BKR – Towards the optimal registration period of credit registrations

In countries worldwide, associations of credit information providers play a crucial role in registering consumer-related credits. They are mandated by regulation, operate under local law and their primary aim is consumer protection. The Dutch Central Credit Registration Agency, Stichting Bureau Krediet Registratie (BKR), has reviewed the validity of the credit registration period, especially with regards to the recurrence of payment problems after the completion of debt restructuring and counseling. Since 2017, Zanders and BKR are cooperating in quantitative research and modeling projects and they joined forces for this specific research.

In the current Dutch public discourse, diverse opinions regarding the retention period after finishing debt settlements exist and discussions have started to reduce the duration of such registrations. In December 2022, the four biggest municipalities in the Netherlands announced their independent initiative to prematurely remove registrations of debt restructuring and/or counseling from BKR six months after finalization. Secondly, on 21 June 2023, the Minister of Finance of the Netherlands published a proposal for a Credit Registration System Act for consultation, including a proposition to shorten the retention period in the credit register from five to three years. This proposition will also apply to credit registrations that have undergone a debt rescheduling.

The Dutch Central Credit Registration Agency, Stichting Bureau Krediet Registratie (BKR) receives and manages credit registrations and payment arrears of individuals in the Netherlands. By law, a lender in the Netherlands must verify whether an applicant already has an existing loan when applying for a new one. Additionally, lenders are obligated to report every loan granted to a credit registration agency, necessitating a connection with BKR. Besides managing credit data, BKR is dedicated to gathering information to prevent problematic debt situations, prevent fraud, and minimize financial risks associated with credit provision. As a non-profit foundation, BKR operates with a focus on keeping the Dutch credit market transparent and available for all.

BKR recognizes that the matter concerning the retention period of registrations for debt restructuring and counseling is fundamentally of societal nature. Many stakeholders are concerned with the current discussions, including municipalities, lenders and policymakers. To foster public debate on this matter, BKR is committed to conducting an objective investigation using credit registration data and literature sources and has thus engaged Zanders for this purpose. By combining expertise in financial credit risk with data analysis, Zanders offers unbiased insights into this issue. These data-driven insights are valuable for BKR, lawmakers, lenders, and municipalities concerning retention periods, payment issues, and debt settlements.

Problem Statement

The Dutch Central Credit Registration Agency, Stichting Bureau Krediet Registratie (BKR) receives and manages credit registrations and payment arrears of individuals in the Netherlands. By law, a lender in the Netherlands must verify whether an applicant already has an existing loan when applying for a new one. Additionally, lenders are obligated to report every loan granted to a credit registration agency, necessitating a connection with BKR. Besides managing credit data, BKR is dedicated to gathering information to prevent problematic debt situations, prevent fraud, and minimize financial risks associated with credit provision. As a non-profit foundation, BKR operates with a focus on keeping the Dutch credit market transparent and available for all.

The research aims to gain a deeper understanding of the recurrence of payment issues following the completion of restructuring credits (recidivism). The information gathered will aid in shaping thoughts about an appropriate retention period for the registration of finished debt settlements. The research includes both qualitative and quantitative investigations. The qualitative aspect involves a literature study, leading to an overview of benchmarking, key findings and conclusions from prior studies on this subject. The quantitative research comprises data analyses on information from BKR's credit register.

External International Qualitative Research

The literature review encompassed several Dutch and international sources that discuss debt settlements, credit registrations, and recidivism. There is limited research published on recidivism, but there are some actual cases where retention period are materially shortened or credit information is deleted to increase access to financial markets for borrowers. Removing information increases information asymmetry, meaning that borrower and lender do not have the same insights limiting lenders to make well-informed decisions during the credit application process. The cases in which the retention period was shortened or negative credit registrations were removed demonstrate significant consequences for both consumers and lenders. Such actions led to higher default rates, reduced credit availability, and increased credit costs, also for private individuals without any prior payment issues.

In the literature it is described that historical credit information serves as predictive variable for payment issues, emphasizing the added value of credit registrations in credit reports, showing that this mitigates the risk of overindebtedness for both borrowers and lenders.

Quantitative Research with Challenges and Solutions

BKR maintains a large data set with information regarding credits, payment issues, and debt settlements. For this research, data from over 2.5 million individuals spanning over 14 years were analyzed. Transforming this vast amount of data into a usable format to understand the payment and credit behavior of individuals posed a challenge.

The historical credit registration data has been assessed to (i) gain deeper insights into the relationship between the length of retention periods after debt restructuring and counseling and new payment issues and (ii) determine whether a shorter retention period after the resolution of payment issues negatively impacts the prevention of new payment issues, thus contributing to debt prevention to a lesser extent.

The premature removal of individuals from the system of BKR presented an additional challenge. Once a person’s information is removed from the system, their future payment behavior can no longer be studied. Additionally, the group subject to premature removal (e.g. six months to a year) after a debt settlement registration constitutes only a small portion of the population, making research on this group challenging. To overcome these challenges, the methodology was adapted to assess the outflow of individuals over time, such that conclusions about this group could still be made.

Conclusion

The research provided BKR with several interesting conclusions. The data supported the literature that there is difference in risk for payment issues between lenders with and without debt settlement history. Literature shows that reducing the retention period increases the access to the financial markets for those finishing a debt restructuring or counseling. It also increases the risk in the financial system due to the increased information asymmetry between lender and borrower, with several real-life occasions with

increased costs and reduced access to lending for all private individuals. The main observation of the quantitative research is that individuals who have completed a debt rescheduling or debt counseling face a higher risk of relapsing into payment issues compared to those without debt restructuring or counseling history. An outline of the research report is available on the website of BKR.

The collaboration between BKR and Zanders has fostered a synergy between BKR's knowledge, data, and commitment to research and Zanders' business experience and quantitative data analytical skills. The research provides an objective view and quantitative and qualitative insights to come to a well informed decision about the optimal registration period for the credit register. It is up to the stakeholders to discuss and decide on the way forward.