Loan defaulters will soon be entitled to a 30-day notice from lenders before their names are submitted to credit reference bureaus (CRBs) for listing, in new Central Bank of Kenya (CBK) regulations intended to protect borrowers.
The CBK has published draft CRB regulations 2019 that prohibit banks, microfinance institutions as well as savings and credit co-operative societies (Saccos) from submitting the names of defaulters for listing without their knowledge.
The draft rules require financial institutions intending to report a customer to CRBs to inform him or her by writing or through electronic means and also send another communication informing them about the listing.
“An institution and a third party credit information provider shall notify the customer within one month before a loan becomes non-performing that the institution shall submit to a bureau the information on the loan immediately it becomes non-performing,” reads the draft rules.
These regulations, if passed, will entitle every customer to an updated credit score.
They are expected to address rampant complaints of customers who find their names listed with CRBs without their knowledge.
There are three CBK-licensed CRBs in Kenya; Transunion, Metropol and Creditinfo.
According to CBK data, gross non-performing loans for banks alone stood at a record high of Sh327.9 billion in February 2019, showing an increase in defaulters who risk negative credit reports.
About 20.55 million CRB reports affecting 379,613 customers were generated Between August 2010 and December 2017.
In the draft law, CBK says that customers will now have a right to know the details of the information their lender has submitted to CRBs and will have a chance to have it corrected if in dispute.
Further, a customer will also be entitled to a free copy of his or her credit report from each CRB or its agents at least once a year or within 30 days of receiving an adverse action notice.
CBK defines an adverse action notice as any that is issued by a lender to a customer conveying denial, cancellation or increase in any charges related to an existing or applied loan based on a CRB report.
A customer will also be entitled to a free credit report once every six months after making a request to a CRB to have inaccurate information corrected in the database.
In what will be another win for borrowers, any time a customer disputes a credit report, CRBs will have to immediately notify lenders of the dispute so that the report does not continue being used before the difference is resolved.
“The bureau shall, within 14 days, conduct investigation—If the bureau does not complete its investigation within 21 days, it shall delete the disputed information as requested by the customer,” the draft states.
Use of credit scores has yielded little in helping customers with good history with many loans averaging the same price despite the different scores.
CBK governor Patrick Njoroge has on several occasions said banks have been using the credit score as a tool for punishing customers instead of offering better rates to those with good scores.
Under the CBK proposals, lenders will be required to use customer’s credit scores as just one of the factors to inform decision-making process as opposed to solely relying on it to deny them loans.