Repayment holidays unlikely to impact credit reports

Given the ongoing coronavirus pandemic, the Australian Banking Association (ABA) announced on Friday (20 March) that its members have agreed to a small-business loan package for small businesses that require assistance because of the impacts of COVID-19.

The package includes the ability to defer loan repayments for six months.

Several lenders, including ANZ, Bendigo and Adelaide Bank, Heritage Bank, La Trobe Financial, Mystate Bank, NAB and Westpac, have also announced that they are offering home loan customers repayment relief, ranging from three to six months.

Given the announcements, Mortgage Business reached out to several lenders and credit score providers to clarify whether these deferments would impact a borrower’s credit score.

Credit reporting business illion told Mortgage Business that it would not be counting these variations as credit events.

Steven Brown, director - bureau engagement at illion, elaborated: “Where a borrower seeks and is granted varied terms for loan repayments under a hardship arrangement, the information provided to a credit bureau is typically different from what is reported under a normal loan repayment schedule.

“It is currently standard practice for lenders to omit providing the loan repayment information to credit bureaus where there is a hardship arrangement in place. This means that any delayed payments are not visible to new lenders and are not included in the borrower’s credit score.”

Moreover, Mr Brown said the company “strongly supports the inclusion of a hardship flag in the credit reporting system to more effectively identify customers that are under a hardship arrangement with their lender”.

The director of bureau engagement noted that legislation to achieve this outcome is still to pass the Senate, and illion was recommending its “early passing to ensure that borrowers who are in hardship are more effectively managed”.

Several lenders also outlined that they would not be treating deferred repayments under the hardship arrangements as credit events.

Amanda James, head of broker at Adelaide Bank, commented: “We will always work with our customers to determine the best outcome for their situation, depending on their financial position and needs. 

“If a customer does apply for – and is approved – for formal hardship or long-term arrangements, Bendigo and Adelaide Bank’s current approach is to suspend reporting repayment history information from being listed on the credit report while these arrangements are in place.”

Likewise, La Trobe Financial outlined that it does not update a borrower’s physical credit file as a result of granting hardship assistance and was “well placed to deal with extraordinary events such as COVID-19 that impact a borrower’s credit history (either their physical file or existing repayment history)”.

According to Cory Bannister, chief lending officer at La Trobe Financial, the non-bank lender has a “customised assessment methodology to determine a borrower’s credit worthiness, [which] allows for consideration of life events to ensure credit worthy borrowers are not refused credit”.

He added: “La Trobe Financial has been providing financial solutions for borrowers that have experienced a hardship as a result of a non-recurring life event for over 60 years.”

Business NSW CEO Stephen Cartwright told Mortgage Business that, for many small businesses, “survival is more critical than future concerns about credit” during this COVID-19 pandemic.

However, Mr Cartwright added that if lenders are offering SME (or home loan) borrowers a repayment holiday – and these borrowers are complying with the terms being offered to them by their banking institution – it should not affect their credit score.

“I absolutely think that if they are being offered a repayment holiday and they’re taking advantage of an institutionalised offer for a deferral of those repayments, it shouldn’t affect your credit score,” he said.

The announcements from lenders relating to COVID-19 assistance packages and repayment deferrals complement the federal government and the Reserve Bank of Australia’s recent stimulus packages for small businesses and lenders offering credit to this segment of the market. 

[Related: Banks to suspend SME loan repayments]