What is a Credit Bureau - or rather, what should it be?

What is a Credit Bureau

- or rather, what should it be?

What is a Credit Bureau – according to the dictionary?

Sometimes called a credit reference agency, credit information company or credit register – but never a credit ratings company!

A private firm that maintains consumer credit data files and provides credit information to authorised users for a fee.

An agency that collects individual credit information and sells it for a fee to creditors so they can make a decision on granting loans. Typical clients include banks, mortgage lenders, credit card companies and other financing companies.

A credit bureau, also called a credit agency, consolidates information from creditors to create a report of individual consumer's credit history.

Establishment that makes a business of collecting information relating to credit, character, responsibility, and reputation of individuals and businesses, for the purposes of furnishing the information (credit reports) to subscribers.

That is still not all that clear so…

 A [credit] data exchange system

 Operated by a trusted third party

 A controlled method to register data about a

consumer’s or business’ financial behaviour

 In a locked box

 Accessed or used in a controlled way

 for specific and authorised purposes

 Such as to create a financial CV

 Largely mirrors what an applicant might have been

asked to provide in paper form for applications in the past

 Helps span the data asymmetry problem between

borrower and lender

What is the issue?



Lenders need to have reliable information to make

lending decisions



Consumers and businesses need to be able to give

evidence of their performance



Regulators need to be able to monitor risk at lender

and market level



No country has the perfect system – but some are

better.

See the ACCIS survey

.



The World Bank references this issue as

Increased quantity of information Increased productivity and growth Capital moves to best business ventures Increased chance of getting credit Good Credit Information Understanding the “bigger picture”...

What is the role of a credit bureau?

 The UK scores maximum on the World Bank depth of data index.  Credit bureau data can assist

lenders of credit risks and improve portfolio quality as it reduces asymmetry between lender and borrower.

 The repayment rate can increase by up to 80% when a credit

registry starts operation.

 Access to credit also increases by c10%.

Improved access to credit =

Nombre de contrat et de defaillance (en % de la population majeure)

Source: Banque Nationale de Belgique

P er ce n tage o f po p u latio n w it h at leas t on e cr edit ac cou n t

Why does it matter?

The Belgian experience since creating a positive bureau in 2003

49 50 51 52 53 54 55 56 57 2003 2004 2005 2006 2007 2008 3.90 3.95 4.00 4.05 4.10 4.15 4.20 4.25 4.30 4.35 P er ce n tage o f po p u latio n w it h at leas t on e d efau lt ed cr edit ac cou n t

How do they actually work?

1. Credit

Applicant

2. Request

for credit

3. Lender

5.Grant (or not)

for credit

6. Credit reports 4. Information request

3. Performance data

Credit Application stage

Y ? N

Types of data sharing

• Late payments

(over 90 days)

• Default

• Written Off

• Bankruptcies/

court data

Negative Bureau

• Negative +

• Up to date

(paid on time)

• Minor arrears

(up to 90 days)

• Other data e.g. forbearance

Positive/Full file Bureau

• Banking

Comprehensive – Multi sector

 Ownership/control models

► Government/Central Bank - e.g. Belgium, Bulgaria, Spain, Italy ► Banks – e.g. Ireland, Germany, Italy, Netherlands, Poland ► Private commercial CRAs – e.g. UK, Denmark, Spain, Sweden

 Data Models – bank only or comprehensive

► Public data only – that may be very limited or comprehensive e.g.

Denmark (changing)

► Negative only –Finland, Spain,

► Positive (plus negative and public) – UK, Italy, Greece, Hungary,

Sweden, Turkey

 Data providers

► Government only ► Bank only

► Traditional lender only

► Comprehensive/ Full file across other obligations [can include non

bank lending, energy, water, communications etc]

ACCIS 2010 survey of 37 members in EU

27 26 26 21 17 10 9 7 25 22 21 8 3 2 0 5 10 15 20 25 30 ed it an d st or e ca rd Ho m e pu rc ha se /m or tg ag e Lo an s Ov er dr af t Re ta il/ in st al m en t Te le co m s M ai l o rd er Ut ili ty Or ig in al a m ou nt o f cr ed it D ur at io n of lo an Ou ts ta nd in g am ou nt Pe ri od ic ity o f re pa ym en t In te re st r at e Ot he rs (p le as e de sc ri be )

Type of loan product Details on credit contract

ACCIS 2010 survey of 30 members

ACCIS 2010 survey of 30 members

27 26 26 21 17 10 9 7 25 22 21 8 3 2

Type of loan product Details on credit contract

To summarise

– the benefits of sharing positive and comprehensive data

 Reduces default rates (c 50%) because better decisions are made about customers at application and customers manage their agreements better

 Improves lending volumes (c10%) and increasing financial income

 Streamlines and speeds up the lending process

 Allows lenders to more accurately evaluate risk of each proposition and monitor and manage each agreement so that they can intervene at an earlier stage

 Better assessment of proposed forbearance measures

 Allows assessment and monitoring of portfolio quality

 Reduces fraud

Benefits for

Lenders - Market  Makes credit available to more low

risk customers c 10% uplift

 Restricts credit to high risk customers and direct them to advice sector instead

 Speeds up the credit application process by creating a transferable, reliable, consistent digital financial cv Makes it easier to shop around for the best product

 Incentivises consumers to manage their finances to maintain good payment histories

 Reduces the risk of over-indebtedness

 Enables customer to effectively check and challenge input information used by lenders

Benefits for

Borrowers - Citizens

 Wider and more appropriate consumer credit drives steadier financial market development and economic stability

 Potential to track and monitor economic activity at a macro level  Potential to track and monitor

activity at a geographic level  Potential to perform monitoring of

financial services providers

Benefits for

The optimal system – according to the World Bank

General principle 1:

 Credit reporting systems should have accurate, timely and

sufficient data - including positive - collected on a systematic basis from all relevant and available sources, and should retain this information for a sufficient amount of time.  What does sufficient data look like?

► enough to get a good view of the credit behaviour of the

data subject

► enough to get a good view of the commitments of the

data subject

► enough to cover as many data subjects as possible

 E.g. most consumers and businesses have a telephone – mobile or fixed

 It is a critical service for most businesses

The UK model

What is a Credit Bureau?



In response to the need



Recognition evolved with all stakeholders that working

together can build a system that benefits:

►

Consumers

Lenders

Economy



Information is just one part of an effective solution



Regulation, monitoring and enforcement are also key –

this bit is still evolving!

Government’s approach to data sharing

 Support increased data sharing to enable more responsible lending and support for consumers in difficulty

 Few legislative/regulatory interventions – encourage industry and consumer representatives to develop voluntary approaches  Collaborative approach to build understanding of data sharing

processes and systems

 Vital to protect privacy – strong engagement from UK

Credit referencing in the UK

Historically a number of reasons why UK has developed

 Deregulation of banks in 1970s promoted competition and choice

 Government policy for consumers to “shop around”

 Consumers started to open accounts with multiple lenders

 In 2004 a number of suicides gave focus to concerns over indebtedness

 At the same time, government also worried about financial inclusion

More

people bought

houses and other goods

as consumers became

more aspirational

The data in the UK

Public data



Electoral register



County Court Judgments

Shared credit data



Closed user group (CAIS)



Comprehensive

Derived



Links – names,

people, addresses

The Experian credit bureau in the UK

Industry Wide Data - comprehensive



Banks & Building Societies



Credit Card Issuers



Debt Purchasers



Finance Houses



Home Collected Credit



Insurance Credit



Home Shopping



High Street & On Line Retailers



Payday Loans



Telecoms & Internet Providers

 Limit

 Balance – current (and past balances)

 Payment profile – status code 0 – 6

 Flags

► Deceased

► Arrangement

► Debt Management Plan

 Behavioural data (cards only)

► Paid in full, part or minimum

UK credit bureau data – how is it delivered?

Associations

Alias

&

Summarised variables – the Delphi Block

UK experience

breadth and depth gives better decisions

 Holistic coverage is essential

 Comprehensive data

► All types of credit ► Traditional e.g. bank ► Non traditional e.g. Telco,

energy, water

 Positive data

► Limit ► Balances ► Performance

More data = growing discriminatory power

55 60 65 70 75 80 85 90 Gini Coefficient

Credit referencing in the UK

 3 main consumer and 5 commercial credit reference agencies

 Credit referencing well developed and in mainstream use for over 30 years

 Covers wide range of commitments and still growing

 Current landscape developed through close work between:

► Government – ICO, BIS, OFT

► Lenders and their trade associations

 A means to accurately and fairly use large amounts of (often) conflicting data

 Statistical basis using linear regression

 Uses outcomes of over 100,000 accounts – far more than any manual underwriter could ever take into account

 Ensures consistency and fairness – as long as underlying data is accurate

 Lenders consistently report in excess of 10% increase in approvals whilst maintaining book quality

 Highly effective for volume operations & speeds up decision process

 Allows lenders to out sort and manually underwrite “special” cases as referrals

The Credit Bureau

Regulatory Environment

What is a Credit Bureau?

The Credit Bureau Regulatory Environment

Experian

Credit Bureau

Bureau data is personal data and as such the 8 Data Protection principles apply.

Lenders will search the Bureau with the individual’s consent an the individual is notified what data will be obtained, how it will be used, what data will be supplied and how others will use it.

There are consumer rights including access to data which must be adhered to by the Bureau.

Bureau data must be accurate and consumers have the right to request their data is amended, deleted or suppressed.

Bureau must adhere to data sharing (and use) rules in the Principles of Reciprocity, which are administered by the Steering Committee on Reciprocity and underpinned by the Privacy Notices.

Bureau must respond to the consumer within statutory timeline

Regulation of consumer credit to transfer to the Financial Conduct Authority as part of UK regulatory reforms in the Financial Services Bill.

The consumer has the right to independent dispute resolution via the Financial Ombudsman Service (FOS) should they be unhappy with a firms decision.

Bureau’s subject to FOS jurisdiction must comply with FOS requirements on

Data protection

Data sharing

Statutory requirements

The data on consumers

 Public - Electoral register,(47.29m) Bankruptcy,(598k) Voluntary Arrangements, (270k) County Court Judgments (4.29m)

 Full positive shared data on over 400m credit agreements from more than 500 companies across a range of mortgages, personal loans, overdrafts, credit and store cards, mail order, home credit, payday loans, telecommunications, power and water suppliers, and Student Loans (default only).

 CIFAS fraud data

 Derived intelligence – different types of search footprints, links between addresses names, and people

► Fully reciprocal

► Tightly controlled – Consumer Credit Act, Companies Act,

Data Protection Act, Representation of the People Act, Codes of Conduct, client contracts

► Membership at default or full level

 Quality and integrity is key to success and confidence in model

 Data must be consistent and accurate

► Definitions agreed at an industry level

► Constant checks

► Audits and controls

 New client account opening

► Check business model (liaise with OFT if in doubt)

► Checks on applicant – Consumer Credit License, Data

The Experian credit bureau

The rules in the UK

What is a Credit Bureau?

Data protection act

Data Protection Act 1998…

Replaced 1984 DPA…

Followed the EU DP Directive



 Any organisation supplying goods or services ahead of payment can join CAIS

 CAIS has a consumer and commercial database ► Consumer data covers personal activity

► Commercial data ranges from sole traders to limited companies ► Links are created between databases

 For full membership lenders must notify their customers when accounts are opened that they will do so

► Experian offers standard wording for Privacy Notices (agreed with the ICO)

 For default lenders can notify at default – giving 28 days notice

► Defaults represent accounts where “the relationship has broken down such that

the lender would no longer do business with that customer – if they had that option”.

► Defaults are defined and rules set in the Guidance Note on Defaults which are

currently under review

 Customers’ non default data on existing accounts can only be shared with their explicit consent

 Consumers must be told if their data will be processed in automated systems and if credit scoring will be used

► Consumers have the right to object to automated processing and ask for a manual assessment

 Consumers must be told why they have been turned down

► They must be told if credit bureau data contributed to the decision and how to check it

► They have a right of appeal of the decision

 Consumers have right of access to their data at a cost of £2.00

► CRAs must deliver it within a max of 7 days ► They can ask for and/or access it

 Consumers have the right to dispute data and have it marked as disputed whilst it is being investigated

► CRAs have 28 days to investigate disputes

 Consumers have the right to add a notice to their data to explain it –

Notice of correction

 Consumers have right to break links with other people if

► they are no longer operating as a financial unit ► Have no joint financial agreements

 Data is retained for 6 years after the account is closed whether good

or bad

 Data must be accurate and up to date and processed fairly

 All uses are set out in the Privacy Notices and agreed with the ICO

 Cross Industry Code of Conduct for the use of shared data  Started 1999

 Cross industry agreement on data sharing  Code of conduct embedded in contracts

 Gives clear guidance on how data that is shared for the prevention of over-indebtedness may be used.

 Overseen by a cross industry group - SCOR  Administered by the credit reference agencies

Purpose of sharing data

Data is shared for the prevention of over-commitment, bad

debt, fraud and money laundering, and to support debt

recovery and debtor tracing, with the aim of promoting

responsible lending.

 British Bankers’ Association (BBA)

 Consumer Credit Association (CCA)

 Consumer Credit Trade Association (CCTA)

 Council of Mortgage Lenders (CML)

Steering Committee on Reciprocity

Representation

 3 x mainstream credit reference agencies

 Niche CRA – Teletrack

 Payments Association

The Principles of Reciprocity

Reciprocity in the UK

You get what you give at

● Portfolio = product or even brand or type within a product

● E.g. all credit cards/Sub prime credit card

2. Account within portfolio

● Account = A. N. Other account within the portfolio

● E.g. if only accounts opened after 1 January 2009 are shared then only those accounts may

 Full member – standard

► Supplies and gets full standard data

 Full member with credit and storecard additional data

► Supplies (if a credit or storecard issuer) and gets full standard data and additional credit and storecard behavioural data

 Default member

► Supplies and gets default data only

 Bank current account default member

► Supplies default and gets default and delinquent

 Debt collection member

 Supplies default and gets full if the account was shared at full

prior to default

Why lenders join up

 Sharing data encourages customers to:

► Understand their finances and pay if they possibly can

► Contact their lender to discuss any problems they might have at an early stage

► Keep their details up to date e.g. if they move

 Having access to the data enables lenders to:

► Use the shared data to check data accuracy and supplement missing information

► Use the shared data to make decisions about what terms to offer a new customer

 UK Government policy is to engage consumers in their financial wellbeing

 Encourage them to seek their credit file  CRAs must make it easy to get information  Regular engagement with Consumer Minister

 Most consumers (and consumer groups) support data sharing  Result of deliberate “education offensive” started over 10 years

ago

 Has normalised data sharing

 View escalated after suicides in 2004 and concerns over overindebtedness

Engagement with consumer groups

 Which?

► Regular meetings

► Monitors and checks data quality

 Consumer Focus ► Regular reports

 CC Water

► Engaged on Water data sharing

 MoneySavingExpert

► Regular articles and comment

CreditExpert is the “

go to

” source for credit files

Consumers and the Bureau

Some of the Bureau myths

A blacklist is maintained of bad payers

Anyone can get hold of my data

The blacklist

Security

The credit history of previous occupants at my

address impacts my credit rating

My credit information is not accessible to me

Previous occupants

Secrecy

The decision is made entirely by the bureau and

To summarise

– the benefits of a credit register

 Reduces default rates (c 50%) because better decisions are made about customers at application and customers manage their agreements better

 Improves lending volumes (c10%) and increasing financial income

 Streamlines and speeds up the lending process

 Allows lenders to more accurately evaluate risk of each proposition and monitor and manage each agreement so that they can intervene at an earlier stage

 Better assessment of proposed forbearance measures

 Allows assessment and monitoring of portfolio quality

 Reduces fraud

Benefits for

Lenders - Market  Makes credit available to more low

risk customers c 10% uplift

 Restricts credit to high risk customers and direct them to advice sector instead

 Speeds up the credit application process by creating a transferable, reliable, consistent digital financial cv Makes it easier to shop around for the best product

 Incentivises consumers to manage their finances to maintain good payment histories

 Reduces the risk of over-indebtedness

 Enables customer to effectively check and challenge input information used by lenders

Benefits for

Borrowers - Citizens

 Wider and more appropriate consumer credit drives steadier financial market development and economic stability

 Potential to track and monitor economic activity at a macro level  Potential to track and monitor

activity at a geographic level  Potential to perform monitoring of

financial services providers

Benefits for