Approved changes to the Privacy Act will come into effect in March 2014 and, along with it, a significant increase in the information permitted to be listed on a client’s credit report. The major concern for brokers is how lenders will adjust their lending criteria based on the new information they will have at their disposal.
“It is safe to say that comprehensive credit reporting will differ from the existing negative credit reporting system as it will reveal more about an individual’s payment habits. We now know that ‘repayment history information’ will be included in a credit report in addition to the current information, however exactly what this will consist of is still being negotiated between the Office of the Information Commissioner and the credit reporting agencies,” says Credit Repair Australia CEO Richard Symes.
‘Repayment history information’ is defined by the Act as “…information about the individual; whether or not the individual has met an obligation to make a monthly payment that is due and payable in relation to the consumer’s credit”, however, Symes speculates that it will consist of:
(which will allow for differentiation between accounts)
(which will allow a lender to see how old an account is compared to the others that an individual may have)
DATE ACCOUNT CLOSED
(this will allow lender to differentiate between currently active and closed accounts)
(help determine serviceability)
REPAYMENT HISTORY FOR THE LAST 24 MONTHS
(to see any trends)
The current credit reporting system does not provide enough information for lenders to determine whether an enquiry proceeded to an account being opened or if the borrower declined to proceed with the finance, forcing the lenders to view all credit enquiries as negative. In that regard, the addition of ‘repayment history information’ could prove to be a positive move for brokers, as it would allow lenders to make more informed decisions about individuals with a number of enquiries on their credit report.
The new information will further assist in determining the credit worthiness of an individual – credit providers will have a better insight into someone’s ability to repay a loan.
“Creditors will have more information at their disposal in order to identify undisclosed debts, late
payers and repeat offenders, in addition to a reasonable idea of how much other debt the borrower has – allowing the lender to more accurately assess serviceability. We are yet to confirm whether the credit reporting agencies will increase fees in exchange for the additional information, however we consider it a possibility” says Symes.
The way ‘repayment history information’ is likely to be recorded is in three categories: paid on time or before; paid shortly after; and paid well after the due date. This will cause a shift in those who may and may not be able to obtain finance. Symes believes that there are four possible outcomes under the new regime:
Whether an individual’s application is accepted or declined will remain indifferent to comprehensive credit reporting.
Individuals who have been previously declined may be accepted under the comprehensive credit reporting.
Most worrying for brokers, individuals that would normally be accepted may be declined under comprehensive credit reporting.
An individual who would have been previously approved may be charged a higher interest rate based on negative ‘repayment history information’.
ENTERING THE UNKNOWN
Whilst Symes believes there is no cause for immediate alarm, he suggests “brokers who are concerned about the new credit reporting system and have pending applications should process them before March 2014, as we are entering into unknown territory. Therefore, no one can say for certain the effect that the new credit reporting system will have. We can only speculate, and like with any changes there will be an adjustment period. It is also uncertain if ‘repayment history information’ will be backdated to December 2012 or if the data will begin to be recorded as of March 2014.
“Although there is evidence to suggest that the credit reporting agencies will adopt March 2014 as the date in which they will begin to record the ‘repayment history information’. If this is correct it will take a further six to 12 months after implementation for lenders to get their hands on enough usable data and for us to experience the full effects of comprehensive credit reporting.
“What we do know is, not every credit provider may participate in providing ‘repayment history information’ and therefore we cannot clearly determine how lenders will react to the new information. Brokers will be faced with new challenges as the current way of operating will be shifted. Individuals may no longer fit into the traditional models used by brokers for assessing credit worthiness, for example first tier lenders may accept an application that in the past would have only been approved by a second-tier lender.”
The implementation of comprehensive credit reporting will bring Australia in line with other G20 countries, and the general consensus is that comprehensive credit reporting is a positive move – as it will provide a better indication of a borrower’s ability to maintain repayments. However, this is yet to be seen.
An individual who has no defaults on their credit report, but is a consistent late payer (inside 60 days and hence avoiding default) is likely to be declined finance under the new credit reporting regime. This individual could be approved under the current reporting system.
An individual who has a default on their credit report but has been paying their bills on time for the past two years may have a higher chance of being approved for finance due to positive ‘repayment history information’, whereas previously they may have been immediately declined
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