In March of 2014, sweeping reform was passed down to provide clearer, more comprehensive credit reporting from banks and credit bureaus, in an effort to benefit consumers, small business and alternative peer-to-peer lenders. The move from negative credit reporting to a more positive regime has been embraced by some, but conventional lending institutions, namely large banks, are unhappy with the proposed changes. Although the laws are not strictly imposed, but rather voluntary at this time, banks are not compelled to participate for the purpose of helping alternative lenders, even as the competition is rapidly increasing.
The New Credit Reporting Laws
Knowing that the need to increase clarity in the credit reporting process is ultimately necessary in order to benefit borrowers in both the personal and business space, Australian lawmakers proposed new laws that would broaden the scope of the information included in credit reporting. Forcing lenders to provide more detailed data regarding borrowers’ credit behaviours would allow for a more well-rounded system of reporting that would benefit both lenders and consumers alike.
Under mandatory reporting requirements, Australian lenders operate on a negative reporting system, meaning borrowers are penalized with a black mark in their credit file for shopping various loan rates and repayment terms. Under the new voluntary guidelines, however, a shift toward positive reporting will lead to more concise information regarding borrower activity and the level of risk they pose for lenders.
For instance, under new directives, borrowers who may have missed or been late on their repayment of a loan or a credit card, they have the opportunity to show it is not a recurring issue. Full and detailed repayment history for all debt obligations can be seen by lenders. And if it is clear that the borrower does not have a consistent history of missing or late payments, lenders may be able to offer more favorable loan terms. In addition to better offers, credit reporting bureaus will be able to assign more accurate credit scores for borrowers based on a greater degree of information on credit history.
Big banks are not eager to move toward a more positive credit reporting system because of the looming threat of peer-to-peer lenders. By not focusing solely on credit history black marks or the minimal information provided by current credit reporting standards, alternative lenders are able to work on a lending model that is more robust and ultimately, more beneficial and affordable for the consumer. Big banks are concerned that this move in credit reporting will create an environment where peer-to-peer lenders are the first stop in loan options, making the conventional, and at times out-of-date processes implored by banks, less attractive to borrowers.