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Policy Update: Full-file Credit Reporting
By Katherine Lucas-Smith on 07/13/2011 @ 04:00 PM
CFED’s Carol Wayman urges support for full-file credit reporting: utility and telecom can increase access to affordable credit for many
Carol Wayman, Director of Federal Policy, presented on June 28 to a convening of Ford Foundation grantees on the potential of full-file reporting to improve the accuracy of credit scores and increase access to affordable credit. Full-file reporting, or alternative data credit reporting of telecom and utility payments, is a no-cost federal policy mechanism that would expand access to mainstream credit to as many as 70 millions of households that currently lack access to affordable credit.
The convening covered a variety of topics related to the use of credit reports and the impact of credit scores on financially vulnerable households.
As many as 75 million Americans are excluded from the mainstream credit system not because of bad credit history, but rather due to a lack of information. Thirty million Americans have no payment history in their credit files and consequently have no credit score. Even more have “thin files”—too few documented payment histories for them to be scored with precision. Landlords, banks and credit unions and insurance agencies check consumers’ credit scores before renting apartments and approving applicants for checking accounts, insurance and other financial services. As many as 60% of employers report checking credit reports before making hiring decisions for some jobs. No or low scores translate into reduced access to mainstream credit, forcing borrowers to rely on higher priced lenders and preventing them from investing in their homes or businesses in economically productive ways. In addition, not including this information keeps many peoples’ scores lower than they should be and prevents people from quickly demonstrating improvements in their financial capacity after a hardship.
A straightforward solution is to simply add more accurate information on credit payments to credit files. Utility and telecommunications bills are nearly universal; including all payment information for these transactions would enhance credit access for millions of households. Research from the Brookings Institution shows that adding full utilities payment information to credit files would decrease the number of consumers with no credit score by ten percentage points. This market-driven policy response will help lenders better assess credit applicants and decrease the nation’s persistent—and widening—wealth gap. And through the widespread reporting of such non‐financial payment data to consumer reporting agencies, millions of Americans with little or no credit history can establish payment histories and gain access to mainstream affordable credit.
Carol’s presentation cited research from PERC and the Brookings Institution Urban Markets Initiative showing that reporting utilities and telecom payment data will substantially benefit those with lower incomes, African Americans, Latinos, young adults, the elderly, and renters. Research also shows that including utility and telecom payment information in consumer credit files can be predictive of future delinquency by individuals in general. Moreover, there is no evidence that reporting utility and telecom payments leads consumers to overextend themselves by borrowing too much.
Carol also discussed the impact of a new PERC study that found that although 19% of consumer credit reports have errors, only one half of one percent (0.5%) of reports have errors substantial enough to move them from one tier to another (from prime to subprime, for example, or prime-plus to prime). Credit report inaccuracies are a cause for concern, but the research shows they tend to accurately reflect risk. There is still work to be done, as even half of one percent equates to more than one million people, but the lack of an accurate credit score harms a great many more. The dispute resolution process needs to be improved as well, so that those who report substantive errors see them more easily corrected.
Despite compelling evidence that alternative data credit reporting is a win‐win scenario for borrowers and lenders, utility and telecom firms are reluctant to report full payment histories to the credit bureaus due to regulatory uncertainty; currently most firms only report late payments to credit bureaus and/or the National Consumer Telecom and Utility Exchange. At the federal level, some companies that previously reported full payment histories to the credit bureaus have stopped due to uncertainty about privacy requirements. Congress should resolve the uncertainty through legislation that provides affirmative permission to utilities and telecom firms to report all payment history to the consumer credit bureaus.
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