President-elect Joe Biden has come up with a proposal for a public credit reporting agency. Although this is a move that consumer advocates are applauding, it’s still a long way from becoming a reality.
The U.S. system of credit reporting – the gateway to enjoying the materialistic benefits of consumerism – has been under attack for many years. Detractors say that the credit reporting bureaus are not responsive to consumers, unaccountable and perpetuate existing racial inequalities.
Responding to such scathing feedback, President-elect Joe Biden has come up with a proposal for a public credit reporting agency. Although this is a move that consumer advocates are applauding, it’s still a long way from becoming a reality.
Need for public credit reporting agency
There have been multiple legislative attempts to reform the existing credit reporting system and make it more consumer-friendly, but they have not really changed the status quo.
Ed Mierzwinski, senior director of the federal consumer program at U.S. PIRG., recounts that back in 1990 credit bureaus were the number one complaint with the Federal Trade Commission, a topic on which he published a report. Thirty years later, he has again reported that credit bureaus continue to lead for complaints with the Consumer Financial Protection Bureau, with the pandemic causing a big hike in complaint volume.“The complaint agency’s changed, but the credit bureaus have not,” Mierzwinski said. “Further, as Congress figured out after the Equifax debacle, ‘we’re not their customers, we’re their product.’ They collect and sell information about us, without our permission, and we cannot stop them. And it is often wrong.”
Chi Chi Wu, staff attorney at the National Consumer Law Center, concurs that consumers get the short end of the stick with today’s credit bureaus. She expects that a public credit reporting agency will be more responsive to consumers. In the current system, “Consumers are not the customers of the Big Three credit bureaus,” Wu noted. Rather, the credit bureaus are more focused on the needs of the creditors and debt collectors who both use and supply the credit information.
Even then, consumers have no choice but to deal with the big three credit bureaus if they apply for a mortgage loan, credit card or car loan.
“A public credit registry would provide an alternative for consumers that should be more responsive to consumers, at least as voters,” Wu said. “That should mean better procedures for accuracy that are not biased against consumers, as well as a dispute system that makes it easier for consumers to correct errors.”
Biden proposal for public credit bureau
Acting on this need for better consumer service, President-elect Joe Biden’s campaign came up with a proposal to create a public credit reporting agency.
This proposal aims to also make it easier for so-called “credit invisibles” – those who don’t have access to credit because they don’t have much credit history with the major credit reporting agencies, or don’t have sufficient or recent input in their credit reports – to get access to credit. The CFPB estimated the number of such people at 26 million in a 2015 report.
The current system also exacerbates existing racial inequalities, according to Biden. His plan calls for the public credit reporting agency to use input from algorithms that don’t make for discrimination, as well as alternative data such as payment history on utility and rent bills.
The Biden team did not respond to an inquiry seeking input on this proposal, which is based on a plan put forth by Demos, a think tank that aims to create an inclusive democracy.
Ultimately, those with better credit scores get credit on better terms, and tend to pay less money in interest for the loans they get, which helps them save money. Access to credit also makes for the accumulation of wealth through home ownership, for one. According to Demos, the current credit reporting system tends to build up the existing racial inequalities, rather than doing away with them.
Demos stated in an online post outlining its plan, “Generations of discrimination in employment, lending, education and housing have produced significant racial disparities in credit history. Past discrimination is baked into current determinations of creditworthiness: Credit scores and other lending algorithms disproportionately represent black and Latino loan applicants as ‘riskier’ customers.”
That’s the sort of inequality that Demos wants to do away with.
An improved credit reporting agency?
The Demos plan calls for a public credit reporting agency to be set up within the CFPB. This agency would develop algorithms that would negate the impact of past discrimination, make credit scoring more transparent (currently, credit scoring models are proprietary and consumers don’t know exactly how they are scored), make the dispute resolution process more accountable and also enable data security.
Under Biden’s proposal, which would phase out the existing private credit bureaus over a seven-year period, adverse input from medical debt and delinquencies on predatory loans would not make its way onto credit reports and the scoring process. And adverse input would only be reflected on a credit report for a four-year period, rather than today’s typical seven years.
The algorithms used for scoring purposes would be publicly available so that you get the finer details on how to improve your score, rather than just making educated guesses. The system would also hold lenders and other furnishers of credit information more accountable.
Besides, the use of credit reports would only extend to decisions about making consumer loans. The use of these reports for other purposes such as housing and employment screening, or for immigration or insurance purposes, would not be permitted.
And to ensure data security, credit information would be frozen by default so that lenders would need consumer permission to access them.
The Consumer Data Industry Association, a credit reporting industry trade group, while prepared to engage with the Biden administration on its proposal, sees the current private credit reporting system as better than a public one. For one, the CDIA says the private sector is more innovative.
Responding to an inquiry for comment, Francis Creighton, president and CEO of CDIA, said, “The incoming administration has been supportive of policies that would bring more kinds of information into the current credit reporting system to help address disparities in the financial system. CDIA supports these efforts, and we have advocated for policy changes to achieve these goals for years. We look forward to building on the current credit reporting system with policy makers and the new administration.”
A spokesperson for FICO, which provides credit scoring algorithms for the credit reporting industry, noted that it is too early to comment on the proposal, but that FICO is aware of it and looks forward to “continuing to serve as a helpful resource.” And a spokesperson for VantageScore, another credit scoring company, declined to comment on this proposal.
The American Bankers Association, Consumer Bankers Association and the CFPB did not respond to inquiries seeking comment.
Uphill road ahead for public credit bureau
While they see a consumer-focused public credit bureau as a win for consumers, consumer advocates also expect an uphill road to establishing such a bureau. It’s also not clear how much of a priority this would be for the incoming administration.
Ira Rheingold, executive director of the National Association of Consumer Advocates, expects that “looking through the lens of racial justice and equal access to credit,” this credit bureau, which he expects will be very similar to the Demos model, could be a priority for the Biden administration. The level of priority would also depend on who gets appointed at the CFPB.
With the rising use of alternative data, Rheingold would prefer to have a government agency looking at the data so there is no discrimination that perpetuates existing inequalities.
He doesn’t see the proposed seven-year timeframe for phasing out the existing private reporting system as a feasible one, particularly if the proposal has to go through Congress. However, if the agency is set up through an administrative process without need for Congressional approval, it would be a faster process.
“Washington works slowly, and there is a lot of work that needs to be done,” Rheingold said.
Fierce opposition from lenders and credit bureaus likely
Other countries have better credit reporting systems, Rheingold said, but he expects that this plan to put the private credit bureaus out of business would meet a lot of resistance.
“Corporations making money will fight it tooth and nail,” Rheingold pointed out. U.S. PIRG’s Mierzwinski and NCLC’s Wu also expect a fight, (from banks and other lenders as well as credit bureaus), but see system reform as necessary.
Mierzwinski said, “We’ve tried stronger and stronger regulation for 50 years. It’s time to switch to a government alternative.”
He noted that the Demos proposal is not written in final statutory language, and that there will be public hearings on needed changes and fine-tuning.
“The credit bureaus and banks and car dealers and other patrons of the current system will make a lot of unfounded claims,” Mierzwinski said. “They will spend a lot of money on lobbyists and give more to the various ‘business-oriented’ think tanks in D.C. that claim to represent consumers.”
The CDIA is also betting that it will take a long time to amend the laws that currently govern the industry. In an online statement, the credit reporting industry trade group noted, “The time it would take to reinstate a new CFPB director, garner the political will to create a new agency and corral political opponents to this proposal is an extremely heavy lift.”