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Should defaults be forgotten? Evidence from variation in removal of negative consumer credit information
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.
AUTHORS: Nakamura, Leonard I.; Bos, Marieke
Should defaults be forgotten? Evidence from legally mandated removal
Swedish law mandates the removal of information about past credit arrears from the individuals? credit reports after three years. By exploiting a quasi-experimental variation in retention times caused by a change in the credit bureau?s timing of arrear removal, we are able to examine the causal effect of increased retention time on consumers' short- to medium-run credit scores, loan applications, credit access, and future defaults.> We find that a prolonged retention time increases the need for and access to credit relative to shorter retention times. Additionally, prolonged retention times seem to reduce the likelihood to default again two years after removal. We also find that in both regimes only a minority of the individuals (less than 27 percent) receive a new arrear within two years after removal, suggesting that only a minority of the individuals who received an arrear may be inherently high risk.> Alternatively, our results may be interpreted as suggesting that removal of credit arrears may induce borrowers to exert greater effort along the lines of Vercammen (1995) and Elul and Gottardi (2007). Either interpretation opens the possibility that credit arrear removal is welfare enhancing.
AUTHORS: Bos, Marieke; Nakamura, Leonard I.