Banks to be Big Brother in credit report profiling

The need to curb banks home loan lending practices

Banks over the last three years have let leading standards slip, in an effort to compete with non conforming lenders [sub-prime lenders]. This has lead to higher defaults and foreclosures and that is no good for anyone involved. But are the extra credit reporting requirements really necessary?

The Australian Government‘s  solution is to new responsible lending requirements and regulation, that is set to come  into effect from January 2011.
Banks and credit reporting agency’s remedy is a bitter pill for most of us. They want to have a full financial profile of home loan applicants  to ensure you can afford the mortgage loan [or any other credit] that you are taking on.

I don’t buy this as they have the information already to make a prudent decision on home loan lending.
And in  case you are thinking that this is happening already, there is a big difference.
When you currently apply for credit of any kind, including a home loan, you sign a privacy Act statement that allows the home loan lender to access your credit reports and discuss your credit with other lenders.
Banks only get access to all defaults, all utility account tranactions. For instance, phone bills that you or your partner, or even ex partner have not paid can be a deal breaker and unpaid judgements against you. they also get a handle on how many credit enquiries you have made over a 90 day period.

This should be plenty of information to make a sound lending decision.

That can also be a deal breaker when it comes to getting finance approved. That is, banks just need the bad stuff on you to decide if you a good credit bet. Curently a default is considered only after 60 days of unpaid bills.

But the banks new model is to view every aspect of your finance and credit affairs, including accounts with other institutions, relationships with utility companies, when accounts are opened and closed, and, crucially, the repayment history of all accounts going back two years [currently this can be as low as 6 months to 12 months].
They now want all the credit stuff on you, the bad and the good, and will be able to fully credit profile you.
And the time lapse will shrink, so a credit account late payment can have a worse outcome that some of us would like.
The banks view is that by knowing more about you, will give then a better ability to ensure you are able to repay your bills and credit when due. This could be based on your payment cycle, so 30 days may be the number that is settled on.

The Australian Government’s intent are in the consumers’ best long term interests because foreclosures when home loan repayments fall behind  due to financial hardship benefit no one and hurt the consumer.

My concern is that credit reporting agencies have other motives in collecting more information that could be used by the banks, beyond the home loan applicants intent or good.

Will this affect house prices? It could well dampen demand for housing if home loans become harder to get, or even prevent some people from obtaining finance, based on the fact that many people are in my view over committing on their mortgage credit. Less home loan approvals could mean less demand and lower home prices.

About: Rick Adlam: Rick Adlam has been helping clients with home loan finance since 1985 when he was home consultant with AV Jennings. Rick started Equity Home Loans in 1996 to help homeowners become property investors. Rick currently consults in the development of Mr Mortgage for mortgage brokers and HomeMate for new home buyers. Website: http://www.mrmortgage.com.au