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Addressing Credit Invisibility Through Federal Contracting Power

posted by Adam Levitin

The Biden administration could substantially reduce the number of "credit invisible" and "thin file" consumers without legislation, simply through a determined use of federal contract regarding multi-family mortgages and wireless spectrum licenses. By requiring credit reporting as a condition of federal purchase of multi-family mortgages or sale of wireless spectrum, the Biden administration could ensuring credit reporting for a lot of renters and all cellphone contracts, which would help millions of Americans start to come into the credit system and escape the Catch-22 of credit invisibility. This would be a major step toward achieving economic equity in the United States. 

Here's the Catch-22 about establishing credit:  you need a credit report and score to get credit, but you can't get a credit report and score without having credit in the first place. Yes, there are some on-ramps: student loans, secured credit cards, and co-signors, but these aren't options that are available to everyone, particularly to lower-income individuals. A student loan requires being a student. A secured credit card requires a banking relationship (geographically difficult for some people). And a co-signor requires a close relative or friend with credit. As a result, there's 45 million people—20% of the adult population—who are "thin files" or "credit invisibles" and are denied the opportunity to fully participate in the economy. 

Yet, many thin file and credit invisibles actually do have extended transactional records showing their payment history, but it's just with the wrong counterparties:  they have histories paying on their utilities (including cellphones) and their rent. The problem is that most landlords and utilities do not credit report. And why should they? Landlords and utilities do not benefit from credit reporting. The main benefit to credit reporting is not the creation of a quasi-public good of credit report data. (I say "quasi" because the data is certainly non-rivalrous and furnishers cannot exclude users, although consumer reporting agencies can.) Instead, the main reason to engage in credit reporting is because of its in terrorem effect that helps lenders that are either unsecured (credit card lenders) or face the possibility of unsecured deficiencies (mortgages and car lenders). Creditors that have better collection capability generally don't bother with credit reporting.  Hence payday lenders don't have any need to credit report because they just hit the borrower's bank account without needing a judgment.  Similarly, landlords and utilities don't get much benefit from credit reporting. They already have substantial collection ability without the in terrorem cudgel of negative credit reporting. Landlords can in most jurisdictions evict relatively easily and utilities can disconnect nonpaying customers. 

The general scarcity of landlord and utility credit reporting means that such data may not always be included in credit scores, even when it is included in a report, and scores are generally used alone or in conjunction with a report in underwriting.  

So let me throw out an idea for how the Biden administration could make major progress in addressing the thin file/credit invisible problem:  make credit reporting a contractual requirement for undertaking certain transactions with federal entities.  Specifically: 

  • Treasury (as an amendment to its preferred stock purchase agreements) could require Fannie Mae and Freddie Mac to insert a clause in their multi-family mortgage loan documentation that requires the mortgagee to credit report regarding any tenants. That would result in credit reporting in a sizable part of the rental market. 

These moves would require the assent of some independent regulatory agencies (FHFA and FCC), but critically, they would not require legislation. (An executive order would, at the very least, be quite persuasive in this area.) I don't think it's possible to reach other types of utilities—power, water—through federal contracting power, and legislation mandating credit reporting could run into First Amendment corporate speech problems. But if the Biden administration is willing to be creative about using federal contracting power, it could substantially advance the type of information—especially cellphone contracts—that is being reported and see meaningful results in reducing credit invisibility, which is a key step toward achieving economic equity. 


This relates also to Chapter 13 bankruptcy, as payments made by debtors during the course of their plan are usually unreported by creditors (including their ongoing mortgage payments). While many folks can get new mortgages and refinancing during bankruptcy at surprisingly low rates, that credit reporting purgatory leaves the same people stuck with subprime car loans for 5 years. Trustees could be authorized to report payments, which would help tremendously.

A smaller lift would be to allow debtor's attorneys to report the repayment of their fees to the credit reporting agencies but lawyers are prohibited by the CRAs from furnishing information.

We'd definitely be opposed to this idea, which would leave consumers no choice but to have their rent, telco, and utility data involuntarily reported to the Big Three credit bureaus. (We've been OK with voluntary opt-in rent reporting, altho right now in the pandemic is probably not a good time) Why feed the oligopoly even more of our financial data?
There's this mantra out there that being credit invisible is a financial fate worse than death. But it really isn't - having a BAD credit report is worse, especially for employment and insurance purposes. Ironically the fact that rent and utilities are not reported on a widespread basis means much some of the economic harm of the pandemic hasn't resulted in credit reporting harm, as I explain in The Credit Score Pandemic Paradox and Credit Invisibility: http://bit.ly/covid-invisible-credit.
Also, there is a consumer reporting agency that has telco payment & some utility data: National Consumer Telecom & Utilities Exchange (NCTUE). I hope you saw the the Washington Post article that NCTUE data was sold to ICE to hunt down undocumented immigrants:
Finally, if the point of credit reporting is to have an in terrorem effect to force consumers to pay bills they are struggling to afford, why extend it to even more bills to create more terror? Why not build a better system for judging creditworthiness instead?

Chi Chi, I'm having trouble understanding your complaint. You're throwing together four separate problems: (1) involuntary nature of reporting, (2) pandemic-related damage to scores, (3) misuse of credit reports, and (4) the in terrorem function of reporting (as opposed to use of reports). Only the first point has anything to do with the idea of requiring credit reporting as a condition of certain federal government contracts, and even then it's kind of beside the point, unless you want to end all credit reporting (which maybe you do).

(1) Involuntary reporting. You complain that we shouldn't mandate any sort of credit reporting because consumers cannot opt out. But _ALL_ credit reporting data is already involuntarily reported. Consumers have no choice about who or what reports or doesn't.

If you want to solve the credit invisibility problem, you've got to do something that forces more consist reporting. Yes, some folks will have bad credit reports, but that's because they have bad repayment histories. There's no getting around that. I don't think a system will work if consumers can cherry pick only good information to credit report, but if this is really the concern, then allow consumers to opt-out of credit reporting generally, or at least opt-out of government-contract mandated reporting.

Whether reports should be allowed for things like employment and insurance is an important separate question, but the way to address the use issue is with regulations on report usage, not with keeping data out of the system.

(2) Pandemic-related damaged credit is a problem. But prohibiting negative credit reporting during the pandemic is a separate and temporary question from whether to encourage credit reporting generally (and a variant of allowing consumers to cherry-pick what is reported).

(3) Misuse of data. As far as sale of data to ICE, that seems to violate 15 USC 1681b. Maybe the use falls within the 1681f or 1681v exemptions, but that would require more information to determine. But if the problem is a concern about misuse of data by Big Brother, I don't see why a public system like the one you advocate for would possibly be better at keeping data from being used by other government branches. In any case, the problem strikes me as primarily an immigration policy problem, not a credit reporting system problem.

(4) Yes, as I've been writing, the reason businesses furnish data is to gain in terrorem leverage. But the problem is that businesses also use that same data when deciding whom to deal with. It's a package deal. There's no way to get consumers the benefits of credit reporting without them also facing the threat of reporting.

So where does that leave us? "Build a better system for judging creditworthiness" sounds great, but what does that mean? That seems to be an issue about credit scores, not reports per se. And what's the alternative? A public system for scoring? That frankly terrifies me. I do not want the government creating an algorithm that determines my creditworthiness, unless the government is putting its own funds on the line.

And if you look at what is used for determining credit worthiness in countries that do not have credit reporting systems, it looks much worse—it's things like social status and connections (self-reinforcing of elites) and purchase history (hugely invasive of privacy).

The current credit reporting system has a lot of problems, but public provision isn't the answer nor is making the current system unworkable. We need to improve the current system, and that starts with getting more complete data into it (addressing credit invisibility) and then focusing regulation on incentivizing greater accuracy in reports. That might require some substantial changes in regulation, but I don't think it points to a public reporting bureau, just to a utility-like regulation of reporting bureau dividend payments tied to performance metrics.

Finally, when Dems can't even get a $15 minimum wage passed or pass a 36% usury cap (I don't think that even got out of committee in the House last Congress), the idea that we're going to move any sort of major public provision forward is unrealistic. Let's focus on what's achievable.

Adam - by now, it's obvious we don't agree very much on credit reporting issues. Suffice to say, I am opposed to anything that gives the current oligopolists vast amounts of new data that consumers have no choice or control over. And as for politically achievable, a proposal that would force every mom & pop landlord with a federally backed mortgage to furnish information to the credit bureaus - I am not sure that is gonna fare any better

Chi Chi-Fair enough. We clearly don't agree on the solution here.

I will say that I don't think the problem is about oligopoly, even though that is certainly a reasonable description of the market. I don't think o0ligopoly is our problem because ee'd have these same problems if we had 30 bureaus instead of 3.

The problem isn't the number of competitors, but the nature of how they're competing. They aren't competing based on reporting quality. The Metro2 format means that it's basically costless for furnishers to report to an additional agency, so there's no competition on the furnishing side. Instead, the competition is in terms of the format and add-ons they offer report users, not the underlying data quality. If we ever fixed the quality problem, we might have to worry about the oligopoly, but that's a problem for the distant future.

It's easy enough to carve out smaller multi-family landlords based on the number of units in their buildings. And it doesn't need legislation. HUD can do this for FHA insurance, Fannie/Freddie could adopt on their own or at the directive of FHFA or per an amendment to the Treasury PSPA, and FCC could do this by regulation.

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