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ISCOVER
We’re little more than a month away from the introduction of mandatory comprehensive credit reporting (CCR) for the big four banks and you could forgive consumer finance professionals for feeling a little apprehensive.
During the past few months, there has been vigorous discussion around what the scheme means for the consumer credit industry, particularly mortgage and personal loan brokers.
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Central to the debate will be how positive credit reporting will shape risk-based lending practices. Critics are concerned that the move could see some borrowers penalised with higher rates, while advocates point to increased transparency and competition.
The truth is that the changes won’t be nearly as dramatic or as fast-moving than either camp currently estimates. However, that’s not to say that the introduction of positive credit reporting won’t be felt by brokers and advisers. The sheer volume of commentary is bound to spark both curiosity and confusion among borrowers. It will be up to trusted consumer finance professionals to help their clients navigate these questions.
For brokers, there is likely to be a number of pragmatic changes to their business in six to 12 months following the introduction of CCR.
Better data means improved efficiency
One of the most common challenges we hear from our broker network is around productivity, particularly with a new client.
Many hours can be sunk into accurately understanding a new client’s financial position. Even the most well-meaning client can get a little “fuzzy” when it comes to providing an accurate picture of their credit performance.
For example, a survey into the mortgage broking industry by Deloitte[1] found around 30 per cent of borrowers met or interacted by phone/email with their broker more than five times ahead of settlement. Anecdotally, a lot of this back-and-forth comes in the early stages of the relationship.
It obviously differs from business-to-business, but often it’s a cost that can’t be recouped. It’s frustrating for the client and the broker, and it can have a significant impact on a broker’s bottom line. So much so that it has become something of a holy grail in broker business efficiency.
CCR changes all that. With financial institutions providing a more complete picture of borrower behaviour, it becomes a very effective tool for brokers to have a lot of the initial discovery in a fraction of the time.
More information means greater efficiency, which in turn can only be a good thing for loan book growth and client satisfaction.
Predictability and actionability
In the same way that CCR will help streamline the “front end” of the client relationship, it will also have a significant impact on negotiations between the broker and lender.
Perhaps the most immediate and profound change will be around loan approval, largely because the broker and lenders are both working with similar data sets. Modelling studies[2] in North America, Brazil and Argentina found dramatic increases in loan acceptance rates when more comprehensive borrower data became available.
Not only does this improve efficiency between lender and broker, it can also significantly strengthen the relationship with the end client.
Take a worst-case example under the current system, where a would-be borrower is unexpectedly turned down by a lender, with little to no explanation as to why from their broker. It’s the kind of negative experience that regularly parachutes a client into the arms of another broker, or has them go direct to less discerning lenders.
CCR will not only help reduce this from happening, but, even when it does, all is not lost. With positive reporting, the broker can work with the client to identify reparable financial behaviours that will ultimately improve their creditworthiness — in time securing the loan or negotiating a better rate.
Not only can the relationship be maintained, but it can build the kind of trust that creates a lifelong client relationship. An existing, positive relationship is the number one reason for choosing a broker. Its long-term value cannot be overstated.
Looking into the crystal ball
These are just a couple of the more immediate effects of CCR that brokers and advisers can expect to see in the coming months.
It will be more “evolution than revolution” but nonetheless mean some important, potentially beneficial changes for the financial community.
[1] https://www2.deloitte.com/content/dam/Deloitte/au/Documents/financial-services/deloitte-au-fs-home-loan-preferences-041116.pdf
[2] https://www.transunion.com/docs/rev/aboutTransunion/maximizing_the_Benefits_from_Credit_Reporting%20_Michael_Staten.pdf
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