Credit reporting debate goes on

Both sides in the credit reporting debate will continue to press their claims on government ahead of the introduction of amendments to the Privacy Act next year.

While some financial institutions, notably the credit reporting agencies, said they were happy with the position announced by the Australian government last week, some lenders will continue to argue for the inclusion of more data in credit reports and consumer groups will argue that the planned changes go too far.

The government will introduce five new pieces of data into consumer credit reports, adopting all the recommendations of the Australian Law Reform Commission for a more comprehensive reporting system.

The timetable is for the new credit reporting rules to be in force by January 2011 to coincide with the implementation of the responsible lending provisions of the National Consumer Credit Protection Bill.

The ALRC recommended that four new pieces of information be added to credit files: the type of each current credit account (mortgage, credit card, personal loan and so on); the date on which each current credit card account was opened; the credit limit of each account; and the date on which each account was closed.

It also recommended that the government allow credit reports to include a fifth additional piece of data - payment records - but only if it was satisfied "there is an adequate framework imposing responsible lending obligations in Commonwealth, state and territory legislation."

A government paper issued by Cabinet Secretary and Special Minister of State Joe Ludwig says the responsible lending obligations in the Consumer Credit Protection Bill will address the consumer protection issues raised by the ALRC.

The proposed amendment will introduce a number of other changes to the credit reporting system. The industry will be required to develop a credit reporting code with standards and a compliance regime.

Participants will be required to join an external dispute resolution scheme.

New legislation will prohibit direct marketing using credit information but will permit pre-screening of direct marketing lists to remove adverse credit risks.

Joint chief executive of the Consumer Action Law Centre, Carolyn Bond, says pre-screening involves credit reporting agencies scanning target lists to remove the 14-year-olds and other irrelevant listings before the marketing material is sent out.

Bond says: "Our view is that this type of thing does not lead to responsible lending. It makes this type of marketing more targeted and more attractive. The approach to a screened list can be more aggressive."

The Consumer Action Law Centre has argued throughout the whole debate that some lenders target borrowers who have a high likelihood of defaulting because they pay high fees, rates and penalties.

Bond says: "All the overseas research shows that more comprehensive credit reporting leads to more lending. We are putting a lot of trust in lenders.

"The responsible lending provisions of the National Consumer Credit Protection Bill are a good start. We think the new law will be successful in stopping the extreme behaviour but it is hard to see how it will deal with some of the sophisticated techniques at the edges - the upselling, the three year repayment holidays on store finance."

On the lenders' side, a consultant working with a large unsecured credit provider says there will still be big gaps in the information flow.

Credit files will show the credit limit on each account but not the amount of available credit that has been used. Some lenders argue they need this data if they are going to stop providing credit to consumers who are applying for new credit to make payments on maxed-out cards.

Nor will files show whether a customer has asked a credit provider for financial hardship assistance. People who are sick or have lost their job will usually apply for hardship assistance before they get into arrears. Some lenders argue they should have that information.