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A broker has urged lenders to change their policies in regard to assessing a potential borrower’s creditworthiness based on their postcode.
Finance broker, founder, and chief executive of Finch Financial Services, Julian Finch, has called out lenders for participating in postcode discrimination when it comes to determining the creditworthiness of a prospective borrower.
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Finch said lenders using postcode data to determine creditworthiness “imposes an invisible barrier” for borrowers.
“A lot of problems arise out of postcode discrimination because where you live is often linked to other factors like your wealth, your income, your age, even your ethnicity and other qualities,” Finch said.
“When banks use an applicant’s postcode data as part of the evaluation process, they’re basing their information off the history of the people who live nearby.
“This means that even if you’re a strong applicant, with a steady income and strong saving habits, your credit score could be affected just because you live in an area that’s regarded as lower in socioeconomic status or a higher risk of mortgage stress.”
Finch said that regional areas and high-density postcodes are most affected and has called on lenders to update their policies in regard to lending in these areas.
“[I believe] lenders have an obligation to the community to best represent them and take on [risk] a little bit more evenly,” he said.
“We’re in the middle of a housing shortage, I don’t [understand] why people should be disadvantaged for wanting to purchase the type of property in areas that best suit their budget.”
Finch said that different areas generate different risk profiles based on various factors.
“These factors determine the level of risk a financial institution is prepared to take on and this is reflected in the interest rate. If the area in which you live or want to purchase has a higher risk profile, then the interest rate will be higher,” Finch said.
“In addition, the amount of money the institution is prepared to lend may vary as well. Some lenders may only require a 10 per cent deposit however if you are refinancing or purchasing in an area with a higher risk profile, the institution may raise the deposit requirement to 20 per cent or more.”
Furthermore, Finch has said that loan assessments should be made “based on each individual and their unique circumstances”.
“Loan applications should not be treated the same and the solutions should not all be cookie-cutter, run-of-the-mill solutions. For many lenders, assessment is automatically generated based on big data insights,” he said.
“Automated decision making is a statistical process that’s dehumanising and doesn’t take into account the entire matrix of factors that humans can use to determine whether the loan application should be approved.”
Finch said another drawback of automated decision making is the “lack of transparency and accountability” and has urged borrowers to seek out a mortgage broker to assist them with their loans.
“A good broker knows the system, understands how risk profiles work, and how different lenders deal with them,” he said.
[RELATED: SMEs unfairly ‘penalised’ by credit scoring system, brokers warn]
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