The average Brazilian has one credit card. The average American has four. Interest rates for all types of credit extended to Brazilian consumers averaged 44% in late February, 2011. The typical commercial business loan in Brazil recently carried an interest rate of 29%. Even if a business can get credit at this high rate, repayment periods are often short.
There are various reasons for the difficulty and expense of obtaining credit in Brazil, but at least one of those reasons appears set to disappear: legal obstacles to collecting credit information on good payers. Brazil is for the first time adopting definitive legislation concerning the collection and maintenance of positive credit histories of consumers and businesses. It is doing so in a somewhat roundabout fashion.
In December, 2010, Act 263 of 2004 creating a "Positive Credit Registry" was approved by the Brazilian Congress. Act 263 provided for inclusion of a single, but significant, paragraph in Article 43 of the Consumer Defense Code of Brazil:
Section 6; in the providing of products or services which involve the offering of credit or granting of financing to the consumer, the provider will inform the Credit Protection System, for the creation of a Positive Credit Registry, but only with respect to the [positive] fulfillment of the contracted obligation and only if the consumer has given his previous authorization for the registration of this credit information.
As can be seen, the Act permitted only the collection of "positive" credit information, and has been commonly referred to in the Brazilian media as the "Positive Registry Act." Brazil has an existing system for the collection and storing of negative credit information regarding borrowers who are delinquent in their payment obligations (for example, deadbeat monitoring systems are currently maintained by organizations such as SPC Brasil and Serasa Experian).
Act 263, however, was subsequently vetoed by President Luiz Inacio Lula da Silva ("Lula") on December 30, 2010, his next-to-last day in office, on grounds that the law was overly vague and generic. President Lula simultaneously replaced Act 263 with a Presidential proclamation known as Provisional Measure 518.
This Provisional Measure, however, was only effective until the Brazilian Congress approved Law No. 12414, on June 9, 2011 ("L 12414"), making a few changes to the Provisional Measure based upon suggestions from former President Lula. Accordingly, the law regarding the manner in which to provide credit scoring of consumers and companies is now final and we shall highlight some of the most relevant matters and the impact of this activity in Brazil.
Key Features of the Positive Credit Registry
Below are some aspects of the Positive Credit Registry as defined in L 12414, along with some of the anticipated benefits which may be derived from this new regime.
L 12414 envisions the following four groups of primary players among those to be involved in collecting and sharing credit information:
- credit databanks for the collection and storing of credit information on businesses and individuals (presumably these databanks will be maintained by private companies, as the Brazilian government has not signaled any intention to set up government-run credit clearinghouses),
- consumers who choose to be registered by the system,
- companies making use of the credit databanks' information and
- those providing credit information to the system.
For the managers of the databanks, L 12414 provides that they may store only payment information concerning Registrants that is objective, clear, true and easily understood. Credit information may not be kept in any databank for more than 15 years. Financial institutions such as banks may only furnish credit information to the Positive Credit Registry databanks when authorized by their clients and only regarding their own clients' loans and other financial transactions.
Positive Credit Registry databank managers are granted the right to share data with other databanks, but only when expressly authorized by the registered consumer. The databanks, however, are jointly and severally liable for any injuries caused to the Registrants by inaccurate information. In fact, companies that consult the credit databanks and those that supply information to the databanks, as well as the databanks themselves, are all jointly liable for any damage suffered by a consumer under the terms of the L 12414 as well as those of Brazil's Consumer Defense Code.
Consumers have the right to access all of the content of their credit file. They also have the right to require their exclusion and also to challenge the inclusion of any erroneous information regarding them in a given databank. The correction of the information improperly added to the system must be made within seven days from the date of the notice sent to the databank manager. Consumers may authorize utilities such as water, sewer, gas and land-based telecommunications providers, as well as financial institutions, to furnish their credit history to a databank. However, consumers may not authorize the release of credit information related to their mobile telephone account when such service is provided under contract and paid for in monthly installments (this is a curious exception since Brazil is the third largest mobile phone market in the world with practically every adult owning a cell phone).
As for regulations implementing the Positive Credit Registry, to the extent that the Registry may have a systemic impact on the broader financial sector, it is expected that the Brazilian Central Bank could issue regulations to shape this impact. To date, however, no regulations have been promulgated concerning the Registry.
Impact of the New Law
It is anticipated that creation of the Positive Credit Registry will have a very positive impact on the Brazilian market for consumers, businesses and investors.
As already noted, credit of all kinds is currently very expensive in Brazil. There are a number of reasons for this, not least the unusually high interest rates maintained by the Brazilian Central Bank to control inflation. The Central Bank's benchmark SELIC rate, for example, was 11.25% as recently as January, 2011. The creation of a Positive Credit Registry will not by itself lower these rates. There should, nevertheless, be a substantial impact in the credit markets for individual consumers as a result of these changes, particularly as regards a reduction in operational costs associated with financial institutions risk management. This should lead to a decrease in the cost of credit itself, as good payers are identified by the system.
The impact may be even greater in the corporate world. Companies paying their debts in a timely fashion will see the interest rates on their debts fall in comparison with those whose accounts are shown to be delinquent in the deadbeat databanks of SPC Brasil and Serasa Experian.
As good credit risks are rewarded, it is also possible that we will see the creation of credit scoring in Brazil along the lines of the American model. Credit scoring has historically been unavailable in Brazil, since comprehensive payment histories were unavailable. The advent of credit scoring could both lower interest rates and, just as significantly, encourage the lending of money for longer periods of time.
Companies such as Serasa Experian are already creating "Positive Registry" databanks, building on their existing systems for storing delinquent payers' information. It is not yet clear how costly it will be to access positive credit information. In order to access the deadbeat registry, companies and individuals must typically pay an annual fee and an additional 8 cents or so per consultation. The negative information that can be consulted for this price consists of protested instruments of credit such as Promissory Notes, judgments, supplemental or bankruptcy proceedings, and also whether a credit risk has issued a dishonored check. The Positive Credit Registry will likely operate along similar lines.
Conclusion
The potential impact of the new "Positive Registry Law" in Brazil is significant. The new Registry will present opportunities for buyers, sellers, collectors and distributors of credit information. It also will present opportunities for lenders, many of whom have avoided Brazil due to the inability to obtain reliable credit information on potential borrowers. Finally, the law opens doors for retailers and makers of consumer products for sale in Brazil. By allowing the collection of credit information on consumers, retailers can grow their existing customer base by offering credit terms to buyers that they previously avoided.
The new system admittedly has flaws. Limiting the system to only those consumers and businesses who voluntarily register with it, for example, will reduce it comprehensiveness. Nonetheless, the Positive Credit Registry is a major step forward in the development of the Brazilian credit market.
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