Sunday August 5, 2007

Check on credit check

Stories by JOSEPH LOH

When credit reference agency CTOS made headlines recently, some parties spoke up in support of its services while many others slammed it. But one thing that all parties agree on is that Malaysia needs to set up a transparent credit bureau system that looks at both good and bad payments.

WHEN H.L. Phua (not his real name) found the house of his dreams, he was ecstatic. He placed a down payment and started the process of obtaining a loan to finance the puchase of the house.

He did not foresee any difficulty in obtaining the loan. He had been a dependable paymaster all his life, never missing a payment on car loans as well as credit cards.

Chung: ‘It is the responsibility of the subscriber to carry out further probes before making a decision’

But the first bank he applied to rejected him and several other banks did the same. On checking, he found the reason: he had stood guarantor for a loan 10 years' ago, which was now in default.

“I had forgotten about it, and had moved house since signing it. I found out that I was being rejected because it showed in my CTOS report – and it was only for a relatively small amount,” laments Phua.

“I understand my obligation as a guarantor, but what bothers me most is that no one had the courtesy to tell me why I was being rejected until a bank officer finally told me about CTOS.”

Phua is but one of the many people who have been – in one way or another – affected by an adverse CTOS report.

Now in its 17th year of operation, CTOS Sdn Bhd has ingrained itself into the financial system of the country, and most financial institutions (as well as industries that involve some form of credit) use its services as one of its tools to judge if a potential borrower or customer will be a good paymaster or not.

Suraya Hassan, credit operations director of Citibank Berhad, discloses that a CTOS report typically contains details of the customer’s legal status – for example existing summons or bankruptcy proceedings, the case and plaintiff details as well as the legal firm’s details.

Chung Tze Keong, chief executive officer of CTOS, says in an email interview that his company gathers information that is available in the public domain, mainly from the Companies Commission of Malaysia, the Insolvency Department, government gazettes and newspapers, the National Registration Department and the Registrar of Societies.

“CTOS updates its information every day, based on what is available. As soon as the information is published, it is picked up by CTOS and keyed into the database. Therefore, the information in the CTOS database is current.

“However, if information such as bankruptcy discharges are not advertised in the newspapers nor gazetted as required under the Bankruptcy Act and Rules, CTOS will not be able to update the information,” says Chung.

From a legal perspective, says Lim Chee Wee, secretary of the Malaysian Bar Council, there is nothing wrong with the service that CTOS offers.

“Currently, there are no laws in place that specifically govern the collation and dissemination of information.

“There could be other laws that CTOS may have breached but the gathering and dissemination of information per se may not be an offence. There is currently no regulatory framework, and this has led to abuse. This is evident from the numerous complaints, many of which have been publicised.”

The use of CTOS information is widespread, and Chung lists banks and finance companies, commercial firms, commercial firms, traders, securities firms, insurance companies, credit and charge card issuers, legal firms and foreign investors, among its clientele.

Datuk Moehamad Izat Emir, president of the Malaysian Malay Businessmen and Industrialists Association (Perdasama) – who is not so forgiving of CTOS – asserts: “The way CTOS conducts itself is totally irresponsible. It provides a list (to its subscribers) of anybody who is in debt of any kind. It does not matter how you are in debt, what amount or when you owe, or whether it has been settled.”

But there are others who are of the view that the blame should not fall squarely on CTOS. Steven Coyle, an American specialist in credit control based in Malaysia, says financial institutions share the responsibility of data updating.

Liew: ‘The decision-making process is not dependent entirely on credit reports’

“CTOS is just filling a hole that exists in the system. If CTOS is inaccurate, whose fault is that? They are not getting updated information from creditors. The thing is, banks put notices in the newspaper, and CTOS picks up on that.

“It is not CTOS that is blacklisting you – it is the banks that are putting it in, so whoever puts it in has an obligation to clean it up if the customer pays. Some of its records are updated, but it only updates those that it learns about.”

Lim says that although there may not be a legal duty to update the information, what is of great concern is that some banks and financial institutions are relying on the information provided by CTOS, knowing full well that such information may not be reflective of the actual credit worthiness of a borrower. The hardship and inconvenience caused is foreseeable and CTOS should ensure that the information it provides is updated.

In its own defence, Chung asserts, “CTOS does not rank or rate the creditworthiness of any individual or company, nor does it make decisions or give recommendations to reject or approve a transaction. It is the responsibility of the subscriber to carry out further probes before making a decision. The information provided by CTOS is merely a source of lead information.”

Like it or not, a CTOS report does have some bearing on the decision to grant the credit facility or not. Liew Swee Lin, group head, consumer banking, Alliance Bank says each bank has its own lending policies and criteria. By knowing the customer’s total credit commitment and history, banks will be able to assess the character worthiness, consumption behaviour and repayment capacity as well as complement the bank’s understanding of a customer’s credit behaviour.

“When issuing credit lines, banks must be responsible and ensure that borrowers can manage their credit responsibly, and loans are more readily available to those with a good history and proven track record.

“Credit information plays a very important role in credit assessment, but the decision-making process is not dependent totally and entirely on credit reports. There are other considerations to be taken into account such as the customer’s total and net disposal income to determine the loan repayment ratio, legal proceedings or bankruptcy against them, and present or future events may influence the decision as well,” she adds.

Mohd Izat, however, strongly feels that the CTOS database contains far too many inaccuracies for it to be a tool for evaluating credit worthiness. In the business world, disputes on payment are common.

“People do not pay debts unless it is legitimate. Many people make claims because they feel they are in the right, but until it goes to court and it makes a judgement, nobody is right or wrong. However, CTOS picks up your name and supplies it to banks and you cannot get a loan anymore. They are the instrument to prejudge you and sentence you before the courts do.”

»It provides a list of anybody who is in debt of any kind. It does not matter how you are in debt, what amount or when you owe« MOEHAMAD IZAT EMIR

He raises another point – businessmen sometimes find themselves in financial difficulties for reasons beyond their control, for example, in a currency crisis or the war in Iraq.

“But while we are clearing up our losses – and not our crime – we are made to look like someone who has no intention to pay, and this is what is happening to thousands of innocent people. CTOS should refund all the money they have earned, and banks are also answerable for using an unreliable source of information.”

He adds, “With CTOS, entrepreneurs have been deprived of growth, because all the banks that use CTOS are wrong. How can an organisation – which does not conform to the laws of the country – make millions of dollars by supplying the names of innocent people without notifying them? There have been countless protests, letters and resolutions, but this is the first time it has been so exposed.

“I would like to congratulate Datuk Kayveas for his guts and bravery and am very grateful to the PM and DPM for their open statements on this issue. But the country is not run by ministers – it is run by officers of the ministry,” said Mohd Izat.

What all parties agree on is that Malaysia needs a credit referencing bureau, in one form or another.

Says Coyle: “Malaysia does not really have a credit bureau system. People need to know how you are as a paymaster, if you have been a defaulter somewhere else. Bank Negara Malaysia (BNM) has CCRIS (Central Credit Reference Information System), but that is only available to banks. For example, telecommunications providers offering post-paid plans have no way to check on an individual.

One thing is clear. The Data Protection Bill, which protects private information, that was discussed some years ago must be looked at again.

Lim says, “It is now timely to introduce the appropriate safeguards to protect such information. Credit reference companies such as CTOS must be licensed, controlled and regulated. They must also be made to assume liability for inaccurate reporting that results in loss to any party.

“The Bar Council welcomes the directive by the Cabinet requiring banks to obtain the consent of borrowers before acquiring information from companies that supply credit information. This is a positive step towards establishing a regulatory framework that will safeguard the interests of consumers.”

CTOS too supports the recent decision of the Association of Banks in Malaysia (ABM) to obtain written consent from loan applicants before checking their financial history.

At the end of the day, the responsibility for maintaining a good credit record lies with the individual.

“It is the responsibility of consumers to maintain a healthy credit record. An individual must always take prudent measures to repay credit facilities promptly and not overstretch themselves by applying for credit facilities beyond their means.

“If consumers feel they have some financial setbacks, they should come forward and discuss with the financial institution on an amicable solution. BNM has also set up the Credit Counselling and Debt Management Agency (AKPK), which provides consumers with money management, credit counselling and debt management services,” says Suraya.

Related Story:
Penalise the bad and reward the good

News Poll

Latest Jobs from Star-Jobs

Latest from StarProperty