On 12 March 2014, changes to privacy laws will significantly impact the credit reporting system in Australia. In this report, The Adviser investigates the expected impact on the lending environment and how brokers can use the impending changes to better serve their clients
As part of the reforms to the Privacy Act 1998 due to take effect on 12 March 2014, the credit reporting framework in Australia is set to undergo a major overhaul.
According to the Office of the Australian Information Commissioner (OAIC), these changes are designed to simplify, clarify and update the credit reporting provisions, and to restructure them to reflect the information flows in the credit reporting system.
The reforms introduce a more comprehensive system of credit reporting, allowing the recording of information about an individual’s current credit commitments and a detailed account of an individual’s credit history information from the previous two years.
The reforms bring Australia’s credit industry into line with a majority of the rest of world, allowing for positive credit data to be included in an individual’s credit report. This gives lenders a much more accurate insight into a potential borrower’s risk profile and repayment capacity.
According to the OAIC, the reforms permit a number of new types of credit-related personal information to be held in the credit reporting system, including;
The type of consumer credit held by a consumer
The day on which the consumer credit is entered into and the day on which it is terminated or otherwise ceases to be in force
The terms and conditions of the consumer credit that are prescribed by the regulations and that relate to the repayment of the amount of credit
Repayment history information (RHI), which is information about:
Whether or not an individual has met an obligation to make a monthly payment that is due and payable in relation to consumer credit
The day on which that payment is due
If an individual makes a payment after that day, the date on which that payment is made
Prior to these reforms, only negative information such as defaults and bankruptcies was permitted to be held in the credit reporting system. This framework denied some consumers, who may have a slight blemish on their record, the chance to prove they are in fact a reliable credit risk.
Damian Paull, chief executive officer at the Australian Retail Credit Association (ARCA), says the reforms will address the imbalance of information currently found in the credit industry.
“I think the benefits as we go forward are that we are going to get a much clearer picture of a consumer’s exposure to licensed credit products, and for the consumer, the additional benefit is going to be greater equity in the system,” he says.
Currently, many Australians know very little about the credit reporting framework and their rights and responsibilities with regards to it. As a result, most consumers give their credit report very little thought until they are declined for a credit card or a loan.
According to Mr Paull, the reforms are a great opportunity for consumers to become more aware of the credit reporting environment and its implications for their borrowing capacity.
He says the reforms are also a good opportunity for brokers to remind their clients of the importance of a good credit history, and the simple things consumers can do to keep their file clean.
“Consumers are going to be able to become more aware of credit reporting and take a more active role in making sure their credit reports are better managed than they have been,” he says.
“One of the big implications for mortgage brokers, particularly where they’re acting on behalf of the consumer, is to educate the customer as to the importance of the credit reforms. I think it’s like any other change – for these reforms to be effective we have to change consumer behaviour,” he says.
IMPLICATIONS FOR CREDIT PROVIDERS
For lenders, the major benefit of the reforms will be the ability to create a much more accurate profile of a potential customer’s credit risk and ability to repay debt. The increase in information held is expected to lead to more equitable and responsible lending decisions.
Mr Paull says, “I think what we will find is that credit providers will be in a better position to be able to assess the credit risk and therefore the application. That itself may give some consumers better access to mainstream credit, but in other circumstances, it may also preclude people who perhaps shouldn’t be getting credit in the circumstances they are in.”
David Grafton, executive general manager, credit risk and advisory services at Veda, highlights the 24 months of repayment history information permitted to be included on the credit file under the reforms as the key to better lending policies.
The new system will reward good repayment behaviour, allowing consumers the chance to improve their credit score and borrowing prospects, he says.
“For example, if you have credit providers with a policy rule that says, ‘If there is a default on the bureau then automatically we are not going to give credit’, if that default was for a relatively low value Telco default as a student five or six years ago, then is that really a fair credit decision, when in the last two years you had a small number of credit accounts and you have managed them 100 per cent satisfactorily?” he says.
“If you look at what happens in overseas markets where this type of credit reporting is introduced, you do see that lenders can loan money more safely, so the whole market grows and it’s growing in a way that doesn’t increase risk.”
Whilst the actual effects of these reforms are still unknown, a common belief is that it will lead to increased product innovation. Looking at comparable markets with similar credit reporting frameworks, such as the United States, it is reasonable to expect the introduction of risk-based pricing models to the Australian lending environment.
Risk-based pricing currently exists in many overseas markets and has been shown to be mutually beneficial for lenders and borrowers. This pricing model can also increase the amount of reliable credit offered, increasing spending and stimulating the overall economy.
Phil Naylor, president of the MFAA, says this increase in product innovation and competition is good for consumers and mortgage brokers.
“I think it’s likely that lenders will become more informed regarding the positive information about the credit risk of potential clients, so they can form interest rates that are differentiated based on the credit risk,” says Mr Naylor.
“You might find that people with a very low credit risk are likely to get better deals than those who have a perceived higher credit risk, whereas until now that has been difficult to do because lenders haven’t had the information.”
Mr Naylor says the MFAA supports the reforms and has in the past made a number of submissions to governing authorities supporting the principle of adopting positive credit reporting. He says the association believes it to be the most equitable credit system, which will also increase the strength of the broker proposition.
Meanwhile, Mark Hewitt, general manager of sales and operations at the Australian Financial Group (AFG), is more sceptical, saying while the reforms have the potential to be a real positive for brokers, he has doubts about the impact they will have in the short to medium term.
“I think, ultimately, it will be beneficial for consumers who have done the right thing and have clean credit histories, and it will probably make decision making quicker. I’m just a bit sceptical on where the drive is going to come from for the changes to be introduced,” he says.
As well as increased competition in lending, the reforms will also create a new lender-borrower dynamic, where consumers are empowered to make increased demands in products and pricing. This means consumers can arm themselves with their credit score and those with a good history can go to market and seek the best deals.
This situation presents brokers with an excellent opportunity to improve their value proposition by capitalising on their knowledge of the credit markets to find the best deal for their client. While this proposition isn’t exactly new, the reforms will provide brokers with an additional tool to use in negotiations with lenders.
According to Mr Grafton, brokers have a great opportunity to demonstrate their value in a way that is over and above their current role.
“The reforms give a whole new playing surface for brokers to operate in,” he says.
“If they can work with the customer in terms of obtaining or helping the customer obtain their credit score, then when risk-based pricing comes in – which it undoubtedly will – the brokers are then able to say that credit provider A offers a better risk-based price than credit provider B.”
With increased product innovation and more accurate credit profiling, those with a good credit history will find the finance sector more of a borrower’s market than ever before.
“It completely changes the kind of power relationship between product providers and product consumers. All of a sudden, you are armed with something that is quite valuable ... and you can get yourself the best deal,” says Mr Grafton.
Of course, the reality is that for some borrowers, the increased information held on their credit file will not be flattering. This can be due to a number of things, including what many would consider minor indiscretions such as the late payment of a household bill.
There are, however, things that brokers can do to ensure their client’s credit file is in the best possible condition. Educating clients on how best to maintain a good credit file is a simple but effective way for brokers to help their clients to improve their credit score.
In addition, brokers can engage a credit repair agency to work with their client to improve their credit history.
This can be a great way for brokers to build a better customer relationship through a proactive offering that helps their clients out.
Richard Symes, chief executive officer at Credit Repair Australia, warns the reforms may not be welcome news for all borrowers. They may mean some consumers, who would have previously been approved for credit, could now find securing a loan more difficult, he says.
“Some consumers may see an increase in their credit score if, for example, they are good at paying bills on time or even early. However, those who are habitual late payers of five days or more may find themselves being declined or even paying a higher interest rate,” he says.
FIXING THE SCORE
Under the new framework, minor indiscretions can have a big impact on a consumer’s credit score.
“With new information being listed, there is further opportunity for a client to unknowingly tarnish their credit score, by being as little as five days late,” says Mr Symes.
At the same time, positive action will also be recorded and this can be used to improve a credit file and negate earlier indiscretions.
“The report will also show early payments, providing clients with an opportunity to take positive action and work on getting in payment habits that could potentially improve their score,” says Mr Symes.
“In addition to assisting clients to remove the negative listings, Credit Repair Australia aims to educate clients on these positive habits in order to maintain and improve their credit score over time.”
Credit repair agencies offer specific services, which brokers can engage for their clients to help them improve their credit scores. These companies also offer brokers a free copy of their clients’ credit reports and credit scores, giving them the tools to best match their clients with an appropriate lender.
“We encourage all brokers and clients to review their credit report and have the listings explained prior to application, whether it be a free assessment through Credit Repair Australia, or on their own,” says Mr Symes.
“This prevents a surprise decline, which can affect the broker-client relationship,” he adds.
For more information on the changes to credit reporting, see the OAIC website.
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