Information removed after one year, says banking body
Borrowers who enter into a hardship agreement with their bank will now have that information recorded on their credit report for one year, says the Australian Banking Association.
As credit reporting bodies do not use financial hardship information to calculate a customer’s credit score, a hardship arrangement is likely to be preferable to missing repayments, which stay on a credit report for two years.
Before July 1, 2022, financial hardship arrangements were not included in the information allowed on consumer’s credit reports, the ABA said. If a hardship arrangement was in place, missed repayments may still have shown up on the customer’s credit report. Some lenders stopped reporting on a customer’s repayment history during an arrangement, leading to a lack of consistency across the industry.
The ABA represents 22 banks across Australia (around 90% of the market), including the four major banks, regional banks, foreign subsidiaries providing retail banking services and several smaller banks.
New credit laws which came into effect on July 1 have made it mandatory for licensed lenders to report credit information about their customers to credit bureaus. They specifically provide for a credit report to reflect where a customer has entered into a hardship arrangement with their bank.
ABA CEO Anna Bligh (pictured above) spoke to MPA about recent changes to credit reporting, how brokers can help customers understand what will be recorded on their credit report, and the importance of borrowers who are facing difficulty to talk to banks early, ideally before they miss a repayment.
If a customer misses a repayment and doesn’t speak to their bank, their credit score will suffer, Bligh said. Where a borrower’s credit report shows they’ve missed repayments, that information stays on their report for two years, as part of their repayment history, she said.
“[They’ll] be shown as missing a month and if [they] miss a second payment it will be two months,” Bligh said.
If a customer starts to experience financial difficulty, for example, they lose their job, their hours are reduced or they experience an unexpected event that affects their financial situation, they can contact their bank and enter into a hardship arrangement. This can be temporary arrangement or a variation of the loan, Bligh said.
An example of a temporary arrangement would be deferral of payments for a certain period (e.g., for three months). Another option is to restructure the loan to reduce monthly payments.
“Instead of the number ‘one, two or three,’ which indicates how many months [the borrower] has missed, that will be recorded as either (a) for a temporary arrangement, or (v) for a variation,” Bligh said.
Provided the customer meets the terms of the financial hardship arrangement agreed with their bank, their credit report will show they have made their repayments on time for the period of the arrangement, she said.
If the borrower enters into and complies with a hardship arrangement and their credit report has either an “a” or a “v” on it, that information will disappear from their credit report after 12 months, Bligh said.
Where a new lender sees a borrower has a hardship marker, they will require an explanation of the circumstances that led to the arrangement and will want to confirm the borrower is now in position to afford the new loan, Bligh said.
“This protects both the customer and the bank from poor lending decisions,” Bligh said.
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The ABA recently introduced credit report fact sheets for customers and financial counsellors, along with an FAQ to explain the changes. These include information on the forms of help that banks provide, and how financial hardship information can disappear from credit reports after a set period.
Although customers are likely to contact their lender directly, brokers with clients who are struggling and at risk of running into financial difficulty may be able to speak to a lender’s hardship team on their behalf (providing the customer provides authority), Bligh said.
Banks are required to report customer defaults to APRA on a monthly basis. Despite the current inflationary and rising interest rate environment, Bligh said current data showed 90-day defaults were lower than they were in 2019.
Official cash rate rises typically take a few weeks to flow through to retail interest rates and then to borrowers’ repayment schedules, Bligh said. Currently, most customers are only seeing the first two cash rate rises (May and June) reflected in their loan repayments, she said.
“There’s no evidence of any real increase in hardship today, but it’s equally true that the full impact of the four interest rate rises have not yet hit the pockets of most customers,” Bligh said.
“The cumulative impact of those – plus any more that might come down the pipeline in the next couple of months – will no doubt make life very tough for a number of customers.”
On the upside, Bligh acknowledged comments made by the RBA data that overall, Australian households were resilient to at least some rate rises, and a sizeable percentage had built up savings buffers, putting them ahead on their mortgage repayments. But she expected some customers would find the cumulative impact of the interest rate rises difficult.
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Through their hardship team, banks have the flexibility to help customers weather that storm, Bligh said.
Bligh said it was important that brokers advise struggling customers to contact their bank as early as possible, ideally before they think they’re going to miss a payment.
“People find it hard sometimes to talk about this and unfortunately that means they can get into more trouble … if people start doing things like using their credit card to pay their mortgage, it starts to get very difficult to help them,” Bligh said.
Australian banks have an industry guideline to help them manage hardship issues, Bligh said. Given that keeping people in their home is the best outcome, a foreclosure on a mortgage is the worst outcome for both the customer and the bank, she said.
“If they go in straight away when they’re really struggling, (as mentioned) there are very practical things that banks can do to get them through,” Bligh said.
Bligh acknowledged that many brokers have clients who they’ve worked with over a lengthy period and have built trusting relationships with.
“A broker can help customers understand what it means for the credit reporting, what a hardship arrangement means and how important it is to get out of trouble before getting into trouble,” Bligh said.
Further information on credit reporting, including credit report fact sheets and an FAQ, are available on the Australian Banking Association website.
