17.08.2010
55.109 There is a spectrum of views about the categories of personal information that should be able to be collected as part of a more comprehensive credit reporting system. In the Discussion Paper, Review of Australian Privacy Law (DP 72), the ALRC identified a lack of consensus regarding a preferred model of comprehensive reporting.[156] In the past, this has hindered debate about whether more comprehensive reporting should be introduced, including in the context of previous government inquiries.[157] More recently, a significant number of credit providers have reached broad agreement on the desirable elements of a more comprehensive credit reporting system, including on the categories of personal information that should be collected.
New categories of personal information
55.110 An important focus of the Inquiry has been on whether Australian law should be amended to expand the categories of personal information that may be collected and used in credit reporting and, if so, what categories of personal information should be permitted. The following discussion focuses only on categories of personal information that concern an individual’s current credit commitments or repayment performance. Chapter 56 deals with the collection of other categories of personal information, such as identifying information.
55.111 In response to the Issues Paper, Review of Privacy—Credit Reporting Provisions (IP 32),[158] a range of views was expressed, from those suggesting loosening prohibitions on the content of credit reporting information through to those suggesting only minor extensions to the content currently permitted under s 18E of the Privacy Act.
55.112 Some credit reporting agencies and credit providers favoured removing the existing restrictions and permitting the collection of an extensive range of information about accounts, repayment performance and current credit commitments.[159] An alternative approach, proposed by Dun and Bradstreet, would permit credit reports to contain a limited number of additional data elements only, including information identifying an individual’s open accounts and credit limits.[160] Some credit providers considered that these categories of information were the minimum necessary to deliver benefits in credit decision making. On the other hand, this more limited model of more comprehensive reporting was criticised by others in the credit industry, primarily because it ‘lacks the most predictive risk data that is the repayment history’.[161]
Discussion Paper proposal
55.113 In DP 72, the ALRC proposed that the new Privacy (Credit Reporting Information) Regulations should permit the inclusion in credit reporting information of the following categories of personal information, in addition to those currently permitted under s 18E of the Privacy Act:
the type of each current credit account opened (for example, mortgage, personal loan, credit card);
the date on which each current credit account was opened;
the limit of each current credit account (for example, initial advance, amount of credit approved, approved limit); and
the date on which each credit account was closed.[162]
55.114 This modest extension of the current reporting system (the ALRC proposal) had some support from both industry and consumer groups. Importantly, credit providers would have access to more information about an individual’s current credit commitments to assist in promoting responsible lending. The ALRC stated that this extension in credit reporting information would provide much of the additional predictiveness desired by proponents of more comprehensive reporting.[163]
Submissions and consultations
55.115 There was broad support for the implementation of some form of more comprehensive reporting, especially from credit reporting agencies and credit providers.[164] Those in favour of more comprehensive credit reporting included those who supported the ALRC proposal as the preferable model (or as a worthwhile expansion of permissible credit reporting information);[165] and those who favoured further expansion beyond that proposed by the ALRC.[166]
The ALRC proposal
55.116 Dun and Bradstreet submitted that, at this stage, the ALRC proposal ‘extends far enough’ and finds an ‘appropriate balance between the extremes of the existing Australian system and the full-file of the United States’:
The ALRC proposal creates a unique opportunity for lenders to demonstrate the benefits that can arise from better quality data and accordingly provides a powerful incentive for lenders to embrace this reform fully.[167]
55.117 While supporting the inclusion of repayment performance information, the ANZ considered that the ALRC proposal constituted ‘an appropriately balanced approach that promotes both credit market efficiency and privacy protection’.[168] MGIC Australia stated that
this small extension will provide credit providers with a more complete knowledge of an individual’s current commitments which will assist the lender in applying a prudent approach to credit approval and provide consumers with protection against over-commitment.[169]
55.118 Another group of stakeholders favoured an extension of permissible credit reporting information beyond that proposed by the ALRC. Most submissions from these stakeholders expressly endorsed a model proposed by ARCA. This proposal (the ARCA model), discussed below, would permit credit reporting information to include information about individuals’ repayment performance.
55.119 Credit industry stakeholders argued that the additional predictive power that would be available under the ALRC’s proposal would be insufficient to justify the expenditure required by credit providers to modify reporting and credit scoring systems to take advantage of the additional data items.[170] The AFC, for example, submitted that
in order for the industry to participate in a more enhanced reporting environment, there has to be value that off-sets implementation costs. Based on feedback from our members, we submit that … the [ALRC proposal] may have limited value and consequently take-up by the industry. For example, the inclusion of a credit card limit figure does not give a true picture of debtor’s commitments unless it can be changed to reflect the balance outstanding at [a] point in time.[171]
55.120 Many stakeholders considered, however, that the addition of repayment performance information would ‘tip the balance’ and lead to a significant improvement in the ability of credit providers to assess credit worthiness.
The ARCA proposal
55.121 In this context, ARCA proposed that, in addition to the data items comprised in the ALRC proposal,[172] credit reporting information should include a 24-month history of repayment. This would be represented by a series of codes so that the system:
assigns a ‘0’ for no payment required, a ‘1’ for a payment required and made, a ‘2’ for one contractual payments missed, a ‘3’ for two contractual payments missed, and so forth up to ‘7’ for 6 or more payments missed (180 or more days delinquent). Other codes such as ‘B’ would be recorded if the account was included in a bankruptcy, or ‘D’ if the status of the account was in ‘dispute’, or ‘H’ if the account was involved in a hardship arrangement.[173]
55.122 ARCA considered that this extension to the permitted items proposed by the ALRC would ‘significantly improve responsible lending and most importantly will be implemented by credit providers and credit reference agencies’.[174]
55.123 Veda Advantage supported the ARCA approach and stated that it did not believe that ‘any further compromise is possible without fatally decreasing the predictive power of the comprehensive information’.[175] Similarly, the ANZ stated that while
the inclusion of the information proposed by the ALRC will improve marginally the quality of lending decisions and pricing of risk … in order to gain a more accurate and complete assessment of a customer’s credit worthiness it is important to have some level of historical repayment data.[176]
Research on predictive value
55.124 The case for allowing credit reporting information to include repayment performance information on the ARCA model was supported by the results of research conducted by several major credit providers following the release of DP 72.
55.125 As discussed in DP 72,[177] Veda Advantage proposed to conduct a data study to model the effect that more comprehensive consumer credit reporting would have on the accuracy of credit providers’ application risk evaluation. It proposed to use information from Veda’s credit reporting database and more comprehensive ‘positive’ information, including credit card application, account and payment histories, provided by participating credit providers.[178] This data study did not eventuate, in part because of the constraints imposed by the Privacy Act.
55.126 On the initiative of ARCA, and to provide evidence supporting the case for more comprehensive credit reporting, the four major banks and a number of international financial services groups undertook analyses of their own internal data to estimate the relative predictiveness of different variables that might be included in a more comprehensive credit reporting system. The studies assumed a full set of possible credit reporting variables (including repayment performance information and current balances) to have a ‘weighted performance’ of 100%, and compared the performance of these comprehensive variables with those permitted by the ALRC and ARCA proposals respectively. The results were reported in the following table:[179]
Table 55–2 Overall weighted contribution to customer behavioural scorecards | ||
Scenario | Percentage Contribution | Incremental Contribution |
Today[180] | 10% | 10% |
ALRC[181] | 23% | 33% |
ALRC + account payment status[182] | 22% | 55% |
ALRC + account payment status + repayment history[183] | 19% | 74% |
Full[184] | 26% | 100% |
55.127 Broadly speaking, the combined result of these studies, by four major banks and a number of international financial services groups, showed that the ALRC proposal would provide 33% of the potential predictive value of fully comprehensive credit reporting.[185] In comparison, the inclusion of repayment performance information, as proposed by ARCA, would provide 74% of the potential predictive value of fully comprehensive credit reporting.[186]
55.128 In assessing the implications of these research results, it should be noted that there are some discrepancies between the assumptions described in the research model and the ALRC and ARCA proposals, as described in DP 72 and in this Report.[187] The research methodology and results have not been independently verified, and the disaggregated results of the research conducted by each institution are commercially sensitive.
55.129 The research results can be viewed from different perspectives. While put forward as evidence of the inadequacy of the ALRC proposal, Dun and Bradstreet commented that the analysis:
demonstrates that while the greatest benefit comes from a full-file system, there is still considerable benefit from data elements reflecting the ALRC proposed model. In particular it shows that the predictive power arising from adding additional data allowed under the ALRC proposal increases by 23%.[188]
55.130 Some stakeholders suggested that even the ARCA proposal did not go far enough towards a fully comprehensive credit reporting system, which would permit, for example, the inclusion of information about current balances and repayment amounts.[189] In addition, some proponents of the ARCA proposal saw it as a compromise or interim position—and considered that the permitted content of credit reporting information should be expanded further in future.[190]
55.131 ARCA itself noted that ‘full comprehensive credit reporting would provide the optimum solution’ and has put forward its proposal in order to facilitate a ‘gradual process of implementation’.[191] Specifically, credit providers continued to believe that information about current balances should be available through the credit reporting system.[192] National Australia Bank, for example, submitted that
the balance of credit account and/or associated limit utilisation would provide for an even more informed lending decision to ensure borrowers are not placed in situations where they cannot meet their obligations. This should be considered as a future enhancement.[193]
55.132 Citibank Pty Ltd maintained the view that including the current outstanding balance should be permitted ‘to provide the optimum support for responsible lending and assessing customers credit worthiness’.[194] MasterCard stated:
Without allowing current balance information to be stored on an individual’s credit report, lenders do not have a source to confirm whether the statement is an accurate reflection of the borrower’s true position.[195]
Opposition to more comprehensive credit reporting
55.133 Consumer groups, privacy advocates and regulators generally opposed more comprehensive credit reporting.[196] The potential benefits of, and some of the problems associated with, more comprehensive reporting as perceived by these stakeholders are discussed above. These stakeholders also focused on alternatives, and desirable pre-conditions to, the possible introduction of more comprehensive credit reporting.
55.134 Some stakeholders observed that, if additional information is required by credit providers in order to assess an individual’s eligibility for credit, this information can be sought from the individual directly or from a third party with the individual’s consent.[197]
55.135 The Banking and Financial Services Ombudsman (BFSO) noted that credit providers can reduce information asymmetry ‘by asking for details of all current credit facilities as part of the application process and requiring consumer declarations as to the accuracy of the information’. Therefore, addressing the ‘absence of a comprehensive dispute resolution regime and the ability to report unregulated credit … would appear to be the more immediate priorities’ than implementing more comprehensive credit reporting.[198] Telstra stated that the additional information proposed to be permitted by the ALRC is available to credit providers who ‘wish to make the relevant inquiries and obtain the required consents’ and ‘should not automatically form part of credit information files’.[199]
55.136 Some stakeholders who opposed the introduction of more comprehensive credit reporting submitted that the focus of the present Inquiry should be on reforms to improve the current credit reporting system, before any consideration is given to its extension. In this context, the Victorian Review noted that alternatives to both the status quo and comprehensive credit reporting include:
Improving the existing negative reporting scheme in terms of its accuracy.
Providing additional incentives for credit reporting agencies to maintain accurate and complete data. For example, requiring credit reporting agencies to pay a specified amount to a consumer in each case where information is reported as inaccurate may assist in addressing current information asymmetry within the current system.
Requiring consumer declarations in relation to loan applications.
Expanding financial literacy programs to encourage better self-selection by consumers and shopping for credit by consumers.[200]
55.137 The Australian Privacy Foundation submitted that the ALRC should recommend that any further consideration of comprehensive reporting be ‘deferred until after experience with an initial round of reforms resulting from the current Review’.[201] National Legal Aid also stated that it would oppose the introduction of more comprehensive reporting ‘until there is positive progress on addressing the major defects of the current scheme’.[202]
55.138 A number of stakeholders suggested that further study is required before reaching any decision to recommend the implementation of more comprehensive credit reporting,[203] including studies which focus on the possible impact on over-indebtedness and access to affordable credit.[204]
55.139 The OPC submitted that independent research should be conducted on the impact that comprehensive credit reporting would have on the Australian financial system and Australian consumers. It was suggested that this research should provide recommendations about: whether comprehensive credit reporting should be introduced in Australia; and, if comprehensive credit reporting were to be introduced, what model should be adopted; which industry participants should be included in the expanded system; and what compliance framework should be imposed. The ALRC’s proposals would be considered as part of this research.[205]
Credit reporting and responsible lending
55.140 The link between more comprehensive reporting and responsible lending practices was highlighted by consumer and privacy advocates. These stakeholders considered that changes to consumer credit regulation to require responsible lending should be a pre-condition to the introduction of more comprehensive credit reporting.[206] The Consumer Action Law Centre, for example, stated:
Appropriate regulation of credit marketing and irresponsible lending in Australia could minimise the negative effects of expanding credit reporting information. However this would need to be implemented before consideration is given to expanding credit reporting information.[207]
55.141 The Cyberspace Law and Policy Centre submitted that:
No additional classes of information should be permitted in credit information files unless there are simultaneous changes to consumer credit regulation including an obligation to lend responsibly including taking into account all available information.[208]
55.142 It was observed that while industry stakeholders, in promoting a move towards more comprehensive credit reporting, have emphasised potential benefits in relation to responsible lending, credit providers are under no positive legal obligation to engage in responsible lending. Galexia noted that the limited ‘shield’ provision of the Consumer Credit Code[209] (discussed above) under which a court may reopen an unjust transaction is the only relevant legislative provision.[210]
There is no general licensing scheme or regulation for credit providers in Australia that requires them to be responsible lenders. Specifically there is no requirement that lenders assess a consumers’ ability to repay a loan without suffering undue hardship.[211]
ALRC’s view
55.143 The ALRC recognises that, according to widely accepted economic theory, making more information available to credit providers will tend to increase efficiency in the market for credit. It also will assist in making credit more available to those able to repay and reduce rates of default (or both).[212] There was no significant disagreement among stakeholders that more comprehensive credit reporting has the potential to improve risk assessment by credit providers, even among those who expressed concerns about how this improved risk assessment would be used in the credit market.
55.144 There are many possible approaches to reform of the credit reporting provisions to permit more comprehensive credit reporting. The spectrum of choice ranges from recommending no changes in the categories of information now permitted, extensions to these categories such as those as proposed by the ALRC in DP 72 and by ARCA, through to fully comprehensive credit reporting such as exists in the US.
Benefits of more comprehensive credit reporting
55.145 Proponents of more comprehensive credit reporting have sought to justify reform by reference to potential benefits arising from improved credit market competition and efficiency, resulting in decreased levels of consumer over-indebtedness and default, lower cost and higher availability of credit.
55.146 While industry stakeholders have presented considerable evidence and argument to support these expected outcomes, the ALRC is not convinced these outcomes are sufficiently certain to justify the implementation of more comprehensive credit reporting. The fundamental point is that any credit reporting system is only one tool, albeit an important one, used by credit providers to assess risk and to determine lending practices. This tool can be used in different ways, which may depend on other factors including, for example, a particular credit provider’s competitive position in the market. The information available through the credit reporting system ultimately cannot dictate what lending practices will emerge or prevail in the marketplace.
55.147 This fact has been emphasised recently by the so-called ‘subprime’ crisis. In the US, high levels of default on subprime loans contributed to an ongoing liquidity crisis in global financial markets, which began in mid-2007.[213] While the term ‘subprime’ is not consistently defined in the marketplace or among individual institutions, US regulators have defined subprime lending as
programs that target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, or bankruptcies. Such programs may also target borrowers with questionable repayment capacity evidenced by low credit scores or high debt-burden ratios.[214]
55.148 The comprehensive credit reporting information available to lenders in the US might be expected to have assisted lenders in proper risk assessment. Commentary has suggested, however, that credit scoring such as that provided by the Fair Isaac Corporation (FICO) was not effective in preventing lenders from advancing risky loans:
FICO scores are built on data gathered by the three big credit bureaus. The score is heavily influenced by the amount of debt a borrower already has and by payment history … But mortgage lenders got a little too confident in FICO and failed to give adequate weight to two other factors in a mortgage application: how much the borrower is putting down and how well he has documented his income.[215]
55.149 The ALRC recognises that risk assessment practices were not the only factor contributing to the subprime crisis. Other factors included aggressive marketing practices, such as the use of low fixed introductory (‘teaser’) interest rates, and promoting loans through brokers with financial incentives to close deals.[216] Arguably, one lesson that may be drawn from the US subprime lending experience is that the availability of comprehensive credit reporting information, on which to base proper risk assessment, will not necessarily produce responsible lending. The availability of risk assessment tools do not dictate lending policies—lenders do.
55.150 Some stakeholders identified the current Australian economic environment as an important reason to implement more comprehensive reporting.[217] Veda Advantage, for example, referred to high levels of household debt and concerns about an economic downturn and stated that:
In these circumstances, Australian borrowers and lenders need the best credit information and stronger consumer protection to help manage their risk. This is the most compelling argument for reform of the credit reporting provisions of the Privacy Act.[218]
55.151 As discussed above, it is hard to draw any firm conclusions about the impact of credit reporting systems on credit markets and the economy generally. In any case, research results cannot determine the policy position to be adopted. Any proven economic benefit still needs to be balanced against individual privacy rights and the risk of breach of those rights. An appropriate balance needs to be struck between efficiency in credit markets and privacy protection.
55.152 The most compelling argument for more comprehensive credit reporting is based on assisting credit providers to practise responsible lending. More comprehensive credit reporting clearly has the potential to enable credit providers to assess better individuals’ capacity repay and the risk that credit will not be repaid.
55.153 The current limitations on the permitted content of credit reporting information do not work in the best interests of either industry or consumers. As noted above, industry research suggests that the credit reporting information currently available provides only 10% of the potential predictive value of fully comprehensive credit reporting.[219] Whatever the precision of this figure, it is clear that the existing constraints significantly limit the predictive power of credit reporting information.
55.154 An effective credit reporting system should enable a credit provider to verify an individual’s potential credit commitments. The additional categories of credit reporting information recommended by the ALRC would assist to highlight discrepancies with the information provided by an individual credit applicant. At the very least, credit providers should be able to confirm whether an inquiry from another credit provider resulted in credit being granted. From the consumer side, there are also concerns about the currently misleading nature of inquiry information.[220]
Repayment performance information
55.155 The categories of personal information currently permitted in credit reporting information should be augmented, as proposed in DP 72.[221] The remaining question is whether the categories should be extended further to include repayment performance information, along the lines suggested by ARCA and others. A good case for the inclusion of repayment performance information can be made.
55.156 ARCA has proposed that credit reporting information should include a 24-month history of repayment.[222] This would not record the amount of any repayment, but would represent repayments by codes indicating, at each point in the repayment cycle, whether a repayment was required and whether contractual payments have been missed.[223]
55.157 At present, the Privacy Act permits the inclusion in credit information files of information about credit where the individual is at least 60 days overdue in making a payment and the credit provider has taken steps towards recovery of the amount outstanding.[224] This is often referred to as ‘default’ information or overdue payment information.
55.158 From one perspective, the proposed ‘negative’ repayment performance information is simply a more differentiated and comprehensive version of the default information currently collected—relevant to more specific time periods and forming a historical record. Under the ARCA proposal, the system also would record that no repayment was required or that a repayment was required and made. This information is ‘positive’ information that tends to work in favour of an individual in his or her dealings with credit providers, by indicating willingness to repay.
55.159 Some credit providers and credit reporting agencies suggest that the more limited extension of the credit reporting system proposed by the ALRC may not provide a sufficient incentive for the industry to bear the costs of implementation—despite, on ARCA’s figures, contributing another 23% of the predictive power of the full set of credit reporting variables. This view was not shared by other industry stakeholders, as discussed above, and is not accepted by the ALRC. Credit providers have, nevertheless, presented a strong case that repayment performance information would significantly improve the predictive value of credit reporting information and would be implemented by credit providers, if permitted by law.
55.160 The ALRC recommends that the new Privacy (Credit Reporting Information) Regulations should permit credit reporting information to include some repayment performance history. For these purposes, an individual’s repayment performance history should comprise only information indicating:
whether, over the prior two years, the individual was meeting his or her repayment obligations as at each point of the relevant repayment cycle for a credit account; and, if not
the number of repayment cycles the individual was in arrears.
55.161 The ALRC recognises that implementation of this recommendation will result in the sharing between credit reporting agencies and credit providers of more detailed information about the conduct of individuals with respect to credit and, therefore, a corresponding reduction in information privacy.
55.162 Credit reporting agencies will be permitted, for example, to collect and report information indicating that an individual was on time, or 30, 60 or 90 days late, in making a payment due under his or her credit card or other credit account. This detailed information may be collected about any individual who opens a credit account, even where that individual has never failed to meet his or her credit obligations. The information, as is the case with existing credit reporting information, will be collected, used and disclosed without the express consent of the individual concerned.
55.163 The recommended system of more comprehensive credit reporting would, however, retain the prohibition on the collection or reporting of the current balances of credit accounts or the amounts of repayments made or overdue.
55.164 For the reasons set out in this chapter, the ALRC concludes that the balance tips in favour of allowing repayment performance information provided that, as discussed below, consideration is given to the enactment of new responsible lending obligations.
55.165 Further, the ALRC’s recommendations that an extension be permitted in the categories of personal information that may be collected in credit reporting are intended as part of broader reform of the credit reporting system. Submissions emphasised the need to review and improve the existing regime of privacy protection, regardless of whether more comprehensive credit reporting is permitted by legislation or implemented by the finance industry.[225]
55.166 The ALRC agrees with this approach. Other changes to the regulation of credit reporting recommended in Chapters 56–59 are intended, among other things, expressly to prohibit the use or disclosure of credit reporting information in direct marketing, promote consistency and accuracy in the reporting of overdue payments, and improve complaint-handling and dispute resolution processes. If these other changes are not implemented, the foundation to support more comprehensive credit reporting falls away.
Responsible lending obligations
55.167 In the course of the Inquiry, it became clear that many stakeholders considered that consumer credit legislation should be reformed to promote more responsible lending before any form of more comprehensive credit reporting is introduced. Galexia, for example, stated that regulation of responsible lending and credit marketing should include regulation of ‘what factors should be included in a proper assessment of a consumer’s capacity to repay a loan’.[226]
55.168 A number of parliamentary reports have recommended reform relevant to responsible lending obligations. In 2005, the Senate Economics Committee recommended that the states and the Northern Territory develop ‘uniform consumer credit legislation requiring credit providers to undertake appropriate checks of borrowers’ capacity to pay before issuing new credit cards or raising credit limits’.[227]
55.169 In its 2007 report Home Loan Lending,[228] the House of Representatives Standing Committee on Economics, Finance and Public Administration outlined a range of concerns with the current Consumer Credit Code regime, including the weak requirements on credit providers to assess individuals’ capacity to repay and the ability of credit providers to avoid the Consumer Credit Code by requiring individuals to sign ‘business purpose declarations’.[229] The Committee concluded that credit regulation ‘has failed to keep pace with the rapidly evolving and growing credit market’ and is ‘ineffective in dealing with the new practices that have emerged’.[230] The Committee recommended that, in future, the Australian Government should regulate credit products and advice, including regulation of mortgage brokers and non-bank lenders.[231]
55.170 The states and territories have sought generally to maintain harmonisation of consumer credit law through the uniform Consumer Credit Code. Issues concerning responsible lending are included on the current Strategic Agenda[232] of the Ministerial Council on Consumer Affairs.[233]
55.171 In addition, Australia’s consumer policy framework (including the Consumer Credit Code) is subject to a current review by the Productivity Commission. In its draft report, released in December 2007, the Productivity Commission made a draft recommendation that responsibility for regulating finance brokers and other credit providers should be transferred to the Australian Government, with the regulatory requirements encompassed within the regime for financial services administered by the Australian Securities and Investments Commission. As part of this transfer, the Productivity Commission suggested that the Consumer Credit Code and related credit regulation, appropriately modified, should be retained and that federal, state and territory governments ‘should give priority to determining the precise requirements, and how they would be best incorporated within the broader regime’.[234]
55.172 As observed by Veda Advantage, industry and consumer stakeholders often ‘contextualise’ discussion of credit reporting regulation by reference to concerns about responsible lending and consumer credit regulation more generally.[235] The UCCCMC observed that the existence of more comprehensive reporting is ‘relevant to any decision about the feasibility of imposing a statutory requirement on lenders to assess capacity to repay’.[236]
55.173 On the other hand, industry has expressed the view that privacy law (including reform of the credit reporting provisions) should not be used as a ‘proxy measure to mitigate consumer harms that are more properly dealt with in other jurisdictions’[237] or as a ‘vehicle for indirectly regulating consumer lending’.[238]
The better view is that if, as a matter of policy, the government determines that additional obligations with respect to responsible lending should be imposed on credit providers, those obligations should be imposed directly through the consumer credit laws.[239]
55.174 Assisting credit providers to practise responsible lending is the most compelling argument for more comprehensive credit reporting. Some have questioned, however, whether more responsible lending will be an outcome of introducing comprehensive credit reporting, in the absence of new legislative obligations on credit providers.[240]
55.175 In the ALRC’s view, it would be inappropriate for this Inquiry to recommend specific changes to the Consumer Credit Code or other consumer credit legislation. Legislation relating to responsible lending is not referred to expressly in the Terms of Reference of the Inquiry—although, as is standard, the Terms of Reference direct the ALRC to consider ‘any related matter’. More importantly, specific changes to consumer credit legislation were not a focus of detailed consultation during the course of the Inquiry.
55.176 As discussed above, however, the ALRC established that there is a clear link between this issue and the possible implementation of more comprehensive credit reporting. The additional categories of personal information to be included in credit reporting information recommended in Recommendation 55–1 can be seen as an incremental extension of existing permitted content. Permitting the inclusion of repayment performance history, however, would be a more significant change.
55.177 The ALRC recommends, therefore, that repayment performance history only should be permitted to be contained in credit reporting information if the Australian Government is satisfied that there is an adequate framework imposing responsible lending obligations in Commonwealth, state and territory legislation. In making this assessment reference could be made to the Productivity Commission’s report on Australia’s consumer policy framework, this ALRC Report, and any future review of the Consumer Credit Code.
Regulating for permitted content
55.178 In Chapter 56, the ALRC recommends that the new Privacy (Credit Reporting Information) Regulations should prescribe an exhaustive list of the categories of personal information that are permitted to be included in credit reporting information. This list should be based on the provisions of s 18E of the Privacy Act, subject to the changes set out in Recommendations 55–1, 55–2, 56–2 to 56–4, 56–6, 55–8 and 55–9.
55.179 Periodic review of the regulations would provide adequate flexibility for industry, while protecting the privacy of individuals. Given the relative resources of industry and consumer stakeholders, any further reduction in privacy caused by expanding the permitted content of credit reporting information should be subject to parliamentary scrutiny and consultation with consumer groups, privacy advocates and the regulator.
55.180 It would be appropriate, however, for detail on how repayment performance history is to be recorded to be set out in the credit reporting code. As discussed in Chapter 54, the ALRC recommends that credit reporting agencies and credit providers should develop, in consultation with consumer groups and regulators, including the OPC, a credit reporting code providing detailed guidance within the framework provided by the regulations.[241] The credit reporting code should deal with a range of operational matters, including procedures for the reporting of repayment performance history.
Permissible retention periods
55.181 Part IIIA of the Privacy Act contains detailed provisions requiring credit reporting agencies to ensure that personal information contained in credit information files is deleted after the expiry of prescribed maximum permissible periods.[242] As discussed in Chapter 58, the ALRC concludes that there is no compelling case for any major change to the existing retention periods and recommends that the regulations should provide for the deletion of different categories of credit reporting information after the expiry of maximum permissible periods, based on those currently applying.
55.182 A new retention period, however, needs to be set for new permitted content of credit reporting information—that is, information about open credit accounts and their current limits, and credit accounts that have been closed. No new retention period needs to be set for repayment performance information, because the new Privacy (Credit Reporting Information) Regulations should provide that only information relating to an individual’s credit over the prior two years is to be included. The ALRC recommends that the regulations provide for the deletion of credit account information two years after the date on which a credit account is closed. This would ensure that repayment performance information about accounts that have been closed is retained for no longer than that relating to current credit accounts.
Recommendation 55-1 The new Privacy (Credit Reporting Information) Regulations should permit credit reporting information to include the following categories of personal information, in addition to those currently permitted in credit information files under the Privacy Act:
(a) the type of each credit account opened (for example, mortgage, personal loan, credit card);
(b) the date on which each credit account was opened;
(c) the current limit of each open credit account; and
(d) the date on which each credit account was closed.
Recommendation 55-2 Subject to Recommendation 55–3, the new Privacy (Credit Reporting Information) Regulations should also permit credit reporting information to include an individual’s repayment performance history, comprised of information indicating:
(a) whether, over the prior two years, the individual was meeting his or her repayment obligations as at each point of the relevant repayment cycle for a credit account; and, if not,
(b) the number of repayment cycles the individual was in arrears.
Recommendation 55-3 The Australian Government should implement Recommendation 55–2 only after it is satisfied that there is an adequate framework imposing responsible lending obligations in Commonwealth, state and territory legislation.
Recommendation 55-4 The credit reporting code should set out procedures for reporting repayment performance history, within the parameters prescribed by the new Privacy (Credit Reporting Information) Regulations.
Recommendation 55-5 The new Privacy (Credit Reporting Information) Regulations should provide for the deletion of the information referred to in Recommendation 55–1 two years after the date on which a credit account is closed.
[156] Australian Law Reform Commission, Review of Australian Privacy Law, DP 72 (2007), [51.117].
[157] See, eg, Consumer Affairs Victoria, The Report of the Consumer Credit Review (2006), 273. In its response to the Victorian Review, the Victorian Government observed that this lack of consensus makes it difficult to determine whether more comprehensive credit reporting would in practice ‘enhance decision making’ by credit providers: Victorian Government, Government Response to the Report of the Consumer Credit Review (2006), 46.
[158]Australian Law Reform Commission, Review of Privacy—Credit Reporting Provisions, IP 32 (2006).
[159] Australian Finance Conference, Submission PR 294, 18 May 2007; Veda Advantage, Submission PR 272, 29 March 2007; MasterCard Worldwide, Submission PR 237, 13 March 2007; GE Money Australia, Submission PR 233, 12 March 2007; American Express, Submission PR 257, 16 March 2007; Australasian Retail Credit Association, Submission PR 218, 7 March 2007.
[160] Dun & Bradstreet (Australia) Pty Ltd, Submission PR 232, 9 March 2007.
[161] See, eg, GE Money Australia, Submission PR 233, 12 March 2007.
[162] Australian Law Reform Commission, Review of Australian Privacy Law, DP 72 (2007), Proposal 51–1. These categories of information would replace ‘current credit provider’ status under Privacy Act 1988 (Cth) s 18E(1)(b)(v).
[163] Australian Law Reform Commission, Review of Australian Privacy Law, DP 72 (2007), [51.165]. The Barron and Staten (2007) research found that an ‘intermediate model’ between the existing Australian and US credit reporting systems would provide ‘some 71% of the reduction in delinquencies achievable under the full US scenario’: M Staten and J Barron, Positive Credit Report Data Improves Loan Decision-Making (2007) Australian Finance Conference, 6. The ALRC’s proposed model allows additional categories of credit reporting information to those under the assumed ‘intermediate model’ and would, therefore, be more rather than less predictive.
[164]Australian Bankers’ Association Inc, Submission PR 567, 11 February 2008; GE Money Australia, Submission PR 537, 21 December 2007; Optus, Submission PR 532, 21 December 2007; Uniform Consumer Credit Code Management Committee, Submission PR 520, 21 December 2007; Confidential, Submission PR 517, 21 December 2007; Australian Collectors Association, Submission PR 505, 20 December 2007; Veda Advantage, Submission PR 498, 20 December 2007; Australian Credit Forum, Submission PR 492, 19 December 2007; MGIC Australia, Submission PR 479, 17 December 2007; HBOS Australia, Submission PR 475, 14 December 2007; Westpac, Submission PR 472, 14 December 2007; Abacus–Australian Mutuals, Submission PR 456, 11 December 2007; Law Society of New South Wales, Submission PR 443, 10 December 2007; Citibank Pty Ltd, Submission PR 428, 7 December 2007; MasterCard Worldwide, Submission PR 425, 7 December 2007; Australasian Compliance Institute, Submission PR 419, 7 December 2007; National Australia Bank, Submission PR 408, 7 December 2007; Dun & Bradstreet (Australia) Pty Ltd, Submission PR 401, 7 December 2007; Australian Finance Conference, Submission PR 398, 7 December 2007; Australasian Retail Credit Association, Submission PR 352, 29 November 2007; Confidential, Submission PR 297, 1 June 2007; St George Banking Limited, Submission PR 271, 29 March 2007; Institute of Mercantile Agents, Submission PR 270, 28 March 2007; AAPT Ltd, Submission PR 260, 20 March 2007; American Express, Submission PR 257, 16 March 2007; MasterCard Worldwide, Submission PR 237, 13 March 2007; Mortgage and Finance Association of Australia, Submission PR 231, 9 March 2007.
[165]Uniform Consumer Credit Code Management Committee, Submission PR 520, 21 December 2007; Confidential, Submission PR 517, 21 December 2007; Australian Collectors Association, Submission PR 505, 20 December 2007; MGIC Australia, Submission PR 479, 17 December 2007; HBOS Australia, Submission PR 475, 14 December 2007; ANZ, Submission PR 467, 13 December 2007; Abacus–Australian Mutuals, Submission PR 456, 11 December 2007; Law Society of New South Wales, Submission PR 443, 10 December 2007; Australasian Compliance Institute, Submission PR 419, 7 December 2007; HSBC, Submission PR 417, 7 December 2007; National Australia Bank, Submission PR 408, 7 December 2007; Dun & Bradstreet (Australia) Pty Ltd, Submission PR 401, 7 December 2007.
[166] Australian Bankers’ Association Inc, Submission PR 567, 11 February 2008; GE Money Australia, Submission PR 537, 21 December 2007; Veda Advantage, Submission PR 498, 20 December 2007; Australian Credit Forum, Submission PR 492, 19 December 2007; Westpac, Submission PR 472, 14 December 2007; ANZ, Submission PR 467, 13 December 2007; Abacus–Australian Mutuals, Submission PR 456, 11 December 2007; Citibank Pty Ltd, Submission PR 428, 7 December 2007; MasterCard Worldwide, Submission PR 425, 7 December 2007; Australasian Compliance Institute, Submission PR 419, 7 December 2007; National Australia Bank, Submission PR 408, 7 December 2007; Australian Finance Conference, Submission PR 398, 7 December 2007; Australasian Retail Credit Association, Submission PR 352, 29 November 2007.
[167]Dun & Bradstreet (Australia) Pty Ltd, Submission PR 401, 7 December 2007.
[168]ANZ, Submission PR 467, 13 December 2007.
[169]MGIC Australia, Submission PR 479, 17 December 2007.
[170] Veda Advantage, Submission PR 498, 20 December 2007; Westpac, Submission PR 472, 14 December 2007; Australian Finance Conference, Submission PR 398, 7 December 2007; Australasian Retail Credit Association, Submission PR 352, 29 November 2007.
[171] Australian Finance Conference, Submission PR 398, 7 December 2007.
[172]Australian Law Reform Commission, Review of Australian Privacy Law, DP 72 (2007), Proposal 51–1.
[173]Australasian Retail Credit Association, Submission PR 352, 29 November 2007.
[174]Ibid.
[175]Veda Advantage, Submission PR 498, 20 December 2007.
[176]ANZ, Submission PR 467, 13 December 2007.
[177]Australian Law Reform Commission, Review of Australian Privacy Law, DP 72 (2007), [51.100].
[178] Veda Advantage, Submission PR 272, 29 March 2007.
[179]Australasian Retail Credit Association, Submission PR 352, 29 November 2007.
[180] This scenario was described as assuming the use of the following data ‘current Australian bureau; information on some credit accounts only; extreme negative information only’: Ibid.
[181] This scenario was described as assuming the use of the following data ‘information on all credit accounts; opened date; whether active; limits’, including ‘consumer or business account; number of account-holders; whether PL is secured or unsecured’: Ibid.
[182] This scenario was described as assuming the use of the following data ‘information on all credit accounts; ALRC information +; delinquency history’, including ‘consumer or business account; number of days in excess; whether PL is secured or unsecured’: Ibid. The ALRC understands that the term ‘account payment status’ in the table means information about the number of days, if any, account payments are overdue and is, therefore, a subset of ‘repayment performance history’, as that term is used by the ALRC in this chapter.
[183] This scenario was described as assuming the use of the following data ‘information on all credit accounts; ALRC information +; delinquency history; repayment history’, including ‘consumer or business account; number of days in excess; whether PL is secured or unsecured; value, number and dates of repayment’: Ibid.
[184] This scenario was described as assuming the use of the following data ‘current arrangement in the USA (FICO); information on all credit accounts; balance and repayment history; transaction/purchase information; delinquency history’, including ‘consumer or business account; amount due (credit cards); time and value in excess’: Ibid.
[185]Ibid.
[186] One of the contributing studies, conducted by Westpac, concluded that the ALRC proposal would provide 38% of the predictive value of comprehensive credit reporting and the ARCA model would provide 60% of the potential predictive value: Westpac, Submission PR 472, 14 December 2007.
[187] For example, the ALRC proposal, as described in DP 72, would also permit the use of information about closed accounts: Australian Law Reform Commission, Review of Australian Privacy Law, DP 72 (2007), Proposal 51–1. The ARCA proposal, as described in ARCA’s submission, would not permit the use of the values of repayments: Australasian Retail Credit Association, Submission PR 352, 29 November 2007.
[188]Dun & Bradstreet (Australia) Pty Ltd, Submission PR 401, 7 December 2007.
[189]GE Money Australia, Submission PR 537, 21 December 2007; Australian Credit Forum, Submission PR 492, 19 December 2007; MasterCard Worldwide, Submission PR 425, 7 December 2007.
[190]Citibank Pty Ltd, Submission PR 428, 7 December 2007; National Australia Bank, Submission PR 408, 7 December 2007; Australasian Retail Credit Association, Submission PR 352, 29 November 2007.
[191]Australasian Retail Credit Association, Submission PR 352, 29 November 2007.
[192] See, eg, GE Money Australia, Submission PR 537, 21 December 2007; Australian Credit Forum, Submission PR 492, 19 December 2007; Citibank Pty Ltd, Submission PR 428, 7 December 2007; National Australia Bank, Submission PR 408, 7 December 2007.
[193]National Australia Bank, Submission PR 408, 7 December 2007.
[194]Citibank Pty Ltd, Submission PR 428, 7 December 2007.
[195]MasterCard Worldwide, Submission PR 425, 7 December 2007.
[196] Australian Privacy Foundation, Submission PR 553, 2 January 2008; National Legal Aid, Submission PR 521, 21 December 2007; Consumer Action Law Centre, Submission PR 510, 21 December 2007; Office of the Privacy Commissioner, Submission PR 499, 20 December 2007; Legal Aid Queensland, Submission PR 489, 19 December 2007; Cyberspace Law and Policy Centre UNSW, Submission PR 487, 19 December 2007; Galexia Pty Ltd, Submission PR 465, 13 December 2007; Telstra Corporation Limited, Submission PR 459, 11 December 2007; Financial Counsellors Association of Queensland, Submission PR 371, 30 November 2007; Min-it Software, Submission PR 236, 13 March 2007; Telecommunications Industry Ombudsman, Submission PR 221, 8 March 2007; New South Wales Council for Civil Liberties Inc, Submission PR 156, 31 January 2007.
[197] Telstra Corporation Limited, Submission PR 459, 11 December 2007; Financial Counsellors Association of Queensland, Submission PR 371, 30 November 2007; Banking and Financial Services Ombudsman Ltd, Submission PR 263, 21 March 2007.
[198] Banking and Financial Services Ombudsman Ltd, Submission PR 263, 21 March 2007. The Consumer Action Law Centre also considered that improved complaint-handling and enforcement mechanisms should be more of a priority than the possible introduction of more comprehensive reporting: Consumer Action Law Centre, Submission PR 274, 2 April 2007.
[199] Telstra Corporation Limited, Submission PR 459, 11 December 2007.
[200] Consumer Affairs Victoria, The Report of the Consumer Credit Review (2006), 272.
[201] Australian Privacy Foundation, Submission PR 275, 2 April 2007.
[202] National Legal Aid, Submission PR 265, 23 March 2007.
[203] Office of the Privacy Commissioner, Submission PR 499, 20 December 2007; Legal Aid Queensland, Submission PR 292, 11 May 2007; Queensland Law Society, Submission PR 286, 20 April 2007; Consumer Credit Legal Centre (NSW) Inc, Submission PR 255, 16 March 2007.
[204] Consumer Credit Legal Centre (NSW) Inc, Submission PR 255, 16 March 2007.
[205]Office of the Privacy Commissioner, Submission PR 499, 20 December 2007.
[206]Australian Privacy Foundation, Submission PR 553, 2 January 2008; National Legal Aid, Submission PR 521, 21 December 2007; Consumer Action Law Centre, Submission PR 510, 21 December 2007; Legal Aid Queensland, Submission PR 489, 19 December 2007; Cyberspace Law and Policy Centre UNSW, Submission PR 487, 19 December 2007.
[207]Consumer Action Law Centre, Submission PR 510, 21 December 2007.
[208]Cyberspace Law and Policy Centre UNSW, Submission PR 487, 19 December 2007.
[209]Consumer Credit Code s 70(1).
[210] Galexia stated that ‘this provision has proved to be difficult to use in practice’. The provision ‘does not require any proactive steps by credit providers and it usually involves considerable time, expense and legal representation to re-open a credit contract on the grounds that it is unjust’: Galexia Pty Ltd, Submission PR 465, 13 December 2007.
[211]Ibid.
[212] See, eg, the literature reviews in J Barron and M Staten, The Value of Comprehensive Credit Reports: Lessons from the US Experience (2000) Online Privacy Alliance <www.privacyalliance.org/resources/
staten.pdf> at 5 May 2008.
[213] For example, a range of factors relating to the operation of markets dealing with collateralised debt obligations were also important in the development of the liquidity crisis.
[214]Federal Deposit Insurance Corporation, Examination Guidance for Subprime Lending Programs (2001) <www.fdic.gov/news/news/financial/2001/fil0109.html> at 5 May 2008; United States Department of the Treasury, Federal Deposit Insurance Corporation and National Credit Union Administration, Statement on Subprime Mortgage Lending (2007) Federal Reserve <www.federalreserve.gov/newsevents/press/
bcreg/bcreg20070629a1.pdf> at 26 November 2007.
[215] M Maiello, ‘Where was FICO?: The Widespread Use of No-Money-Down Mortgages Flummoxed the Best-Known Scorer of Creditworthiness’, Forbes Online, 17 September 2007, <members.forbes.com/
forbes/2007/0917/044.html>.
[216]J Vigdor, What Should Government Do About the Subprime Mortgage Market?: A Taxpayer’s Guide (2007) National Taxpayers Union.
[217]GE Money Australia, Submission PR 537, 21 December 2007; Veda Advantage, Submission PR 498, 20 December 2007.
[218] Veda Advantage, Submission PR 498, 20 December 2007.
[219]Australasian Retail Credit Association, Submission PR 352, 29 November 2007.
[220] See Ch 56.
[221]Australian Law Reform Commission, Review of Australian Privacy Law, DP 72 (2007), Proposal 51–1.
[222]Australasian Retail Credit Association, Submission PR 352, 29 November 2007.
[223]Ibid.
[224]Privacy Act 1988 (Cth) s 18E(1)(b)(vi). The ALRC understands that, in practice, credit providers do not usually report overdue payment information until at least 90 days after default.
[225] See, eg, N Waters—Cyberspace Law and Policy Centre UNSW, Submission PR 277, 3 April 2007.
[226]Galexia Pty Ltd, Submission PR 465, 13 December 2007.
[227] Parliament of Australia—Senate Economics Committee, Consenting Adults, Deficits and Household Debt—Links Between Australia’s Current Account Deficit, the Demand for Imported Goods and Household Debt (2005), rec 7. The Committee stated that the Fair Trading Act 1992 (ACT) provided an appropriate model.
[228]Parliament of Australia—House of Representatives Standing Committee on Economics Finance and Public Administration, Home Loan Lending: Inquiry into Home Loan Lending Practices and the Processes Used to Deal with People in Financial Difficulty (2007).
[229]Ibid, 43. The Consumer Credit Code makes a distinction between credit ‘provided or intended to be provided wholly or predominantly for personal, domestic or household purposes’, which is regulated by the Code, and other credit, which is not: Consumer Credit Code s 6(1)(b).
[230]Parliament of Australia—House of Representatives Standing Committee on Economics Finance and Public Administration, Home Loan Lending: Inquiry into Home Loan Lending Practices and the Processes Used to Deal with People in Financial Difficulty (2007), 49.
[231]Ibid, rec 2. Galexia noted that an exposure draft Finance Broking Bill 2007 (NSW), prepared by the Ministerial Council on Consumers Affairs, and intended as uniform national legislation, contains provisions requiring finance brokers to take proactive steps to assess a consumer’s ability to repay: Galexia Pty Ltd, Submission PR 465, 13 December 2007. See Ministerial Council on Consumer Affairs, National Finance Broking Scheme Consultation Package (2007), exposure draft Finance Broking Bill 2007 (NSW) cl 33(3)–(4).
[232]Ministerial Council on Consumer Affairs, Ministerial Council on Consumer Affairs: Strategic Agenda (2007) <www.consumer.gov.au/html/mcca_projects.htm> at 5 May 2008.
[233] The Ministerial Council on Consumer Affairs consists of all Commonwealth, state, territory and New Zealand ministers responsible for fair trading, consumer protection laws and credit laws.
[234] Productivity Commission, Draft Report: Review of Australia’s Consumer Policy Framework (2007), 65, draft rec 5.2.
[235]Veda Advantage, Submission PR 498, 20 December 2007.
[236]Uniform Consumer Credit Code Management Committee, Submission PR 520, 21 December 2007.
[237]Veda Advantage, Submission PR 498, 20 December 2007.
[238]GE Money Australia, Submission PR 537, 21 December 2007.
[239]Ibid.
[240] Australian Privacy Foundation, Submission PR 553, 2 January 2008; National Legal Aid, Submission PR 521, 21 December 2007; Consumer Action Law Centre, Submission PR 510, 21 December 2007; Legal Aid Queensland, Submission PR 489, 19 December 2007; Galexia Pty Ltd, Submission PR 465, 13 December 2007.
[241] See Rec 54–9.
[242]Privacy Act 1988 (Cth) s 18F.