The federal government will force banks to provide half of their credit information ready for reporting by the mid-year of 2018 (with the rest to be available in 2019).
It is rather odd in this modern age of big data that the four major banks are in a position to keep their huge collections of loan information for so long. The data shows how trustworthy we are in paying back our loans. This data is valuable to the lender.
In order for the proposed legislation of the government to be effective, it will need to ensure that effective regulations have been put in place that safeguard our personal information and prevent further stress on our mortgages. To accomplish this, there are lessons to be gleaned by observing experiences in the US experience.
The new law on credit data will allow the market for consumer credit to more competition. This could create lower-cost loans.
Competitors with skills using the latest technologies could provide consumers with new loan options that are competitive in interest rates. Non-traditional lenders may aggressively increase their market share at the expense of banks. The consumers would appear to be the main beneficiaries.
Lessons Learned from the Global Financial Crisis
Australia has had for years one of the strictest credit reporting systems in the OECD nations. The reporting system in Australia has permitted credit reporting agencies like Equifax as well as Dun and Bradstreet to report on consumers’ credit histories. These records include items like bankruptcy and late loans or rental repayments.
The US system has already required to report certain positive elements of a customer’s credit behavior, such as their timely repayments of loans. This has allowed companies to create statistical scoring models that can determine a borrower’s default risk with incredible precision. Credit scoring was the basis of underwriting the decisions of consumer loans.
This, of course, led to an intense competition. With more reliable data, lenders no longer needed to believe that consumers with lower incomes had a greater risk of not paying on loans.
As loan histories of customers were provided to rivals, customers with a track record of being reliable borrowers were given loans. As competition increased and the market grew, a growing sub-prime market for mortgages developed. The shady lending practices of the past became commonplace and set the stage for 2008’s worldwide financial crises.
Australian households are already in a state of debt. A fierce competition as a result of the proposed legislation could risk forcing families to fall deeper into debt. Consumers with lower incomes could be more susceptible to falling to debt-traps.
In part, in response to the financial crisis in the world, Australia introduced responsible lending obligations for lenders. These are designed to halt the lending of loans to those who cannot pay them back. However, the US subprime crisis demonstrated that lenders had become adept at evading the regulations, and regulators did not have the determination to apply these rules. The regulators need to be especially vigilant to prevent this happening in Australia.
Inviting the major banks to provide loan history to third-party organizations, including the credit report agencies, creates new risks that need to be carefully monitored. The lenders will either design the credit scoring models based on the information provided by banks or will use the scores provided by credit agencies for reporting.
A score that is inaccurate or not accurate can have serious consequences for the consumer. It could mean they are denied loans or provided with interest rates more expensive than the rate if their score is exact.
There must be efficient procedures in place to ensure that customers have access to their credit scores and can challenge any errors. Transparency in information should be a priority to the benefit of both the lender and the consumer.
Another possibility is that criminals could take personal loan data. In the course of this year, the credit ratings agency Equifax was hit by an attack by hackers that impacted more than 143 million Americans and more than 600,000. Brits. Australia’s biggest credit reporting agency, Equifax Pty Ltd, is a wholly-owned affiliate of Equifax Inc.
The data breach exposes US and UK customers to greater risks of identity fraud as well as targeted scams. In the event that banks are required to release the data on our loans to third-party companies, it increases the likelihood of a data breach.
Competition can bring substantial benefits to consumers. But, excessive competition could end up putting at risk the interests of consumers as individuals and the economy in general.
Consumers also have to contend with the increasing risk of security breaches. The federal government, as well as their regulatory authorities, will have to be on guard for these risks and stay alert.