One last shot at credit reporting reform

The consumer credit reference company Veda Advantage has taken a final shot in the battle over credit reporting. With the Australian Law Reform Commission overdue to produce its recommendations for changes to the Privacy Act, including credit reporting rules, Veda yesterday released a report on the issue it had commissioned from Access Economics.

No prizes for guessing that Access favours a move from the current negative reporting regime (what goes in the file is reports of default, court actions and bankruptcy) to positive reporting (how the borrower is managing payments on credit cards, personal loans and so on).

In fact, Access concluded that there are advantages for everyone - borrowers, lenders and the economy - if more information is included in credit files.

While the conclusions are entirely predictable, what makes the report interesting is that it says change to the Privacy Act to allow for positive credit reporting should be accompanied by policies to ensure responsible lending programs and improved financial literacy programs. Lenders have to earn the right to get more information about consumers.

No one disagrees with the proposition that, as Access puts it, "credit bureau data provide a very limited snapshot of the potential borrower." But the argument with consumer groups has come down to a question of whether lenders can be trusted with more information - whether better information results in better credit decisions or more predatory selling.

The report emphasises the potential of positive reporting to help overcome financial exclusion. A small number of adult Australians (0.8 per cent) have no financial product and six per cent have only a transaction account.

Lenders that rely on negative credit reporting have to fall back on information about income when assessing credit applications. One result is that people on low incomes may miss out on credit even though they could service a debt. They suffer financial exclusion.

Positive reporting would highlight the fact that they had a good repayment history. As far as Access is concerned, access to credit is a social equity issue.

Interim recommendations from the Law Reform Commission were for an expanded credit reporting data set to include the type of current credit accounts, the date when accounts were opened, the limit on each existing credit account and the date on which credit accounts were closed.

The industry has said this does not go far enough. What it wants is the borrower's repayment history.

Access sees other benefits. Risk is priced more appropriately. Competition is enhanced.

Access acknowledges that acceptance rates could increase sharply following the introduction of positive reporting. Consumer groups worry that this will put stress on already stretched households.

But Access believes the market will operate rationally: "For low-risk borrowers who are currently unable to access credit because they are erroneously assessed as high risk, lending will increase.

"For high-risk borrowers who are currently able to access credit because they are erroneously assessed as low risk, lending will decline."

In a strange omission, the report is silent on the question of predatory lending. Strange because it is a charge that has been made by consumer groups and one the Law Reform Commission is sensitive to. It goes to the issue of privacy.

Also strange because the recent case of an enforceable undertaking given by GE Money to the Australian Securities and Investments Commission showed that even large financial institutions that invest a lot in their brands engage in unacceptable conduct in the consumer finance market.

Access says the most common cause of financial stress is poor individual financial management and cites research that found 18 per cent of people make misleading statements in order to secure credit. It is hard to imagine such a one-sided conclusion convincing anyone at the Law Reform Commission.