On numerous occasions in 2020, the House of Representatives passed legislation that contained language to undermine the safety and soundness of credit reporting and credit scoring. Though they claimed their efforts would help lower-income Americans, in reality they would reduce the accuracy of credit scores, lock consumers out of credit markets, and likely raise interest rates for borrowers. These destructive policy proposals will almost certainly be resurrected in the new Congress and this time, thanks to a Democratic trifecta in Congress and the White House, they could become law.
While bills such as the Comprehensive CREDIT Act and the HEROES Act attempted to significantly overhaul our nation's delicate credit reporting laws, a more impactful approach to lift credit scores is to expand the universe of data reported to credit bureaus. Specifically, Congress should consider legislation requiring government housing agencies and certain landlords to furnish information on whether or not their tenant is “current” - meaning up to date on their rent. This slight change will overwhelmingly benefit lower-income Americans, who often have thin credit files, to help build their credit history.
The number of Americans who have little-to-no credit history is a significant issue. Estimates from industry experts and the government’s Consumer Financial Protection Bureau indicate 30 to 45 million people do not have a traditional credit score. On a more granular level, close to fifty percent of Americans in the lowest-income census tracts are “credit invisible.” This means their opportunities to climb the income ladder, escape poverty, and pass on generational wealth are seriously limited.
Requiring public housing agencies and landlords of the Section 8 housing voucher program to furnish rental information would help solve this credit inequality problem. With millions of Americans receiving rental assistance, it could be the boost needed to begin the process of credit building.
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In fact, in February 2020 the Department of Housing and Urban Development looked at this exact issue and determined that “subsidized rental payment data in consumer credit files warrant further attention from policymakers.” According to this groundbreaking study, HUD notes that including subsidized rental data in credit reports “could increase the proportions of tenants with scorable credit histories and with good credit scores” and the “problem of credit invisibility and unscorability can be dramatically reduced.”
Perhaps most importantly, this change is, by the very nature of subsidized rentals, completely targeted to lower-income households. Helping more Americans build their credit file will in turn increase access to credit, creating downstream benefits for the economy through higher consumption. Of course, some tenants who are substantially behind on their payments could see a lower credit score. This is the same result for credit card or mortgage data. Still, the vast majority of people benefit from this information being furnished. And over the long run more information can be positive even for those who might owe back rent. It can serve as an additional “early warning system” before households fall so hopelessly far behind on payments that their financial future is irreparably harmed.
In this policy proposal, the only additional burden would fall on the government housing agencies, which have the human resource capabilities to handle thousands of monthly payment data points, as well as landlords who already have to meet certain requirements to be eligible to rent their property under the Section 8 program. These incremental additions are far outweighed by the benefits to the economy of more credit ready households. Taxpayers ultimately win too, as families gain more financial tools to escape dependence on government assistance programs.
Some make the case that the federal government should require rental, telecommunications, and utility data be included in credit reports. While there may be some merit in incorporating this data into an individual’s credit file, the costs of doing so would exceed the benefits. Mandating tens of millions of small landlords to update the bureaus on a monthly basis would be a much costlier burden, both in terms of time and money. For landlords that rent out multiple properties, the burden would be that much higher.
All policymakers should want to expand access to credit, but it must be done in a responsible manner without ruining the fundamentals of our nation’s credit reporting laws. After all, credit scores are also utilized in several government-backed loan and aid programs; if the scores become less accurate, the liabilities to taxpayers from defaults could rise. More information, not less, is also crucial towards creating a more inclusive economy that also protects borrowers and lenders from undue risk. There are positive steps that we can pursue that can assist consumers without undermining the larger credit reporting system and threatening to increase borrower’s costs, endanger taxpayers, and to reduce access to credit.
Thomas Aiello is a policy and government affairs manager with the National Taxpayers Union, a nonprofit dedicated to advocating for taxpayers at all levels of government.
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