I thank the people at Credit Slips for asking me to guest blog this week. It has been a great sounding board. I want to close by highlighting a part of Charging Ahead about which I am not at all sure: my praise of the American credit reporting system. As I explain there, you can say that our credit reporting system works well compared to systems in most other countries because it is private, centralized, voluntary and technologically advanced.
But as lending decisions become ever more standardized, I wonder if the incentives to game the process are starting to undermine it. In particular, increasingly the hot-button disputes about credit reporting are not the inevitable problems about the hassle of correcting unintentional errors. Rather, what we now see is a set of problems that relate to whether the system is sufficiently complete. For example, Capitol One and Target want to keep the information about their credit limits private, because disclosing that information would make it easier for other lenders to poach their customers. Credit card issuers in general have pressed the national bureaus to ignore available information about bankruptcy discharges. As far as I can tell, most of the strategies move in one way -- keeping "positive" information out of the system to make credit scores lower.
The natural response of many consumer groups, of course, is to try to force more information into the system. But there are serious costs to an unbounded drive to gather all information into the credit reporting system. In general, the added information is going to make it easier for lenders to identify and serve riskier sections of the market. There also are serious privacy concerns, and not just for people of Euro-centric sensibilities. Here, as in insurance rate-setting, do we really want a system with complete information? Should the interest rate on my mortgage depend on the grocery store at which I shop? The items I buy when I go there?
On the flip side, the recent growth of fringe lenders suggests that increased access to this information presents some real value to the lower middle class. If the credit bureaus had as much information about those people as they have about the swath of the middle class that has a dozen credit cards and two mortgages per household, the rates charge in the markets in which those people borrow well might fall significantly from the levels that are so easily challenged as "unconscionable."
I don't yet have a good answer to this. Banking groups oppose regulatory intervention, claiming that smaller lenders will drop out of the system. And our voluntary system obviously would be undermined if a significant group of lenders dropped out. Still, I can't accept the idea that lenders' incentives are properly aligned with those of borrowers, so I question whether lenders should be allowed to decide what and how much to report. Farewell!