Now, more than ever, national lawmakers must be creative and bold. After all, drastic times call for drastic measures.
One such proposal — known generically as “suppression and deletion” — aims to protect borrowers from damage to their creditworthiness by preventing lenders from reporting late or “negative” payment data to nationwide credit bureaus (Equifax, Experian and TransUnion).
The Disaster Protection for Workers’ Credit Act of 2020 proposes the suspension of negative or adverse data until 120 days after the disaster declaration is lifted. Since it is conceivable that the crisis could last a year or more, this could result in the suppression of all negative data for well over a year.
Proponents of suppression/deletion argue that current measures to protect consumers don’t go far enough — and that far more is needed to protect borrowers. Opponents counter that proposed suppression/deletion measures are at odds with requirements under the Fair Credit Reporting Act to ensure maximum possible accuracy in credit data.
They worry that removing accurate late-payment data reduces the integrity of credit bureau data, making it harder for lenders to differentiate between higher- and lower-risk borrowers.
Balancing consumer protections with concerns over systemic safety and soundness involves difficult choices. One senior regulator said, “It’s like juggling steak knives while wearing a blindfold.”
Fortunately, it’s not a Sophie’s choice — and there is evidence available to guide policymakers as they deliberate.
With less accurate data, banks will make more lending mistakes. Consequently, lenders will respond to degraded credit data by raising minimum credit score requirements, decreasing the amount of credit available, and raising the price of credit to reflect a higher risk premium.
This is already happening.
Recently, the Federal Housing Administration, Veterans Affairs, Wells Fargo and Chase all raised minimum score requirements for residential mortgage loans, and many card issuers are reducing credit limits.
This is only the beginning.
As more accurate data drops out of the credit reporting system as a consequence of state attorneys general strictly enforcing consumer dispute resolution requirements — despite a pragmatic statement from the Consumer Financial Protection Bureau, the federal agency charged with oversight and enforcement in credit reporting matters and the nation’s financial consumer watchdog to boot — it is reasonable to expect credit markets to tighten, lenders to rely on relationship banking, and the cost of credit to increase, as a credit crunch sets in.
The crunch will be worsened by suppression/deletion at exactly the time when governors, Congress and the Trump administration are scrambling to jump start economic recovery.
As the most recent credit data is the most valuable to credit reports and credit scores, this proposed policy could cripple these tools for credit underwriting and credit access just as they become vital for economic recovery.
There is a better alternative to suppression/deletion that would countervail the anticipated deluge of negative payment data resulting from COVID-19, backed by evidence.
Congress could mandate that broadband, cable and satellite TV, and wireline and wireless telecommunications service providers report timely or “positive” payment data to the big three credit bureaus.
This is only fair, and is long overdue. Such firms have for decades been using credit reports for eligibility determination and reporting very late payment data.
For instance, the Consumer Financial Protection Bureau found between 2013 and 2018 more than one in five Americans had a telecoms collection on their credit report, and a majority of subprime borrowers had at least one telecoms collection. Telecoms firms are punishing their customers for being late without rewarding good payment behavior.
These very same firms have resisted sharing positive payment data with credit bureaus for a generation. The reason is simple. They fear competition. If one firm reported, then the others could use the data to cherry-pick their best customers, they argue.
Well, if they are all forced to leap together, then this problem goes away — and consumers have a more comprehensive, more accurate credit report and an achievable path to rebuilding and restoring their good credit standing.
Of course, no mandate would be needed if such firms voluntarily report payment data to credit bureaus. Already they may, and already many do report late payment data.
Study after study in the United States show that this non-financial payment data is highly predictive of traditional credit behavior. Flooding credit reports with positive payment data during a period of economic decline will offer immediate help.
It will also empower consumers with a path to recovery and credit access based on accurate data — an approach that does not compromise the integrity of the national credit reporting system and won’t further a credit crunch.
In sum, the integrity of the national credit reporting system must be maintained. Failure to do so will hamper the recovery and begin to eat away at the safety and soundness of the financial system. Negative data suppression will quickly become a growing liability after the very short-term.
The only rational choice for lawmakers is to mandate positive payment reporting to all national credit bureaus by large telecoms, cable and satellite TV, and broadband service providers.