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Three negative actions of the “name clearing industry” for the credit market

Suppression of information caused by predatory litigation results in social, legal and economic damage

Popularly known as “name cleaning industry”, class actions brought by associations - some of them fronts - have attracted the attention of the Brazilian courts. 

These actions, which aim to remove the name of debtors from the register, can cause social, legal and economic damage. 

In practice, the situation described as predatory litigation by Recommendation No. 127, published in February by the CNJ (National Council of Justice), occurs through the action of lawyers who file thousands of lawsuits a year, with petitions containing the same claims and causes, changing only the name of the party represented and a few other pieces of information identifying the case. 

In the view of Elias Sfeir, president of the National Association of Credit Bureaus - ANBC, The actions interfere with the quality of information for risk analysis, which is fundamental for a healthy credit market and economy.  

A legal and economic opinion commissioned by ANBC, drawn up by Luciano Timm, a lawyer and professor at FGV-SP, and Luciana Yeung, who holds a PhD in Economics from the same institution, shows the negative effects of the injunctions granted by judges on the credit market, as well as demonstrating that such decisions end up encouraging undesirable behavior, aimed at predatory and opportunistic judicialization.

“Predatory litigation penalizes defaulters for the bad behavior of defaulters. Default accounts for around 35% of the impact on the banking spread. The higher the default rate, the greater the impact on interest rates. Thus, any suppression of information for credit assessment will cause harm to the consumer,” he says. According to the Cost of Credit Indicator, created by the Central Bank, which reflects the weight of interest rates in the economy, default is the main component of the spread.

Sfeir also points out that the “clear name” consume precious judicial resources. “It's also worth noting that the bureaus have mechanisms in place for borrowers to object. The bureaus have an obligation to consult the creditor source to clarify any doubts and have specific processes for this; therefore, initially going to the courts is not a good mechanism.”

According to the executive, the three most damaging actions caused by the name-cleaning industry to the credit market are:

1. Information asymmetrycredit granting involves trust and the information provided by credit bureaus helps to reduce information asymmetry. It is the bureaus that provide lenders with information on borrowers“ ability to pay, for example. ”With predatory litigation, the quality of the data shared by the bureaus is compromised, since, because of the injunctions granted, they are obliged to delete data on those who have been denied credit without them having honored the obligation assumed," details the president of ANBC.  

1. Penalizing the defaulterThose who are up to date with their financial commitments end up being penalized by the increased costs of granting credit, since the cost of the risk of default ends up being distributed throughout the chain. 

1. Deleting an important alertUnlike what many people may think, negativity has its positive side, as the measure serves as a warning of possible forgetfulness or lack of control over payments, and also to prevent over-indebtedness by signaling to the market that the borrower is getting into debt beyond their capacity, opening up space for negotiation. In addition, the debtor is given time to pay off the debt.

ANBC Press Relations

Regina Pimenta: (11) 98136.6835 regina@pimenta.com

Ana Carolina Rodrigues: (11) 98674.0348 anacarolina@pimenta.com