One of the biggest changes to the credit reporting regime is about to hit Australia. What does it mean for you as an investor and why should you care?
If you haven’t paid much attention to your credit history, you may want to now, as Australia embarks on a massive overhaul of its credit reporting system.By March 2014, comprehensive credit reporting changes will take effect as a result of the changes to the Privacy Act. The provision in the Act means that credit providers will be able to share a broader range of information about your credit history to credit reporting agencies such as Veda, Dun & Bradstreet and Experian than they are able to share today.
Currently, the credit reporting agencies can only hold information about:
- Credit enquiries made in the past 5 years for personal or household loans. This occurs when you apply for a loan or credit card. The more enquiries made about you, the lower your score becomes
- Information on your current status with credit providers – for example, if you have a credit card or home loan
- Details of overdue consumer credit accounts, such as phone, gas and electricity bills
- Any court judgments and court writs
- Details of overdue credit accounts
With the exception of enquiry information and current credit provider status, the credit report contains mainly so-called negative information, such as information relating to the individual having defaulted on a loan or bill payments.With the comprehensive reporting changes, the credit reporting agencies will be able to hold more information, such as:
- Information about your current loans or credit facilities, including the balances and repayment history
- Iinformation about your bank and other accounts, including the identity of the institution where the account is held and the number of accounts held
- Further information than is currently permitted under the Privacy Act relating to overdue or defaulted payments
What it means to you as a borrower
The changes could positively or negatively impact on you, depending on how you manage your credit.
“Changing to a comprehensive credit reporting system will help give lenders (like us) a better overview of a person’s financial situation and reveal more about an individual’s payment habits,” explains Heidi Armstrong, CEO of State Custodians Mortgage Company.
“This means that lenders can distinguish between high- and low-risk borrowers easily, and potentially offer more competitive financial products to lower-risk borrowers.”
David Grafton, executive general manager of credit risk and advisory services at Veda, says this will mean consumers will be positively assessed for good credit performance, instead of being assessed negatively.
“Currently, Australia operates on a negative credit reporting system. By law, only negative information such as defaults, bankruptcies and court judgments can be held by the credit bureau. This way, the information can be used by credit providers to deny borrowers access to finance,”
Grafton says.Grafton further explains that banks today currently lack information on how many other accounts their customers have and what credit limits are attached to them. This poses a risk for lenders because they don’t get to see the full picture and don’t always know if customers are overcommitted. With the new changes, banks will have a better understanding of whether a further loan would make someone even more overcommitted. It benefits the consumer because responsible lending practices prevail.
The credit changes are also good news for people who have traditionally been in demographics that lenders have been reluctant to approve loans for in the past. This includes young people and recent migrants who, up until now, have faced a lot of difficulty because the banks don’t have enough information about them and consider them too much of a risk.
“Under comprehensive credit reporting, your credit history builds up quickly and very soon you will become creditworthy,” Grafton says.
Vibha Coburn, head of mortgages at Citi Australia, adds that the changes could also potentially cut down on loan application times, while generally improving the whole application process. “The changes will potentially reduce the amount of paperwork applicants need to provide. Lenders will be able to verify credit behaviours by collecting this information from the credit bureau rather than [the applicant].”
This means that when refinancing existing loans, for example, lenders may no longer have to ask to see loan statements as much of the information contained in these will be available via the credit report. This will improve turnaround times, considering that delays with home loan applications are often due to outstanding statement information.
Protection of information
Coburn says the changes will ultimately see Australia move towards having a partially positive credit bureau, but points out that the regulatory framework will be different to that of the US system, which some commentators have said the new changes resemble.
In the US, the information lenders obtain is available for marketing, but in Australia this will be forbidden. Clear guidelines are set out in the Privacy Code attached to the Act, and these prevent the use of borrower data for marketing.
How borrowers can prepare themselves
Grafton advises that borrowers should become aware of what the changes mean and don’t mean. They need to understand that how they manage their credit commitments will be of fundamental importance in building a good credit score. “The more you pay your bills on time and don’t miss payments, the better your score is going to be,” he says.
As a real-life example, if you were to go on holiday and forget to make a few payments, you wouldn’t necessarily be unable to acquire credit again; it would just be reflected in your score.
“What this means is that consumers will be more motivated to manage their credit better because it’s in their interest to do so,” Grafton says.Armstrong adds that the whole idea of a score is that it gives borrowers who have made mistakes in the past a second chance. “If a borrower had a significant default from two years ago, but since then has met all repayments on time, the current negative reporting system would only show the default, whereas the new system will show both the default and repayment history, which could improve the borrower’s chances of getting their finance approved.”
What it means for lenders
From the perspective of lenders, a significant challenge that arises as a result of these changes involves preparing their back-end operating systems to meet the new reporting requirements.
Lenders will also need to adjust their assessment criteria to cater for the additional information that will become available, Armstrong says. As a case in point, she says many lenders today, when assessing a person’s suitability for a home loan under the current system, do not require evidence that a borrower’s credit cards and personal loans have been paid on time and kept within the credit limits.
“With these new changes lenders will see this information as a matter of course and will begin to factor this additional credit information into their underwriting criteria – ultimately impacting the result of whether a loan is approved or declined,” says Armstrong.
Coburn says another challenge for lenders will be in making appropriate changes to their business practices to improve the overall customer experience and enhance the credit assessment process.
The challenge after that, Coburn says, will be for all industry participants to adapt to these changes.
“The collection of data will start from 2014, but for the industry to be able to leverage the data, at least 12–24 months of information will be required. So, we expect that we’ll start to see some interesting changes from the second half of 2015 onwards.”
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