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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. Australia is currently one of four countries in the developed world (the others being New Zealand, France and Italy) still operating under a negative reporting system. Under this 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 don’t have as much information as they should when assessing a credit applicant’s true ability to repay a loan. They are limited to collecting negative data and this could leave their credit markets open to a similar situation as the sub-prime lending markets in the United States.

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 applicant’s real credit obligations and ability to repay a loan.

However the Australian Law Reform Commission (ALRC) has proposed the introduction of a more comprehensive credit reporting regime as part of its major review of Australian privacy law and practice. These are data protection laws which regulate the collection, use and disclosure of personal information about people.

For Australians this potentially means that large sections of the credit industry would have access to information about individuals’ loans or credit facilities, including the limits and balances, their repayment history and further information than is currently permitted relating to overdue or defaulted payments.

A credit reporter is a company that collects credit and personal information from credit providers and publicly available sources and then sells the information to third parties. These third parties are commonly but not always credit providers seeking to establish if a potential client is a good or bad credit risk. The industry has changed dramatically in recent years. From manually typed credit reports in the 1970’s to web-based data in the late 1990’s today’s credit bureau has quickly become an electronic masterpiece offering a vast range of data online.

This has resulted in opposition from privacy camps who argue that as privacy is a human right, individuals should be protected from unwarranted intrusions.

However those in favour point out that If credit reporting agencies were able to gather a wider range of information, this may encourage improved lending practices and make it easier for some people on low incomes to obtain finance. Lenders would also be in a much stronger position to spot people getting into financial hardship.

If consumers find credit easier to come by the Australian economy would be boosted by around $5 billion dollars.

Low risk consumers or in other words borrowers whose records show that they meet their financial commitment each month would most likely see a reduction in their monthly bills as if the lenders had more access to credit information including payment histories, they would be able to price for risk.

Those advocating privacy say that by allowing lenders access to a wider range of credit information financial hardship amongst consumers would actually be increased and have used the US and UK as examples of what happens when credit reference agencies are allowed to share a wider range of credit report information with lenders. This is because in these two countries there has been an increase in the numbers of consumers facing financial troubles.

They carry on to say that by giving lenders access to more credit information it is unrealistic to believe consumers who have to rely on Payday Loans would suddenly be granted access to mainstream credit products, especially in light of the recent credit crunch.

The Australian Government will make its decision sometime in March so until then Australians will carry on mulling over the pros and cons of this new proposal.

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Steve

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