Transcript Slide 1

Consumer Lending:
Implications of new comprehensive credit reporting
Steve Johnson
F.I.M.A.
“Benefit from Our Experience”
Financial Institutions & Management Advisory Pty Ltd
Normanby House, Suite 108, 430 Little Collins Street, Melbourne, VIC, 3000
Telephone: +61 3 9614 5000, Facsimile: +61 3 9614 0734, Email: [email protected]
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
Legislation becomes
passed
effective
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
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Comprehensive Credit Reporting
In simple terms, the industry refers to Comprehensive Credit Reporting as introducing five new
data elements:
Date Account
Opened
Credit Limit of
Account
Type of Credit
Date Account
Closed
Repayment
History *
Key insights
Payment history
Strong risk measurement characteristic, evidence of willingness to pay
Total customer exposure
Provide reliable indication of exposure relative to customer disclosed
Type of credit
Indication of customer’s risk appetite and product mix
Age of accounts
Long term account relationships are lower risk
Number of lenders
Strong indication of high risk
*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.
F.I.M.A.
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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
Partial
Full
(must be a
licensed credit
provider)
Defaults and
Enquiries
Defaults and
Enquiries
Defaults and
Enquiries
+
•
•
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•
Date opened
Credit limit
Type of credit
Date closed
+
•
•
•
•
Date opened
Credit limit
Type of credit
Date closed
+
24 months
repayment
history
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Comprehensive Credit Reporting
Organisations that do not participate in Comprehensive Credit Reporting are at risk of adverse
selection.
Comprensive Credit Reporting
Negative Reporting
Lender A
(negative only)
M1
M2
M3
M4
M5
M6
M7
M8
M9
M10
M11
M12
M13
M14
M15
M16
M17
M18
M19
M20
M21
M22
M23
M24
Bureau Report
$ 200,000
$ 40,000
$ 20,000
$ 20,000
$ 280,000
Bank Loan
Credit Card
Store Card
Personal Loan
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Comprensive Credit Reporting
Defaults
nil
Enquiries
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Application Form
Loans:
240,000
Negative Reporting
M1
M2
M3
M4
M5
M6
M7
M8
M9
M10
M11
M12
M13
M14
M15
M16
M17
M18
M19
M20
M21
M22
M23
M24
Bureau Report
Lender B
(Comprehensive
Reporting)
$ 200,000
$ 40,000
$ 20,000
$ 20,000
$ 280,000
Bank Loan
Credit Card
Store Card
Personal Loan
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Defaults
nil
Enquiries
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Application Form
Loans:
240,000
×
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.
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Comprehensive Credit Reporting
Some lenders may be reluctant to participate fully in Comprehensive Credit Reporting – sharing
information will dilute their relative competitive advantage.
Estimated relative improvement in
discriminatory power
Share of Consumer Lending
Citi
GE
Money
Others
NAB
CBA
WBC
ANZ
CBA
WBC
ANZ
NAB
GE
Citi
Multi-nationals and new entrants have the most to gain from a mature Comprehensive redit
Reporting environment.
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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.
100%
90%
Proportion of data contribution
80%
70%
60%
50%
40%
30%
Negative
20%
Partial
10%
Full
0%
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Comprehensive Credit Reporting
Various studies prior to 2008 have pointed to Comprehensive Credit Reporting offering more
efficient distribution of credit.
Customers rejected for credit in a
negative environment become more
attractive risk under Comprehensive
Credit Reporting
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•
Customers approved fro credit in a
negative environment are declined
when Comprehensive Credit Reporting
is available
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
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Comprehensive Credit Reporting
The implications of implementing Comprehensive Credit Reporting post-sub-prime crisis/GFC is
untested.
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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.
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Comprehensive Credit Reporting
The over-indebted segment is particularly vulnerable to adverse consequences of
Comprehensive Credit Reporting.
Today
Negative Credit Reporting
Transition to Comprehensive
Credit Reporting
Ready access to credit, able
to exploit information
asymmetry to manage overindebtedness.
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 is forced to
shadow banking (non
CCR) system
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.
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