Finance article in this weekends AFR

I'm not clever enough to put the link up, but there was an interesting article whose headlines were on the cover of this weekends AFR. The article went into depth about the new credit reporting regime, (moving from a negative to positive model) which has already been signed off by governement? and how that will affect the way lenders behave. Talking about rate for risk, direct marketing of credit card increases, less scope for fraud etc.

Did anyone else see the article? To my mind it will turn the industry on its head, and I was surprised these changes seemed to have been already approved. It was interesting to note in comparisions done with negative and positve credit reports that both had similar default rates overall, however more loans were written under a positive systme, which was put up as a positive thing. Too bad the research was done prior to the GFC and subprime fiasco....
 
i saw some stuff about it on foxtel. the bankers were saying it would be good for everyone and i think no one else knows much about it, hence it's a done deal with little discussion. I believe they use credit scoring in the US? if so it sums it up for me. default rates on lo docs in Oz are very low.
 
Yes, there is credit scoring in the USA. We found it quite a game to keep the absolute highest credit score possible. We got all kinds of bonuses which amounted to megabucks over the years.
 
Positive Reporting is BS

I don't see many positives to 'positive' reporting.

Positive reporting is a misdemeanor - there are very few positives..
Mainly it is a tool for banks to reduce their risks further. They give you a score (FICO) based on all sorts of things - total repayments, total debts, receivables, recoveries, length of credit history, ANY recent loan applications (and any rejections), types of credit, total amounts owned, what your job is, where you live, age, tax bracket, etc. However after looking at the last GFC - You wouldn't say American banks or the American Consumer have come out on top.
And yet we race to follow them......

The problem with FICO scoring is that you can have an asset which is cashflow positive and the banks will refuse to lend to you because you have "too much" of one type of debt. Like mortgage debt. And yet you can even be punished for not having enough consumer debt (I kid you not).

It also works vice versa - I have a friend in the US whom you wouldn't lend a cent to and yet he has a very high fico score because he has manipulated it, with small amounts of credit, now he has Credit Card companies ring him up offering him huge credit limits (like $15K).

Another problem is that a business owner may use a large line of credit via credit cards to buy stock and pay off his credit cards every single month and yet he will not be able to qualify for a loan, even with very strong financials, because he has too much credit card credit available to him.

Also people (like Farmers - who have been in drought for +5 yrs) when they are getting into trouble and want to refi it is still possible - with positive reporting there is no chance.

The other issue is Negative gearing and funding even a small % by borrowings.
If you are negative gearing you will have issues borrowing. If you have to borrow any % to fund property repayments or lifestyle - you will be gone.

Here is my promise to you - if Australia adopts a "positive" credit reporting system = High Defaults and Higher Loan Losses and faster default actions by the banks (liquidations, etc). They will not want to help customers trade out of any issues. They will also pull loans faster (demanding immediate repayment - and yes it does happen, more often than anyone thinks).

However it does have some advantages. It can be very good for developers, if they get paid during construction (and remain up to date in repayments).

*Please Note - While a FICO score might not include certain factors (like job) allot of the banks in the US layer fico on top of their own info and create a new score for you. They refuse to release this score citing commercial confidence.
 
Additionally the Government is also moving forward with broad ranging reforms to the consumer credit market including the introduction of positive credit reporting and responsible lending laws.

These changes will allow lenders to better assess an individual's credit risk and will deter the extension of credit to consumers in an irresponsible fashion.

The new responsible lending obligations will be fully operational by 1 January 2011.

I am advised that an exposure draft of the Bill that will include changes to credit reporting will be released in the early part of this year.
 
Nice notations TasInvestor. I appreciate your postings.


will allow lenders to better assess an individual's credit risk


This one cracked me up. I found out a couple of months ago, after having Banked with one of the big 4 for the past 15 years, that their grading scale of customers is somewhat non-complimentary. Typically you never get to see it, and we were only verbally told what our level was. They wouldn't show it to me.


Ours has levels fom A all the way down to H. The levels are further segregated into sub categories 1, 2 and 3.


Any new customer they take on board must register at least a rating of D3.

Any existing customer with F1 or lower is actively hustled out the door. G's and H's are not re-financed when their loan expires.

E3 is the major cut-off you wish to avoid. We naively enquired whether were we perhaps a B1 or B2 or something. They laughed, and said A's were solely reserved for Govt instrumentalities. B's were reserved for the likes of Wesfarmers and the Woodside's of this world.....we were firmly sitting at the E2 level, one level away from getting kicked out the door.

It explained why they wouldn't entertain any more borrowing. We were not a D. The wife and I both laughed at first, then quickly became angry. 15 years of always paying large interest bills, never missing a payment, not once....and we are graded as "not so bad that we will start moving you toward the exit sign, but you certainly won't be getting any more."

Incredible.....and as I've said before, the guys setting the all important policies are not investors at all, typically still have a mortgage on their very avergae PPoR and maybe a few 10K in the bank account as cash. These are the people that decide who gets what. It makes no sense to me.

In the background of course, you've got Maths PhD research fellows developing fancy computer modelling, to pidgeon-hole investors even further. These guys of course typically don't have two cents to rub together, but the MBA grads, who don't understand the mechanism behind the PhD models, give it the OK and recommend to management all is well. Voila - a sausage machine that everyone at the Bank collectively stands behind but doesn't fully understand, and one that they take great delight in feeding investors through to see if they fit.
 
I have an AFR subscription, can post the article but cant find it. if OP can provide more details like the title or something i can search for....
 
My apologies, I cannot remember the exact title of the article. It may have been "how to be a gold plated borrower' or something like that.
It was on the front cover, and inside it led their 'perspective' section I think? the bit after the news ends and their editorials begin....
 
Dazz,

That is exactly right, policies made by people who have no understanding of how the real world works and the strategies people use.

I saw a presentation from a guy at NAB last year, looked like the 40 yo virgin who still lived with his mum, his gross generalizations and assumptions were not only probably illegal but just downright frighting that this guy thinks he has built the perfect assessment model that "no human can beat"!

Just scary stuff
 
I doubt positive credit reporting will have any impact on the individual credit scores the banks use for commercial clients.
It will just mean they will be more able to segment the other end of the market, sending out unsolicitored credit card increases, mail outs pushing consolidtation loans to people who have missed a few car loan or credit card payments.
Perhaps at the other end mortgage clients with gleaming credit histories might have more chance getting a discount with their pricing departments, if they ask....
 
I don't see many positives to 'positive' reporting.

Positive reporting is a misdemeanor - there are very few positives..
Mainly it is a tool for banks to reduce their risks further. They give you a score (FICO) based on all sorts of things - total repayments, total debts, receivables, recoveries, length of credit history, ANY recent loan applications (and any rejections), types of credit, total amounts owned, what your job is, where you live, age, tax bracket, etc. However after looking at the last GFC - You wouldn't say American banks or the American Consumer have come out on top.
And yet we race to follow them......

The problem with FICO scoring is that you can have an asset which is cashflow positive and the banks will refuse to lend to you because you have "too much" of one type of debt. Like mortgage debt. And yet you can even be punished for not having enough consumer debt (I kid you not).

It also works vice versa - I have a friend in the US whom you wouldn't lend a cent to and yet he has a very high fico score because he has manipulated it, with small amounts of credit, now he has Credit Card companies ring him up offering him huge credit limits (like $15K).

Another problem is that a business owner may use a large line of credit via credit cards to buy stock and pay off his credit cards every single month and yet he will not be able to qualify for a loan, even with very strong financials, because he has too much credit card credit available to him.

Also people (like Farmers - who have been in drought for +5 yrs) when they are getting into trouble and want to refi it is still possible - with positive reporting there is no chance.

The other issue is Negative gearing and funding even a small % by borrowings.
If you are negative gearing you will have issues borrowing. If you have to borrow any % to fund property repayments or lifestyle - you will be gone.

Here is my promise to you - if Australia adopts a "positive" credit reporting system = High Defaults and Higher Loan Losses and faster default actions by the banks (liquidations, etc). They will not want to help customers trade out of any issues. They will also pull loans faster (demanding immediate repayment - and yes it does happen, more often than anyone thinks).

However it does have some advantages. It can be very good for developers, if they get paid during construction (and remain up to date in repayments).

*Please Note - While a FICO score might not include certain factors (like job) allot of the banks in the US layer fico on top of their own info and create a new score for you. They refuse to release this score citing commercial confidence.

This is just plain wrong.

You're mixing up positive credit reporting and credit scoring.

Credit scoring is used by most lenders around the world and is basically a expression of the statistical probability of a debt going into default based on weighting a range of variables associated with the deal. Some lenders build their own, some buy them in, but most buy in the basic score card and adjust based on the performance of their own portfolios. The insurers, in turn, have their own.

FICO is a proprietary credit scoring model developed by the Fair Isaac Corporation (FICO..get it?) and is the dominant credit scoring model in the US.

Positive credit reporting is something different altogether, though can be an inout into a credit scoring model. In Oz, we have negative credit reporting. That is, the only stuff that appears on your credit report is what credit you've applied for and anything you've defaulted on (hence, "negative" credit reporting). Positive credit reporting simply means that in addition to the info already available on a report you get stuff like the date a loan was actually settled, the types of loans the borrower has, current balances, repoayment histories or the date loans were closed.

For some borrowers, this will improve their borrowing capability because they will have a strong, proven history that will give the lender greater confidence than they might otherwise have. For others, it will create problems because lenders will have far greater visibility of the actual outstanding debts than they have now.

Good borrowers will do well. ******** artists will suffer.

As it should be.
 
Nice notations TasInvestor. I appreciate your postings.





This one cracked me up. I found out a couple of months ago, after having Banked with one of the big 4 for the past 15 years, that their grading scale of customers is somewhat non-complimentary. Typically you never get to see it, and we were only verbally told what our level was. They wouldn't show it to me.


Ours has levels fom A all the way down to H. The levels are further segregated into sub categories 1, 2 and 3.


Any new customer they take on board must register at least a rating of D3.

Any existing customer with F1 or lower is actively hustled out the door. G's and H's are not re-financed when their loan expires.

E3 is the major cut-off you wish to avoid. We naively enquired whether were we perhaps a B1 or B2 or something. They laughed, and said A's were solely reserved for Govt instrumentalities. B's were reserved for the likes of Wesfarmers and the Woodside's of this world.....we were firmly sitting at the E2 level, one level away from getting kicked out the door.

It explained why they wouldn't entertain any more borrowing. We were not a D. The wife and I both laughed at first, then quickly became angry. 15 years of always paying large interest bills, never missing a payment, not once....and we are graded as "not so bad that we will start moving you toward the exit sign, but you certainly won't be getting any more."

Incredible.....and as I've said before, the guys setting the all important policies are not investors at all, typically still have a mortgage on their very avergae PPoR and maybe a few 10K in the bank account as cash. These are the people that decide who gets what. It makes no sense to me.

In the background of course, you've got Maths PhD research fellows developing fancy computer modelling, to pidgeon-hole investors even further. These guys of course typically don't have two cents to rub together, but the MBA grads, who don't understand the mechanism behind the PhD models, give it the OK and recommend to management all is well. Voila - a sausage machine that everyone at the Bank collectively stands behind but doesn't fully understand, and one that they take great delight in feeding investors through to see if they fit.

Daz,

Seems to me:

(a) banks have pulled away from the property sector
(b) you have an awe-inspiring ability to judge credit worthiness
(c) you have a large asset base easily converted to cash.

Why are you wasting your time with the landlord caper when there is all this demand out there with healthy margins for you? Liquidate your portfolio and start handing out the cash mate ;)
 
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