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
Organization of today’s 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
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
Results of 1999-2000 World
Bank survey of public and
private credit registries
Survey sample by country
Region
Public CIR Private CIR
Number of obs by:
Country
Country
Firms
Latin America
Africa
26
13
17
1
29
1
12
4
6
5
66
7
6
4
1
36
7
8
5
2
52
(includes 8 nations in BCEAO)
W. Europe
E. Europe
Asia Pacific
Other
TOTAL
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
Public vs. Private
Credit Registries
Feature
Public
Private
Source of
information
Participation
mandatory?
Positive Info?
Supervised
institutions
Yes
Varied sources
Yes
In some cases
No
Borrowers assigned Yes
No
a rating?
Minimum loan size In some countries No
Fee for service
No charge or
minimal charge
Yes
Institutional Arrangements for
Private Credit Registries
Institutional Type
Pros
Cons
Private firm w/no
bank ownership
Private firm w/ bank
ownership
All types of data,
independence
All types of data,
Special access to
bank data
Access to bank data
Integrity
Retail & non-bank
data, broad cover,
historical record
In-depth data on
commercial sector
No automatic
access to data
Independence may
be questioned
Bank association
Chamber of
Commerce
Commercial &
Credit insurance
firms
Only bank data,
only bank access
No bank data,
Limited funds for
modernization
Limited coverage,
High cost per entry
Who submits information to
public and private registries?
Public
(of 29,
w orldw ide)
35
30
No. of registries
25
Private
(of 28 in
LAC)
20
15
10
5
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Firm data collected by
public and private registries
Public
Credit
Registries
(30
worldwide)
Private
Credit
Bureaus
(26 in Latin
America)
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Percent
Distribution of data by
public and private registries
100
80
60
40
20
0
Consumer Attention:
Survey Responses
Comparing Private and Public Registries
35
30
25
20
15
10
5
0
Private
Public
Access to
own data
Consumer
Relations
Department
Complaints
taken by
phone
Protocol for
taking
complaints
Comment on
record
Percentage of Banks which consult a
credit registry for consumer loans
no
16%
yes
84%
Percentage of Banks which consult a
credit registry for small business loans
no
7%
yes
93%
Importance of Registry information relative to
other sources of creditworthiness
35
number of firms
30
25
20
15
10
5
0
Collateral
Financial Standing of Borrower's History
the Borrower
with the bank
Information from a credit registry is more important
Information from a credit registry is less important
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.
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
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
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
Emerging elements of “good practice”
Credit reporting and bank supervision
• Supervisors include financial institution’s 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
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
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