ABA Position Paper on Development of Credit Reporting Systems

2008 Policy advocacy2 700 x 466

Development of credit reporting systems in the Asia-Pacific region

1. The Asian Bankers’ Association recognizes the important role played by credit bureaus in the financial system. Lenders use credit bureau information to help set interest rates in accordance with the risk profile of individual borrowers and determine loan amounts in accordance with the credit capacity of individual borrowers. This leads to lower average interest rates, greater lending through reduced rationing and lower rates of delinquency and default. By helping financial institutions better understand borrowers’ risk profile and capacity, credit bureaus facilitate efficient and equitable allocation of credit throughout the economy as well as safer and sounder lending, benefiting both lenders and borrowers.

 

2. The ABA notes the findings of studies, [1] which show that the structure of credit reporting, bureau ownership and the type of information reported determine the extent to which positive results are achieved. In particular, we note the different results achieved with the use of full-file as opposed to negative-only reporting and comprehensive as opposed to segmented reporting, as well as in economies where private credit bureaus are operating in contrast to economies where only public credit bureaus are found.[2]

 

2008 Policy advocacy3 700 x 4663. We note the advantages of full-file vis-a-vis negative-only credit reporting. We agree that risks can be judged more accurately by lenders possessing more information in addition to past credit failures of loan applicants. Systems that only report serious delinquencies do not capture many moderately late payments (e.g., 30 to 60 days past due) that are indicative of higher risk. In addition, positive credit information provides a cost-effective way of gathering data on applicants who are making timely payments, including those among population segments who usually face discrimination, such as lower-income borrowers, women and young people. Full-file reporting also facilitates better assessment of a borrower’s capacity to carry a loan by revealing the individual’s existing lines of credit, associated balances, and credit limits.

 

4. Similarly, we note that comprehensive reporting, in contrast to segmented reporting, provides more information and allows for better predictions. In addition, comprehensive reporting provides a low-cost way of gathering data on those who apply for loans in another sector. We acknowledge the benefits of adding non-financial payment data, such as utilities payments, to consumer credit files, and the potential for these data to be used in making credit more available to historically underserved consumers and entrepreneurs who lack credit files or have too little information to adequately allow risk assessment.

 

5. The ABA also recognizes the benefits that private credit bureaus can bring. We note that public credit bureaus principally serve supervisory purposes, particularly in monitoring the safety and soundness of the financial sector, while private bureaus are established for the primary purpose of reducing information asymmetries and to improve risk assessment in lending. We agree with the view that private credit bureaus complement the role of their counterparts in the public sector.

 

2008 Policy advocacy1 700 x 4666. The ABA notes that given the importance of issues related to banking secrecy, privacy and confidential data, the adoption of full-file and comprehensive credit reporting needs to go hand in hand with the development of data protection systems that meet international standards that protect data subjects’ rights of notice, choice, control over access, dispute and correction of data.

 

7. Based on these findings, the ABA recommends that governments consider measures to promote full-file and comprehensive reporting to private credit bureaus that also effectively address privacy issues and the protection of confidential data. We urge APEC Finance Ministers to assist developing economies in the region in implementing these measures, beginning with a systematic survey of credit reporting systems in the region, including legal and policy frameworks, and identifying key areas that require regional capacity-building measures.

 

[1] The results of various studies on this subject are summarized in Michael Turner, Robin Varghese and Patrick Walker, The Structure of Information Sharing and Credit Access: Lessons for Policy (Chapel Hill, PERC, July 2008).

[2] The various methods of credit reporting are defined as follows: Negative-only reporting is the reporting of only negative information, or adverse payment data on a consumer, such as defaults, delinquencies, collection, bankruptcies and liens. Full-file reporting is the reporting of both negative information and positive information, which includes information on the timeliness of payments, including whether payment was on time, indeterminately late or delinquent, payment information which contains the payment date relative to the due date, oftentimes also data on account type, lender, date opened, inquiries, debt, and can also include credit utilization rates, credit limit and account balance. Segmented reporting is a system in which only data from one sector, e.g., retail or banking, are contained in reports. Comprehensive reporting is a system in which payment and account information, are not restricted by sector and contains information from multiple sectors, e.g., utilities payments.

X