Veda Advantage calls Federal Government to improve lending practices in Australia
Australia’s large custodian of credit-related information, Veda Advantage, called on the Federal Government to improve responsible lending practices in Australia by updating out-dated legislation which governs credit reporting practices.
According to Veda Advantage, Australian legislation should allow for the adoption of a Positive or Comprehensive Reporting system and the introduction of tight data management controls to protect our financial markets from the chaos caused by poor lending practices in the United States.
The fallout from the collapse of the US sub-prime markets, brought about by a reduction in credit lending standards, accentuates the fact Australia needs to update its credit reporting system and associated Privacy legislation.
Australia’s reporting legislation has not been updated for more than a decade, and is out of step with the digital age. This leaves consumers and businesses vulnerable not only to incomplete and inferior credit assessment practices but also to a growing array of identity crimes.
It is generally assumed in Australia that banks and lenders have access to a person’s full credit history, however this is not the case. Under Australia’s current ‘negative’ reporting system, banks and lenders only have access to past customer applications for credit, and whether a default has occurred in the past five years.
This means they do not have as much information as they should when assessing a credit applicant’s true ability to repay a loan, which leaves our credit markets open to a similar situation as the sub-prime lending markets in the US.
For example, under the current credit system, a consumer may have a mortgage, an investment loan, five credit cards and three personal loans, but none of these will be mentioned on their file if they are more than five years old, or if the credit provider has not performed a credit check.
On top of this incomplete information, banks and lenders are not able to see whether an application for credit has been successful, which inhibits the credit providers’ ability to accurately assess an applicants real credit obligations and ability to repay a loan.
Veda Advantage believes a comprehensive assessment of a person’s credit history when making lending decisions would protect consumers from taking on more credit than they responsibly should, helping to keep our credit markets stable and secure.
In September, the Australian Law Reform Commission (ALRC) will hand down its interim position on changes to the Privacy Act in the credit reporting area. Like many in the industry, Veda Advantage sees this review as a once in a generation chance to make real and substantive change to both encourage more responsible lending and offer consumers greater protection leading to significant benefit the Australian economy.
Veda Advantage has made the following recommendations to the Australian Law Reform Commission:
Australian credit files should include details such as the type of credit, credit provider, date the account was opened, the credit limit, the outstanding balance and the re-payment history. This would allow businesses to effectively assess the level of risk of each customer and properly evaluate whether they can repay their loan.
The current system only records applications and credit defaults. The future system should record and acknowledge a positive credit history such as a good payments history and responsible use of credit.
The future system should allow lenders to see whether or not past credit applications were successful, which would provide great certainty regarding an individual’s true credit capacity and would prevent creditors for being penalised for shopping around for credit.
A comprehensive reporting system was not a panacea and would only work if it adhered to strict governance standards relating to consumer data and privacy regulations.
Consumers’ credit details would stay safe and secure. In conjunction with a comprehensive reporting system Veda recommends strengthening obligations on credit reporting agencies to ensure data quality, data security and effective compliance with privacy requirements.
It is their recommendation that information kept on credit reports would only be accessible to strictly authorised institutions, and would not be used for direct marketing in any circumstances. In addition, they would like to see more powers to the credit reporting regulator, to oversee and make sure lending standards are kept at an optimum level.
Under this improved system, Australian banks and lending institutions would low their lending risk, and would gain back time and money employed in chasing bad debts.
Through the provision of accurate and comprehensive information, Veda Advantage would also potentially see a reduction in the incidence of identity fraud, money laundering and terrorism financing
One of the challenges we confront as a nation is few people understand the current credit reporting system or even realize that they have a credit file. This can mean some of the important points get lost in the debate or misunderstood by those who do not understand the applications of the current system.
The Privacy reforms proposed in Veda Advantage’s submission to the ALRC would bring our Australian system into line with international best practice. This would lead to efficient credit markets and to cost savings which can be passed onto consumers.
28-Aug-2007