Comprehensive credit reporting is now well and truly happening. All of the Big 4 have transition projects underway, and the legislation for mandatory supply of credit reporting information is making its way through Parliament.
The most powerful new element— Repayment History Information (RHI) on lines of credit—provides significant benefits for lenders and borrowers alike, by showing how well a person is currently managing their credit commitments.
For brokers, being able to access and understand their customer’s RHI will help them determine which products are the best fit, based on their demonstrated ability to make repayments. It will also create opportunities for brokers to negotiate better terms for their clients, which will improve the overall customer experience.
In addition, regulators such as APRA expect to see the use of credit reporting when conducting credit risk assessment, declaring in July it would give much greater visibility of a borrower’s existing debt commitments. And in August the Reserve Bank said it was “encouraged by the potential for comprehensive credit reporting and open banking to lower the cost of credit risk assessment for lenders”.
RHI looks at the repayment patterns of consumers. This includes whether the minimum repayments on a credit account, including credit cards, personal loans and mortgages, have been made on time. In cases where repayments are late – and there is a reasonable grace period - RHI also shows how many times a consumer has been late.
It’s important to know there are differences between late payments and a default.
A default is a payment of $150 or more that has been overdue for at least 60 days. They stay on a consumer credit report for five years.
Late payments, on the other hand, are between 14 and 60 days overdue (after a 14-day grace period), and a number of late payments in a row can be an indication of financial stress and difficulty. Late payments stay on a consumer’s credit file for 24 months in the monthly Repayment History Information.
Impacts of RHI
RHI provides visibility on people who are struggling with their current credit commitments. It also enables people who had a period of financial stress and may have a default as a result, to show they have recovered.
Modelling shows there is a positive impact on the number of people able to access credit.
When comparing negative data to comprehensive data (based on 100,000 enquiries on the Equifax bureau), over 3,000 individuals who applied for mortgages and were previously classed as high risk (based on negative data in their report) became low risk (based on comprehensive data). At the other end of the scale, 300 individuals who were previously classed as low or medium risk became high risk.
For brokers, this reclassification offers an incredible opportunity to work with the high-to-low swap set, gaining a greater number of customers. In addition, having oversight of consumers’ credit movements is important due to the role it plays in assessing and matching suitable customers and creditors.
Mike Cutter is Equifax’s group managing director for Australia and New Zealand.
Read Mike’s other columns in this series:
1. How brokers can harness the power of CCR
2. How CCR can help brokers verify and assess borrower expenses