Should Defaults Be Forgotten? Evidence from Variation in Removal of Negative Consumer Credit Information

52 Pages Posted: 20 Aug 2014

See all articles by Marieke Bos

Marieke Bos

Swedish House of Finance - Stockholm School of Economics; Vrije Universiteit Amsterdam; Consumer Finance Institute, Federal Reserve Bank of Philadelphia; Tinbergen Institute

Leonard I. Nakamura

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: July 1, 2014

Abstract

Practically all industrialized economies restrict the length of time that credit bureaus can retain borrowers’ negative credit information. There is, however, a large variation in the permitted retention times across countries. By exploiting a quasi-experimental variation in this retention time, we investigate what happens when negative information is deleted earlier from credit files. We find that the loss of information led banks to tighten their lending standards significantly as the expected retention time was diminished from on average three-and-a-half to three years exactly. Simultaneously, we find that borrowers who experience this shorter retention time default more frequently. Since borrowers nevertheless obtain more net access to credit and total defaults do not increase overall, we cannot rule out that this reduction in retention time is optimal.

Keywords: Household finance, Consumer credit, Lending policy, Credit scoring

JEL Classification: C34, C35, D63, D81, G21

Suggested Citation

Bos, Marieke and Nakamura, Leonard I., Should Defaults Be Forgotten? Evidence from Variation in Removal of Negative Consumer Credit Information (July 1, 2014). FRB of Philadelphia Working Paper No. 14-21, Available at SSRN: https://ssrn.com/abstract=2482407 or http://dx.doi.org/10.2139/ssrn.2482407

Marieke Bos (Contact Author)

Swedish House of Finance - Stockholm School of Economics ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

HOME PAGE: http://www.mariekebos.org

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Consumer Finance Institute, Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Tinbergen Institute ( email )

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

Leonard I. Nakamura

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3804 (Phone)
215-574-4364 (Fax)

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