With affordability a major focus of the new FCA regime, Mike Cobb reports on the first step in making sure customers are able to take on the debt they have applied for
The incoming FCA regulation changes have brought a renewed focus on the consumer within the motor finance industry. There is now increasing pressure to look at affordability of deals for consumers and to treat customers fairly throughout the process of providing finance.
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The first step in the process will remain unchanged and yet may still be the point at which most finance providers and dealers are likely to see potential conflict with irate consumers. The credit report remains the first barrier to a consumer’s approval of finance but is still one of the least understood aspects of the process.
It is, however, something that dealers and finance providers can work with customers to understand better and hopefully avoid the confrontation by offering advice and alternative solutions.
In the US obtaining a personal credit report is as necessary a step in purchasing a new car as visiting a dealership. In the UK however, it’s still more often the exception rather than the norm to get hold of the data before a dealer visit, despite it being a more and more common element in any credit application.
The difference is partly down to a matter of history. Consumer credit reports have only been used in the UK for about 30 years according to Experian, one of the big three UK credit reference agencies (CRAs), and only commonly used by lenders for the past 10 to 15 years.
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By GlobalDataIn the US the use of credit reports in lending activity has been common for nearly 40 years, and most consumers know their score will affect their chance to get common credit products ranging from mobile telephones to mortgages.
The big three
Now, with a mature market in place in the UK there are three providers: Experian, the largest in the UK, US-based Equifax and CallCredit, which is the newest entrant to the market.
The increasing use of credit referencing, both in the UK and in the US, has meant the industry has become big business. Equifax made $333m (£199.8m) on revenues of over $2.3bn in 2013 and Experian made $288m.
The revenue generated from credit reports for lenders accounts for just under half of the business at these firms, according to figures released by Experian in its annual statement. Another 20% or more of the revenue comes from providing credit reports to consumers themselves.
These latter types of report are the ones that would most help consumers in their first steps to buy the car of their dreams, say the three CRAs.
“What we would always recommend, the first step, is that a consumer checks before they go and apply for any sort of credit,” says Rachel Knight, head of partner solutions at Equifax Consumer.
By doing this a consumer will help prevent nasty surprises, but it isn’t foolproof as the scoring system used by the CRA on a consumer report can be different to the one used by dealers. As James Jones, head of consumer affairs at Experian explains: “This score is a guide that the public sees, just to help them understand how a lender is likely to assess just that information, just the credit report. It doesn’t look at the information that people provide on a credit application forms or information lenders have already. So it’s just part of the picture.”
Using your data
The credit ratings provided by the agencies in this case are put together using a number of sources. “Its based upon what credit accounts you hold, what bank accounts you hold, what your payment history is, whether you are on the electoral roll,” says Knight.
“A credit report goes back generally six years and is just a record of any credit you have used over the last six years, shared by all the various lenders that take part,” expands Jones. The number of those lenders that provide information to somewhere like Experian number over 500, he explains.
And the variety of credit information is wider than many consumers imagine says Kelli Fielding, director at CallCredit Check: “There’s a lack of understanding about what data makes up the report and how their behaviour can impact it, so a mobile phone contract isn’t always seen as credit, or your utility bill isn’t always seen as credit. But it is in fact an actual credit account, and is contributed to the data.”
Register your address
Other data collected by the CRAs is information from third parties, such as court records and data on bankruptcies.
One of the biggest and most common of the other data collected that can negatively affect a report, however, is if the customer appears on the electoral roll or not.
The electoral roll, despite its name, is not simply a register of people eligible to vote, but a registration of a valid UK address. “It’s about making sure you register that you live at an address,” explains Knight, and adds that if you live in the UK registration is vital to ensure a good credit score.
“I think most lenders wouldn’t automatically refuse an application from someone where they weren’t on the electoral roll at their current address,” says Jones, but adds that in some cases the application can “hit the buffers” without it, a view that is supported by Knight and Fielding.
The lack of a presence on the electoral roll can affect those who have just moved from overseas most of all, as they will have no other form of credit history in the UK.
And, despite the EU’s open borders, citizens from within the area will still fall foul of this as at present there is no sharing of data across borders, something CallCredit hopes will change in the course of time.
As Fielding explains, there is no short-term solution to this problem. “You are looking at one, two or three months to make it
different.”
One way to help in the short term is to write a note and attach it to your report says Jones. “Its called a notice of correction and it can be a statement of up to 200 words and we suggest that people use them to add background information, so if you’ve missed payment because you were ill or made redundant or something like that you can add that to the report,
“Likewise if you are not on the electoral roll because you simply aren’t eligible you can add a note in place of the electoral roll and that appears on the report and is seen by lenders,” he continues. This notice has to be read by lenders Jones explains, and irrespective of the report’s score must be taken into account before making a decision.
Less is more
Another area that is taken into account on a credit report is the number of applications that the consumer has made for credit. In some extreme cases applicants who are turned down for credit at one location will hope for a better result somewhere else, an act which if repeated over and again, often leads to an increasingly poor rating when the applications appear on the report.
On occasion, however, a customer may falsely get a feeling of justification in performing this action by having more success at another finance provider. A situation which can lead to confusion and even complaints to the first lender approached.
Sometimes this confusion can stem from a misunderstanding of what is on the report that the dealer sees as opposed to the score that a consumer sees when obtaining their own records. “We explain on the [Experian] website, this score is a guide that the public sees, just to help them understand how a lender is likely to assess just that information,” says Jones.
The reason that scores can be different from the consumer’s report and the finance providers is down to the extra elements used by the finance companies to refine their profiling, and define the pass marks of creditworthiness.
“Many finance companies have some of their own scoring rules and then they use our scoring as well,” says Knight, which gives them a blend of external and internal data to work from.
Jones refines that information down to three elements: “You have the application details, you have the internal records and you have the credit reference agency report,” he says.
Application details such as marital status, address and job have a strong influence on some company’s scoring according to Jones, for others it is the history the lender may have with a customer that can make the difference between a yes and no on borderline cases.
Modelling the consumer
In all cases the details held by the lender are fed into a model and then matched with those from the CRA to provide a unique score used by the lender which is compared to a “pass mark”.
The software and modelling systems are also something the CRAs can provide to the lenders to help with the credit profiling of their customers.
“We all have experts that will help a lender build a scoring system and calibrate a scoring system to its own criteria, but the way the scoring works, the pass marks and all of those things are always the decision of the lender, so the lender decides, we just help.”
Pass marks themselves vary from lender to lender says Jones: “If your data looks like the data from past customers who are great customers or bad customers, then your score is going to reflect that. And it’s like a race really, the lender sets its finishing line or its pass mark, and if your score meets or exceeds that mark then the chances are they will offer you credit.”
Some aspects of even a good report, however, may well become instant refusals due to the policy of the lender. It is possible, for example, that some lenders may refuse credit to people with payday loans believes Jones, although he stresses he hasn’t seen an example of this yet.
More commonly, finance providers create policies around those whose records show that they are still subject to a county court judgement, undischarged bankrupts or perhaps may not be old enough to take out a loan or lease agreement.
Pass marks are not just about defining who will or will not receive credit. They will also define which customers are more likely to be offered a subprime or prime deal.
Whatever the pass mark, the duty of the finance provider at the point of a refusal is to inform the customer what the reasons are, and also make it clear which information it was that failed them. If the result is based upon information from the CRA the lender should inform the customer and urge them to talk through the problem with the CRA directly, says Knight. If a failure results from the company’s own scoring system then this should be made clear too.
Accurate and protected
Having so much influence over the credit process is not one the CRAs take lightly. All three CRAs believe that standards in the UK, set by the Steering Committee on Reciprocity (SCOR) and backed up by the Consumer Credit Act make the data they provide safe and accurate. Data is held securely and only used when the consumer allows it, stresses Knight.
In addition the CRAs take steps to ensure all the data they collect from lenders is accurate. “Our responsibility is to make sure that the information is accurate and that it is kept up to date. That forms a huge part of the work we do on a day-to-day basis,” says Jones. “We run that through more than 350 individual checks to look for things that look a bit unusual,” he continues, “we just cannot load mistakes onto credit reports, so that’s our day-to-day challenge.”
Knight points out that the rules on how the data is shared are set by SCOR and “if the data provider does not comply with these rules by supplying timely and accurate data, then they will no longer be allowed to share or access the data. The incidence of this happening is, in our experience, very rare.”
Accuracy of data is therefore as much guaranteed by the need for a lender to use it as it is by the CRA running regular checks.
More useful than ever
For a finance provider the accuracy of data and its usefulness in assessing the ability for a customer to be able to pay back a finance deal will only look to grow as the new regime comes into play.
What all three providers would advise any lender is: before customers choose their dream car and discuss applications for credit, advise them to access their own credit report. It may save some grief and embarrassment should the results of the credit report be negative on the dealer’s screen.
