Seminar on Credit Reporting System and Chinas Economy The Peoples Bank of China and the World Bank T

1
Seminar on Credit Reporting System and Chinas
Economy The Peoples Bank of China and the
World Bank The Legal and Regulatory
Framework for Credit Reporting in the United
States and the European UnionDavid Medine
May 18, 2004
2
United States/European Union Regulation of Credit
Bureaus

• Statutory structure
• Legitimizes system
• Provides protection
• Encourages participation
• Poses risk of over-regulation

3
United States/European Union Regulation of Credit
Bureaus

• Participation
• Voluntary
• If perceived to be in lenders self-interest
• Mandatory
• Improves decisionmaking
• Increased competition
• New entrants can make educated credit decisions
• Encourage use of unsecured credit
• Greater access to credit
• Easier and faster

4
United States/European Union Regulation of Credit
Bureaus

• Process Protections
• adverse action notification
• disclosure rights
• dispute and reinvestigation
• record of inquiries
• obsolete information
• limitations on access -- permissible purpose or
  consent
• Principles accuracy, fairness and privacy

5
History of Credit Reporting in the United States

• Before World War II
• Credit relationships were more personal
• Merchants knew their customers
• Consumers were less mobile

6
History of Credit Reporting in the United States
Vastly increased demand for credit
7
Changes After World War II

• Increased population
• Population more mobile
• Computerization of consumer reporting information
• Consolidation of industry

8
Problems That Led to the Fair Credit Reporting Act

• No restrictions on access to information about
  consumers
• Consumers were unaware that credit reports even
  existed
• Even if aware, consumers could not challenge
  incorrect information

9
Current FCRA

• Key terms "consumer report" and "consumer
  reporting agency
• Not limited to credit
• Offers legal framework to regulate databases used
  to make eligibility decisions
• Improves risk analysis in wide range of economic
  sectors

10
Current FCRA

• No licensing or registration requirements
• Safeguards based on law enforcement and private
  lawsuits
• Guiding principles of statute
• Privacy
• Accuracy
• Fairness

11
Key Provisions

• Permissible purposes
• Alternative to consent
• Limited government access to information
• Generally initiated by consumer action
• Record of inquiries
• Access

12
Key Provisions

• Reinvestigation and dispute procedures
• Disputed information must be verified or deleted
• Notice of adverse action
• Obsolete information
• Enforcement
• Government
• Private lawsuits

13
Furnishing Information

• Voluntary system
• No requirement to furnish information
• Vast majority of creditors conclude it is in
  their collective interest to regularly report
  information -- at their own expense
• Greatly improves risk control
• Continue voluntary reporting even with increased
  regulation
• Threat posed by subprime lenders
• No reporting or no credit limit reporting
• Threat of legislation and negative publicity
  created pressure to report

14
Furnishing Information

• Voluntary system
• Contrast with Switzerland
• Known for privacy, yet
• Creditors have duty to report credit and late
  payments
• May need incentives or legal requirements to
  start new system
• U.S. system evolved as a voluntary one
• Value proposition may not be apparent with new
  system

15
Furnishing Information

• Voluntary system
• Positive and negative data
• Positive data permits fine tuning of offers
• Promotes competition
• Greater access to credit data permits new
  entrants to evaluate credit risk
• No access to competitor files
• Reduces concern of customer loss

16
Furnishing Information

• Ownership of data
• Furnishers do not assert ownership or control of
  data
• Derive value from credit reporting database
• Failure to report reduces risk control
• Recent effort to make furnishers responsible for
  accuracy of information reported

17
Scope

• Consumer not credit reports
• Covers
• Employment
• Insurance
• Landlord/tenant
• Wireless telephone service

18
1996 FCRA Amendments

• Greater access to information
• All information in the file
• Stronger reinvestigation process
• Thirty days to conduct investigation
• Steps required to insure deleted information not
  reinserted

19
2003 FCRA Amendments

• Free annual reports
• Identity theft provisions
• Proper document destruction
• Block fraudulent data
• Restrictions on state laws
• Limits on reporting health data
• Affiliate marketing restrictions

20
Regulatory Authority Role

• Interpretation
• Regulation
• Opportunity to adapt statutory requirements to
  unexpected developments
• Industry Guidance and Education
• Enforcement
• Studies

21
Regulatory Authority Role

• Individual disputes
• Dispute rights with credit bureaus in the first
  instance
• Local government may intervene in individual
  disputes
• National government only addresses systemic
  problems
• Order improved procedures
• Require file correction

22
European Union vs. United States

• EU
• Strict laws
• Lax, low-key enforcement
• US
• Sectoral legislation
• Strict, high visibility enforcement

23
European Union vs. United States

• US starting point
• Responding to problems that had developed with
  its credit reporting system
• EU starting point
• Broad concern about data protection
• Privacy as a fundamental right
• Need to harmonize laws within EU

24
European Union

• Convention for the Protection of Individuals with
  regard to Automatic Processing of Personal Data
• Basic principles for data protection
• Quality of data
• Process fairly
• Use compatible with collection purpose
• Collect only as much as needed
• Accurate and current
• Keep only as long as needed

25
European Union

• Basic principles for data protection
• Sensitive data
• Special protection for data concerning
• Race
• Political opinions
• Religious beliefs
• Health
• Data security
• Appropriate security measures

26
European Union

• Basic principles for data protection
• Additional safeguards
• Disclosure of
• existence of an automated personal data file
• its main purposes
• identity and location of controller
• Access to data
• Correction or deletion of illegally processed
  data
• Remedies for noncompliance

27
European Union

• No comprehensive EU legislation on credit
  reporting
• Credit reporting raises unique issues not always
  addressed in data protection legislation
• EU may need credit reporting directive to
  encourage credit reporting systems that cross
  member state lines