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Covid-19 and the rise of responsible lending

How to lend responsibly and access the data, to remain compliant, quick, and competitive.

By James MacTavish

What effect has Covid-19 had on the property sector?

Britain’s property market boomed in the pandemic, thanks to pent-up demand and a desire for more space amid increased home working. However, the rise in demand from buyers hasn’t been matched by new properties appearing on the market, and the imbalance could keep property prices rising higher.

Demand is rising and prices are rising with it, putting immense pressure on banks, and building societies. Customer satisfaction relies on lenders helping to provide them with a safe home, and to help them maintain financial stability – something that has only become even more relevant, in the post-Covid economy.

However, banks and building societies cannot rush into negotiations with customers on mortgage or loan agreements. The Bank of England has introduced a new regulatory requirement: in 2021, the financial sector must perform stress testing, to understand the risk the economy faces from climate change. For example, flooding creates a high likelihood of mortgage default and as such is a major category of risk and the Bank of England is encouraging all financial institutions to work towards net zero by 2050.

In addition, with the rise in home working leading to office closures, and commercial properties being converted for residential uses, other risk assessments must be carried out. By understanding the risks involved with each individual property, financial organisations can better manage a system of ‘responsible lending.’

What is ‘responsible lending’?

‘Responsible lending,’ as the name suggests, relates to making informed decisions. Despite growing competition in the lending sector, and customers’ increasing demands for speedier decisions and transactions, banks and building societies cannot afford to make irresponsible lending decisions – neither for themselves, or consumers and business clients. Irresponsible lending could lead to mortgage defaults, which in turn can have significant impact on banks, households, and the economy in general. With the changing face of Great Britain’s high streets, there is more expectation from customers for online banking to be quicker and easier, but at the same time, risk free.

In these circumstances, lenders need far higher levels of decision-making certainty. Thorough assessments for financial decisions requires accessing better datasets, in the same amount of time, so that potential opportunities and risks for individual assets can be fully considered. They can then work towards lending responsibly, protecting both themselves and their consumers, and follow tighter regulatory requirements – as well as their own, as both continue to evolve.

Risk assessment decisions require data, but the solution is not that simple. Information on individual properties is often incomplete and inaccurate, which for the lending sector can only lead to additional uncertainty, and risk.

So, how can the financial sector make informed decisions, and lend responsibly; and how can they access the data they need, to remain compliant, responsive, and competitive?

Responsible lending has changed post Covid-19

Better data can help lenders adapt to the changing impacts of the climate crisis. Read our insight, 'How to lend in a new era of climate risk'.