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Credit Searches - Treasury Contents


4  Multiple credit searches

The problem

18. Whether applications for credit will be successful is determined by the processes within each lending institution, using the information available from consumers' credit reference files in financial institutions' own internal credit scoring systems. To find out :

  • whether they will be accepted for credit, and, if so;
  • at what price that credit will be offered;

consumers have to make a full application for credit to each different lending institution. Before we began this inquiry, there was the suggestion that multiple applications might impact on some consumers' credit ratings, and thus the price and potential availability of lending from other lending institutions. It was alleged that multiple credit application searches were seen as a sign that a potential borrower was 'high risk'.

19. One of the main problems that worried Martin Lewis was the impact of the information about multiple credit application searches on customers trying to obtain 'priced for risk' unsecured credit products, such as certain credit cards. Mr Lewis forcefully expressed his concern for customers who:

have absolutely no idea that, when they apply for an 8.9% loan, they may be given a rate of 30% interest and they have no idea that the fact that they have been given a rate of 30% interest, rejected it and applied for another piece of credit may well then stop them getting the next piece of credit.[47]

20. His concern was that when customers shopping around for a loan, using full application searches to do so, rejected offers because they were at different rates to those that they applied for, they were building up application searches on their records, and thus finding credit increasingly hard to get. Mr Van der Meer considered consumers affected were those who did not know of the impact of multiple credit application searches until it was too late and then found difficulties in accessing credit.[48] The industry though denied that there was such a strong impact in interest rate changes to consumers.[49] We explore below the impact multiple credit application searches actually have on consumers. However, it is important to note that there are alternative approaches available.

OTHER COUNTRIES' SYSTEMS

21. Mr Van der Meer raised the possibility of mirroring the German system which he outlined as follows:

In Germany, they have a credit bureau, the SCHUFA, and they run two types of quotations, a hard search equivalent to full credit score and a quotation search which is the equivalent of the UK one maybe with some slight local nuances. The quotation search can be run and is left on the footprint of the customer and the banks can see that for ten days, therefore, allowing them to take on any fraud issues related to multiple applications, and it is available to the consumer, I believe, for a year and possibly more than that, and a full credit search would stay on the record for both the banks and consumers for three years.[50]

He suggested that nothing prevented the adoption of such a system here in the UK.[51] Experian suggested that there may be a cost from implementing the German system here in the UK:

Application searches are recorded when a consumer decides which potential offer to apply for but they can still be refused. Application searches are still used in scoring for up to one year but, the German credit bureau advises that whilst still predictive they are now less so than they were before this system was put in place. As a result, more consumers who should not be getting access to credit are almost certainly doing so.[52]

And Ms Dews from the OFT shared her "fear" that interest rates for consumers may rise if CRAs were no longer able to store information on credit searches.[53]

22. In the United States consumers have a credit score, which they can then use to assess whether particular products are likely to be available to them. Mr Lewis outlined the benefits this brought:

in the States you get the actual number of how good your credit score is and what the advertisers do is they say, "If you've got a credit rating of over 900, you can get this product" and, therefore, you apply.[54]

However, such a system would be a significant departure from that currently in operation in the UK. Mr Lewis described the implementation of the US system as a "massive, radical overhaul" and reiterated his belief that the present problem could be sorted by "with iterative change just by making the quotation search work".[55] Ms Hoyle was cautionary as to the potential impact of the implementation of a US system. She warned:

you were saying earlier about a standard credit scoring method, maybe as they have used in the US that sounds very much like a very 'vanilla', fairly restricted approach, and that may have the potential for excluding some people from the market who currently benefit from credit products.[56]

23. We recommend that in considering the impact of multiple credit searches, and credit searches more generally, the OFT assesses whether there are lessons to be learnt for how the UK system operates from other countries' systems.

How important is search data?

AS A SIGNAL OF ABILITY TO PAY

24. Given that there was a complaint that consumer detriment was occurring, we attempted to find out how important being able to see the number of credit application searches a consumer has made is to lending institutions, and see whether a correct balance was being struck. The lenders were adamant that application search data were important. The Finance and Leasing Association warned that if lenders were no longer able to refer to such data:

it would severely undermine the quality of credit decisions. It would also result in a rise in problem debts from customers with multiple searches and it is in no-one's interest to provide credit where it cannot be repaid.[57]

Lenders were keen to keep their access to search data for application searches because they believed that it could be a significant indicator of whether or not consumers would be able to pay their debts in the future. However, the industry was at pains to point out that multiple credit application searches alone would not be enough to make a difference to the outcome of a credit application, as they were used as part of a range of information, and formed only part of the system used to assess credit suitability.[58] Experian explained that:

credit searches alone are unlikely to have a significant impact. However, if an applicant is already borrowing a significant amount and displays other characteristics analytically proven to be high risk then they will almost certainly lose points for each and the number of searches may tip them into being refused for credit.[59]

25. It appears to be only certain customers who are most at risk of an impact from frequent and recent credit application searches. The Council of Mortgage Lenders termed these 'borderline' cases.[60] To highlight who was affected the most by multiple application searches on their credit reference files, Equifax identified three different types of consumer:

  • POOR FILE—consumers who at the time of application had defaulted on previous credit or currently had serious arrears on one or more accounts.
  • THIN FILE—consumers who at the time of application had either no open credit accounts or only one or two accounts opened in the last few months.
  • GOOD FILE—consumers with open credit accounts at the time of applications and with a generally positive repayment history.[61]

Equifax then stated that those in the 'Thin File' group were "penalised the most heavily at all levels of search activity".[62] Evidence from Experian highlighted "an individual who might have a weaker credit score would be one who has a mortgage of £200k, plus unsecured a combination of unsecured and hard core credit card debt of £18k, accrued in the recent past and a declared income of £25k", whose score result would be based on these factors, but then "exacerbated" by credit card applications.[63] Experian told us that credit applications are one of 400 potential characteristics, and that application search data is "proven to be linked to consumers who are less able to repay credit; often they tend to be the ones that are looking for extra credit because they are already overcommitted".[64]

26. Ms Dews noted that there was a balance to be struck between "good information being available to lenders and information which is relevant to the pricing of risk, but we do also believe very strongly, in the Office, that people should be able to shop around to get the best quote they can without that having an impact on their credit rating".[65] She concluded that the OFT were keen to find that balance.[66]

Numbers affected

27. We were keen to assess the number of people potentially affected by multiple application credit searches. Mr Lewis pointed out that such information was unavailable to the consumer side organisations.[67] For its part, the industry suggested that this was not a significant problem. The Council of Mortgage Lenders explained that "it has been put to us by one major lender that this is likely only to affect around 1% of mortgage applicants, if that".[68] Ms Key-Vice explained that:

We have run some statistics about the proportion of consumers that have more than five credit searches within the critical period which is three months and, according to our statistics, only 7% of consumers have that number of credit searches and, of those, a small proportion would be impacted because, as we explained in our evidence, this is about the cumulative impact together with other risk information.[69]

TIME

28. As we noted earlier, one of the principles which the Information Commissioner's Office highlighted was that information "must not be kept for longer than necessary".[70] However, search information becomes less useful over time. Mr Leenders told us:

there is an iterative, cumulative effect for application searches, and I think the number referred to typically across the submissions that were made in writing was around about five in around about three months. Those searches are held on file, I think, for 12 months and of course the value of that data in determining risk and propensity to repay rather dilutes over time, so the value of that data after the initial three months, for example, after six months becomes a less significant issue on the score card, and actually in some score cards now they are not used at all.[71]

29. We note that application credit searches become less useful both for detecting fraud and as part of a credit scoring system, the older the search data is. We recommend that the ICO look at whether the 12 month period for storing search data is appropriate, given the principle that information "must not be kept longer than is necessary".

Shopping around

30. The banking crisis and the ensuing recession have of course impacted on the credit market. Credit availability has been diminished. Martin Lewis, of Moneysavingexpert.com, felt that consumers who had previously been excellent credit risks were now deemed to be good credit risks, while those deemed previously to be good credit risks were now getting products previously offered to applicants with poor credit scores.[72] As Mr Van der Meer, from Moneysupermarket.com, explained, this has had an impact on consumers, in that "accept rates in the [lending] industry have moved from around 50% to closer to 30%, so the ability of these consumers to easily find the products that are available to them and at the rates that are available to them is declining".[73] As such, people are now probably having to shop around for credit, both on price and to see if they will be accepted for a loan.

31. There is also another potential driver for increased shopping around, in the increasing use of the internet, especially where consumers are searching for credit, which has a direct effect and also may have increased awareness of the desirability of comparing different prices more generally. Mr Van der Meer confirmed that "more consumers [are] shopping around over the last few years, so the use of comparison sites, like Martin's and ours, has obviously increased, but just generally consumers shopping around, however they do so, whether it is in a branch or online, is increasing every year, so you have got more consumers who want to shop around". [74]

32. The industry appears to have recognised that both difficult market conditions and increased internet usage will increase "shopping around", and appears to have made some adjustment to the way it uses search data. Ms Hoyle reported that "A couple of years ago, if you did have three or four searches within a short period of time, then that would feed into the credit score. But now customers are actively shopping around (and even more so in the current market) and some lenders are saying that actually seven or eight searches within a period of time may not be unusual and so should not adversely affect a credit score."[75] Mr Leenders told us that:

as the banking industry, we are rather moving away from the inclusion of search data in credit scoring models rather than including more search data in search models as more sophisticated techniques come on line and one, for example, […] was behavioural data through personal current account performance[76]

33. Both the impact on credit availability from the recession, and the ease with which an application can be submitted via the internet has meant an increase in full applications being made. The industry seems to have responded by reducing their use in credit scores, or lessening the weight given to them. We recommend that the ICO examine whether there is a cut-off point beyond which the impact of search data on consumers' risk profiles is so weak that storing this data is unfair, since any benefit would be outweighed by its detrimental impact on customers.

WHAT ARE CONSUMERS OFFERED?

34. What do consumers expect a quotation search to tell them? In its evidence, Experian suggested that consumers faced two questions when shopping around for credit, "How much will it cost?" and "Can I have it?".[77] Experian went on to assert that "shopping around for credit is not about whether a lender will provide the credit but is about how much the credit would cost and whether it is the right product for that consumer".[78] Using such a definition, Ms Hoyle told us that "Making multiple credit applications has an effect, not shopping around".[79]

35. We have already seen that quotes provided under quotation searches do not assure the consumer of acceptance should they then make a full application. When asked whether he felt this was right, Mr Cates replied "I think you should be able to see, actually, when you are going to get credit".[80] Consumers who have been quoted a price for a product expect to get the product at that price and not be refused on full application.

36. The problem is that given there is no way to find out if the product is available other than to make a full application, there is no practical distinction between "multiple credit applications" and "shopping around", whatever the industry view. We cannot see anything wrong in consumers making multiple full credit applications to see whether or not they can obtain credit from firms which may have different, opaque, criteria for acceptance. We received evidence that consumers seeking credit under the current system could find that multiple application searches tipped the balance between being offered credit and being refused, or affected the rate they were offered. We are not convinced that consumers when 'shopping around' distinguish between questions over price and availability sequentially, but rather think of them together. At present, the evidence is that repeated application attempts reduce some consumers' ability to access credit, or affect its price. We recommend that the OFT investigate the impact of multiple applications on the availability and price of credit to consumers.

FRAUD AND OPEN COMMITMENTS

37. One of the main reasons cited by the credit reference agencies and the lenders for their need to see search data was to counter the risk of fraud, or ensure that consumers were not offered too many lines of credit at the same time.[81] For example, Experian stated that consumers may make large numbers of credit applications "if they are looking to commit fraud and are testing the decision systems of lenders".[82] Experian also noted that "Applications that are successful result in firm offers which can only be withdrawn if crucial information changes. A consumer applying for and getting offers of 10 or even 20 or 30 credit cards could then activate them all. This could lead to an explosion in credit, often to those least able to manage it."[83] By being able to see the number of credit searches a consumer has made, then the risk of either fraud or multiple open credit commitments can be combated.

38. Mr Lewis appeared content for quotation searches to be used to look for fraud. However, he was unsympathetic about the use of searches in establishing whether people posed a credit risk:

For fraud, most companies tend to use an agency like National Hunter to do their fraud scoring; it is slightly separate from the credit reference agencies. Now, I am certainly not arguing that we bar quotation searches from being sent to National Hunter so that they can weed out people for fraud based on quotation searches. If someone applies for 100 cards in a week, you would probably know it is ID fraud, but you could equally do that and say that this cannot count towards someone's credit score.[84]

The Committee is, of course, committed to ensuring that fraud is minimised, and also to ensuring that people are not offered too many potential credit commitments at one time. However, as shopping around increases, the extent to which multiple credit searches are good indicators of fraud or over commitment may well be changing, and should be kept under review by the OFT.

Does the system deter shopping around?

39. We are particularly concerned by suggestions that the knowledge that multiple credit applications might affect someone's credit score could itself affect the way in which the market worked. Knowledgeable consumers are often considered the bedrock of a functioning market, a position reaffirmed by Mr Cates from the OFT, who stated that "active, informed consumers really do drive the markets".[85] Mr Van de Meer highlighted a group of people who may be adversely affected precisely because of their knowledge that there is some impact from credit searches. He noted his concern for:

the people who do not apply because of unknown parts of the system as the people who do apply multiple times and are, therefore, downgraded in their credit score, so it is the uncertainty around the system and the way it works that creates a fear of shopping around which is as much of a problem as the actual number.[86]

These fears, whether founded or not, are also present in some of the consumer experiences outlined in Moneysavingexpert.com's submission.[87] Consumers made statements such as "Had I not have feared having a footprint left on my file I probably would have made at least three more applications" or "I wanted a decent APR but was worried about leaving credit search footprints".[88] Industry guidance may also have not helped in this regard. One guide from financial industry associations which was sent to all MPs to help them with constituency problems had the following advice:

Be patient, not persistent

If you're refused credit for a product or service, don't keep reapplying as this may lower your score. Wait a couple of months before making further applications.[89]

Ms Hoyle felt that this was reasonable advice, arguing that "if I am turned down for credit [their advice is] to pause, to have a period of time—maybe there is a volume of searches; […] for our members, eight or more over a short period of time, which would be indicative of possible over-indebtedness or of fraud". [90] She felt that such advice was about consumers "taking a responsible approach to managing [their] overall credit rating".[91]

40. There is clear evidence that some consumers do not shop around because they fear that to do so will affect their credit score. Indeed, industry advice suggests that multiple applications "may lower your [credit] score". We consider there are likely to be serious flaws in a market in which consumers are discouraged from shopping around, either because of unfounded fears or because of industry bias against multiple searches.

Possible Solutions

MANDATORY QUOTATION SEARCHES?

41. Mr Lewis thought that the problem of multiple searches was "an easy one to solve, to be honest".[92] He suggested mandating quotation searches and that would prove "a very simple solution to this particular problem".[93] During our inquiry it became apparent that the use of quotation searches by lending institutions appears to have differed depending on the market. In the mortgage market, about 80% of all searches performed by mortgage suppliers on the Equifax database were quotation searches.[94] Equifax concluded that "where quotation searches are required by regulation (i.e. in the mortgage market) the process is working well and ensures credit search applications are typically only being performed when a formal application for a mortgage occurs".[95] Experian also noted this difference is the regulatory environment on the use of quotation services: "The FSA included use of quotation searches in their mortgage rules and the (then) DTI recommended that all unsecured lenders that offer rate for risk products follow suit".[96] Quotation searches appear not to have penetrated as far into the unsecured lending market since quotation searches have accounted for only some 2% of searches in the overall market (secured and unsecured) since the end of 2007.[97] Mr Martin explained that this may be due to the mix of products in the unsecured lending market. Since it may be that more unsecured lending products were not rated for risk, there would be less need for quotation searches.[98] Experian though suggested that from their client systems they had identified a ratio of two quotation searches for each application for both mortgages and personal loans.[99]

42. Moves are already afoot to ensure the system for quotation searches operates better in the future. In its evidence to the Committee, the Office of Fair Trading stated that:

We are currently considering responses following consultation on our draft Irresponsible Lending guidance. We have decided to add a reference in that guidance explicitly covering the need to allow quotation searches as well as application searches where this is appropriate to the credit product. We will reinforce this by amending our licensing forms to gather information from lenders about the systems which they do or will have in place in order to ensure their searches can where appropriate be recorded as quotation searches.[100]

43. Quotation searches have been widely used in the mortgage market. There may be parts of the unsecured market where they should be used more widely, in particular where the price of a product is weighted for risk. We welcome the moves by the OFT to ensure its guidance is explicit on the need to allow quotation searches where appropriate, and recommend that it undertakes regular monitoring to ensure compliance.

OTHER SYSTEMS

44. From the evidence we have received, it may be that the industry itself is beginning to developing other systems to counter this problem. Evidence from Confused.com highlighted a system it had developed, that reduced the number of searches on consumer's credit reference files. When using this tool for credit cards, the system has, according to Confused.com, the following benefits:

  • It significantly reduces the number of applications a consumer makes for credit cards that, from the outset, they have little or no chance of obtaining.
  • It ensures the customer is aware which products are attainable for someone of their credit profile (and so those who want to avoid rejected applications do not choose a higher APR product in the mistaken belief that they may not be eligible for more competitive products).
  • Consumers who already hold credit cards are able use their product recommendations to assess whether they are overpaying on existing debt, potentially saving them money.[101]

We welcome the development of tools by the industry that may minimise the number of full searches that have to be made by consumers, and urge all industry participants to examine such systems, and see if good practice can be shared.

Consumer education

45. The credit search process is a daunting one, especially for the uninformed. A potential solution is for greater consumer education as to the process. Mr Van der Meer stated that "education is a core part of the solution that we would advocate".[102] This opinion was shared by the British Bankers Association and the Finance and Leasing Association in evidence they submitted after our oral evidence session. They felt that our hearing had "reiterated the need for better consumer education, so that customers receive clear information about credit searches and the role they play both in the application process and in influencing a customer's credit profile".[103] Because of this, they had held initial discussion "with consumer groups to explore the development of a Consumer Forum, which would also look at how greater transparency can be achieved on how consumer data is used in delivering responsible lending decisions".[104] We welcome the steps taken by the British Bankers Association and the Finance and Leasing Association to explore how further transparency can be achieved. We urge the credit reference agencies to ensure they are part of this process, so that a well thought-out, comprehensive approach can rapidly be achieved.

Conclusion

46. The use of application search data in credit scoring has clearly been sensible in the past as a means to detect fraud or demonstrate potential inability to pay. However, it is not clear that this remains the case now that shopping around has become more common, and credit is harder to obtain, even for those who may be able to repay it. There is a fine balance of public interest between ensuring that fraud is prevented and consumers are protected from reckless lending, and ensuring that the market is subject to the disciplines of informed consumer choice. We have not been presented with unequivocal evidence that application search data is essential for loan providers, who have over 400 indicators that they may use.[105] Nor have we been given overwhelming evidence that it is a major source of direct consumer detriment, although the number of consumers making multiple application searches seems likely to rise. However, we are extremely concerned about the effect of the use of credit searches on market mechanisms, since, in principle, we believe the ability to shop around is not only an important means for consumers to assess the market, but also provides a key discipline on providers. We have been presented with some solutions which would reduce the adverse effects of the use of credit application search data in credit reference files; we consider that any acceptable solution must strike an appropriate balance between minimising fraud and over borrowing and ensuring the market is subject to normal disciplines. We recommend that the OFT look at this in its assessment of the credit market.



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