Australia is on the cusp of making major changes to its credit reporting regime, but whether the new system will be better for brokers’ clients is still up for debate. Andrea Cornish investigates

Australia’s credit reporting system is facing a major overhaul and in some minds, the changes are long overdue. Unlike developed economies such as the US and the UK, the current regime in Australia only reports ‘negative’ data – such as the fact that a loan application was submitted (but not whether it was accepted or rejected), defaults of greater than 90 days and bankruptcy. The source of the debt and the size of the default make no difference on the credit report – missing mortgage payments is as detrimental as failing a store credit card. Negative records stay on a borrowers’ credit report for up to seven years – even if the bill has been paid in full.

On the other side of the coin, someone who has applied for credit and never used it has just as good credit as someone who has dutifully paid their mortgage for 10 years. Credit reporting agencies store their naughty lists, and then sell the information – credit reports – to anyone keen on lending money.
But since 2004 the credit industry has been lobbying for change. Dun & Bradstreet, one of the reporting agencies spearheading the campaign, describes the current system as out-dated and claims Australia’s credit reporting laws provide an “incomplete picture of a borrower’s true risk profile.

However, the real catalyst for change was the National Consumer Credit Protection Act, according to the law firm Minter Ellison. A fundamental feature of the NCCP act is a requirement for credit providers to collect and verify information about a loan applicant’s financial position, which is an underlying component of the loan “unsuitability assessment’ that all credit providers must investigate before entering into a credit contract. As such, the credit industry has been pushing for a privacy reform which will allow more comprehensive reporting to help them better understand a borrower’s financial position.

After much review, the government released an exposure draft of the credit reporting reforms to the Privacy Act in February this year. Under the proposed changes, the information on an individual’s credit file would now contain a greater amount of information to give lenders a more comprehensive picture of the potential borrower. The revised ‘comprehensive reporting’ scheme includes five new areas of information: the type of each active credit account a person holds; the date in which the account was opened and, if it was closed, the date it was closed; the amount of credit available and information about repayments. The new scheme has since been referred to the Senate Finance and Public Administration where it is currently under review.

Advantages

According to Dun & Bradstreet, comprehensive credit reporting holds several advantages for both lenders and borrowers, such as:
• Reduced default rates
• Improved access for under-served demographics to the mainstream credit system
• Greater market competition
• Enhanced responsible lending practices
• Greater ability for borrowers to “shop around” for credit cards

Veda Advantage defended the new reporting scheme against criticisms that the system would deny credit to worthy borrowers. Spokesperson Chris Gration says there is nothing “draconian or big brother” about the law and claims the comprehensive credit reporting would only deny credit to borrowers unable to service a loan, which reflects the intent of NCCP legislation.

“Comprehensive credit reporting very significantly improves the capacity of the lender to work out if a consumer can afford the loan,” Gration explains. “National Parliament has passed laws that basically say we don’t want consumers who are overcommitted financially being likely to be able to get loans. In doing so, there is an understanding that when a bank or credit union says no to an overcommitted consumer, that consumer will be disappointed, but it is still nonetheless the right decision.” Gration also says there is an advantage in comprehensive credit reporting for borrowers with good repayment histories, pointing out that those borrowers could be able to demand rate discounts.

Home Loan Experts director Otto Dargan also sees potential in the new scheme for rate discounts. “If Veda Advantage gives every credit file a score, similar to the USA’s FICO Score system, then there is the potential for borrowers to use this as a bargaining chip when shopping around for a rate,” he says. “Several lenders have already shown an appetite for ‘rate for risk’ lending by offering discounts for low LVR loans. I expect these same lenders will consider a credit score based interest rate as well. If the current system remains where the banks do not use a score from Veda, and instead generate their own score, then there is still the potential to have a rate for risk system similar to the one already used by non-conforming lenders or Esanda with vehicle finance. However because every lender would have their own scoring system, this would be less transparent to consumers and so would be more difficult to market.”

Dargan also says the new reporting system will make it harder for borrowers to commit “soft fraud”. “In the current market it is too easy for borrowers to hide their existing debts,” he states. “If positive credit reporting can help lenders identify undisclosed debts or past repayment problems then this will help the entire industry. If the new system proves itself to be accurate then maybe lenders will not ask for statements for any existing debts, including debts being refinanced. The gains in efficiency from this change would be a big win for customers, brokers and lenders.”

The new system may even encourage Australians to manage their finances better, Dargan says. “In the US most people are well aware of what information is taken into account by the FICO score system, and so they actively manage their finances to try to achieve a better score,” he observes. “There are even people who brag about their credit score or want to see their fiancée’s score before getting married. At the moment, very few Australians even know what credit scoring is. If Australians become aware of how the scoring system works then they may try to make their payments on time, every time, in order to increase their score. Hopefully this will improve the behaviour of people that don’t care about making their repayments on time.”

The Mortgage Planner Group’s principal Darryl Benn is also looking forward to the changes, as he believes it will provide a better outcome for borrowers. “The current system of credit reporting is based purely on negative reporting and I have had concerns with agencies for a number of years as they have on many occasions unfairly jeopardised a consumer’s capacity to borrow.”

A number of clients have been burned through no fault of their own, Benn says. “I recall many loans being refused when one telco listed all accounts as in default when they went into liquidation and the consumer couldn’t actually pay them. When it came to LMI they just wouldn’t listen. They may have excellent credit history but a telco bill prevents them from borrowing and this form of negative reporting was not helpful to consumers.”

In other cases, Benn says he’s had clients who had excellent credit histories, lost their jobs and went into default. Despite regaining employment and clearing debts, they continue to be penalised for year to come. Benn also argues that clients should be rejected based on the number of enquiries they’ve made. “If a person does not proceed those enquires in my opinion should be removed.”

Disadvantages

But the new system is not without its detractors. Potential drawbacks flagged by lenders in the build-up to the exposure draft were:
• Protection of privacy and controls over data access and usage
• Data reciprocity
• Data quality
• Complaints handling and dispute resolution standards
• Governance and oversight framework

Oasis Mortgage Group’s Graham Reibelt recently came out swinging against the new regime, stating that it would empower lenders enormously and impact the majority of clients’ credit worthiness in a negative way. He also suggested brokers would be pushed into the non-conforming space as a result.
“If lenders do a bit of an audit, then they can uncover an awful lot of information that hasn't been disclosed fully to them,” he warns. “A customer may have understated the credit limit on their credit card, or fallen behind on a store card, but are not always a bad credit risk. We don’t always need or want the whole truth particularly when the information isn’t of material importance. It’s a bit like your wife asking, ‘does my bum look big in this?”

Credit reporting lawyer Joseph Trimarchi, of Joseph Trimarchi & Associates, says the new reporting system may catch out clients who are on the borderline for lenders and could penalise borrowers who were late making payments, but not yet listed in default.

According to Dargan, the new system could potentially limit access to credit – at least in the beginning. “Initially I believe this will give customers less access to credit,” he predicts. “Banks will take time to adjust and to create policies around the new information they are receiving and so will start off by being conservative. However after this initial period, the banks may consider lending to customers who have adverse listings as long as they have a good track record of behaviour with their other accounts as shown by the new positive credit reporting data. It can help separate someone who has had a one-off problem from someone who can’t handle their finances.”

Change for brokers

Resi CEO Lisa Montgomery acknowledges that the new reporting scheme could prompt brokers to adjust their interview process with clients. “If the borrower discloses past credit issues early in the loan discussion, it may prompt the broker to bring forward the request for a credit report. Again though, this will depend on whether all financial institutions embrace positive credit reporting. The value of this data will be determined by how robust it is.”

But Dargan is confident brokers will change their interview practices as a result. “I expect many mortgage brokers will carry out a credit check as part of the loan interview or will request customers to order a copy of their credit file prior to the meeting. You can’t accurately recommend a loan if you don’t know anything about the customer’s credit history.”

Changes of note

Some of the changes proposed in the new credit reporting scheme have attracted more attention than others. Three such noteworthy changes include:
• For an individual’s late payment history, late payments will only be recorded by banks and lenders in terms of payment cycles ‘missed’ – which are measured monthly – under the new credit reporting system.
• If you miss a utilities bill repayment, this will not negatively affect the borrower under the new legislation – as utilities providers do not have access to the system. Only NCCP regulated credit providers can report or use repayment history. (This information will not be available alongside payment history).
• Repayment history will only be available for the last two years.