F.I.M.A. Benefit from Our Experience Financial Institutions & Management Advisory Pty Ltd Normanby House, Suite 108, 430 Little Collins Street, Melbourne, VIC, 3000 Telephone: , Facsimile: , Consumer Lending: Implications of new comprehensive credit reporting Steve Johnson

F.I.M.A. Comprehensive Credit Reporting Comprehensive reporting legislation has been passed in parliament and will be effective from March 2014 – however there is still much work to by done. 2 Dec12Mar13Jun13Sep13Dec13Mar14Jun14 Legislation passed New Credit Reporting Legislation becomes effective Credit Reporting (Industry) Code – focus on reciprocity, likely to require ACCC endorsement Industry Credit Reporting Data Standards - currently v10, dependent upon regulations and codes being finalised Regulations - drafted by Attorney General for discussion Credit Reporting Code (CR Code) – requires public consultation and OAIC approval

F.I.M.A. Comprehensive Credit Reporting In simple terms, the industry refers to Comprehensive Credit Reporting as introducing five new data elements: 3 Key insights Payment historyStrong risk measurement characteristic, evidence of willingness to pay Total customer exposureProvide reliable indication of exposure relative to customer disclosed Type of creditIndication of customers risk appetite and product mix Age of accountsLong term account relationships are lower risk Number of lendersStrong indication of high risk *Repayment history refers to monthly payment performance over previous 24 months. Sharing of repayment history is permitted for credit licensees only (as defined by the NCCP (2009) Act and subject to Responsible Lending obligations). Telecommunications and utilities cannot share repayment history. *Repayment history refers to monthly payment performance over previous 24 months. Sharing of repayment history is permitted for credit licensees only (as defined by the NCCP (2009) Act and subject to Responsible Lending obligations). Telecommunications and utilities cannot share repayment history. Date Account Opened Credit Limit of Account Type of Credit Date Account Closed Repayment History *

F.I.M.A. Comprehensive Credit Reporting Lenders have a choice whether to participate in negative-only, partial or full comprehensive reporting - each option has different costs, risks and benefits 4 Negative Only Partial Full (must be a licensed credit provider) Defaults and Enquiries Date opened Credit limit Type of credit Date closed Date opened Credit limit Type of credit Date closed 24 months repayment history + + Date opened Credit limit Type of credit Date closed Date opened Credit limit Type of credit Date closed Defaults and Enquiries +

F.I.M.A. Comprehensive Credit Reporting Organisations that do not participate in Comprehensive Credit Reporting are at risk of adverse selection. Repayment history and verified total exposure are masked from lenders that do not have access to Comprehensive Reporting – they risk accepting applications that are rejected by other lenders. 5 Lender A (negative only) Lender B (Comprehensive Reporting) ×

F.I.M.A. Comprehensive Credit Reporting Some lenders may be reluctant to participate fully in Comprehensive Credit Reporting – sharing information will dilute their relative competitive advantage. Multi-nationals and new entrants have the most to gain from a mature Comprehensive redit Reporting environment. 6

F.I.M.A. Comprehensive Credit Reporting Based on rational response to competitive threat and technology impediments of some lenders, it is likely that a full comprehensive credit environment will not be in place and late

F.I.M.A. Comprehensive Credit Reporting Various studies prior to 2008 have pointed to Comprehensive Credit Reporting offering more efficient distribution of credit. 8 Customers rejected for credit in a negative environment become more attractive risk under Comprehensive Credit Reporting Customers approved fro credit in a negative environment are declined when Comprehensive Credit Reporting is available enable industry to more accurately assess the risk of a consumers credit application, with the reduced risk leading to an expansion in the availability of credit; ensure consumers are granted credit on their true capacity to pay, at a price which reflects their risk; enable identity fraud to be detected sooner, due to improved information flows; and create a more efficient, lower cost, credit market due to increased information sharing and reduced risks 1 1 Options for implementation of comprehensive credit reporting in Australia Centre for International Economics Canberra & Sydney and Edgar Dunn & Company Sydney - September 2006

F.I.M.A. Comprehensive Credit Reporting The implications of implementing Comprehensive Credit Reporting post-sub-prime crisis/GFC is untested. The US sub-prime crisis demonstrated that over-reliance on credit reporting (eg FICO scores) for credit decisions is flawed. Regulators now insist on lenders assessing a borrowers ability to repay (eg NCCP). Australias proposed credit reporting is different to overseas (eg does not include balance). Australia is different to other countries studied (ie mature environments in US and UK; emerging markets in Asia, South America and Eastern Europe): Ready availability of credit and high consumer indebtedness; Competitive financial markets; Consumer and privacy advocates are more influential; Higher socio-economic population (less under-serviced segments). The implementation of Comprehensive Credit Reporting in Australia may have unintended consequences. 9

F.I.M.A. Comprehensive Credit Reporting The over-indebted segment is particularly vulnerable to adverse consequences of Comprehensive Credit Reporting. 10 Today Negative Credit Reporting Transition to Comprehensive Credit Reporting Customer is forced to shadow banking (non CCR) system Customer placed on long-term hardship arrangement Customer fails contractual obligations and forced into bankruptcy Lender becomes aware of credit provided by other lenders. Unlikely to offer increase in credit, more likely to decrease/restrict credit. Other lenders become aware of previously undisclosed debts. Problem exacerbated if house prices fall – restricts drawing on home equity. Ready access to credit, able to exploit information asymmetry to manage over- indebtedness. Use multiple lenders, multiple accounts (credit cards, personal loans store finance). If home-owner, able to leverage home equity from rising house prices. Preliminary studies suggest that 5%-10% of borrowers could be in this situation.