AMNESTY ANALYSIS

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DEFINITIONS

� Adverse: When a credit agreement is not honoured and a default listing is added

to the consumer’s credit profile by the credit provider.

� Amnesty: Provides for the removal of consumer credit information that meets

certain criteria.

� Retention periods: The maximum period that a credit bureau may retain.

information on a consumer’s credit profile, regardless of whether the information

is negative or positive, for the purpose of credit assessment or credit scoring.

Calculated from the date of the event.

� Payment profile: A consumer’s payment history in respect of a specific

transaction.

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WHAT IS A CREDIT BUREAU?

� Credit bureaux host information on how consumers manages their accounts &

credit obligations and provides this to credit providers.

� Credit bureaux does not make credit granting decisions.

� Credit bureaux merely provide lenders with the information required to do an

affordability assessment (as required by the NCA) – assist with:

� Risk management;

� Enabling lenders to increase or decrease amount of lending;

� Reduction of the default rates; and

� Enabling borrowers to develop credit profiles

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WHAT IS A CREDIT BUREAU?

� Sources of information includes companies that offers credit (e.g. retailers,

banks and utilities companies) who provide account information and courts

(provides civil judgments, sequestrations and administration orders) – thus it is

not the credit bureaux’ data.

� Bureaux hosts positive and negative data – majority of all data hosted are

positive (+/- 85% is positive data).

� Duties in terms of NCA include amongst others:

� To host accurate, up to date and relevant information;

� Provide free credit reports (1 per annum) to the consumer; and

� Assist consumer free of charge to investigate and log disputes on

inaccurate information on credit reports.

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BACKGROUND

� Amnesty Regulations (GN R1209 in Government Gazette 29442 of 30 November

2006) contains the amnesty requirements.

� Bureaux had to expunge the information 1 June 2007.

� 31 August 2007: the bureaux had to submit an audit report to the NCR that the

information has been removed.

� 28 February 2008: an independent audit report had to be submitted by the

bureaux confirming the above – all registered bureaux at that time complied with

these requirements.

� Information was removed – bureaux did not keep a list of ID numbers that

benefitted through amnesty.

� A data comparison was, however, performed and about 600 000 consumers were

identified and used as a statistical sample – a statistically significant sample was

therefore used in preparing this presentation.

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Criteria for Amnesty as per the Amnesty Regulations (GN R1209 in Government Gazette 29442 of 30 November 2006)

Upon receipt of prima facie proof of judgment being paid up:

� Listing in respect of a civil court judgment

� Judgment amount must be R50 000 or less

� Judgment was listed on the consumer's profile on or before 1 September 2006

� The judgment was paid up before 31 December 2007

Automatic removal:

� Displayed on the consumer’s profile on or before 1 September 2006

� Civil court judgments of up to:

� R500 except if the consumer has 2+ unpaid judgments

� R5 000 if the judgment is older than 18 months, except if the consumer has

2+ unpaid judgments

� R50 000 if the full amount of the judgment was paid by 1 September 2006

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CONSUMER OVERVIEW – POST AMNESTY

• 64% of the individuals who benefitted from amnesty opened accounts

36%

64%

No Acc Opened P/A Opened Acc P/A

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CONSUMER OVERVIEW – POST AMNESTY (CONT.)

• 74% of the individuals who obtained credit had bad (3+) or adverse

accounts

13% 13%

30%

44%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Good Indeterminate Bad Adverse

Perc

en

t

Max delinquency

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CONSUMER OVERVIEW – POST AMNESTY (CONT.)

� 19% of the individuals had a judgment in the last 5 years

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RESULT OF ANALYSIS:

Most of the 64% of the individuals that opened an account after amnesty had

delinquent performance.

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REMOVAL OF INFORMATION BY BUREAUX:

� Credit bureaux are constantly removing information from consumer’s profiles

through:

� Data retention periods

� Clearance certificates

� Rescissions

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DATA RETENTION PERIODS

Categories of ConsumerCredit Information

Description

Display Period fromdate ofcommencement of theevent

Details and results of disputes

lodged by consumers

Number and nature of complaints lodged and whether

complaint was rejected. No information may be displayed on

complaints that were upheld.

18 months

Enquiries Number of enquiries made on a consumer’s record, including

the name of the entity / person who made the enquiry and a

contact person if available.

2 years

Payment Profile Factual information pertaining to the payment profile of the

consumer.

5 years

Adverse classifications of

consumer behaviour

Subjective qualifications of consumer behaviour which are

subjective classifications of consumer behaviour and include

classifications such as 'delinquent', 'default', 'slow paying',

'absconded' or 'not contactable‘.

1 year

Adverse classifications of

enforcement actions

Classifications related to enforcement action taken by a credit

provider including classifications such as ‘handed over for

collection or recovery’, ‘legal action’, or ‘write-off’.

2 years

Debt Restructuring As per section 86 of the Act, an order given by the Court or

Tribunal.

Until a clearance

certificate is issued12

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DATA RETENTION PERIODS

Categories of ConsumerCredit Information

DescriptionPeriod for which Information must be retainedfrom date of commencement of the event

Civil court judgments Civil court judgments including

default judgment.

The earlier of 5 years or until the judgment is

rescinded by a court or abandoned by the credit

provider in terms of section 86 of the Magistrate’s

Court Act, 32 of 1944.

Administration Orders As per the court order. The earlier of 10 years or until order is rescinded by

a court.

Sequestrations As per the court order. The earlier of 10 years or until rehabilitation order is

granted.

Liquidations As per the court order. Unlimited period.

Rehabilitation Orders As per the court order. 5 years

Other information Any information not included in a

category above.

2 years

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RETENTION PERIODS: TOTAL RECORDS EXPUNGED POST AMNESTY - on average per year

� Enquiries: 4,000,000

� Adverse: behaviour: 7,700,000

� Averse: enforcement action 1,700,000

� Judgments: 140,000

� Other categories data not available due to time constraint

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PROJECTED DELETION BASED ON INCREASE IN CREDIT ACTIVE CONSUMERS FOR 2013

� Enquiries: 7,000,000

� Adverse: behaviour: 14,000,000

� Averse: enforcement action 3,000,000

� Judgments: 235,000

� Other categories data not available due to time constraint

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CLEARANCE CERTIFICATES

� Section 71 of the NCA provides for removal of information regarding debt re-

arrangement of a consumer’s credit agreements or judgments granted against a

consumer.

� Bureaux must expunge all info connected to defaults preceding the debt re-

arrangement – this includes payment profiles.

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RESCISSION OF JUDGMENTS

� Bureaux must expunge all info relating to a judgment that has been rescinded.

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OVERVIEW OF CREDIT BUREAUX AND THE CREDIT MARKET

� Credit built into modern economic infrastructures.

� Responsible access to credit dependent on sound risk and affordability

assessment tools.

� Credit reporting systems integral to well-functioning credit markets.

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SUSTAINABLE LENDING

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� Screening stage: lenders need information about borrowers’ riskiness.

� High risk borrowers will be inclined to disguise their riskiness.

� Low risk borrowers will be inclined to highlight their low level of risk.

� Asymmetric information between borrowers and lenders can cause adverse

selection and moral hazard.

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ADVERSE SELECTION:

� Lenders unable to distinguish bad borrowers from good borrowers

� Interest rate charged determined by the ‘pooled’ experience of the lenders

� Good borrowers penalised at the expense of bad borrowers

MORAL HAZARD:

� Borrower incentive to default if information is not shared

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� Prevent adverse selection and moral hazard

� Credit decisions are made with the best possible information

Help lenders identify good borrowers, which:

� Improves risk management

� Enables lenders to increase amount of lending

� Reduces default rates

� Enables borrowers to develop credit profiles

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CREDIT BUREAUX

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CREDIT BUREAU

� Prevents over-indebtedness – ‘information sharing activity’ allows lenders to be

aware of a credit applicant’s level of indebtedness.

� Scoring systems developed using credit information – allows for quick

automated reliable lending decisions.

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SOUTH AFRICA

HAS A SOPHISTICATED

CREDIT BUREAU SYSTEM

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WORLD BANK’S DOING BUSINESS REPORT 2011

South African Rating

Getting Credit (rank) 2Strength of legal rights index(0-10) 9Debt of credit information index (0-6) 6Public registry coverage (% adult) 0Private bureau coverage (% of adults) 54.9

South Africa is ranked 4th in the world in terms of ease of gettingaccess to credit, based on the strength of legal rights and thedepth of credit information.

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FRAGMENTED / INEFFICIENT SYSTEM

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� Sector segmented information.

� Poor participation in the credit reporting system.

� Reporting of incomplete, inaccurate and outdated data, or only adverse or negative

data.

� Lenders placing great emphasis on negative/adverse data.

� Data retention periods do not correspond with the predictive power of the

information, or law requires predictive data to be removed.

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MATURE / SOPHISTICATED SYSTEM SUCH AS THE SOUTH AFRICAN SYSTEM

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� Widespread participation

� Principle of reciprocity

� Use of scoring models

� Full-file credit reporting system

� Fixed, reasonable data retention periods

� Reporting on consumers and commercial entities

� Appropriate regulatory framework

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THE ‘BLACKLIST MYTH’

� The term ‘blacklist’ refers to a database of negative info only.

� SA has both positive and negative data shared across sectors.

� Lenders make their own decisions based on their own credit granting policies and

appetite for risk

� When credit is granted it is not because there is no information on the credit

bureau, but because there is positive information

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CONSEQUENCES OF UNNECESSARY REMOVAL OF DATA

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� Non compliance with the NCA: lenders not able to do affordability assessment.

� Less data means more risk.

� Adverse selection will increase and lenders will not comply with the act (Ss 81(2) and 79

& 80). More risk – higher interest and charges (making credit more expensive and

possible leading to less credit granted).

� Moral hazard will increase – borrower will have more information that the lender which

could lead to over indebtedness.

� Over indebtedness:

� 9.05 million consumers with impaired records

� Overall consequence: an increase of systemic risk of the sector, economy and country.

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NEED FOR MORE COMPLETE DATA SET

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� 18.5 million credit active people in SA out of SA’s population (estimated at 50.59 million)

� Result: more than half of SA’s population not represented on the bureaux

� Solution = bureaux require access to more complete data, including:

� Municipal payment records

� UIF data

� Other government departments’ data

� Benefit:

� Expand access to credit of the population

� Small business development

� Contribution to GDP

� Increase in number of tax payers

� Can help government reduced bad debt

� By having more data, bureaux can provide lenders with the infrastructure to lend to

more people who never before had access to credit – can result in economical growth29

IMPACT OF FULL FILE CREDIT REPORTING: STUDY JAPAN

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FOUND

� Full file credit reporting system increased lending in the private sector by 20%.

� High creditor participation means consumers have greater access to affordable

credit from reputable lenders.

� Use of fully reported, bank and non-bank financial data increases the ability of

lenders to distinguish between good and bad risk borrowers.

� A better performing loan portfolio also increases a Japanese lender’s profit

margins and increases the amount of capital for loans.

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CONCLUSION

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� 64% of consumers who got amnesty are credit active.

� 74% of the above are currently delinquent.

� NB: Amnesty only wipes out the fact that a debt gets reported on, it does

not wipe out the debt.

� This means that a consumer who cannot afford credit will be granted

credit based on an inaccurate report and this will lead to over

indebtedness and an increase in defaults.

� Despite the risk on credit providers and negative impact, the amnesty

did not benefit the consumer as most are delinquent again, in other

words it has a big impact on the financial sector and possible increase in

systemic risk.

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CONCLUSION (Cont.)

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� Credit assessments shows that defaulting is habitual – amnesty does

not seem to change habit.

� In fact amnesty puts the consumer in a worse-off position.

� Credit bureaux expunge records via retention periods on a daily basis –

thus continuous “amnesty”.

� Can create a precedent: consumer expecting amnesty.

� Possible solution: consumer education

� Bureau spend approximately R3 million on consumer education.

� Bureaux co-funds the Credit Ombud’s Education Programme.

� National funding for education may assist in preventing delinquent.

consumers is required.

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Enquiries:Frank Lenisa: frank@compuscan.co.za

CBA: enquiries@cba.co.za

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Thank You

Presented by Frank Lenisa from Compuscan

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