Presentation Transcript

1. Consumer Lending: Implications of new comprehensive credit reporting Steve Johnson
2. Comprehensive Credit Reporting Comprehensive reporting legislation has been passed in parliament and will be effective from March 2014 – however there is still much work to by done. New Credit Reporting Legislation becomes effective Legislation passed Dec12 Mar13 Jun13 Sep13 Dec13 Mar14 Jun14 Regulations - drafted by Attorney General for discussion Credit Reporting Code (CR Code) – requires public consultation and OAIC approval Credit Reporting (Industry) Code – focus on reciprocity, likely to require ACCC endorsement Industry Credit Reporting Data Standards - currently v10, dependent upon regulations and codes being finalised
3. Comprehensive Credit Reporting In simple terms, the industry refers to Comprehensive Credit Reporting as introducing five new data elements: Repayment History * Type of Credit Credit Limit of Account Date Account Opened Date Account Closed *Repayment history refers to monthly payment performance over previous 24 months. Sharing of repayment history is permitted for credit licensees only (as defined by the NCCP (2009) Act and subject to Responsible Lending obligations). Telecommunications and utilities cannot share repayment history.
4. Comprehensive Credit Reporting Lenders have a choice whether to participate in negative-only, partial or full comprehensive reporting - each option has different costs, risks and benefits Negative Only Defaults and Enquiries Partial Defaults and Enquiries Date opened Credit limit Type of credit Date closed + Full (must be a licensed credit provider) Defaults and Enquiries Date opened Credit limit Type of credit Date closed 24 months repayment history + +
5. Comprehensive Credit Reporting Organisations that do not participate in Comprehensive Credit Reporting are at risk of adverse selection. Repayment history and verified total exposure are masked from lenders that do not have access to Comprehensive Reporting – they risk accepting applications that are rejected by other lenders. Lender A (negative only)  × Lender B (Comprehensive Reporting)
6. Comprehensive Credit Reporting Some lenders may be reluctant to participate fully in Comprehensive Credit Reporting – sharing information will dilute their relative competitive advantage. Multi-nationals and new entrants have the most to gain from a mature Comprehensive redit Reporting environment.
7. Comprehensive Credit Reporting Based on rational response to competitive threat and technology impediments of some lenders, it is likely that a full comprehensive credit environment will not be in place and late 2015.
8. Comprehensive Credit Reporting Various studies prior to 2008 have pointed to Comprehensive Credit Reporting offering more efficient distribution of credit. enable industry to more accurately assess the risk of a consumer’s credit application, with the reduced risk leading to an expansion in the availability of credit; ensure consumers are granted credit on their true capacity to pay, at a price which reflects their risk; enable identity fraud to be detected sooner, due to improved information flows; and create a more efficient, lower cost, credit market due to increased information sharing and reduced risks1 1 Options for implementation of comprehensive credit reporting in Australia Centre for International Economics Canberra & Sydney and Edgar Dunn & Company Sydney - September 2006
9. Comprehensive Credit Reporting The implications of implementing Comprehensive Credit Reporting post-sub-prime crisis/GFC is untested. The US sub-prime crisis demonstrated that over-reliance on credit reporting (eg FICO scores) for credit decisions is flawed. Regulators now insist on lenders assessing a borrower’s ability to repay (eg NCCP). Australia’s proposed credit reporting is different to overseas (eg does not include balance). Australia is different to other countries studied (ie mature environments in US and UK; emerging markets in Asia, South America and Eastern Europe): Ready availability of credit and high consumer indebtedness; Competitive financial markets; Consumer and privacy advocates are more influential; Higher socio-economic population (less under-serviced segments). The implementation of Comprehensive Credit Reporting in Australia may have unintended consequences.
10. Comprehensive Credit Reporting The over-indebted segment is particularly vulnerable to adverse consequences of Comprehensive Credit Reporting. Transition to Comprehensive Credit Reporting Today Negative Credit Reporting Customer is forced to shadow banking (non CCR) system Ready access to credit, able to exploit information asymmetry to manage over-indebtedness. Use multiple lenders, multiple accounts (credit cards, personal loans store finance). If home-owner, able to leverage home equity from rising house prices. Lender becomes aware of credit provided by other lenders. Unlikely to offer increase in credit, more likely to decrease/restrict credit. Other lenders become aware of previously undisclosed debts. Problem exacerbated if house prices fall – restricts drawing on home equity. Customer placed on long-term hardship arrangement Customer fails contractual obligations and forced into bankruptcy Preliminary studies suggest that 5%-10% of borrowers could be in this situation.