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Should defaults be forgotten? Evidence from legally mandated removal

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  • Marieke Bos
  • Leonard Nakamura

Abstract

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.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 12-29.

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Date of creation: 2012
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Handle: RePEc:fip:fedpwp:12-29

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Keywords: Households - Finance ; Consumer credit ; Credit scoring systems;

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  1. Guido Imbens & Thomas Lemieux, 2007. "Regression Discontinuity Designs: A Guide to Practice," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0337, National Bureau of Economic Research, Inc.
  2. Leonard I. Nakamura & Kasper Roszbach., 2010. "Credit ratings and bank monitoring ability," Working Papers, Federal Reserve Bank of Philadelphia 10-21, Federal Reserve Bank of Philadelphia.
  3. Ronel Elul & Piero Gottardi, 2011. "Bankruptcy: is it enough to forgive or must we also forget?," Working Papers, Federal Reserve Bank of Philadelphia 11-14, Federal Reserve Bank of Philadelphia.
  4. Boyes, William J. & Hoffman, Dennis L. & Low, Stuart A., 1989. "An econometric analysis of the bank credit scoring problem," Journal of Econometrics, Elsevier, Elsevier, vol. 40(1), pages 3-14, January.
  5. Vercammen, James A, 1995. "Credit Bureau Policy and Sustainable Reputation Effects in Credit Markets," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 62(248), pages 461-78, November.
  6. David K. Musto, 2004. "What Happens When Information Leaves a Market? Evidence from Postbankruptcy Consumers," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 77(4), pages 725-748, October.
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