversight to ensure that NBLs adhere to appropriate creditworthiness assessment standards.
Mortgages and consumer loans
The report also provided insights into market trends, particularly concerning loans granted under the consumer credit directive (CCD) and the mortgage credit directive (MCD) between 2020 and 2023. The analysis showed fluctuations in the proportion of credit requests granted by NBLs over this period:
— The proportion of CCD credit requests granted by NBLs increased from 34% in 2020 to a peak of 43% in 2021. However, this figure declined to 38% in 2022 and further to 37% in 2023, indicating a stabilisation after the peak year.
— In contrast, the proportion of MCD credit requests granted by NBLs exhibited a decreasing trend. It started at 58% in 2020, surged to 75% in 2021, but then declined sharply to 49% in 2022 and continued its downward trajectory to 45% in 2023.
These trends suggest that while NBLs initially saw a rise in credit issuance, particularly during the peak year of 2021, both consumer credit and mortgage credit approvals have since declined, with mortgage credit showing a more pronounced drop.
The EBA indicated that it would continue to monitor the activities of non-bank lenders through its biennial consumer trends report. Depending on future findings, the EBA may consider initiating further actions to enhance consumer protection within the EU. The authority emphasised the need for ongoing vigilance in this sector to address the challenges posed by non-bank lending and to ensure that consumers are adequately protected from the risks of over-indebtedness.
To conduct this fact-finding exercise, the EBA collaborated with national competent authorities, who selected a sample of 125 non-bank lenders from across the EU for analysis.
The EBA concluded that there is a need for improved regulatory frameworks and supervision to ensure non-bank lenders adhere to robust creditworthiness assessment practices, thereby protecting consumers from the risks associated with inadequate lending practices.
