Good lending practices emphasize the lender’s responsibility, including when assessing a consumer’s creditworthiness. It should be possible to assess the borrower’s financial circumstances on the basis of the best information available and to scale the credit to be granted accordingly. In practice, the realization of responsibility in this case is often based on trust: The credit decision must be made on the basis of the consumer’s self-reported income and debt. This type of procedure inevitably shifts the responsibility to the consumer, as the creditor currently has no reliable way of verifying the information provided by the credit applicant. That is also why, from time to time, I head off the idea of a so-called positive credit register. Recently, the topic was raised in public discussion by Juska Roska, CEO of Samen Asiamastietro, and Rekka Matini, CEO of Sanbuan Consumer Finance, in the Guest Pen column of Helbert Senomat 5.1. in his published paper. The authors present their views on the problems of the current situation and the possibilities of a positive credit register to prevent debt problems.
A positive credit register would gather real-time information on a consumer’s overall debt situation, so that the existing debt of the borrower could actually be compared to the credit granted. This would better guarantee the accountability of lending and thus improve the consumer’s position as a debtor.
The payment default entry says too little, too late
Lending companies, of course, already have a negative credit register in place, where a consumer finds credit when they find the entry. However, a register like this one does not reveal the consumer’s debt burden, but only the part of the debt that has already advanced. Indeed, the default payment signal is often just the tip of the iceberg and an unfortunate late signal of possible over-indebtedness. At its worst, the consumer has had time to collect debt from various sources for several months before the default order appears to alert lenders to the default of that person. Due to the long delay in credit information entry, the lender is not even in a position to react in time, even if the consumer already owes a lot of debt to his or her neck when applying for credit. Roska and Matini declare in their writing the weaknesses of the negative credit register the very late and one-sided nature of information.
The default payment stops the debt cycle at that time, but usually milk is already in the country at this stage in the case of over-indebtedness. A positive credit register, on the other hand, would help to reduce the risk of over-indebtedness, as the development of the consumer’s debt burden could be assessed separately with each credit application.
Loan application processes will be automated and information digitized
even so, the introduction of an electronic register of consumer debt information would only be a natural step. Already now, everyone’s tax information is by law public, but it is somewhat controversial that the law prohibits the compilation of an electronic register of tax information, for example, to help lenders. Still, the only way to verify the information provided by the borrower about their income and debts is to ask them for a written tax certificate. In the electronic age, this kind of paper war seems unnecessary and causes extra work for both parties.
A positive credit record has multi-dimensional positive effects
Statistics show that the payment default records of Finns in recent years have come close to the highest figures since the previous recession. Therefore, it would be high time to switch to a system that would also see the authors behind the credit history information early enough. A positive credit register is already in use in most European countries and, according to international economic experts, increased transparency has only improved the reliability of creditworthiness assessment, as also noted in the above-mentioned article in Helbert Senomat.
At present, therefore, lenders have virtually no opportunity to know what kind of debt the borrower has to bear, which in turn generally forces them to raise the cost of credit – a consequence that once again feels in the consumer’s pocket. A positive credit register would reduce the risk to the lender and possibly also the cost of the loans over time. It would also undoubtedly be in the interests of the consumer to keep up to date with all his commitments through the register. “The real problem with over-indebtedness is that the consumer can repair his economy by constantly taking on new debt from several lenders,” Roska and Matini summarize in their essay, Helbert Senomat.
It is never in the interests of the lender or the consumer
In particular, to grant credit to a person who is actually insolvent, with costs ultimately falling on the debtor. Overdebtedness is a penalty, which is a barrier not only to obtaining a loan but also to obtaining a rental home, for example. So far, good credit practice is challenging to put into practice, as lenders lack appropriate tools for monitoring. A positive credit register would facilitate the implementation of good lending practice in accordance with the letter of the law and would allow the stumbling block to the invisible debt problem.