Responsible lending rule to take effect

TALLINN - In July, instructions from the Estonian Financial Supervision Authority will come in force, according to which banks will have to, to a greater extent, consider the real possibilities and needs of people before granting a loan, reports Postimees. Although the law that obliges banks to observe the requirement of responsible lending was valid in the boom years as well, Financial Supervision Authority board chairman Raul Malmstein says that its contents were not specified. The instruction that will soon be enforced should fill in these blanks.

Estonian Banking Association board chairman Riho Unt says that banks, supervision authorities and loan takers have all learned a lesson from the boom era. According to the new instruction, banks have an obligation of making sure that people’s incomes are actually sufficient to fulfill the obligations they take. Unt explained that this means, for example, careful consideration of result-based wages of employees or of dividends that can easily be cancelled, as well as whether a person is able to find a new job should he lose his existing one.

The bank should also look at whether the loan applicant had been earlier able to save money or not. The decision to grant a loan has to depend on the needs of loan-takers: for example, if a person living alone wants a loan to buy a 200 square meter home, this may not seem to be very “reasonable.”

Unt said that still, there are no firm rules and banks have to decide in each case, separately, if it is reasonable to grant a loan or not. The instruction also prescribes that banks have to explain to customers what happens when difficulties emerge. “Attention has to be paid to the black scenario,” said Malmstein.

Malmstein said that it can be assumed that issues concerning responsible lending can in the future bring court cases that are based on debt restructuring and debt protection laws.