ICO Guidance to Lenders on Defaults

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http://www.ico.gov.uk/upload/documen...3%20%20doc.pdf

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Re: ICO Guidance to Lenders on Defaults

Excellent document for clearing up some of the questions on defaults, sadly not always in the favour of the debtor, particular points of interest in answer to questions previously posted:

Recording the amount of default

29 Original amount and current balance

Default records should show the original amount of the default as a snapshot in time and should reflect subsequent payments by showing the current balance of arrears. A common cause of disputes relates to the accuracy of the current balance. The current balance should be filed both by those who file monthly account information and those who file only defaults. It should be updated regularly. Defaults should be shown as satisfied where all payments have been received. If the individual no longer owes any money to the lender the balance should be shown as zero. The satisfaction of defaults is discussed at paragraphs 49 to 51.

30 When ‘in collection’ Where debts are passed for collection to internal or external debt collection departments or agents, the lender is responsible for keeping the record of the default and any outstanding balance accurate and up to date. The lender will need to make sure that those responsible for collection report payments to them or directly to the agency (or both) to make sure internal records and those of the credit reference agency are kept up to date. The account record on the agency file should continue to show the name of the lender and not any outside collection agent. This situation is to be distinguished from that where debts are assigned or sold to debt collectors. The sale or assignment of debts is dealt with at paragraphs 52 to 54. The date of default

31 The date of default recorded on the file should be the date on which a decision to file a default becomes effective according to the criteria discussed in paragraphs 9 to 16. If a notice of intention to file a default is served (see paragraphs 32 to 37), the default date should be the date the notice becomes effective. When a default is filed after a genuine and agreed variation in payment schedule has broken down, it should record the date of that breakdown subject to the conditions described in paragraph 21.

Notices of intention to file a default

32 Lenders should tell their customers about filing information with a credit reference agency as part of the account opening procedure, in line with the requirements of the ‘fair processing code’4. This explanation will not normally refer explicitly to defaults and will often be distant from the events which cause them. Therefore we strongly recommend that a notice of the intention to file a default should be served. Many lenders now subscribe to trade association codes of practice which require this. This practice helps the transparency of the credit reference process and may even prompt payment, so avoiding the need to file a default at all.

33 Notices to comply with Sections 13.7 of the Banking Code5 and 7.5 of the Lending Code6 should provide adequate warning. A notice of intention to file a default can be sent with a formal default notice served under Section 87 of the Consumer Credit Act 1974. Where lenders are not required to issue these notices, they can send an intention to file a default through a final demand, letter or relevant account statement, which should make clear not only the intention to file but also the date of the intended default. The date should allow the customer enough time to respond properly. Lenders who have to provide a notice of intention to file a default under a relevant code of practice should be aware that not complying with the code may be taken into account in any assessment of the fairness of their processing.

34 When a default occurs in line with the criteria in this guidance, and the lender has given the customer 28 days notice of the intention to file a default, then subject to paragraph 37, the lender may supply this information to a credit reference agency despite no advance warning when the account was opened.

35 It may not be necessary to serve a notice on all occasions. We accept there are cases when there should be no doubt over a default, for example, cases:

• involving fraud;
• where the lender has been notified under the terms of a bankruptcy or IVA;
• where there has been successful court action or repossession; or
• where a customer has made no attempt to resolve their arrears.

36 We do not believe that on its own a notice of intention to file a default amounts to harassing the debtor. We accept that lenders need to take care in the wording and use of notices to avoid the possibility of harassment.

37 If a borrower fully meets the terms set out in a notice of intention to file a default, it follows that the lender should not file the default.

Accuracy of a lender’s default records

39 Records Any default record should be accurate. We normally expect a lender to keep records that are necessary to show an agreement exists and to support filing a default. We would also expect a lender to be able to produce evidence to justify a default record they had placed on a credit reference file. Not having any supporting records may indicate a breach of the data protection principle requiring personal data to be adequate, relevant and not excessive for the purpose for which it is processed. A record that a notice of an intention to file a default was sent, if not a copy of the notice itself, will help lenders to comply with this requirement.

40 Factors to be taken into account in enforcement Any decisions on enforcement action will be taken in accordance with our Regulatory Action Strategy. When we consider enforcement action in cases where there is inconclusive evidence of whether a default did or did not occur, or the amount of a default, we must make a judgement on whether we consider that the Information Tribunal would support a view that a default record filed with an agency is incorrect or misleading. To reach a judgement we will consider, among other factors:

• any evidence that exists, even if it is inconclusive;
• the credibility of the data subject;
• the credibility of the lender;
• the reliability of the lender’s internal procedures;
• the existence of other similar complaints about the lender; and
• the use which the customer, or lender has made of other mechanisms to determine the accuracy of the record, for instance the courts or a relevant ombudsman scheme.

41 Credit reference agencies potentially have a defence against action through the courts by individuals who successfully challenge the accuracy of data received from a lender. However, this defence is only available if the agency takes reasonable steps to make sure the data is accurate and, as soon as they become aware of the challenge, takes steps to mark the file accordingly7. Records where the accuracy is challenged can be marked as ‘under query’. This marker alone is unlikely to be sufficient to provide protection against claims, including those for compensation. Agencies should therefore ask the lender to
substantiate the disputed information within a reasonable time frame, for example, 28 days, and, if the lender is unable to substantiate the disputed information in that time, should suppress the information from the file.

Unresolved disputes

42 Lenders are faced with difficult decisions when considering recording defaults which are disputed by the customer. It is not our role to arbitrate in disputes between borrowers and lenders. However, when we consider complaints, we will conclude, where there is clear and sufficient evidence that a default has not occurred, that it is likely that the lender has not complied with the data protection principle which requires that personal data are accurate.

43 If we conclude that there is a genuine, reasonable and unresolved dispute between the borrower and lender, then we are likely to find that personal data have been processed unfairly if a default has been filed. Defaults filed in these circumstances may also be inadequate for the purpose of credit referencing in that they do not provide meaningful information about the creditworthiness of the customer.

44 These are difficult judgements to make. Although none of the following will necessarily be conclusive, we will take into account these factors.

• Is the customer able to produce evidence that they disputed that a default occurred?
• Did the customer dispute the default before the lender announced their intention to file a default or after?
• What is the nature of the dispute? For instance, does the customer allege that the agreement has been breached, for example, because the goods supplied were faulty, or does the customer simply dispute the amount of the default?
• What evidence has the customer produced to support their side of the dispute?
• Has the lender simply ignored this evidence or have they produced evidence to support their version of events?
• If the goods financed were supplied by a third party, has the lender taken reasonable steps to check the accuracy of the information supplied about the dispute?
• Does the customer argue that payment is owed not by them but by a third party such as an insurance company, and, if so, is there any evidence?
• Has the customer told the lender that they are exercising set- off rights?
• Is the customer defending a court action by the lender to obtain a judgement, and what is the nature of their defence?
• Has a court refused judgement to the lender and, if so, on what grounds?
• If the dispute has not been before a court, is the lender prepared to test their claim by seeking a CCJ or decree against the customer? If not, why not?

45 We will not necessarily ask a lender to remove default records while they are carrying out their initial investigation to establish whether a dispute is genuine, reasonable or unsolved. However, there should be no unnecessary delay in this investigation. In these circumstances, defaulted accounts under investigation should be marked as ‘under query’ on the credit reference agency file.

The ‘sale’ or assignment of debts on defaulted accounts

52 When the rights to a debt are sold to a third party, the lender has to make sure the records with the credit reference agency are accurate, up to date and adequate. If they want information about the debts to continue on the credit reference file they will need to come to an agreement with the purchaser about who is to be responsible for this.

53 If the purchaser agrees to take control of the record, the customer should be informed that the debt has been sold or assigned and to whom. The credit reference agency file should be changed to show the name of the purchaser and that the rights to the debt have been sold or assigned. The purchaser should then make sure the record is kept up to date including changes to the amount still owed. The purchase should not affect how long the record is kept. It should be removed six years after the default.

54 Where the purchaser of the debt does not agree to take control of the record, the original lender, and at least in part the credit reference agency, will remain responsible if the original record is kept on the file. When the debt is sold or assigned, the customer will no longer owe any money to the original lender. If the record is not removed, the sale or assignment should be recorded and the balance should be shown as zero. The customer should still be told who the debt has been sold or assigned to.