Why Australia needs a better system for credit scores

From The Conversation.

Australia’s credit rating system is failing both borrowers and lenders. Many borrowers are unaware of their own credit scores and our research shows they have trouble applying for suitable loans. Lenders are also struggling with too little information, causing them to extend loans to those they shouldn’t and restrict loans to worthy borrowers.

Upcoming changes to Australia’s credit reporting system could remedy these issues.

Under the new credit reporting regime, both lenders and borrowers will have access to more data, such as monthly payment histories on loans and credit cards. This will help consumers understand their own creditworthiness, improve their credit scores and shop around for lower interest rates.

The new data will arm banks and other lenders to make better lending decisions. But it should also level the playing field by giving new entrants more information, helping them to compete with the established lenders.

My research with Luke Deer examined loan applications to SocietyOne. This is a peer-to-peer lending marketplace that specialises in unsecured personal loans.

Borrowers are only accepted onto the SocietyOne platform if their credit scores can be verified. Substantial “underwriting” is required to ensure borrowers are of sufficient credit quality.

Underwriting involves evaluating a borrower’s income and cash flow, based on bank statements and other public information.

Despite this labour-intensive and time-consuming process, which requires individuals to submit copies of their documents to third-party lenders, lenders do not receive a complete picture of the potential borrower’s financial situation.

A borrower may report only part of their true financial situation – for example, by sharing information from only one of multiple accounts. Without an accurate picture of creditworthiness, lenders could be extending loans to borrowers that should be rejected, and others might not receive loans they should qualify for.

This is where the new credit reporting regime comes in – there will be much more data. In addition to monthly payment histories, there will be red flags on any missed payments of more than 14 days. The current system only flags missed payments of more than 60 days or bankruptcies only.

Credit reports will include information about current accounts you hold, what accounts have been opened and closed, the date that you paid any default notices, and how well you meet your repayments.

The shift towards comprehensive credit reporting should reduce the time required to underwrite loans and allow loans to be priced more efficiently. This is in part because it will reduce the risk of lending to people who are risky borrowers, and so will lower costs.

While this means that borrowers with good credit history will benefit from good behaviour, lower credit quality customers may face higher borrowing costs, or be left searching for alternatives.

But it also opens up more opportunity for borrowers to improve their credit rating by acting on any red flags.

More innovation ahead in mortgage lending

Australia has lagged other developed countries in adopting positive credit reporting. Up to this point, the large banks have had a significant informational advantage over new entrants. Because many of us have accounts with the larger banks, they simply had access to information that other lenders don’t.

As well as opening up the market to new borrowers and lenders, the new comprehensive credit reporting regime will also likely lead to the automation of more financial services and the inclusion of more data sources.

For higher-risk borrowers, novel techniques to assess credit risk (such as analysis of social media accounts) may be the answer to distinguish good borrowers from bad.

This will partially eliminate the need for costly processes in loan underwriting. But prior experience from an over-reliance on credit scores in the United States shows that careful assessment of borrowers remains vital.

It could also have the side effect of reducing the prospects of misconduct by either borrower or lender at this stage.

Comprehensive credit reporting should lead to, in aggregate, lower borrowing rates for lower-risk individuals and incentives for higher-risk individuals to improve their position. However, it remains to be seen whether this will lead to a greater degree of exclusion or predatory loans for riskier borrowers.

Author: Andrew Grant, Senior Lecturer, University of Sydney

NAB and Comprehensive Credit Reporting

NAB has today commenced Comprehensive Credit Reporting (CCR) for personal loans, credit cards, and overdrafts, as announced in October 2017.

NAB is the first major bank to start participating in CCR, well ahead of the Government’s mandatory scheme.

NAB Chief Operating Officer, Antony Cahill, says NAB has taken a leadership position on CCR since the start.

“Under Comprehensive Credit Reporting, we now have a more holistic picture of a customer’s credit situation, so we’re better able to make sure our customers receive the right type and amount of credit for their individual circumstances.

“We believe CCR is good for competition, and will mean better outcomes for customers.

“A number of smaller players have been participating in CCR already, and the Government recently released draft legislation to make it mandatory for all the major banks.

“We’re pleased to be going live with CCR today, and we look forward to seeing it roll out across the industry.”

About Comprehensive Credit Reporting:

  • Most Australians have a credit report. CCR will mean credit reports will represent a more balanced reflection of their credit history.
  • For decades, a credit report has contained only negative information – information like when someone’s defaulted on a loan, and how many credit enquiries they’ve made.With Comprehensive Credit Reporting, positive credit information will be added – including which accounts have been opened, credit limits on those accounts, and details of monthly payments made as well as missed.
  • This will provide a more complete picture of a customer’s situation, and mean that lenders like NAB are better able to match our provision of credit to a customer’s individual needs.
  • NAB has commenced CCR for personal loans, credit cards, and overdrafts. Later this year, other types of lending will also be included. NAB is phasing its roll out of CCR to ensure a smooth transition for customers

72 Hours That Changed Banking – The Property Imperative Weekly 10 Feb 2018

Recent events have the potential to create a revolution in Australian Finance. We explore the 72 hours that changed banking forever.

Welcome to the Property Imperative Weekly to 10th February 2018.Watch the video or read the transcript.

In our latest weekly digest, we start with the batch of new reports, all initiated by the current Australian Government – and which combined have the potential to shake up the Financial Services sector, and reduce the excessive market power which the four major incumbents have enjoyed for years.

On Wednesday, the Productivity Commission, Australian Government’s independent research and advisory body released its draft report into Competition in the Australian Financial System. It’s a Doozy, and if the final report, after consultation takes a similar track it could fundamentally change the landscape in Australia. They leave no stone unturned, and yes, customers are at a significant disadvantage. Big Banks, Regulators and Government all cop it, and rightly so. They say, Australia’s financial system is without a champion among the existing regulators — no agency is tasked with overseeing and promoting competition in the financial system.  It has also found that competition is weakest in markets for small business credit, lenders’ mortgage insurance, consumer credit insurance and pet insurance. The report demonstrates the inter-linkages between difference financial entities, and their links to the four majors. They criticised mortgage brokers and financial advisers for poor advice (influenced by commission and ownership structures) and the regulatory environment, where the shadowy Council of Finance Regulators (RBA, ASIC, APRA and Treasury) do not even release minutes of the meetings which set policy direction. You can watch our separate video blog on this.

On Thursday, the Treasurer released draft legislation to require the big four banks to participate fully in the credit reporting system by 1 July 2018.   They say this measure will give lenders access to a deeper, richer set of data enabling them to better assess a borrower’s true credit position and their ability to pay a loan. This removes the current strategic advantage which the majors have thanks to the credit data asymmetry, and the current negative reporting. We note that there is no explicit consumer protection in this bill, relating to potential inaccuracies of data going into a credit record. This is, in our view a significant gap, especially as the proposed bulk uploading will require large volumes of data to be transferred. It does however smaller lenders to access information which up to now they could not, so creating a more level playing field.  Consumers may benefit, but they should also beware of the implications of the proposals.

On Friday, Treasurer Morrison released the report by King & Wood Mallesons partner Scott Farrell in to open banking which aims to give consumers greater access to, and control over, their data and which mirrors developments in the UK.  This “open banking” regime mean that customers, including small businesses, can opt to instruct their bank to send data to a competitor, so it can be used to price or offer an alternative product or service. Great news for smaller players and fintechs, and possibly for customers too. Bad news for the major players. The report recommends that the open banking regime should apply to all banks, though with the major banks to join it first. For non-banks and fintechs, the report wants a “graduated, risk-based accreditation standard”. Superannuation funds and insurers are not included for now. In terms of implementation, data holders should be required to allow customers to share information with eligible parties via a dedicated application programming interface, not screen scraping.  A period of approximately 12 months between the announcement of a final Government decision on Open Banking and the Commencement Date should be allowed for implementation. From the Commencement Date, the four major Australian banks should be obliged to comply with a direction to share data under Open Banking. The remaining Authorised Deposit-taking Institutions should be obliged to share data from 12 months after the Commencement Date, unless the ACCC determines that a later date is more appropriate.

Then of course the Royal Commission in Financial Services starts this coming week. We discussed this on ABC The Business on Thursday.  Lending Practice is on the agenda, highly relevant given the new UBS research (they of liar loans) suggesting that incomes of many more affluent households are significantly overstated on mortgage application forms.   And The BEAR – the bank executive behaviour regime legalisation – passed the Senate, and as a result of amendments, Small and medium banking institutions have until 1 July 2019 to prepare for the BEAR while it will commence for the major banks on 1 July 2018.

APRA Chairman Wayne Byers spoke at the A50 Australian Economic Forum, Sydney. Significantly, he says the temporary measures taken to address too-free mortgage lending will morph into the more permanent focus on among other things, further strengthening of borrower serviceability assessments by lenders, strengthened capital requirements for mortgage lending, and the comprehensive credit reporting being mandated by the Government.

Adelaide Bank is ahead of the curve, as it introducing an alert system that will monitor property borrowers that are struggling with their repayments. The bank and its subsidiaries and affiliates will compare monthly mortgage repayments with borrowers’ income ratios. In addition, extra scrutiny will be applied where the loan-to-income ratio exceeds five times or monthly mortgage repayments exceed 35% of a borrower’s income.

But combined, data sharing, positive credit and banking competition and regulation are all up in the air, or are already coming into force and in each case it appears the big four incumbents are the losers, as they are forced to share customer data, and competition begins to put their excessive profitability under pressure.  It highlights the dominance which our big banks have had in recent years, and the range of reforms which are in train. The face of Australian Banking is set to change, and we think customers will benefit. But wait for the rear-guard actions and heavy lobbying which will take place ahead.

Of course the RBA left the cash rate on hold this week, and signalled the next move will likely be up, but not for some time.  Retail turnover for December fell 0.5% according to the ABS seasonally adjusted.  This is the headline which will get all the coverage, but the trend estimate rose 0.2 per cent in December 2017 following a rise of 0.2 per cent in November 2017. Compared to December 2016 the trend estimate rose 2.0 per cent. This is in line with average income growth, but not good news for retailers.

The latest Housing Finance Data from the ABS shows a fall in flows in December. In trend terms, the total value of dwelling finance commitments excluding alterations and additions fell 0.1% or $31 million. Owner occupied housing commitments rose 0.1% while investment housing commitments fell 0.5%. Owner occupied flows were worth $14.8 billion, and down 0.3% last month, while owner occupied refinancing was $6.2 billion, up 1.2% or $73 million. Investment flows were worth 11.9 billion, and fell 0.5% or $62 million. The percentage of loans for investment, excluding refinancing was 45%, down from 49% in Dec 2016.  Refinancing was 29.5% of OO transactions, up from 29.2% last month. Momentum fell in NSW and VIC, the two major states. In original terms, the number of first home buyer commitments as a percentage of total owner occupied housing finance commitments fell to 17.9% in December 2017 from 18.0% in November 2017 – the number of transactions fell by 1,300 compared with last month. But the ABS warns that the First Time Buyer data may be revised and users should take care when interpreting recent ABS first home buyer statistics.  The ABS plans to release a new publication which will see Housing Finance, Australia (5609.0) and Lending Finance, Australia (5671.0) combined into a single, simpler publication called Lending to Households and Businesses, Australia (5601.0).

We continue to have data issues with mortgage lending, with the RBA in their new Statement on Monetary Policy saying it now appears unnecessary to adjust the published growth rates to undo the effect of regular switching flows between owner occupied and investment loans as they have been doing for the past couple of years.  So now investor loan growth on a 6-month basis has been restated to just 2%. More fluff in the numbers! Additionally, the RBA will publish data on aggregate switching flows to assist with the understanding of this switching behaviour.

More data this week highlighting the pressures on households.  National Australia Bank’s latest Consumer Behaviour Survey, shows the degree of anxiety being caused by not only cost of living pressures but also health, job security, retirement funding as well as Australian politics.  Of all the things bothering Australian households in early 2018, nothing surpasses cost of living pressures. Over 50% of low income earners reported some form of hardship, with almost one in two 18 to 49-year-olds being effected.

Despite improved job conditions and households reporting healthier financial buffers, the overall financial comfort of Australians is not advancing, according to ME’s latest Household Financial Comfort Report. In its latest survey, ME’s Household Financial Comfort Index remained stuck at 5.49 out of 10, with improvements in some measures of financial comfort linked to better employment conditions – e.g. a greater ability to maintain a lifestyle if income was lost for three months – offset by a fall in comfort with living expenses.

We released the January 2018 update of our Household Financial Confidence Index, using data from our rolling 52,000 household surveys. The news is not good, with a further fall in the composite index to 95.1, compared with 95.7 last month. This is below the neutral setting, and is the eighth consecutive monthly fall below 100. Costs of living pressures are very real, with 73% of households recording a rise, up 1.5% from last month, and only 3% a fall in their living costs. A litany of costs, from school fees, child care, fuel, electricity and rates all hit home. You can watch our separate video on this.

We also published updated data on net rental yields this week, using data from our household surveys. Gross yield is the actual rental stream to property value, net rental is rental payments less the costs of funding the mortgage, management fees and other expenses. This is calculated before any tax offsets or rebates. The latest results were featured in an AFR article. The results are pretty stark, and shows that many property investors are underwater in cash flow terms – not good when capital values are also sliding in some places. Looking at rental returns by states – Hobart and Darwin are the winners; Melbourne, and the rest of Victoria, then Sydney and the rest of NSW the losers. The returns vary between units and houses, with units doing somewhat better, and we find some significant variations at a post code level.  But we found that more affluent households are doing significantly better in terms of net rental returns, compared with those in more financially pressured household groups. Batting Urban households, those who live in the urban fringe on the edge of our cities are doing the worst.  This is explained by the types of properties people are buying, and their ability to select the right proposition. Running an investment property well takes skill and experience, especially in the current rising interest rate and low capital growth environment. Another reason why prospective property investors need to be careful just now.

Finally, we saw market volatility surge, as markets around the world gyrated following the “good news” on US Jobs last week, which signalled higher interest rates.  In our recent video blog we discussed whether this is a blip, or something more substantive.  We believe it points to structural issues which will take time to play out, so expect more uncertainly, on top of the correction which we have already had. This will put more upward pressure on interest rates, and also on bank funding here.

Overall then, a week which underscores the uncertainly across the finance sector, and households. This will not abate anytime soon, so brace for a bumpy ride. And those managing our large banks will need to adapt to a fundamentally different, more competitive landscape, so they are in for some sleepless nights.

If you found this useful, do like the post, add a comment and subscribe to receive future updates. Many thanks for taking the time to watch.

Mandatory Comprehensive Credit Reporting Draft Bill Released

The Treasury has released draft legislation to require the big four banks to participate fully in the credit reporting system by 1 July 2018.   They say this measure will give lenders access to a deeper, richer set of data enabling them to better assess a borrower’s true credit position and their ability to pay a loan.

We note that there is no explicit consumer protection in this bill, relating to potential inaccuracies of data going into a credit record. This is, in our view a significant gap, especially as the proposed bulk uploading will require large volumes of data to be transferred.

It does however smaller lenders to access information which up to now they could not, so creating a more level playing field.  Consumers may benefit, but they should also beware of the implications of the proposals.

The Government is seeking views on the exposure draft legislation and accompanying explanatory materials, which implements this measure. Closing date for submissions: 23 February 2018

The Bill amends the Credit Act to mandate a comprehensive credit reporting regime such that from 1 July 2018 large ADIs and their subsidiaries must provide comprehensive credit information on open and active consumer credit accounts to certain credit reporting bodies. It also expands ASIC’s powers so it can monitor compliance with the mandatory regime. The Bill also imposes requirements on the location where a credit reporting body must store data.

Since March 2014, the Privacy Act has allowed credit providers and credit reporting bodies to use and disclose ‘positive credit information’ or ‘comprehensive credit information’ about a consumer.

This includes information about the number of credit accounts a person holds, the maximum amount of credit available to a person and repayment history information.

Prior to March 2014, the information that could be shared was limited to ‘negative information’. This includes details of a person’s overdue payments, defaults, bankruptcy or court judgments against that person.

However, the Privacy Act does not mandate the disclosure of comprehensive credit information by credit providers to credit reporting bodies.

The 2014 Murray Inquiry and the Productivity Commission Inquiry into Data Availability and Use recommended that the Government mandate comprehensive credit reporting in the absence of voluntary participation. Comprehensive credit reporting is expected to enable credit providers to better establish a consumer’s credit worthiness and lead to a more competitive and efficient credit market.

In the 2017-18 Budget, the Government committed to mandating a comprehensive credit reporting regime if credit providers did not meet a threshold of 40 per cent of data reporting by the end of 2017.

On 2 November 2017 the Treasurer announced that he would introduce legislation for a mandatory regime as it was clear the 40 per cent target would not be met.

The Bill amends the Credit Act to establish a mandatory comprehensive credit reporting regime which will apply from 1 July 2018. The amendments do not require or allow disclosure, use or collection of credit information beyond what is already permitted under the Privacy Act and Privacy Code.

Currently, Australia’s credit reporting system is characterised by an information asymmetry. A consumer has more information about his or her credit risk than the credit provider. This can result in mis-pricing and mis-allocation of credit.

The Bill seeks to correct this information asymmetry. It lets credit providers obtain a comprehensive view of a consumer’s financial situation, enabling a provider to better meet its responsible lending obligations and price credit according to a consumer’s credit history.

The Government expects that the mandatory regime will also benefit consumers. Consumers will have better access to consumer credit, with reliable individuals able to seek more competitive rates when purchasing credit. Consumers that are looking to enter the housing market will be better able to demonstrate their credit worthiness. Consumers that possess a poor credit rating will also be able demonstrate their credit worthiness through future consistency and reliability.

The mandatory regime applies to ‘eligible licensees’ which initially will be large ADIs and their subsidiaries that hold an Australian credit licence. An ADI is considered large where its total resident assets are greater than $100 billion. Other credit providers will be subject to the regime if they are prescribed in regulations.

Eligible licensees are required to supply credit information on 50 per cent of their active and open credit accounts by 28 September 2018. The information on the remaining open and active credit accounts, including those that open after 1 July 2018, will need to be supplied by 28 September 2019.

The bulk supply of information must be given to all credit reporting bodies the eligible licensee had a contract with on 2 November 2017. In this way the credit provider has an established relationship with the credit reporting body and will have an agreement in place on the handling of data to ensure it remains confidential and secure.

Following the bulk supply of information, large ADIs and their affected subsidiaries must, on a monthly basis, keep the information supplied accurate and up-to-date, including by supplying information on accounts that have subsequently opened. This information must be supplied to credit reporting bodies the credit provider continues to have a contract with.

Credit providers that are not subject to the mandatory regime will be able to access credit information supplied under the regime by voluntarily supplying comprehensive credit information to a credit reporting body or becoming a signatory to the PRDE.

The security and privacy of a consumer’s credit information will be preserved and protected. The Bill relies on the existing protections established by the Privacy Act and Privacy Code and the oversight of the Australian Information Commissioner. The Bill also places a new obligation on credit reporting bodies on where data is stored. In addition, the Bill places an obligation on credit providers to be satisfied with the security arrangements of the CRBs prior to supplying information.

ASIC will be responsible for monitoring compliance with the mandatory regime. It has new powers to collect information and require audits to confirm the supply requirements are being met. ASIC will also have the ability to expand the content to be supplied under the mandatory regime and prescribe the technical standards for the format of the information.

The Treasurer will also receive statements from large ADIs, their affected subsidiaries and credit reporting bodies to demonstrate that the initial bulk supply requirements, as well as the ongoing supply requirements, have been met.

The mandatory comprehensive credit regime, implemented by this Bill, recognises that industry stakeholders have already taken a number of steps to support sharing comprehensive credit information. This includes the PRDE and supporting ARCA Technical Standards.

The mandatory regime includes the ‘principles of reciprocity’ and the ‘consistency principle’ that have been developed by industry. To the extent possible, the mandatory comprehensive credit reporting regime operates within the established industry framework but also provides scope for future technological developments.

An independent review of the mandatory regime must be completed by 1 January 2022. The review will table its report in Parliament.

 

 

Comprehensive Credit Reporting: What Does it Mean for Home Buyers?

Our friends at finder.com.au have written an excellent article for us on the impact of Comprehensive Credit Reporting, authored by Richard Whitten*. It highlights the changes afoot, and the impact on home buyers. Well worth reading!

Comprehensive credit reporting is coming, Australia. The new credit system has big implications for Australian borrowers and lenders and could make it easier to apply for a home loan and get a better interest rate.

So what is comprehensive credit reporting?

Unlike most leading economies, Australia still uses a purely negative credit reporting system.

This means that an individual’s credit report only contains negative events: defaults, debts, overdue payments, applications for credit, bankruptcies and court judgements. It doesn’t cover any positive actions and it doesn’t mention whether a credit application was successful (at the moment, applying for credit results in a negative mark on your credit report regardless of whether you get approved or not).

Comprehensive credit reporting (CCR) rounds out the picture of a borrower’s credit history by including information such as the state of your accounts, when you’ve paid back debts and how reliable you are in meeting your financial commitments.

It gives lenders access to more data about you, which some might find troubling, especially in light of recent scandals with data leaks in the credit reporting industry. But it could help you establish to lenders how credit-worthy you are with much less effort.

What does comprehensive credit reporting mean for home loan customers?

CCR could be very good news for responsible borrowers applying for a home loan. After all, it’s often easier to prove a positive than it is to disprove a negative. If there are a few red marks on your credit report, you’ll be able to offset these by showing a lender that you’ve made regular repayments on debt, saved a regular amount of your income and set low limits on your credit cards.

If you’re applying for a home loan and you can prove that you have a very good credit report (rather than a lack of negatives), you could get a better home loan rate. As lenders start to implement CCR, it’s likely they’ll offer lower mortgage rates to good credit borrowers.

If you’re a borrower with few details in your credit report, CCR means that you can build positive credit far more easily. This is great for younger borrowers, people who don’t have credit cards or people who live with their parents and may not have taken on many financial commitments yet.

Comprehensive credit reporting is good for lenders too, which could help home loan customers

With a greater understanding of the credit-worthiness of potential customers, banks can determine ahead of time which customers are likely to fall behind on their repayments and which aren’t.

With greater certainty, lenders may offer entirely new rates or products to home loan customers with good credit. We’re already seeing lenders offer a dizzying array of product variants with different interest rates determined by the loan-to-value ratio (the amount you borrow relative to the value of the property).

It’s easy to envision lenders doing the same with their applicants’ credit history, assigning grades based on reporting, with lower rates for customers with excellent reports.

There’s also the likelihood that CCR will increase competition in the home loan market. CCR requires more customer data and more systems to process it. The industry is already seeing new fintech players entering the home loan market with online-only, data-savvy platforms. They promise faster application approvals and lower costs.

Leveraging CCR is another method by which lenders can stand out in a crowded market, and greater competition and transparency will almost certainly lead to better rates.

At the moment, the federal government requires the big banks to have at least half of their credit data available for comprehensive credit reporting by July 2018. It remains to be seen whether the government will extend this requirement to all lending institutions. But in the words of the federal treasurer, the new credit reporting system represents “a game changer for both consumers and lenders”.

*Richard Whitten is a member of the home loans team at finder.com.au. His role is to explain all the complexities of the home loan industry in ways that help consumers make better life decisions.

Forcing the banks to hand over our credit history might help with a home loan but it has risks

From The Conversation.

The federal government will be forcing banks to hand over half their credit data ready for reporting by mid-2018 (with the remainder available in 2019).

It seems rather quaint in the age of big data that the big four banks have been able to hold onto their treasure troves of loan data for so long. This data reveals how reliable we are at repaying our loans. This information is gold to a lender.

For the government’s proposed legislation to work well, it would need to ensure effective regulatory systems are in place to protect our data and avoid more mortgage stress. To achieve this, lessons need to be learned from the US experience.

The new legislation on credit data promises to open up the consumer credit market to increased competition. This may in turn lead to cheaper loans.

Nimble competitors using new technologies could offer consumers innovative loan products at competitive interest rates. Non-traditional lenders could aggressively expand their market share at the expense of the banks. Consumers would seem to be the beneficiaries.

Lessons from the global financial crisis

Australia has long maintained one of the most restrictive credit reporting systems amongst OECD countries. Australia’s reporting system had only allowed credit reporting agencies such as Equifax and Dun and Bradstreet to report on consumers’ bad credit histories. These histories include things such as bankruptcies, and late loan and rental repayments.

The US system already has required reporting of the positive aspects of a consumer’s credit behaviour, including their timely loan repayments. This has enabled companies to develop statistical scoring models to estimate a consumer’s loan default risk with remarkable accuracy. Credit scoring became the cornerstone for underwriting decisions for consumer loans.

Unsurprisingly, this led to intense competition. With more accurate data, lenders no longer had to assume that low income consumers represented a higher risk of defaulting on their loans.

With customer loan histories being made available to competitors, low income consumers with a history of being reliable repayers were offered loans. As competition intensified, an ever-expanding sub-prime loan mortgage market developed. Shoddy loan practices became rife, setting the stage for the 2008 global financial crisis.

Australian households overall are already heavily in debt. Intense competition resulting from the proposed new legislation risks pushing households deeper into debt. Low income consumers risk becoming more vulnerable to falling into debt traps.

Partly in response to the global financial crisis, Australia introduced responsible lending obligations on lenders, which are designed to stop loans to consumers who lack the capacity to repay them. However, the US subprime experience showed that lenders became adept at dodging the rules, and regulators appeared to lack the will to enforce them. The regulators will need to be particularly vigilant to avoid this occurring in Australia.

Compelling the big banks to release loan histories to third parties, such as credit reporting agencies, raises further risks that need to be closely attended to. Lenders will either create their own credit scoring models from the data provided by the banks, or rely on the scores produced by credit reporting agencies.

A bad or inaccurate score will have serious implications for a consumer. They may either be refused loans, or only be offered interest rates that are higher than if their score had been accurate.

There needs to be effective systems in place to ensure consumers have ready access to their score, and that they be able to challenge any inaccuracies. Informational transparency should apply for the benefit of both lenders and consumers.

Yet another risk is that our personal loan information will be stolen by criminals. Earlier this year, credit rating agency Equifax was subjected to a cyber attack affecting over 143 million Americans and over 600,000 Brits. Australia’s largest credit reporting agency, Equifax Pty Ltd, is a wholly owned subsidiary of Equifax Inc.

The data breach is subjecting US and UK consumers to increased risks of identity fraud and targeted scams. Requiring the banks to release our loan data to third parties increases the risk of data breaches.

Increased competition can offer considerable benefits for consumers. However, overheated competition risks damaging the interests of individual consumers, and the economy as a whole.

Consumers also face the increased likelihood of data breaches. The federal government and its regulatory agencies will need to be highly alert to these dangers, and ever vigilant.

Author: Justin Malbon, Professor of Law, Monash University

COBA welcomes Government move on credit reporting

COBA says consumers stand to benefit from the Turnbull Government’s decision to nudge major banks to participate in comprehensive credit reporting (CCR).

“COBA welcomes Treasurer Scott Morrison’s announcement of a CCR regime from 1 July next year, starting with the four major banks,” said COBA Acting CEO Dominic Dunn.

“As the Treasurer notes, other lenders are likely to follow suit quickly to improve their competitive position and their credit decision making.

“COBA’s position is that participation in CCR should be voluntary for smaller lenders because they have more of an incentive to participate than the largest lenders and should be able to do so according to their own priorities and resources.

“The landmark Financial System Inquiry (FSI) report in 2014 found that the net benefits of participating will differ between different classes of credit provider. For a major institution with a relatively large customer base, early participation may provide, at least initially, relatively larger benefits to smaller participants than for the institution itself.

“But as participation and system-wide data grow, net benefits increase for all CCR participants.

“CCR has the potential to increase competition because lenders will have more information about consumers, which means they will be able to better match credit types and amounts to borrower capacity. Lenders will have capacity to more accurately price credit relative to the risk profile of the borrower.

“The banking market is an oligopoly and regulatory interventions must be designed to give the competitive fringe of smaller players every chance to take on the major banks.

“The Treasurer’s announcement on CCR is consistent with this approach. Regulatory compliance costs have a big impact on the competitive capacity of smaller players.”

Is positive credit reporting a flawed deal?

From Australian Broker.

The move towards more comprehensive credit reporting may be beneficial on the surface, but one legal expert has warned that it will have negative impacts on consumers and won’t solve a root issue in the reporting process.

While regulators and credit providers have been singing the praises of this expanded credit reporting regime, it won’t improve the number of inaccuracies in the data collected by credit reporting agencies, Joseph Trimarchi, solicitor at Joseph Trimarchi & Associates told Australian Broker.

“It’s not their fault,” he noted. “They are the custodians of the systems and the information they collect is the information fed to them by credit providers.”

What is lacking is a more precise method of recording this information, he said.

“What we find is that the level of inaccuracies that exist on credit files hasn’t diminished. Those mistakes are still there.”

This is a systematic issue caused by the way credit reporting has been structured since its inception in Australia. While the Privacy Act legislates credit reporting, it does not have an enforcement arm to ensure information is correct, Trimarchi said.

Around 70-80% of lenders are accurate in their listings, he added, with the remainder causing issues for consumers. These inaccuracies existed prior to comprehensive credit reporting and will exist afterwards, he said.

“The information which is collected and the information which appears on the credit file – be it the limited information that was on there prior to positive reporting or the expanded information which is now there – this needs to be correct, accurate and up-to-date.”

This inaccurate information will provide a skewed version of an individual’s credit history with every single credit agency in Australia, Trimarchi said.

“It’s not about the volume of information going in. It’s the accuracy of that information that needs to be looked at.”

The increased volume of information has another potential impact on consumers, he added, in that minor financial missteps will now be recorded.

“Even if a loan is in arrears for a few days, it still has capacity to be recorded on the credit file. It certainly does help the banks in determining creditworthiness but at the same time it will make it more difficult for a client who’s gone through a little bit of an upheaval in life … that puts them behind by two or three or four weeks before they catch up.”

How lenders will view these cases in future is yet to be determined, he said.

NAB announces start to Comprehensive Credit Reporting

NAB has announced it will commence its roll out of Comprehensive Credit Reporting in February 2018. Read our earlier post “Comprehensive Credit Reporting, Friend or Foe?”

Comprehensive Credit Reporting will provide a more complete picture of a customer’s situation, and mean that lenders like NAB are better able to match the provision of credit to a customer’s individual needs.

“Most Australians have a credit report, and with Comprehensive Credit Reporting, these reports will represent a more balanced reflection of their credit history,” NAB Chief Operating Officer, Antony Cahill, said.

“NAB has championed Comprehensive Credit Reporting from the start because we believe it’s the right thing to do for customers.”

“Comprehensive Credit Reporting will help ensure customers get the right product and credit that’s suitable for their needs, and it will drive more competition in the industry,” Mr Cahill said.

Currently, an Australian’s credit report contains only ‘negative’ information such as payment defaults, credit enquiries, bankruptcies, and court orders and judgements. Under Comprehensive Credit Reporting, positive credit information will be added – including accounts that have been opened, credit limits on those accounts, and details of monthly payments made.

“By having a more complete picture, we can have better discussions with customers and make the right products and credit limits available to them,” Mr Cahill said.

NAB is phasing its roll out of Comprehensive Credit Reporting, commencing with personal loans, credit cards and overdrafts, to ensure it is a smooth transition for customers.

“A number of smaller players have already started participating in Comprehensive Credit Reporting, and we look forward to seeing it roll out across the industry,” Mr Cahill said.

Comprehensive Credit Reporting has been supported by the Federal Government, and will bring Australia in line with many other countries including New Zealand, the USA, and the United Kingdom.