"I don't know of any other country with such strict data protection"

The Federal Court of Justice (BGH) has ruled: Schufa does not have to provide comprehensive information on how creditworthiness is calculated. But why does the BGH consider the calculation formula to be a trade secret so worthy of protection? An interview with Oldenburg legal expert Jürgen Taeger.

QUESTION: The Federal Court of Justice ruled yesterday that Schufa does not have to disclose its calculation formula, which is used to assess the creditworthiness of citizens. Are you surprised by this judgement?

TAEGER: No, the Federal Court of Justice has only confirmed at the highest level what other courts of first instance had already decided with convincing reasons and was not questioned by the Law literature: The scientific calculation formula itself must remain a trade secret of the credit agency. However, such calculation methods are not only used by credit agencies, but also by credit institutions, for example, which must also have an overriding interest in keeping their calculation method confidential.

QUESTION: "Scoring" is the name of the procedure used by banks and commercial enterprises to assess risk before granting a loan or supplying goods on account. What exactly does this mean?

TAEGER: Banks and retailers regularly check the creditworthiness of their future customers before concluding loan agreements or instalment transactions. Before companies take risks, they want to check the probability that customers will fulfil their payment obligations. These companies either carry out this risk assessment, known as 'scoring', themselves or they use the services of a credit agency. The credit agency can calculate an industry-specific score on the basis of the information available to it.

QUESTION: What does this mean in concrete terms?

TAEGER: That the personal characteristics of a potential future customer are compared with the statistical experience of a peer group whose previous payment behaviour is statistically available. The result of the calculation, the numerical value, is issued as a score. It indicates the statistical probability that a person who shares the characteristics of a certain group will fulfil their payment obligation.

QUESTION: And this score value then makes up the entire risk assessment?

TAEGER: No, the score value is usually only included as one factor in the risk assessment. Most credit institutions also take their own data into account for loan agreements, for example previous experience with the payment behaviour of the loan applicant, such as income, assets or collateral.

QUESTION: Why does the Federal Court of Justice actually consider the calculation formula to be a trade secret worthy of protection?

TAEGER: The Federal Court of Justice already emphasised this in 2011: Credit rating information is of considerable importance for the functioning of the economy. The European Court of Justice has also recognised the important role of credit information. With the aim of strengthening consumer rights, the legislator has legally obliged retailers to check customers' solvency before granting loans or financial assistance. The benefits also lie with the customer: Without a credit check, companies would not deliver on account or would have to be much more cautious when granting loans. In the interests of the customer, a loan agreement is therefore much more likely to be concluded with a credit check than without one, simply because the risks are more manageable. Of course, consumers also notice this in the price, which would rise without a credit check due to payment defaults.

QUESTION: But why does the calculation method have to remain secret?

TAEGER: Just imagine if it became public knowledge. Then service providers would realise their business and, for a fee, help insolvent customers to achieve a better score through targeted manipulation. Then the whole credit scoring system would be worth nothing. We experienced this in the USA a few years ago when the so-called property crisis in the USA triggered a global economic crisis. The possible manipulation of scores based on knowledge of the calculation methods was not entirely innocent.

QUESTION: Isn't it a sign of a lack of transparency if citizens don't know exactly how the calculation is made?

TAEGER: Not at all. In Germany in particular, the procedure is very transparent. For one thing, the Federal Data Protection Act specifies exactly which data may be transmitted to a credit agency. In 2009, the legislator laid down very strict requirements for data transmission in the law. For example, a defaulting customer must be reminded at least twice before the information about a payment default - after prior notification - is reported to Schufa. However, Schufa not only stores such 'negative data', but is also authorised by law to store the fact that an account has been opened - not, of course, the balance on the account or the amount of salary received into the account. And finally, the credit agency can also store data from a publicly accessible insolvency register, but only for a very limited period of time.

QUESTION: Can I find out from Schufa what data the calculation is based on?

TAEGER: Everyone has a right to information from Schufa and other companies that carry out a probability calculation and can find out not only the score value, but also in detail what data the calculation is based on. If, in one of the very rare cases, information is incorrect, this incorrect information will be corrected. After all, Schufa must have an interest in correct data because it wants to support commercial enterprises in concluding transactions and not prevent them from doing so. And on the transparency of the calculation formula itself: The Data Protection Act requires that the calculation is carried out using a scientifically recognised mathematical-statistical method. The credit agencies must prove this - in case of doubt by means of expert reports. The supervisory authorities for data protection know the secret formula and have had it checked, including by the Federal Statistical Office. The Hessian supervisory authority responsible for Schufa has no doubts about the correctness of the calculation method.

QUESTION: Can Schufa also use the sociographic environment - for example, the neighbourhood - of a consumer as a data source?

TAEGER: Quite clearly: no. Schufa takes the residential environment into account. Schufa does not take a consumer's residential environment into account at all - this popular rumour is simply false. Nationality or religion, for example, are also not taken into account. Anyone requesting information will certainly be amazed at how little information is needed to accurately predict the probability of future payment.

QUESTION: How do other countries actually handle the procedure?

TAEGER: I don't know of any other country that has such strict data protection laws as Germany, especially when it comes to scoring. The legislator has indeed expressed that it wants scoring for the reasons already mentioned. The German Banking Act and the German Civil Code even oblige companies to carry out a credit check - to protect the company, but also to protect the consumer, for example from over-indebtedness. At the same time, however, the Federal Data Protection Act formulates very precise requirements as to which data may and may not be used for the calculation. Precise deletion deadlines are specified and customers are granted comprehensive rights of access and rectification. Information is even provided free of charge once a year, which is not the case in comparable countries. The supervisory authorities' control options are also nowhere near as extensive as in Germany. The bottom line is that Germany has a very balanced scoring system that benefits companies and consumers alike. The Federal Court of Justice has helped to ensure that this remains the case with its decision that the calculation method must remain secret despite all other comprehensive transparency.