Reforms on financial hardship: what does it all really mean?

Reforms on financial hardship: what does it all really mean?

From 1 July 2022 “financial hardship information” will be added to credit reports. This is to make credit reports "more transparent". The idea was for a lender to have a more complete and comprehensive picture of consumers’ creditworthiness when they look at any new loan application. The question is, will it be better for brokers who are tasked to help everyday consumers navigate the myriad of different lenders and policies?

What is "financial hardship"?  

Sometimes, our personal lives are affected by events outside our control (think natural disaster, illness, relationship breakdown, and of course Covid lockdown was also a real doozy). These events naturally will have an impact on our income (our hours were reduced/or we lose our jobs) which in turn affects our ability to repay a personal / car / home / business loan. 

What normally happens when customers find themselves in this situation?

Once you miss a repayment for any loan, the lender will make contact to see when the repayment can be made, and the circumstances around it. They would then pass a customer onto a "hardship" team if they are unable to meet the current required repayment as well as subsequent ones. 

Every lender has a hardship team to help the customer navigate themselves out of the difficult situation they are in. By reducing or even stopping repayments, it allows the customer time to get their affairs in order and hopefully be able to meet their repayments in the near future.  This is what a "good corporate citizen" is meant to do. While Banks are about making money, it doesn't mean they do it in a manner that is evil. Also it's a great way to maintain a good public image.

What is the downside?

Pausing a repayment is not the same thing as the euphemistic word "repayment holiday" would suggest. Interest is charged on the daily balance of any loan.  You still have to "catch up" on your repayments and then you have to stay with said lender should you ever want to "refinance" to another lender for that "better rate".  Remember that most lenders require 6 months of "satisfactory" repayment history. Missing your repayments or paying less than the monthly required makes you look bad to a new lender.

While the above may seem "unfair", let's not forget, the lender actually did you a massive solid by not penalising you when that life event put you into hardship in the first place right.

Back to Credit Reports

Up until now, if you are in a financial hardship arrangement, it could not be reported by the lender in the credit reporting system. So any "new" credit searches made by another lender will see your report showing either a "missed payment" or "blank" under any loan facility that is still open. This usually brings down the "scoring". The higher the score, the better the customer is in the eyes of any lender as they are "more likely" to be able to pay off their loan.

As of 1 July, the lender must show the facility open is  “current and up to date” with payments and include a “flag” alongside the repayment history indicating an arrangement was in place. Whilst the financial hardship "flag" will remain on the customer’s credit report for 12 months, it won't be used to calculate a customer’s credit score, as compared to regular missed payments. 

This is how the changes will “protect” a customer's credit report, by maintaining a higher score if they experience financial hardship. 

Will this help Brokers?

Victoria Coster - CEO of Cred