Pearls and Irritations

The Coalition government is pushing hard to get rid of responsible lending obligations, but it doesn’t seem to realise that removing these obligations will pull the rug out from one of its signature pieces of legislation that Scott Morrison championed when he was treasurer – mandatory comprehensive credit reporting.

Under comprehensive credit reporting, which became law in July 2018, a huge amount of financial data is included on a person’s credit report. Previously, credit reports only held negative information such as missed payments of more than 60 days and bankruptcies.

Key information that is now included on a person’s credit report is Repayment History Information (a full explanation is included below). However, the inclusion of Repayment History Information (RHI) poses dangers to borrowers. In a 2008 report titled “For your information: Australian Privacy Law and Practice”, the Australian Law Reform Commission noted that the inclusion of RHI required responsible lending practices to be in place in all federal and state/territory legislation:

“Repayment performance history only should be permitted to be contained in credit reporting information if the Australian Government is satisfied that there is an adequate framework imposing responsible lending obligations in Commonwealth, state and territory legislation.”

The Coalition government clearly accepts this fact. The National Consumer Credit Protection Act 2009 contains the responsible lending obligations. The Act was amended by the Coalition in 2019 to enable financial hardship information to be included in credit reporting.

Point 3.23 of the explanatory memorandum to the amendment references the privacy safeguards put in place to enable comprehensive credit reporting. Specifically: that

“Access to repayment history information [is limited] to those credit providers who hold an Australian Credit Licence and are therefore subject to responsible lending obligations.”

And in Section 3.32 of the memorandum:

“The Bill sets out clearly defined and limited uses of financial hardship information in the credit reporting system. Like the existing protections for repayment history information, hardship information can only be disclosed to mortgage insurers and licensed credit providers who are subject to the responsible lending obligations.”

The Law Reform Commission required responsible lending to ensure that RHI was accurate. If loans were given to people who could not afford to repay them from the outset, then RHI would be inaccurate and misleading.

It is clear that under legislation – introduced by the Coalition government – the inclusion of RHI in credit reports requires that lenders be obliged to lend responsibly. Get rid of responsible lending obligations and the government has to get rid of Repayment History Information.

Concerns about RHI

Under comprehensive credit reporting much more data is listed on credit reports: the type of loan (e.g. home loan, credit card); the loan amount and whether the person is the borrower, co-borrower or guarantor;  who the loan is with; and whether the account is open or closed. All well and good as far as consumer advocates go.

The fifth data set is RHI, which is a rolling 24-month period of whether you paid your loan on time, whether you have defaulted and how long you have been in default, among other things.

Consumer advocates have raised concerns over RHI for two broad reasons.

First, those people whose credit reports suggest they are not good payers may only be able to access higher-cost credit – for example credit cards that charge up to 50% per annum. As Gerard Brody, the CEO of Consumer Action Law Centre, notes, these sorts of “toxic products” already exist in the United States and Britain.

Yet this risk-based pricing of credit creates a dangerous cycle: consumers deemed at higher risk of defaulting pay more for credit, which simultaneously increases their risk of defaulting. This exacerbates inequality.

Second, with so much more information listed mistakes on credit reports happen far more often. As a result, people are being denied affordable credit.

This has led to a boom in debt management of credit repair businesses: companies that promise to “fix” credit reports. This growth is primarily a result of changes to credit reporting.

These businesses – often unregulated – promise to “clean” or fix people’s credit reports for a fee. However, credit reports cannot be fixed unless defaults are wrongly listed, and under such circumstances the consumer is able to fix their reports themselves, or with the free help of financial counsellor. Just five days ago The Age ran a story article about a childcare worker who was told her negative credit rating would disappear if she paid $2700. Such stories abound in the media.

Who benefits from CCR?

The major beneficiary of comprehensive credit reporting is the relatively new players in financial services – the fintech industry, which uses technology in financial services to develop products and services. Among its services are digital banks, unsecured small business lending, cryptocurrencies and peer-to-peer lending. To be a real competitor it needed access to the reams of consumer financial data that banks have long held.

A voluntary regime of credit reporting has been in place since March 2014, when the Privacy Act (1988) was changed to allow all credit providers to voluntarily share comprehensive credit information with credit reporting agencies.

But as far as the fintechs were concerned, the big banks were being too slow to report data under the voluntary regime. From 2016 they ramped up their lobbying efforts. In 2017, then treasurer Scott Morrison announced legislation to make such reporting mandatory, in a move applauded by Australia’s fintech industry.

Fintechs claim they bring competition to financial services, driving prices down, yet there are major concerns.

Fintech companies tend to be either unregulated or less regulated than traditional credit providers. For example, small business finance providers do not require a credit licence to offer business loans. Moreover, they don’t have to be members of the financial ombudsman AFCA so there’s limited protection for consumers when it all goes wrong.

Minimising regulation benefits fintechs greatly– a dangerous prospect in the current economy. Consumer groups have been warning for some time that unregulated lenders will flood the pandemic economy, and that lenders often structure their business to avoid regulation under credit laws. Short-term loans from even regulated lenders such as Cash Converters and Nimble have equivalent annual interest rates often exceeding 200%.

Increasing inequality

While comprehensive credit reporting is sold as a boon because it allows lenders to price risk better, the downside is, as noted above, that it can exacerbate inequality in society and limit access to affordable credit.

The other obvious question is what other financial services legislation has been enacted that relies on responsible lending?

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