Regulatory requirements & experience re Credit Bureaus

Gabriel Davel 22 October 2008

National Credit RegulatorSouth Africa

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In 2005, South Africa passed a National Credit Act, regulating all credit providers, credit bureaus & debt counselling

New legislation passed in response to bank failures in 2002, Inefficient allocation & high cost, particularly for low income & SME

finance Extensive research confirmed that credit market was dysfunctional … based on international best practice, but with significant

modifications

Act covers all consumer credit, bank and non-bank finance, furniture & consumer goods finance & developmental credit National Credit Regulator created to enforce Act• Approximately US$140bn of consumer credit, provided to 17 million

consumers• 3,232 credit providers with 29,811 branches

National Credit Act also covers regulation of credit bureaus regulation of debt counsellors collection & publication of statistics on credit market

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Overview of National Credit Act

Marketing practices

& disclosure

Agreements& quotes

Reckless

lending rules

Enforcement &debt collection

Introduce debt counsellingRegulate Credit Bureaus

Create National Credit Register

Interest & fees

Unlawful

agreements,

provisions

National Credit

Act

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Political perspective on regulation of credit bureaus … Prior to the Act, public anger at bureaus with demands to

close credit bureaus, or alternatively, wipe out all records as a once off “amnesty for the poor” … demonstrations & marches

• Partly motivated by over-indebted persons with bad repayment records, partly contentious judgment practices & doubtful credit provider practices … impacting on credit records & creating consumer resentment

• Also bureaus’ sloppy & unprofessional data management practices

“Self-regulation” ineffective, little credibility … bureaus not able to force credit providers, who are their clients, to change practices

Since legislation, credit bureaus not a political rallying point … there are now “rules created by parliament” to resolve valid concerns … threat

to ban bureaus averted, or to impose limitations on data sharing

credit bureaus de-politicised

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Better to regulate credit bureaus through specialist credit market legislation, not through "privacy legislation” …

Considerations in regulation of credit bureaus vastly different from generic “privacy considerations” Recognising that credit bureaus are in the business of “trading in

consumers’ private credit information”

Thus regulatory objective is not to minimise data sharing, but to

optimise data sharing, accuracy, efficiency & completeness regulate bureaus as part of credit market: attention to accuracy, Enforced through annual compliance reviews by auditors & ad hoc

inspections … for benefit of credit providers (credit risk assessment) and consumers (limiting of over-indebtedness)

Audits at implementation of Act revealed significant data problems reflect reality that bureaus earn living from credit providers, little

incentive to take action that may upset their “clients” … high tolerance for both data inaccuracy & under-reporting

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Summary of requirements of the Act

Fairly simple, concise: 5 sections + 4 regulations, approx 15 pages

Credit Bureaus1. Bureaus registered, pre-registration audits focusing on capacity to manage

data & deal with consumers2. Negative & positive data sharing, shorter retention periods for subjective

data, longer for objective repayment data & judgments3. Legal obligation on bureaus for data accuracy: (a) to assess validity of data

prior to loading, (b) to take reasonable steps to ensure reports are accurate4. Usual stipulations re: definition of sources, types of information, retention

periods, purposes for which data may be released

ConsumerNotified before adverse info to bureaus; Free access to credit report, annuallyIf information disputed, may not be reported until accuracy confirmed

Provisions for “data cleansing” at inception of ActCertain data had to be removed (once-off), + requirement for audit on data accuracy &

procedures

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Act also creates legal obligation for credit providers re submission of data

Information submitted must be accurate Provision of data to bureaus not compulsory But implicit requirement = Act requires ‘affordability

assessments and credit providers need the bureau reports to do affordability tests = have to supply in order to do enquiries

To inform consumers before adverse information supplied to bureaus

Consumer may claim cost for correcting inaccurate information

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Enforcement

InspectionPre-registration

+ Registration

Initial audit

1. Policies2. Data verification

procedures3. Complaints management4. Statistical samples

to assess data quality

EnforcementUndertakings & Agreements

(between bureaus & regulator)

Compliance Notice(public notice of areas of non-compliance)

Referral to Tribunal(deregistration or fine up to 10% of turn-over)

Prosecution in court

Credit Info OmbudEstablished by bureaus

to resolve complaints

Inspections by NCR

(own inspectors or forensic investigators)

Annual compliance

audit (own auditors)

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Observations from credit bureau audits

Inconsistent treatment of complaints

Insufficient follow-up where complaints indicate patters

Insufficient reasonability checks on data received from providers

Insufficient action on providers that provide inaccurate data

Certain data sources unreliable, yet no action

Policies & procedures not formalised, insufficient oversight by Boards of Directors

Self-regulation ineffectual

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Monitoring credit market through statistics received from credit bureaus

Bureaus submit quarterly report to regulator,

on aggregate credit activity & performance indicators

Published as overall indicator of credit market performance

… aggregated information on credit marketpublished quarterly

Table 1: Credit standing of consumers

CREDIT ACTIVE CONSUMERS JUN’ 07 SEP’ 07 DEC’07 MAR'08

CREDIT ACTIVE CONSUMERS 16.78m 16.90m 17.12m 17.14m

GOOD STANDING (#) 10.67m 10.52m 10.67m 10.55m

GOOD STANDING (%) 63.60% 62.24% 62.35% 61.56%

Current 47.47% 46.57% 47.17% 45.05%

1-2 months in arrears 16.13% 15.67% 15.18% 16.51%

IMPAIRED RECORD (#) 6.11m 6.38m 6.45m 6.59m

IMPAIRED RECORD (%) 36.40% 37.76% 37.65% 38.44%

3+ months in arrears 12.79% 12.63% 13.50% 14.26%

Adverse listings* 11.79% 13.12% 12.75% 12.80%

Judgments & administration orders 11.82% 12.01% 11.40% 11.38% TOTAL 100% 100% 100% 100%

Also:-Total enquiries vs % approvedDisaggregated by different sub-sectors of credit industryAverage impairment for different income groups

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Thank You !

www.ncr.org.za

Background information

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National Credit Actkey aspects that deal with fairness in credit market …

1. Negative option marketing & automatic increases in credit limits prohibited

2. Compulsory, standard 1-page pre-agreement quote on all agreements

3. “Penalty interest” prohibited; “In Duplum” rule introduced; Single premium credit life insurance prohibited

4. Changed structure of disclosure, away from “APR”, to separate disclosure & regulation of interest, initiation fees & monthly service fees

5. Prohibited arrangements that give one credit provider a preference over others, particularly in payment system or through payroll deduction

6. Prohibit specific contractual clauses that are considered unfair (not “unconscionable contract approach)

7. Create Register of Credit Agreements & regulate credit bureaus … to provide complete & accurate picture of payment profile & indebtedness

Fairness, predictability, consistency …

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Disclosure

1. Disclosure of cost of credit prior to establishment of agreement critical

2. 1 page ‘pre-agreement statement’ applies to all small agreements

3. Also prescribes minimum disclosure in advertisements