The Legal and Regulatory Environment for Credit Reporting Systems

1
The Legal and Regulatory Environment for Credit
Reporting Systems

• Financial Sector Policy Global Dialogue Series
  7
• Sponsored by the Financial Sector Vice Presidency
  and
• the World Bank Institute
• Washington, D.C.
• June 18, 2001

2
Organization of todays event

• I. Introduction
• - Ms. Margaret Miller, Senior Economist, World
  Bank
• II. Presentation of Legal Issues for Credit
  Reporting
• - Mr. David Medine, Partner, Hogan Hartson
• - Mr. Georgy Lutovsky, Deputy Chairman, Russian
  Central Bank
• Short Break
• III. Importance of Credit Data and the Regulatory
  Framework
• - Mr. Michael Staten, Professor, Georgetown
  University
• - Mr. Raphael Bostic, Economist, Federal Reserve
  Board

3
Elements of a Credit Reporting System

• the public credit registry, if one exists
• private credit registries, including chambers of
  commerce, and banking associations
• the legal framework for credit reporting
• the legal framework for privacy, as it relates to
  this activity
• the regulatory framework for credit reporting
• the characteristics of other pertinent borrower
  data available in the economy
• the use of credit data in the economy, by
  financial intermediaries and others
• the cultural context for credit reporting

4

• Results of 1999-2000 World Bank survey of
  public and private credit registries

5
Survey sample by country
6
The credit reporting industry is in transition,
with many new entrants

• The median age of private registries in the
  survey sample is 10 years. Thirty percent of the
  private registries were established since 1995.
• Latin America led all other regions in the 1990s
  in the establishment of public credit registries.
• Legal issues contributed to the creation of the
  public credit registry in approximately half of
  the countries and legal issues are still
  pending in about half the countries with public
  registries

7
Public vs. Private Credit Registries
8
Institutional Arrangements for Private Credit
Registries
9
Who submits information to public and private
registries?
10
Firm data collected by public and private
registries
11
Distribution of data by public and private
registries
12
Consumer AttentionComparing Private and Public
Registries
13
Percentage of Banks which consult a credit
registry for consumer loans
14
Percentage of Banks which consult a credit
registry for small business loans
15
Importance of Registry information relative to
other sources of creditworthiness
16
Emerging elements of good practice Legal and
regulatory framework

• Legal framework should encourage information
  sharing among lenders
• review bank secrecy laws which can constrict
  information flows
• Consideration of privacy issues important
• broad privacy laws may unduly limit credit
  reporting
• Regulatory framework with enforcement
• consumers have ability to bring complaints
  outside judicial system
• Competition policy aspects of credit info.

17
Emerging elements of good practice Data
collected and maintained

• Open system, not closed network
• ownership by a limited group of lenders, bank
  association, will discourage a broader database
• Collect both positive negative information
• Maintain data for a reasonable time frame - 5
  years minimum
• do not delete data on non-payments when debt
  repaid

18
Emerging elements of good practice Data
collected and maintained

• Data should be inaccessible after a certain
  amount of time
• time limits may vary by size of loan, type of
  inquiry
• Credit reports should not include highly
  sensitive information such as sexual orientation,
  political or religious affiliation, etc.
• Other identifying information, such as gender,
  should be evaluated more carefully

19
Emerging elements of good practice Data
distributed

• Integrity and transparency are paramount
• special standing of any group, including owners
  or government, will discourage participation
• Open system preferable, reciprocity not necessary
• Access to detailed information preferable
• loans described individually, not aggregates
• institutions providing credit identified
• Restrictions to prevent cherry-picking
• Distribution reflects privacy considerations

20
Emerging elements of good practice Credit
reporting and bank supervision

• Supervisors include financial institutions use
  of credit information as part of inspections
• Require publicly (government) owned financial
  institutions to provide data to legitimate credit
  reporting firms, associations
• Encourage all financial institutions to
  participate in credit reporting

21
Emerging elements of good practice Public
Credit Registry (PCR)

• Clear objectives for PCR
• consult with financial institutions, private
  credit reporting firms
• Complement, not compete, with private firms
• Focus on larger loan sizes
• Provide customer service if data is distributed
  to financial system

22
Emerging elements of good practice Consumer
Attention

• Borrowers should have access to their own data
• Consumer-friendly procedures in place to
  challenge erroneous information in reasonable
  time frame
• Record who has accessed data as part of report
• Clearly established privacy policy