Erika-Rae Harvey, Guest Columnist
The basic theory behind a credit-reporting system is that it gives a certain degree of transparency that allows for the issuer of credit to better assess risks in lending.
The lender can tailor the price of credit according to the consumer's 'creditworthiness' or reputation for repayment of debt. The system should incentivise consumers to comply with credit repayment terms and should also improve access to credit for those who already have good reputations for repayment.
The component parts of the credit-reporting system in Jamaica are: the Ministry of Finance; credit bureaus; credit information providers (CIPs); the supervising authority, which is the Bank of Jamaica; and, of course, the consumer.
Credit bureaus are the entities that will be licensed by the finance minister to collect, store and disclose credit information about consumers' credit history.
The credit information providers are defined in the Credit Act Reporting Act of 2010 as banks, FIA licensees, building societies, securities dealers, business that sell under hire purchase, the publisher of information on lawsuits and judgments for debt claims, a credit bureau, insurance companies, moneylenders, Development Bank of Jamaica, National Housing Trust, and Students' Loan Bureau.
CIPs are allowed to provide information about consumers to the credit bureaus but a credit information provider can only share that information after undertaking all reasonable enquiries and investigations, to satisfy itself that the information is reliable.
As a result, it is certainly advisable that CIPs take early steps to assess their current record keeping, ensuring that information about consumers that might be passed to a credit bureau is accurate.
The supervising authority's mandate is to review and recommend applications for licensing and maintain general oversight of a credit bureau's operations. It is also the initial entity that will receive and investigate complaints made by consumers who may be adversely affected by the wrongdoing of a credit bureau.
The consumer is a procurer of credit. Any person who has entered into a credit agreement with one of the above-listed credit information providers may become part of the credit reporting system.
While the credit bureaus may obtain credit information about consumers without their consent, the credit information cannot then be released by the credit bureaus to a third party without the written consent of the consumer.
Other than reducing losses, the system allows credit grantors to approve credit applications more quickly and reduces processing and monitoring costs. As a result of this increased efficiency, the cost of credit could fall for some consumers.
Consumers themselves should also become more savvy as they make the connection between their individual credit history and the cost of borrowing.
The consumer who is suddenly armed with more information on their creditworthiness could also increase competition among lenders and drive borrowing costs down.
Consumers who monitor their individual credit history regularly will also help to curtail potential fraud by reporting the publishing of incorrect information in their reports to the bureaus.
This, of course, is the theory.
We can look to other jurisdictions to see that the system, while helpful, is not perfect. Lack of information, errors in reporting, lack of confidence in the system, improper use of information and poor regulation can all be obstacles to the realisation of all the advantages the system has to offer.
Erika-Rae Harvey is anattorney in the Montego
Bay office of law firm