Credit Histories May Be Rewritten: What Scared the Deputies

Yesterday, February 11, deputies failed the Draft Law “On Credit History” and directed it for public discussion.

A group of deputies was motivated by noble motives to start working on the bill (No. 12260). According to the National Bank, during the war, cases of credit card fraud has increased significantly. Criminals not only steal money from accounts, but also actively apply for loans to their victims. Last year, Ukraine was shaken by a large-scale scam by a group of criminals who massively applied for loans to fallen soldiers.

Strengthening the protection of borrowers’ rights was named among the main tasks of the new document by one of its authors, MP Olha Vasylevska-Smahliuk, Deputy Head of the Verkhovna Rada Committee on Finance, Tax and Customs Policy. Similar motives for adopting the document were also declared by another co-author, Head of the same parliamentary Committee, Danylo Hetmantsev.

“Ensuring responsible consumer lending is one of the commitments made by Ukraine to the International Monetary Fund, in accordance with the Memorandum on Economic and Financial Policy of October 4, 2024,” adds Volodymyr Sytnik, lawyer, partner at K.A.C. Group.

A few weeks ago, the relevant Committee of the Verkhovna Rada recommended supporting the document, but the bill was “killed” at the very first hearing: the deputies supported the idea of protecting consumers of financial services from fraudsters, but completely rejected the way this idea was implemented. Iryna Herashchenko, Co-chair of the “European Solidarity” faction, reported on Telegram that the “credit” bill was the first to be sent for public discussion.

Typically, following the consideration of draft laws, the parliament makes one of three decisions: it adopts them as a basis, rejects them, or returns them for revision. However, there is a fourth option – the draft law is published in the official printed edition for national discussion, after which it is revised and submitted for a second first reading.

Such an unconventional move allowed the people’s representatives to kill two birds with one stone: to wrap up a document that was, in their opinion, harmful, avoid giving the IMF a reason for complaints.

We discussed in detail with lawyers what risks the deputies saw in the draft law “On Credit History”.

What Protection Against Scammers Is Offered?

The authors of the bill propose a fairly simple way to protect yourself from scammers who are swindling you out of someone else’s loans: to block the very possibility of taking out loans. To do this, as the document states, it is enough to notify the credit bureau of your reluctance to conclude credit agreements as such.

Dmytro Lazebnyi, lawyer at the Law Firm “Ilyashev & Partners”, explains that the bill prohibits concluding a loan agreement with a borrower about whom the lender has received information from the credit bureau that the borrower is unwilling to borrow. He provides the following algorithm of actions:

• Before signing a loan agreement, the lender is obliged to check the availability of such information with at least one credit bureau.

• The credit bureau provides the specified information to lenders free of charge upon their request. The consent of the person themselves is not required for the provision of such information.

• A credit agreement concluded after receiving information from the credit bureau about the client’s reluctance to borrow is null and void.

“This innovation simplifies the possibility of proving that a loan was obtained as a result of fraudulent actions. In addition, a potential lender, having received such information, will not issue a loan. Therefore, the client will not have any relevant lawsuits,” comments Maksym Cherednichenko, lawyer at the Law Firm “Maksym Boiarchukov and Partners”.

However, those loans that are taken out before a person blocked the ability to take out loans through a credit bureau will have to be serviced.

“Credit bureaus will also be able to obtain information about the death of a credit history subject and data from the Unified Register of Persons Missing in Special Circumstances. Access to such data should increase the security of the financial environment and prevent fraud in the credit market,” adds Volodymyr Sytnik from K.A.C. Group.

At the same time, most lawyers with whom “Minfin” spoke are skeptical about the proposed option for protecting Ukrainians from credit fraud.

“While this step looks useful, who will ensure that banks promptly take these “stop signals” into account? On paper, it looks nice, but in reality it can become another bureaucratic hell, where your requests get lost as they are thrown around different institutions,” explains Viktor Moroz, managing partner of the Law Firm “Suprema Lex”.

Firstly, no one will control whether the financial institution has taken such a stop signal into account. Secondly, in order to exercise the right to protection from credit fraud, a person must notify all credit bureaus operating at that time about their reluctance to borrow loans and monitor the emergence of new ones.

“Otherwise, there is a risk that the bureau to which the lender will turn will objectively not have information about the person’s reluctance to receive loans. And this negates the person’s right to refuse credit. To ensure effective protection of citizens’ rights from potential cases of fraud, it is advisable to introduce a mechanism for centralized storage of information about the reluctance to enter into credit transactions,” says Volodymyr Sytnik from K.A.C. Group.

Currently, there are 4 credit bureaus operating in Ukraine, but if these structures are given the opportunities provided by draft law No. 12260, there could be many more of them.

Thirdly, as Volodymyr Sytnik notes, the draft proposes “that such a service be paid, which raises the question of its accessibility for all who wish to use it.”

What Will Credit Bureaus Know About Ukrainians?

Still, judging by the comments of the deputies, the most complaints were caused by other provisions of the draft law, which establish the scope, collection, and storage of credit history information.

Such information is crucial for financial institutions to assess credit risks.

“Credit history information is one of the key factors used for such an assessment. The main parameters taken into account are the presence and amount of active loans, the regularity of repayment of obligations, the existence of overdue payments in the past, and the frequency of loan applications.

Borrowers with a good history receive better lending conditions: lower interest rates, higher limits, longer terms. Individuals with a negative history may face lending denials or less favorable terms,” explains Volodymyr Sytnik from K.A.C. Group.

The bill provides for a significant expansion of the amount of data collected and stored in credit histories.

Maryna Barabash, lawyer at Maksym Boiarchukov and Partners, listed the borrower’s data which will be stored in the credit history bureaus:

• last name, first name and patronymic;

• date of birth;

• details of the identity document;

• registration address or information about the absence of a place of registration;

• address of actual place of residence;

• taxpayer’s registration card number (if available);

• unique record number in the Unified Demographic Register;

• information about current employment;

• level of income reported by the credit history subject;

• information about the marital status of the credit history subject and the number of dependents;

• contact information (telephone number and/or e-mail address and/or mailing address) or information about the lack of means of communication.

“The proposed amount of personal data that will be contained in the credit history is excessive and unjustified from the point of view of protecting the borrower’s rights,” she summarizes.

In addition, the credit bureau will keep information (if any) about the bankruptcy, death, or entry into the Unified Register of Persons Missing in Special Circumstances of the subject of the credit history.

“The consent of the credit history subject to the transfer of information to the bureau is not required. This creates a risk of uncontrolled movement of information about the borrower, including personal information, that is, information protected by law,” adds Andrii Ivanov, lawyer at the Lawyers’ Association “Moris Group”.

Information for creating a credit history will be collected not only from open sources and relevant registers, but will also be obtained from financial institutions. At the same time, the financial institution will not need to obtain the borrower’s consent to share such data.

“On the one hand, expanding information on individuals and individual entrepreneurs will allow lenders to more accurately assess the solvency of borrowers and reduce risks for financial institutions.

Nevertheless, it should be noted that the increase in the volume of personal data also carries significant risks for borrowers. The collection and storage of such detailed information creates the threat of data leakage or misuse.

Of particular importance is the possibility of violating borrowers’ privacy through access to personal information, which can be used for unauthorized purposes,” warns Yelyzaveta Alefirenko, lawyer at the Law Firm “Murenko, Kuryavyi and Partners”.

And this is not only the issue of unauthorized information leakage, but also of the possibility of abuse by credit bureaus. The fact is that the bill significantly expands the scope of their activities and, for example, allows them to provide scoring assessments to potential borrowers or engage in consulting.

“The bill stipulates that credit history information is not used to provide information and analytical services. However, the simultaneous provision of both credit services and business consultations may lead to a conflict of interest if the credit bureau still uses such information to provide its additional services and violates confidentiality,” says Yelyzaveta Alefirenko.

Legal experts interviewed by “Minfin” highlighted another risky aspect for potential borrowers. Since information can also reach credit bureaus from open sources, it is far from certain that this data will be correct. However, it will be quite difficult to remove such false data.

“The proposed procedure for challenging information obtained from open sources raises doubts. Thus, in the event of a person challenging such information, the bureau will only update the data in accordance with its source, and data removal is possible only if access to such a source is terminated or loses its public status.

In fact, this may lead to the impossibility of removing controversial information from the credit history if it remains available in open sources,” explains Volodymyr Sytnik from K.A.C. Group.

Other Threats for Potential Borrowers

In general, lawyers agree that outdated legislation on maintaining credit histories needs to be updated, but they consider the proposed version of the bill a worthy replacement.

“The new bill on credit histories looks like an attempt to build something fundamentally new, but from materials that are cracking at the seams.

Data centralization, standardization of procedures – all this sounds like an exemplary reform, but what is it really? Shall one piece of information leak, and the personal data of thousands of people becomes publicly available. Or even better: your credit history depends not on real financial obligations, but on whether you have paid for electricity, as the supplier did not send a bill by accident. Does it sound like a nice prospect to you?” ponders Viktor Moroz from Suprema Lex.

The main risks for potential borrowers contained in the new bill were summarized to “Minfin” by Andrii Ivanov from Moris Group.

Insecurity of personal data. Expanding the amount of information collected increases the risks of leakage or misuse of personal data.

Discrimination. More detailed credit histories may result in refusal of crediting to individuals with past financial difficulties, even if their current financial situation has improved. Tightening credit requirements may also reduce the availability of crediting for some categories of borrowers.

Lack of clear mechanisms for disputing incorrect information. The draft law provides for the possibility for the credit history subject to challenge incorrect data; however, the text does not contain specific procedures and deadlines for considering complaints. If the information is entered with errors, the borrower may need a lot of time and effort to prove its inaccuracy. This may lead to a situation where the person is temporarily deprived of the opportunity to obtain a loan.

Abuse by credit bureaus. The ability for credit bureaus to provide additional services, such as scoring and consulting, potentially creates a conflict of interest, as credit bureaus gain more leverage in the market. For instance, they may intentionally assess the creditworthiness of customers in a way that is beneficial to certain financial institutions. The lack of effective controls can lead to manipulation of the credit history market.

“The introduction of new rules could significantly affect the credit market, especially for middle- and low-income individuals. Stricter credit history requirements could lead to banking institutions becoming even more conservative in granting loans.

As a result, the demand for alternative credit services may increase, in particular, so-called microfinance organizations that operate under less transparent schemes and set higher interest rates,” explains Andrii Ivanov.

The deputies gave the public the opportunity to express their opinions on the proposed norms. From now on, the authorities will receive feedback on the latest changes in the financial market and their course.

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