Having a complete picture of a borrower’s financial position promises many benefits for lenders, brokers and borrowers alike. With comprehensive credit reporting on Australia’s doorstep, The Adviser speaks to industry participants about how brokers can prepare for and make the most of the new regime.
The mandatory comprehensive credit reporting (CCR) regime – which requires lenders to provide access to customer credit data, such as repayment history, credit limits and types of credit accounts – is being lauded as a revolutionary step in the lending process that could facilitate improvements to credit decisioning, credit availability, operational efficiency and competition, if implemented effectively.
What is CCR?
The National Consumer Credit Protection Amendment (Mandatory Comprehensive Credit Reporting) Bill 2018, which was introduced into parliament mid-last year, requires lenders to report positive credit information, such as when minimum payments on a credit card, mortgage or personal loan are being made on time.
While the bill has been put on the backburner a number of times, the financial services industry has been making progress in adapting to the new regime. By the end of September 2018, which was the government-imposed deadline for the major banks to insert 50 per cent of their CCR data into a data exchange system, the big four banks, along with Citibank, HSBC, Teachers Mutual Bank, RateSetter and MoneyPlace had become participants in the regime.
The government said that 100 per cent of CCR data would need to be shared by the big four banks by the end of September 2019, and the deadline for other lenders are 12 months after the major banks.
It is believed that CCR will allow all participating lenders, including non-banks and fintechs, to better assess the risk status of a loan applicant.
As Standard & Poor’s (S&P) notes in its report, Australian Structured Finance: Credit Analysis in a Digital Ecosystem: “Having access to data on borrowers’ financial commitments and the deployment of data science to analyse it will enable lenders to make a more accurate assessment of expenses, resulting in more prudent underwriting.
“It will also facilitate greater consistency in debt-serviceability assessments.”
S&P predicts that an open data model will reduce the financial services industry’s reliance on time-intensive manual processes, because a greater amount of information will be quickly and easily obtainable.
Peter Beaumont, head of growth at ASX-listed peer-to-peer lender Wisr, notes that, traditionally, the onus has been on the borrower to provide information on how they managed their liabilities across a recent time frame.
“Increased transparency… will have a huge positive contribution on business productivity along two dimensions: one is avoiding wasted time and the other is around improved customer understanding,” he says.
“Having CCR historical payment data regarding their liabilities allows [brokers] to better assess the facts around the clients.”
Observing that “many people… don’t tell [their broker] everything”, Anthony Azar, principal at Fenero Bespoke Finance, says CCR will open opportunities to have deeper discussions with clients, allowing brokers to understand early on the risk status of the client and the likelihood of them being successful in obtaining a loan.
“[It will] allow you to see whether the loan can be done based on the [customer’s past conduct] or whether you need to do the loan through second-tier [lenders], rather than push that through to first-tier [lenders] only for it to bounce back [due to] an issue you weren’t aware of,” he says.
CCR may allow some Australians with black marks on their credit report to not be disadvantaged due to past financial hardships.
“It could be somebody whose credit profile appears quite weak but CCR history tells us for the past two years they’ve had three credit facilities and met every payment on time. That can have a significant influence on a lender’s preparedness to lend,” Mr Beaumont says.
Conversely, Mr Beaumont says someone with a high income and numerous assets might present as low risk, but CCR data could show that there is a history of missed payments and overspending. The broker will be able to understand that the client is weaker than they initially thought and may need guidance before they take on additional liabilities.
Mhairi MacLeod, founder and principal at Astute Ability Finance Group, says brokers who work with clients to improve their credit history, such as through better budgeting, and teach them the importance of good credit conduct “will be laying strong foundations for a client for life”.
She believes CCR will also enable more product innovation with wide-ranging benefits for customers.
“These changes will create wide-ranging competition for consumers across all forms of finance and allow lenders on all product lines to compete against the majors on a more even playing field,” Ms MacLeod says.
Meanwhile, Mr Azar also suggests CCR could enable the creation of the “first straight-through home loan approvals without human intervention”, adding that he thinks the regime will favour the fintech segment.
Once the CCR system is widely embraced, Mr Azar says “the first step of any deal will be to look at [client’s] information” to get a better understanding of their true financial positions. This will determine the approach that is taken by the broker and the client to achieve a positive outcome.
“You look at [the client’s] information and you might say, ‘You’ve got a bad record’ or ‘Here are three or four lenders that could help and this is going to be the cost of funds and are you amenable to that interest rate?’ This is [rather than] running around in circles and doing all the work and realising it’s not bankable or it is bankable but the interest rate is not amenable to the client,” he says.
According to Mr Beaumont, it will be important for brokers to understand every lender’s implementation roadmap as there will be varying time frames for them to update their credit decisioning processes.
He notes that lenders, particularly fintechs, are rolling out their own products using the newly available data for brokers and other partners to use, though brokers can also purchase the data directly from credit bureaus.
Further, Mr Beaumont suggests that it is crucial that brokers understand how lenders will process CCR data and what impact the data will have on their credit decisioning processes.
“As a broker… if you have a client who has a series of previously missed payments on their personal loan, as evidenced by the CCR data, you need to ask yourself, ‘Does the lender who you’re proposing to introduce this new loan to care about this? How are they going to react when they see the CCR data?’”
Mr Azar agrees, noting the decisions lenders make based on the same data will differ.
“There are lenders that have zero tolerance [for missed payments], some that have a dollar value tolerance, and some that have a historic tolerance. They will have different views on, for example, what’s an acceptable event of default. [Brokers will] need to be across all of this,” he says.
Aggregators and lenders are already playing a role in supporting their brokers in this area of education, according to Mr Beaumont, who says some are providing CCR training and a credit bureau access service through their own portals.
He says brokers should be cognisant that data quality in the initial stages of the regime will not be perfect, but it will improve over time. As such, lenders also need to ensure, especially with negative CCR data, that it is “correct and not a function of a poor upload from a recent contributor”.
“I would say for 2019, in the consumer space, CCR is essential knowledge that a broker must get a grip on to do the right thing by their client.”
Ms MacLeod agrees, recommending that brokers seek relevant education and training to “ensure they are in a position to offer clients the best possible advice”.