SMH - Financial hardship deals to be flagged on credit reports
By John Collett/7 June 2022
Financial hardship deals struck by those who cannot pay their loans will soon be recorded on their official credit record for 12 months, which may hinder them from obtaining future credit.
Lenders often access credit reports provided by bureaus when assessing someone for a loan.
Only new financial hardship arrangements will be listed on the reports, rather than existing arrangements.
Financial hardship deals are often struck that allow borrowers to have their payments lowered while they are doing it tough. Many were made with mortgage lenders and utility companies, as borrowers struggled to meet repayments after they had lost their jobs or had their hours significantly reduced during the pandemic.
From July 1, having financial hardship agreements flagged on credit reports, while crimping the ability to borrow, could also prevent people from getting into further financial difficulty by taking out new loans.
While lenders can be told about an agreement if you apply to them for a new loan, they will not be told if they are trying to collect overdue payments on an existing loan. And lenders cannot use the flagging of an arrangement on a credit record with another lender as the sole basis for calling in a loan.
The information on the hardship agreement cannot be used in the calculation of credit scores.
Once the terms of the agreement are met and the deal ends, the hardship flag would be removed from the report after 12 months.
Karen Cox, chief executive of the Financial Rights Legal Centre, is concerned that some people may take desperate measures, such as taking out high-interest loans, to meet their other loan costs and expenses, to avoid having a financial hardship agreement recorded on their credit report.
“However, even though [hardship] arrangements will be flagged on the reports, on balance, we think it will be better for people to enter an agreement than to fall behind on their payments”.
“For this reason, we are reassuring people that entering an agreement is usually their best option,” Cox says.
She expects that with higher interest rates and rising costs of living, there is a “cohort of people who are very vulnerable” to running into financial difficulty. They may include those who bought a home recently, when property prices peaked and interest rates were low.
“I think there’s no doubt that we are going to see a cohort who will get into trouble and need help,” Cox says.
She says the major banks became more creative in how they approached financial hardship during COVID-19.
“We have has seen some good responses, such as meeting people somewhere in the middle so that they do not lose everything,” she says.
Mike Laing, chief executive of the Australian Retail Credit Association, says those who fall behind in their loan repayments often enter hardship arrangements with their lenders.
It may be a temporary agreement, where repayments are reduced for a set period, as the lender believes that the borrower’s setback is likely temporary.