APEC Seminar on Cross-Border
Credit Information Exchange
Session III: Key elements of a successful
Cross-Border Credit Information
Exchange mechanism – Data
Ninh Binh, Vietnam
16 May 2017
CONFIDENTIAL AND PROPRIETARY
Any use of this material without specific permission of PERC is strictly prohibited
Credit Reporting is a Key Part of a Well-functioning
Financial Sector and Economy
• Credit Reporting (information sharing)
– Helps to lower lending transaction costs
– Can promote competition and innovation among lenders
(other entities)
– Helps reduce the problem of adverse selection
– Helps reduce the problem of moral hazard
– Improves transparency
– Improves credit inclusion (credit access)
– Can aid in safety and soundness
– Can help protect consumers from overindebtedness
– Can promote sustainable economic growth
2
Credit Reporting is a Key Part of a Well-functioning
Financial Sector and Economy
• Policymakers should look for ways to encourage
credit reporting and when enacting data protections
be careful not to put up unneeded barriers to
information sharing
3
Examples of Impacts of Credit Reporting
Analysis Years
Target Default
Rate
US
Full-file
Australia
Full-file
Brazil Fullfile
Argentina
Full-file
US with
Utility
Data
2000-02
2008-09
2001-02
2000-01
3%
4%
3%
3%
Negative-Only = 1.00
All
Age
18-25
26-35
36-45
46-55
56-65
>65
HH Income (000)
<20
20-29
30-49
50-99
>99
Gender
M
F
1.23
1.27
1.47
1.46
1.42
1.24
1.12
1.05
1.01
1.22
1.21
1.20
1.19
1.36 (a)
1.30 (b)
1.24
1.21
1.18
1.47
Colombia
Full-file
2005-06
US
with
Utility/
Telco
Data
2009-10
3%
3%
7%
Without Utility/Telco=
1.00
1.22
1.10
1.08
1.14
1.06
1.05
1.06
1.06
1.14
1.15
1.07
1.06
1.06
1.06
1.11
1.26
1.15
1.10
1.06
1.03
1.21
1.14
1.10
1.07
1.04
1.09
1.08
2004-05
Negative-Only
= 1.00
4.33
18.31 (c)
6.48 (d)
4.54 (e)
3.85 (f)
5.91
12.39
4
Examples of Impacts of Credit Reporting
Table 2: Percentage Point Change in the Default Rate in Switch from Full-file to NegativeOnly (percentage change shown in parentheses)
Turner and
Varghese
Barron &
Tuner et (Colombian files, Majnoni et al Majnoni et
Acceptance Staten (US
al, (US
includes non(Argentine
al (Brazilian
rate
files)
files)
financial)
files)
files)
20%
4.94 (140%)
30%
0.8 (62%)
4.94 (140%)
40% 1.84 (170%) 0.6 (33%)
8.96 (183%)
0.92 (60%)
1.48 (114%)
50%
0.3 (10%)
8.54 (146%)
60% 1.45 (76%)
0.4 (8%)
8.1 (113%)
0.83 (28%)
1.53 (83%)
70%
75% 1.03 (34%)
80%
0.96 (19%)
0.86 (30%)
90%
100%
5
Examples of Consent and Reporting Regimes
Belgium
Germany
France
US
Canada
UK
Netherlands
India
South Africa
Russia
Mexico
Colombia
Mandated reporting (Negative –only system)
Does not require consents for negative data but does for positive data
Negative only system, consent is not required
Consent permitted as part of loan agreement, can be required for loan agreement
Consent permitted as part of loan agreement, can be required for loan agreement
Consent permitted as part of loan agreement, can be required for loan agreement
Mandated reporting
Mandates reporting of positive and negative data, consent not needed
Similar to UK
Consent often required as part of loan
Consent needed for credit check, but credit reporting usually required (no
consent needed)
Consent permitted as part of loan agreement, can be required for loan agreement
6
Inappropriate Regulations, Overly Burdensome Privacy
/ Consumer Protections
• Burdensome Privacy Rules
– Some require burdensome consents every time consumer data moves
– Perversely seen to slow down positive data collection
– Tension with consumer protection of overindebtedness and social benefit of data
sharing
– Privacy rules should be proportional and better gauged to need
Requiring burdensome consents for regulated banks to share with a regulated
bureau provides little real consumer protections if a consent is already needed
when data is accessed from the bureau. It just restricts data sharing and leaves
the consumers unable to share their data when they need to (since it my not
have been collected).
7
Inappropriate Regulations, Overly Burdensome Privacy
/ Consumer Protections
• Little benefit from adding too many “gates” in information sharing
–
–
–
–
If Lenders are well-regulated
If Credit bureaus are well regulated
If Consumers need to consent to having their credit file accessed
Then further barriers (between data furnishers and credit bureaus are of little benefit
8
Inappropriate Regulations, Overly Burdensome Privacy
/ Consumer Protections
• Credit Information Sharing existed long before Big Data and
Social Media…but may be hindered by new privacy
protections
• Some privacy rules may treat data sharing as an optional
aspect of lending…it is not, it can be part of underwriting and
reporting can act as collateral for the loan.
9
Need for Appropriate, Proportional Regulations
The World Bank’s “General Principles” goes to underscore the importance of
maintaining appropriate flexibility and the need to balance different policy
objectives.
“156. Proportionality of laws and regulations responds to three main characteristics: a)
adequacy; b) necessity; and c) non-excessiveness. In credit reporting, these three aspects
should be reflected in the legal and regulatory frame- work supporting the collection of
credit and related data from businesses and individuals, and the use of such data.
157. When designing new laws or regulations, or amendments to the existing ones,
regulators should carefully weigh the intended benefits with the potential negative
consequences such new rules may have on the credit reporting system as a whole. This
includes the need that any penalties that are established be proportional to the related
offense. The industry should be consulted to help ensure the proposed new regulations
are proportionate and effective.”
10
Need for Appropriate, Proportional Regulations
The World Bank’s “General Principles” goes to underscore the importance of
maintaining appropriate flexibility and the need to balance different policy
objectives.
“159. The legal framework should be designed to balance interests of the
consumers/data subjects on one hand, and the objective of promoting credit information
flows and innovation in the credit reporting system to assure economic development in a
stable environment.”
11
Need for Appropriate, Proportional Regulations
Consistent with a need for proportionality and flexibility based on needs, risks,
and contexts, an EU data protection guide states…
“In principle, all data controllers must notify supervisory authorities when they process
data. Member States may provide for simplification or exemption from notification for
specific types of processing which do not entail particular risks. Exception and
simplification can also be granted when, in conformity with national law, an independent
officer in charge of data protection has been appointed by the controller.”
12
Need for Appropriate, Proportional Regulations
The first and perhaps still most influential document to propose a framework is
the OECD’s Guidelines on the Protection of Privacy and Transborder Flows of
Personal Data (1980, updated 2013). The OECD Guidelines, covering all systems
of collecting and managing all personal data, now consist of 8 principles…
1. Collection Limitation Principle, which stipulates that the collection of personal data
should be limited, be obtained “where appropriate” with the data subject’s consent.
2. Data Quality Principle
3. Purpose Specification Principle
4. Use Limitation Principle
5. Security Safeguards Principle
6. Openness Principle
7. Individual Participation Principle
8. Accountability Principle
13
No need for tension between credit reporting and
consumer data protection
Consumers Benefit When Lenders Are Permitted to Offer Credit Products That
Require Credit Checks and Credit Reporting. To ensure appropriate borrowers
are chosen for specific loan terms (interest rate, loan amount, fees), credit
checks can be required. Credit reporting (including full-file data) can be used as
a commitment mechanism with borrowers and to overcome moral hazard.
Credit reporting, as such, can be a necessary, integral component of specific
credit products (data sharing is part of the product). As such, mandating that
consents for credit reporting be separate and not required by the main credit
agreements would be inappropriate in lending and stifle the development of
consumer lending
14
No need for tension between credit reporting and
consumer data protection
Consumers Benefit From Availability of Independent, Unedited Source of Data
to Assess Consumer Credit Risk and Capacity. As a third party, independent
source of information, the extent of consumer control over credit bureau data
usually extends to acting as a key participant along with the data furnisher and
the credit bureau itself to promote data accuracy. Beyond data accuracy, the
consumer then usually has rights to review their data and control access to their
data. Credit reporting would not be useful to consumers as a trusted proof of
their risk if consumers could choose which specific data or accounts were
allowed to be maintained and shared.
15
No need for tension between credit reporting and
consumer data protection
Economic and Social Benefits from Robust Credit Reporting can be Achieved
without Sacrificing Meaningful Data Protections and Data Subjects’ Rights.
Details of consents and data protections can be designed to both (1) promote
data sharing and (2) give data subjects’ rights to access their on data, control
access to their credit bureau data by other parties, and contest inaccuracies.
Properly designed data protections need not trade robust credit reporting for
meaningful data protection. Both can be achieved.
16
6409 Fayetteville Rd
Suite 120-240
Durham, NC 27713
www.perc.net
(919) 338-2798 x803