Difficulties in making regular repayments on loans or failing to pay bills on time must be taken into account by lenders when assessing an application for credit, but will not necessarily rule out approval.
The Australian Securities and Investment Commission is updating its guidelines for responsible lending conduct and one of the issues it is addressing is how credit licensees should handle the repayment history data in comprehensive credit reports. ASIC issued a consultation paper on the subject last week.
Comprehensive credit reporting is still a relatively new development in the Australian market (it was introduced in 2014 but take-up has been slow) and there has been some uncertainty about how it will be applied. ASIC’s consultation paper gives consumers a few clues about what to expect.
Under the old pre-2014 credit reporting system, credit providers reported so-called “negative” data, such as defaults or bankruptcies, as well as applications for credit. Under comprehensive credit reporting rules, which were introduced a few years ago but are being implemented by the big banks now, they can report a wider range of data about consumer behaviour.
The old “negative” reports could include the following:
- payment on a credit contract is at least 60 days overdue;
- a cheque for $100 or more has been dishonoured twice;
- a bankruptcy order has been made against the individual;
- a credit provider considers that the individual has committed “a serious credit infringement”; and
- details of recent credit inquiries by the consumer.
Since the introduction of the comprehensive scheme, credit providers have been able to add the following additional information to credit files:
- the date a credit account was opened;
- the type of credit account opened;
- the date a credit account was closed;
- the current limit of each open credit account; and
- repayment performance history, including information about late payments.
All this data is provided to credit reporting agencies Equifax, Experian and illion, and can be used as a reference by banks and other financial institutions when a consumer applies for credit.
ASIC’s consultation paper says: “Although the law has not changed since 2010, ASIC considers it timely to review and update the guidance in light of its regulatory and enforcement work since 2011, changes in technology and the recent final report of the Royal Commission.”
On the use of repayment information, ASIC says: “The occurrence of repayment difficulties on one product will not necessarily mean that a new credit product will in all cases be unsuitable for the consumer. This information should instead trigger the licensee to make more inquiries to enable them to understand these repayment difficulties and the likelihood that the circumstances would mean that the consumer could not meet financial obligations in future.”
Elsewhere in the consultation paper, ASIC says it wants lenders to be more rigorous in their approach to assessing credit applications. It says it will “more clearly identify the inquiries and steps that we think are important for licensees in complying with their responsible lending obligations.”
That would include guidance on the kinds of information that could be used for verification of the consumer’s financial situation, including a list of forms of verification.
“We have observed since the start of the responsible lending regime instances where licensees have failed to take sufficient steps in order to comply with their obligations,” ASIC says.
ASIC is also planning to clarify its guidance on the use of benchmarks, such as the controversial Household Expenditure Measure. It says they can be a useful tool to determine whether the information provided by the consumer is plausible. However, lenders should not default to a benchmark as a substitute for making inquiries.
And it wants lenders to have a better understanding of the rationale for the loan, so they can assess whether a credit contract will meet the consumer’s requirements. It says lenders and brokers often identify a “high-level” purpose for the credit but this does not meet the obligation to inquire about the consumer’s objectives and requirements.