There were two important changes in the credit reporting sector in July 2021: the amended mandatory comprehensive credit reporting (CCR) came into effect and debt management services were subject to a new licensing regime. We take a look at the implications of these changes for the industry and customers, and how CCR has impacted the credit repair sector
It has been an eventful start to the new financial year in the credit reporting landscape, with the introduction of new laws that have consequences for various players in the credit industry.
The start of July proved to be particularly significant as the mandatory comprehensive credit reporting (CCR) came into effect from 1 July. While the major banks have been under the CCR regime since 2018, the delayed law finally passed both houses of Parliament earlier this year with various amendments.
CCR now requires other large authorised deposit-taking institutions (ADI) to provide comprehensive credit information on consumer credit accounts to certain credit reporting bodies.
Having a more comprehensive picture of, and greater access to, a borrower’s credit history could enhance a lender’s ability to assess a borrower’s creditworthiness.
With research from credit reporting bureau Experian finding that one in five borrowers admitted to telling “white lies” on their credit applications due to concerns that the truth would hinder their chances of loan approval, it underscores the need for a richer data set that provides lenders with accurate information and more context about a borrower’s credit situation.
What’s entailed in the new CCR phase?
The National Consumer Credit Protection Amendment (Mandatory Credit Reporting and Other Measures) Bill 2019 amended the existing credit laws to expand the customer credit history information that banks must report to credit agencies.
While credit reports previously only contained credit inquiries, defaults and serious infringements (i.e. negative credit reporting), they must now include more details, including “positive” consumer credit behaviour.
The additional information shared under the new CCR includes account opening and closing dates, types of credit, credit limits, repayment conditions, default agreement details, up to 24 months of repayment history information (which will indicate whether a customer paid the minimum amount required on their financial commitments each month) and financial hardship information.
Treasurer Josh Frydenberg and Assistant Treasurer Michael Sukkar had said CCR would enable customers to demonstrate their creditworthiness, which could lead to a better loan deal, while lenders could compete for customers with positive credit histories.
By 28 September 2021, large banks will be required to supply credit information on 50 per cent of the consumer credit accounts within the banking group to all credit reporting bodies that they had a contract with on 2 November 2017.
By 28 September 2022, they are required to supply credit information on the remaining accounts (including those that opened after 1 July 2021 and those held by subsidiaries of the large lenders) to the same credit reporting bodies as the first bulk supply.
Has CCR lived up to its promises?
Now that mandatory CCR has come into effect, some lenders have already remarked how it has helped the mortgage process – particularly when it comes to the amount of paperwork required from the borrower.
Suncorp’s head of broker partnerships, Troy Fedder, recently told The Adviser that CCR has enabled the bank to improve its service offering by reducing the amount of required documentation.
He said: “For loans of under 80 per cent loan-to-value ratio with a debt-to-income ratio of under five, we no longer require bank statements as part of our review.
“That means that there’s a time saving for our brokers... Also, for our systems, it makes it much more efficient.”
As a mortgage broker, Loan Market’s Scott Palazzi said that CCR has provided him with a more comprehensive view of his clients’ previous conduct compared with when he obtained three months’ worth of bank statements.
He said: “I am now more mindful of obtaining all of my clients’ credit reports at the beginning of the process, whereas two years ago, it was only really if people were honest about previous issues.”
But it has not led to better interest rates or bespoke loan repayment plans for his clients, he said.
Indeed, Adam Croucher, general manager, third party banking at the Commonwealth Bank of Australia (CBA), said the most exciting element of CCR is yet to materialise – that is, the potential for it to lead to individualised rates for borrowers as it evolves.
“For us at the moment, it’s about making it easier for customers to provide to us less documentation when we’ve got it there in front of us via CCR,” he told The Adviser, adding that it has minimised the bank’s touch points throughout its value chain.
“We’re excited to be on that journey and see where that takes us and how we can make things simpler and easier for brokers and industry.”
New laws for credit repair firms
CCR is not the only change to have occurred in credit reporting this year. July was also significant for debt management service providers (including credit repair firms), who are now required to hold an Australian Credit Licence when they are paid to represent customers in disputes with financial institutions, as part of the federal government’s plans to overhaul responsible lending obligation laws.
Certain debt management services are now a “credit activity” for the purposes of the National Credit Act under the new laws, and provide regulators with greater oversight of who is operating in his space.
These reforms are aimed at protecting consumers from the “predatory practices of debt management firms”, and can give brokers more peace of mind when working with these companies too.
Brokerages have already been looking at partnering with licensed credit repair firms, and have predicted that the new licensing requirements could prompt others to follow suit.
Fixing credit errors for free
While referring clients with poor credit histories to credit repair companies is one option for brokers, they could also direct clients to fix credit report errors themselves for free by contacting the credit provider.
If a client cannot reach an agreement or is struggling to fix errors, they can contact the Australian Financial Complaints Authority to make a complaint and get free, independent dispute resolution, or contact a free financial counsellor for assistance.
Mr Palazzi said that he always advises his clients about free remedies for fixing errors but warned that clients only have one chance to plead their case for default removal, after which it becomes difficult to argue that point again.
“Whereas referring them to a credit repair company takes the guesswork out of it, as credit repair companies know the clients’ legal rights around listed defaults or errors,” he said.
While CCR aims to paint a clearer picture of a client’s credit record, it could prove disadvantageous for those with poor credit histories or missed repayments because lenders could reject their loan applications.
Part of Mr Palazzi’s service offering therefore is to refer such clients to credit repair agency Credit Fix Solutions, which conducts a complementary assessment of a client’s credit report and score to see if defaults and blemishes can be removed before lodging loan applications.
Removing defaults that may have been erroneously or unfairly listed improves the client’s credit score, which could boost their chances of securing finance through a traditional lender instead of a non-conforming lender with higher interest rates.
Mr Palazzi, who has been using the company for over two years, always obtains a copy of his clients’ credit report upfront before commencing work on their applications.
“At that point, if we identify any issues with their credit report, we discuss the implications for their application with them and flag the option of referring them to Credit Fix,” Mr Palazzi explained.
CCR makes credit repair more complex
Speaking to The Adviser, Credit Fix Solutions CEO Victoria Coster (who founded the agency in 2013 as a business-to-business model to provide credit repair services and credit reporting education), said that around 5,000 brokers currently refer clients to her company.
However, she noted that there was a growing trend occurring with the introduction of CCR.
Under the new requirement to share 24 months’ repayment history information, credit repair has become more complex, she said.
According to Ms Coster, before CCR was introduced, the most common negative data a credit repair specialist needed to consider removing from a customer’s credit history was a default or a court action.
Now, if a customer has had several months’ missed repayments, Ms Coster said she has limited legal recourse to amend or suppress the repayment history information.
“In these cases, which are occurring more frequently, we often do not take on the consumer for credit repair, as we have to make sure that the broker can still get a better loan option for their client should we be able to remove the default but not the repayment history information,” Ms Coster said.
“This has meant that our work takes longer, and we spend more time simply educating consumers and brokers at our own cost, with a lower conversion from lead to client (given that Credit Fix Solutions only charges customers if it successfully removes blemishes from a report, with starting fees of $1,500 for a default under $5,000).
“However, we are more than happy to continue offering these services, as our vision for the business is long-term and focused on education.”
Ms Coster said that while clients can approach credit reporting bureaus such as Equifax, Experian and Illion directly to access a free credit report and fix basic errors, investigating defaults requires deeper legislative knowledge of the credit reporting code and the specific sections applicable to the default.
Clients need credit education
The credit reporting space has been abuzz with legislative changes, but studies have shown that almost half of all Australians are not aware of CCR and its impacts on their credit histories and ability to secure loans.
Herein lies the opportunity for brokers to educate their clients about these changes and the importance of maintaining a healthy credit score to secure home loans.
Brokers could also encourage clients to make timely repayments, because late or missed repayments will appear on their credit reports, impeding their chances of receiving loan pre-approval.
Due diligence key for credit repair
Loan Market mortgage broker Scott Palazzi urged brokers to thoroughly research credit repair companies before referring clients to them.
He suggested that brokers should only liaise with companies that charge customers when they successfully remove defaults from credit reports.
“If they charge the clients upfront before commencing any work, then it’s a no-go for me,” Mr Palazzi said.
“I’ve had clients in the past who have independently approached credit repair companies and paid upfront, and six months later there is no reply or result. I firmly believe there is more of an incentive to actually assist the client in removing the default, rather than just revenue raising.”
Find out more about the changes in credit reporting and credit repair, and how brokers can help their clients with credit scores, in the In Focus podcast with Credit Fix Solutions CEO Victoria Coster.
Tune in to the episode, In Focus: The new credit reporting below:
[Related: Debt management ACL regime begins]
Malavika Santhebennur is the features editor on the mortgages titles at Momentum Media.
Before joining the team in 2019, Malavika held roles with Money Management and Benchmark Media. She has been writing about financial services for the past six years.
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