Why reporting student loan default data to credit reference agencies is a doubtful deterrent
The Ombudsman recently reviewed the procedures for approval of loan applications and recovery of debts under the non-means-tested loan scheme of the Working Family and Student Financial Assistance Agency (“WFSFAA”). One major recommendation in her review report is to deter default loan repayment by reporting the students’ loan default data to credit reference agencies in Hong Kong (the “Proposal”).
There is only one consumer credit reference agency in Hong Kong, namely, TransUnion. The Proposal in effect envisages the transfer of the borrowers’ very private and sensitive data from a Government agency to this commercial enterprise. Under the Code of Practice on Consumer Credit Data, TransUnion is regulated by us in relation to data collection, accuracy, use, security and access and correction. Importantly, it is not subject to the direct oversight of the Hong Kong Monetary Authority as the financial regulator. TransUnion's majority shareholder is the US-based multinational company, TransUnion group, while the major local banks are the minority shareholder.
All along, TransUnion serves the banks and licensed money lenders in Hong Kong almost exclusively in assessing consumer credit worthiness. Individually they contribute consumer credit data (gained through their daily consumer transactions) to the central database maintained by TransUnion and use the pooled data to facilitate decisions on providing credit facilities to consumers. At present, TransUnion operates as a closed system in that generally it does not accept credit data provision or access from entities other than banks and licensed money lenders.
Some commentators have spoken in favour of the Proposal. While we appreciate that the gravity of the problem of loan default must be addressed and deterrent measures have to be found, we cannot, from a privacy and data protection perspective, support the Proposal. We have found that many of the arguments in support of the Proposal are based on some common misconceptions.
Misconception 1: the Proposal is the only option available to achieve a greater deterrent effect
There are many ways to skin a cat. One obvious option is for the debt collection team to get tough on the defaulters. We have no knowledge of the present efficiency of WFSFAA’s debt recovery procedures as we are not the regulator with a performance audit role. But it does appear that WFSFAA had adopted a pretty tolerant approach towards students in default. It seems that no proactive action is taken to collect outstanding debts until they are six months in arrears. Even if legal proceedings were instituted by the Department of Justice, we doubt if bankruptcy proceedings are invariably used as a last resort to recover the debt.
Another obvious option is to impose a penalty surcharge or raise the interest rates for late payments.
It is also useful to learn from the arrangements adopted in other countries. For example, in Australia, New Zealand and the United Kingdom, student loans are incorporated into the taxation system and treated as tax liability. Repayment is triggered once a compulsory repayment threshold is reached. The threshold is set to take into account the student’s taxable income amount. The actual repayment amount also varies with the taxable income amount. This system thus ensures repayment of student loan is linked to the borrower’s ability to repay, and the debt recovery procedures are as robust as those for tax.
Further, if the Government prefers not to take a hard line itself, there is no reason why WFSFAA does not seriously consider contracting out the debt collection function to law firms, as banks normally do for loan recoveries. In case people are concerned about the costs of legal proceedings, we should note that as a matter of legal practice, such costs could be sought from the defaulter.
Misconception 2: the Proposal will be effective in generating a deterrent effect
Under the present closed operating system, TransUnion computes credit scores and compiles credit reports for individual consumers based on the credit information it holds. TransUnion’s algorithm for computing the credit score and how banks make lending decisions based on the credit scores and the credit reports are entirely their prerogative. This should not generate much of a public concern as the banks and money lenders, being both contributors and beneficiaries of the credit data, have a vested interest themselves in ensuring the successful operation of the credit reference agency. As shareholders and directors of the company, they have a say in how TransUnion operates in their favour.
However, WFSFAA as an outsider has absolutely no control over the effect on the defaulter for disclosing his or her default data to TransUnion. Conceivably the Proposal has a negative effect on the defaulter but whether it would produce an insignificant or a disproportionately negative effect on the defaulter is anyone's guess. For example, where the default data belongs to borrowers who have the ability to repay the loan but choose not to do so, we cannot rule out the possibility that little deterrent effect would be created if the banks make lending decisions purely on the borrowers’ repayment ability.
We should note that TransUnion as part of its operations amass on its own initiative consumer credit data from official public records which include legal action for debt recovery. In the event that the Proposal does not generate a deterrent effect great enough to obviate the need for commencement of legal proceedings, the Proposal would be redundant.
Conversely, where the default data belongs to borrowers who have genuine financial difficulties, its disclosure may not result in loan repayment. This is stating the obvious, otherwise bad debts would be a novelty for banks.
Further, WFSFAA plans to implement the Proposal for only the serious default cases where the defaulters owed more than $100,000 and have ceased repayment for over 12 months (770 such cases as at 31 January 2015). In other words, the Proposal has no effect on the majority of default cases. Some artful students might even adjust their repayment patterns to avoid being caught.
Misconception 3: the Proposal concerns only the student borrowers
The Proposal has implications for everyone in terms of privacy and data protection. It in effect opens a floodgate to requests of a similar nature from other government departments and private sector organisations which are also keen to recover outstanding debts from their clients. The ensuing open system may further trigger demands from these credit providers to access TransUnion’s credit records. These developments will result in an expanded consumer credit reference system serving the Hong Kong community as a whole. In the event, credit reporting will become a vital part of the city’s financial infrastructure and an activity of public interest. New legislation may be warranted in the circumstances, similar to the introduction of legislation to regulate the Electronic Health Record Sharing System.
Some commentators have argued that these privacy concerns are unwarranted as each debt is unique and should be treated based on its own circumstances. I do not believe WFSFAA can vow on behalf of all government departments (not to mention the private sector) that they will never quote the Proposal (if adopted) as a precedent for supporting similar requests in future. After all, debts are debts, irrespective of the difference in their nature, and organisations seeking to disclose the default data to TransUnion would argue that they do share the common objective of deterring default and encouraging repayment.
Misconception 4: the Proposal can be expeditiously implemented
This is far from the truth. As mentioned above, TransUnion and the credit providers are regulated under the Code of Practice on Consumer Credit Data which we issue under sections 12 of the Personal Data (Privacy) Ordinance. Before revising the Code to allow the implementation of the Proposal, section 12(9) of the Ordinance requires me to undertake a public consultation to solicit the views of the stakeholders and the interested parties concerned.
In this regard, it is worthwhile to recall the findings of a public opinion survey we undertook in February 2012 which suggested that the majority of the students and the general public were against the Proposal. Importantly, the survey actually identified support for the Proposal from 60% of the respondents who had little or no knowledge of its privacy implications. However, after they had been informed of the privacy concerns, the percentage of respondents indicating support dropped to only 35%. We do not believe that with the lapse of three years, the public sentiment has changed much.
We fully appreciate that student loans are funded by public money and it is of utmost importance that we should explore effective means to tackle the default problem. As explained above, the Proposal entails serious implications for privacy and data protection, and is therefore a non-starter.
We have ventured to suggest some less privacy-intrusive alternative measures to deter default. However, as an outsider, we cannot meaningfully evaluate the suggestions. The onus is on the Government to respond whether they can be pursued and if not, why.