If you need a loan in Germany, want to buy a property or want a cell phone contract, you can’t ignore one of them: credit agencies like Schufa. They have data on millions of people and use complicated algorithms to calculate how creditworthy each individual is. In their opinion, if there is a high probability that a consumer will not be able to service a loan in the future, it will be difficult to even get it. This calculation is expressed using a “score value”, which can vary between one and 100, for example. The worse the score is, the lower the chance that consumers have of getting an apartment, a mobile phone contract or being able to buy goods on account when shopping online.
Because the decisions can have such far-reaching effects, credit agencies in Germany are powerful companies. However, the data basis for their decisions is controversial. For example, credit agencies have so far collected postal codes and other address data in order to calculate the creditworthiness of consumers. The federal government wants to severely restrict this in the future and has initiated a reform of the Federal Data Protection Act. This is intended to better protect consumers when credit agencies rate them. The cabinet already waved through a first draft law presented by Federal Interior Minister Nancy Faeser (SPD) on Wednesday; the Bundestag and Bundesrat now have to approve it.
Protection against discrimination: Credit agencies should be allowed to use less data
Probably the most important change: According to the draft law, when credit agencies evaluate people’s creditworthiness in the future, they will no longer be allowed to use a whole range of information. “We clearly regulate that data on ethnic origin, health data or personal information from social networks as well as the home address must not play a role in the automated calculation of a person’s ability to pay,” says Nancy Faeser. The latter is intended to prevent people from being rated poorly simply because they live in the supposedly wrong, possibly socially weaker neighborhood. This process is often used by credit agencies today and is called geo-scoring.
The question of how often someone moves is also used by credit agencies as a measure of whether someone can repay their loans because they could be in a difficult economic situation. The fact that the moves could have professional reasons, for example, has so far been ignored. This is exactly why such features should no longer play a role in the future, says Federal Consumer Protection Minister Steffi Lemke. “We are also putting a stop to possible discrimination through scoring. In the future, the postal code will no longer be allowed to determine whether someone is classified as solvent or not,” she says.
In addition to personal data and address information, data about what goes in and out of your own bank account should not be included in the score. This in turn is likely to torpedo the future plans of the credit agencies. Some would like to look at Germans’ bank accounts to better determine whether someone is creditworthy or not. This is likely to become significantly more difficult if the draft law goes through further instances.
Why credit agencies decide how: Consumers should find out more easily in the future
In addition, the traffic light wants to create more transparency for consumers. According to the draft law, companies such as Schufa must, at the request of consumers, communicate in a “precise, transparent, understandable and easily accessible form in clear and simple language”, among other things, which personal data they have used, how it was weighted and which gave the highest score influenced. “With the new rules we are shedding light on the black box,” says Lemke.
With this initiative, the federal government is reacting to a ruling by the European Court of Justice (ECJ). The highest European court ruled in a groundbreaking ruling in December that scoring can only take place within a narrow framework. Accordingly, companies are not allowed to make a decision about whether to conclude a contract with customers based solely on an automatically generated score. They had often done that up until then. But the ECJ overturned this practice.
The background to the ECJ ruling were two cases from Germany that were being heard by Europe’s highest court. In one case, the question was how long Schufa was allowed to store certain information. In the second case, a woman sued because she didn’t get a loan. She didn’t understand why that was the case and wanted to know from Schufa how the decision came about and asked for the data to be deleted.