Changes to credit reporting; A breath of fresh air or a storm on the horizon?
Changes to credit reporting;
A breath of fresh air or a storm on the horizon?
With credit providers becoming ever more selective on whom they want as clients, the introduction of a more consistent and predictable credit reporting system is becoming a high priority for many mortgage professionals. The good news is help is on the way, well maybe.
Before we can attempt to fix the problem we need to have an understanding of what’s wrong. I hear a lot of people talking negatively about Veda Advantage and how they have a lot to answer for so let’s start there. I’m not saying that there isn’t room for some improvement within Veda however let’s not forget that they are essentially a warehouse for other people’s data. The truth is they have little control over the accuracy of the information entered by credit providers and although they do have a data accuracy division, it is for the most part reactionary and only able to respond to issues after the data has been entered, or to put it another way, after the damage has been done.
There still seems to be a great deal of confusion by credit providers of their obligations to creditors when making a listing, by this I’m referring to compliance with certain passages of legislation such as Section 80 of the Consumer Credit Code or offering relief under Section 66. This misunderstanding often leads to inappropriate or unlawful listings being made against consumers. There also seems to be little consequence to the credit provider if a wrongful listing is entered, even if real loss to the consumer has occurred.
IOne must remember that Veda is owned by Meryl Lynch which is a profit driven organization. There is a strong argument to support that our credit reporting industry should be under government control, after all in the case of Veda and Dunn & Bradstreet it’s difficult to remain impartial when profits are the primary motivation.
I feel this is a genuine opportunity for the credit reporting agencies to lead the way and adopt a focused education program to their subscribers on the necessary steps required to make a listing and the potential ramifications to a consumer should this process not be followed. I feel that such a program would result in less mistakes being made and therefore fewer consumers being wrongfully affected. Of course the full weight of this responsibility does not lay solely on the credit reporting agencies and support would also need to be show from the relevant government bodies.
Let’s take a look at the banks credit scoring systems and why they have become so restrictive. There is no mistaking this is partly brought about by the GFC, the fact is the credit markets have retracted significantly and the cost of funds has increased. Although lets be honest, the banks still seem to be doing quite nicely thank you very much so how much of this is a genuine response to the current markets and how much is a money grab is up for debate.
I have heard people saying they think rejecting a borrowing because of a small historic credit issue is the banks way of culling applications. I’m not saying this is the case however when one looks at the amount of applicants currently submitted to the banks each week it doesn’t sound all that far fetched. The bottom line is the banks and mortgage insurers are run by numbers and statistics and they have all the evidence they need to show that a client that has defaulted in the past is more likely to default again, of course no credit scoring system is able to work out what listing is right and what listing is wrong so given we know that a very large number of negative listings on credit reports are not lawful there are many clients suffering inappropriately. Is this the banks fault? No, and really we shouldn’t expect them to somehow know the difference. I don’t expect to see any real relaxing of credit policy from the banks for some time so like it or not, it is what it is, at least for now.
The other issue is the very nature of the credit reporting system in Australia. We are one of the few countries on the world to still carry a negative reporting system which means that only enquiries and negative items are listed. Because of this a credit report can become a very slanted document and not necessarily a true reflection of an applicant’s current position or credit worthiness.
In most other countries such as the US and Europe a positive reporting system is utilized which means positive outcomes are noted as well as negative ones. By positive I mean a credit facility that has been taken up, serviced on time and retired without incident. This is potentially a good thing as a credit provider may form a different view of an applicant that has one small blemish but a number of positive listings rather than just being able to view the negative item alone.
The government is well aware the current system is far from perfect and is in need of some fixing, the first step is to try and bring our system in line with most of the world and adopt a positive reporting platform. The big question is at what cost? In 2011 the government is proposing a number of changes to the laws surrounding credit reporting that will coincide with the responsible lending legislation, also due in 2011. The list of proposed changes is extensive however I’ll cover a few of the proposals that could be of particular interest to you as a mortgage professional.
- Stopping the client merry go round.
One proposed change is to try and stop the consumer “merry go round” by placing the onus to resolve a dispute on whoever the consumer complains to first. At the moment consumers tend to get passed from pillar to post when trying to resolve a credit issue, often ending in many months of frustration with no resolution. This proposal has the potential to at least elevate some of this frustration for the consumer which can only be a good thing.
- An external dispute resolution scheme
Other than the applicable ombudsman, consumers currently have very few avenues when making a complaint with regard to credit reporting. It is proposed to introduce an external dispute resolution scheme (EDR) that credit providers will have to be a member of before they will be entitled to list information on a credit file. How effective the EDR will be remains to be seen however this may go a long way in credit providers making sure the listing they are intending to make is correct and the required procedures under such acts as section 80 have been complied with. This will also mean that should a credit provider not be able to substantiate a disputed listing they will have to refer the dispute to the EDR scheme.
- More information to be included in a credit report
At present a listing only contains very limited information such as the creditor’s name, the amount, date applied etc. Under the new legislation it is proposed to include items such as the type of facility (such as credit cards, personal loan etc) the date the account was opened, the credit limit and date the account was closed. I feel this is also positive as it may help alleviate some of the issues surrounding multiple enquires as a potential credit provider will have additional information to be able to determine what listings are relevant.
- Items such as utility payments being made available to credit providers as a separate item
That’s right; the proposal is to allow credit providers access to payment histories such as utility bills etc. Even though this information will help support a more positive reporting environment I’m concerned by how this would work from a practical standpoint and whether it has the potential to disadvantage the consumer even further.
If we accept that in the current market lenders are using negative listings as a means of culling applications what would the outcome be if a client had a perfect credit report but some inconsistent utility payments? Could this be yet another reason to reject the application? It would all depend on the attitude of the lender at the time however in the current market this possibility does not sound far fetched.
Of course there’s nothing set in stone yet however there is no doubt there are big changes on the way. We can only hope that the regulatory bodies such as ASIC seek the necessary advice from industry professionals to help ensure what is decided on is truly a step forward and of real benefit to the consumer.
John Dickinson
We Fix Credit Pty Ltd
