European Court of Justice - Schufa score must not be decisive for creditworthiness
The highest European court has set strict limits on the use of the Schufa score. Companies may use the Schufa score, which quantifies people's creditworthiness, to decide whether to enter into contracts with customers - but only if it is not the sole basis for the decision. According to the European Court of Justice (ECJ) in Luxembourg, if this score plays a decisive role in the granting of credit, this constitutes an "automated decision in individual cases", which is prohibited under the General Data Protection Regulation (GDPR).
Banks, telecommunications services or energy suppliers usually ask private credit agencies such as Schufa about a person's creditworthiness. Schufa then provides an assessment, the so-called score value. This is intended to show how well the person concerned fulfills their payment obligations. According to its own information, Schufa has information on 68 million people in Germany.
The background to the current decision is two cases from Germany in connection with Schufa before the ECJ. On the one hand, a woman who was refused a loan filed a complaint. She demanded that Schufa delete an entry and grant access to the data. Schufa only provided the score value and general information on the calculation, but not the exact calculation method. The Wiesbaden Administrative Court referred the case to the ECJ in order to clarify the relationship with the General Data Protection Regulation (GDPR).
Violation of the GDPR
The judges have now made it clear: if a contract is concluded based largely on the Schufa score, this is in breach of the GDPR. This could have an impact on many companies that have previously relied on Schufa's assessment.
The citizens' movement Finanzwende welcomed the decision: "The ruling is good news for all consumers - and a heavy blow for Schufa," said consumer protection expert at Finanzwende, Michael Möller. The ruling forces Schufa to handle its quasi-monopoly position more responsibly than before. "Schufa's power is crumbling - it's high time it did."
Schufa itself also sees the ruling as positive because it provides clarity. "The overwhelming feedback from our customers is that payment forecasts in the form of the Schufa score are important to them, but are generally not the only decisive factor in concluding a contract," Schufa announced after the ruling. "This is why the vast majority of our customers will continue to be able to use Schufa scores without having to adapt their processes."
Delay in decisions on credit or rental agreements?
Data protection expert Christoph Ritzer from the law firm Norton Rose Fulbright in Frankfurt, on the other hand, sees a "considerable dilemma" for the credit industry if Schufa scores can no longer be used as easily as before. After all, if proof of income, energy supply contracts and other data have to be submitted again, this could significantly delay decisions on credit or rental agreements, according to Ritzer.
"It can therefore be assumed that providers will either have to check the creditworthiness of their customers more intensively themselves or ask customers to register with Schufa and agree to the scoring." This is a typical Pyrrhic victory for consumers: "In the end, only those who allow Schufa to process and pass on their data will benefit from the ruling," says Ritzer.
Consumer advocates are nevertheless hoping for more transparency - and for further legislation: "In order for consumers to finally be able to understand how their credit score comes about, the legislator should now set concrete guidelines for the credit agencies," demanded Michaela Schröder from the Federation of German Consumer Organizations. Federal Consumer Protection Minister Steffi Lemke (Greens) said: "We already agreed in the coalition agreement that transparency in scoring must be improved. We will now examine corresponding regulations in a timely manner."
Storage of data from public directories
The second case concerned the storage of data from public registers, such as insolvency registers. The ECJ had to decide whether Schufa was allowed to use data on consumer insolvencies and store it for even longer than the courts. The judges have now put a stop to this practice: It violates the GDPR if private credit agencies store such data for longer than public insolvency registers. This is because the discharge of residual debt is intended to enable the person concerned to participate in economic life again; however, this is always used as a negative factor when assessing creditworthiness.
In March, the Advocate General at the ECJ was very critical of this practice in his opinion. As a result, Schufa voluntarily shortened the storage period for entries from three years to six months.
The German courts must now decide on the specific cases and take the ECJ's decision into account.
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- As a result of the ECJ's judgment, companies must reevaluate their reliance on Schufa scores to determine creditworthiness, as using it as the sole basis is now prohibited under the GDPR.
- The General Data Protection Regulation (GDPR) sets strict limits on the use of the Schufa score, a creditworthiness assessment tool used by various industries in Europe.
- Consumers in Europe can now challenge decisions based on Schufa scores if they believe those scores played a decisive role, thanks to a recent judgment by the European Court of Justice (ECJ) in Luxembourg.
- Schufa's use of data from public registries, such as insolvency registers, was questioned in a second case before the ECJ, with the court eventually determining that extending the storage period beyond the courts' limits violates the GDPR.
- In order to become more responsible with their quasi-monopoly position, Schufa must now provide more detailed information about its scoring method and calculation if a contract is based on it.
- Private credit agencies must follow the guidelines set by the European Union and the GDPR in regards to storing and using consumer data from public insolvency registers, according to the recent decisions by the ECJ.
- The German legislator should improve transparency in scoring and set concrete guidelines for credit agencies to ensure consumers understand how their credit score is determined, as demanded by consumer advocates.
- Companies that primarily rely on Schufa scores to evaluate creditworthiness or rentals may face delays in decision-making as more intensive verification methods or customer registration become necessary, according to data protection expert Christoph Ritzer.
Source: www.stern.de
