Office of the Federal Privacy Commissioner --- "Review of credit advice summaries" [2001] PrivLawPRpr 13; (2001) 7(9) Privacy Law and Policy Reporter 184

Review of credit advice summaries

Office of the Federal Privacy Commissioner

Since the credit advice summaries were first issued, developments in the credit industry have generated a number of new issues in the interpretation of the credit reporting provisions in Pt IIIA of the Privacy Act 1988 (Cth) (the Act). As well, some of the existing advice summaries are in need of revision. [The existing summaries are at <http://www.privacy.gov.au/publications/pg3pubs.html#41.1> —General Editor.]

As a first step in reviewing the summaries, the Office of the Federal Privacy Commissioner has prepared three new advice summaries for public comment before finalisation. The topics covered are:

• the recording of top-up loans with credit reporting agencies;
• the Privacy Act’s distinction between ‘mortgage insurers’ and ‘trade insurers’, which differs from usual industry usage; and
• the relisting of default entries that have been removed because the requirements of the Act were not met initially — this supplements existing summary 9.3.

It is hoped that these summaries will assist credit providers, mortgage insurers, trade insurers and credit reporting agencies to comply with their obligations under the Privacy Act and will help affected individuals exercise their rights under the Act. It is intended to finalise these advices by the end of March 2001 and all comments are welcome. Further new and revised advices will be released for comment over the next months.

Please send comments to <[e-mail]>.

Reporting applications for top-up loans

There seems to be some inconsistency among the practices of credit providers in relation to the reporting of application amounts to credit reporting agencies for top-up loans sought by customers.

In the situation where an individual has an existing loan and the terms and conditions of that loan contract permit the individual, at a later time, to increase the principal amount borrowed, then it is sometimes known as a ‘top-up’ loan. To all intents and purposes, the obligations of the borrower in relation to the original amount borrowed are unaffected. The borrower will simply owe an additional amount under the same conditions created by the same contract. The additional amount sought does not affect the original loan contract in any other way or give rise to an additional loan contract or account. Loans that include a redraw facility would fall within this category.

Some credit providers report the amount of additional funds sought by the customers and others report the original loan amount and the additional amount combined. There has been some concern expressed over the accuracy of reporting the combined amount.

There are several other common scenarios involving individuals seeking additional funds that are not the same as a top-up loan as described above. These other types of loans should be treated differently when reporting the loan application to a credit reporting agency.

Set out in the table below are the common scenarios and the respective amounts which should be reported to a credit reporting agency to ensure that the customer’s credit information file contains an accurate application history.

Mortgage insurance and trade insurance

Under the Act, ‘mortgage insurance’ is insurance in relation to consumer credit, which is also a term defined in the Act, and ‘trade insurance’ is insurance in relation to commercial credit, also a defined term.

Where an individual has applied for consumer credit subject to mortgage insurance, the Act permits the mortgage insurer to obtain a copy of a credit report from a credit reporting agency without the consent of the applicant. Similarly, the credit provider may also provide a copy of a credit report that it has obtained from a credit reporting agency to the mortgage insurer. The situation is different, however, where the individual has applied for commercial credit and the insurance is consequently ‘trade insurance’, as the express consent of the applicant is required before a copy of his or her credit report may be obtained by a trade insurer.

Loan application	$ to report
1 Customer has an existing loan ($E) from X. Customer applies for a new loan ($N) from Y to discharge $E and have additional funds ($A).	$N
2 Customer has an existing loan ($E) from X. Customer applies for a new loan ($N) from X that will use it to discharge $E and give $A to the customer.	$N
3 Customer has an existing loan ($E) from X. Customer applies for additional funds ($A) from X and $E will simply be increased by $A to a new balance of $N	$A

Consumer ‘credit’ under the Act means a loan sought by an individual to be used ‘wholly or primarily for domestic, family, or household purposes’. Commercial credit is by definition a loan of a kind other than one defined as ‘credit’. Consequently, many individuals seek loans that they intend to use for purposes which the Office of the Privacy Commissioner regards as being a commercial purpose, such as investment properties and share portfolios.

The application forms in use by credit providers generally seek to identify the primary purpose of the credit being applied for by the borrower, presumably for the purposes of the Uniform Credit Code. A small proportion of the real property mortgages for which organis-ations have provided insurance to credit providers appear to be for commercial purposes rather than for consumer purposes.

‘Mortgage insurer’ is defined in s 6 of the Act as:

a corporation that carries on a business or undertaking (whether for profit, reward or otherwise) that involves providing insurance to credit providers in respect of mortgage credit given by credit providers to other persons.

‘Mortgage credit’ is defined in s 6 of the Act as:

credit provided in connection with the acquisition, maintenance or improvement of real property, being credit in respect of which the real property is security.

‘Credit’ is defined in s 6 of the Act as:

a loan sought or obtained by an individual from a credit provider in the course of a credit provider carrying on a business or undertaking as a credit provider, being a loan that is intended to be used wholly or primarily for domestic, family or household purposes.

‘Trade insurer’ is defined in s 6 of the Act as:

a corporation that carries on a business or undertaking (whether for profit, reward or otherwise) that involves providing insurance to credit providers in respect of commercial credit given by credit providers to other persons.

Essentially, mortgage credit is a loan that is intended to be used in connection with the acquisition, maintenance or improvement of real property which is intended to be wholly or primarily for domestic, family or household purposes. A mortgage insurer is a corporation that provides insurance to credit providers in respect of mortgage credit (that is, consumer credit) given by credit providers to other persons. Where real property is used for commercial purposes by the borrower, any loan given by a credit provider in connection with that property is commercial credit within the meaning of the Act, not consumer credit. Consequently, insurance provided to credit providers in respect of commercial credit given to other persons is trade insurance rather than mortgage insurance in terms of the Act.

Where an organisation is considering providing trade insurance to a credit provider and wishes to obtain the borrower’s credit report from the credit reporting agency for this purpose, the organisation must have the borrower’s specific written consent to obtain the credit report for this purpose under s 18K(1)(e):

A credit reporting agency in possession or control of an individual’s credit information file must not disclose personal information contained in the file to a person, body or agency (other than the individual) unless:

(e) the information is contained in a credit report given to a trade insurer for the purpose of assessing:

(i) whether to provide insurance to, or the risk of providing insurance to, a credit provider in respect of commercial credit given by the credit provider to the individual or another person; or

(ii) the risk of the individual defaulting on commercial credit in respect of which the trade insurer has provided insurance to a credit provider;

and the individual to whom the report relates has specifically agreed in writing, to the report being given to the trade insurer for that purpose ...

There is a risk that organisations, when assessing whether to provide trade insurance to a credit provider in respect of commercial credit, will breach the provisions of s 18K(1)(e) of the Act by accessing consumer credit information files held by a credit reporting agency without the consent of the individuals concerned.

Relisting of removed default entries

Where a payment default listed on an individual’s credit information file has been removed because the requirements under the Act for listing a default were not met, it is possible for the default to be relisted after the requirements under the Act have been subsequently met. However, there is a restriction. Under s 18F(2)(c) of the Act, information about a particular payment default may only remain on an individual’s credit information file for a maximum permissible period of five years. This means that the total duration for the original entry and the relisted entry being on the individual’s file must not exceed five years.

Example

A payment default was listed on 1 January 1998 and removed one year later because the payment was only 58 days overdue as at 1 January 1998. On 1 January 1999, the payment was now more than 60 days overdue and in all other respects the status of the debt was unchanged. The default could be relisted with the credit reporting agency; however, the relisted entry could only appear on the individual’s credit information file for four years.

For practical reasons, this will have a bearing on whether the default can be re-listed at all. Where the credit reporting agency concerned is not able or willing to remove the relisted default after the remaining portion of the permissible period has elapsed (four years in the example), the default should not be relisted, as there is a risk that a breach of s 18F(2)(c) would occur if the default was not removed when required.

The situation is different where the individual has entered into a new arrangement with the credit provider to repay the debt, such as entering into a scheme of arrangement with the credit provider. The new situation is not regarded as being information about the same default as the original entry. If the individual subsequently falls into arrears under the new arrangement, then once the requirements for listing a default entry have been met in relation to the new situation, a default entry may be listed and remain on the individual’s credit information file for the full five year period permissible under s 18F(2)(c) of the Act.