Democrats and the Biden administration have pressured credit reporting agencies to alter credit reports and models to such a degree that it runs the risk of rehashing the irresponsible financing that induced the housing crisis in 2007.
Policymakers should promote deregulatory policies that will allow financial institutions to allocate private capital to American households.
Democrats and the Consumer Financial Protection Bureau (CFPB) have introduced policies to whitewash credit scores. Rep. Rashida Tlaib, Michigan Democrat, introduced a bill that alters credit score criteria without acknowledging the risks associated with allocating credit to individuals that are unable to pay their debts. The CFPB has also pressured credit reporting agencies to remove medical debt from reports. Finance professor Clifford Rossi points out in a new research paper that the interest by policymakers to expand access to borrowers with little to no credit history could “disrupt” how the mortgage industry has traditionally used credit scores to allocate financing.
The housing market should rely on credit score data that accurately models the risk associated with offering to finance an individual. As the Federal Housing Finance Agency (FHFA) weighs its decision on how many and what types of credit score models it will use moving forward, it should take into consideration the negative repercussions of adopting any credit score model that weakens the methodology for determining a borrower’s creditworthiness.
Some industry participants have decided to cave to left-wing pressure and alter credit score models in a rushed effort to allocate financing to individuals that are less likely to pay back their debts. VantageScore, a credit-score model development firm created by the credit reporting agencies, announced that starting in October they would “stop factoring all medical debts” into their scores. According to Dr. Rossi, “VantageScore’s approach to analyzing unscorable consumers is to relax the criteria FICO applies in generating a credit score.”
At the same time, starting next year, the three major credit reporting agencies, Equifax, Experian and TransUnion, will remove medical debt “under at least $500” from credit reports. This behavior could result in a race to the bottom of credit scores that inaccurately predict “borrowers’ ability to repay” loans.
The removal of debt and other credit data is a slippery slope that could lead to the removal of more credit data from future credit score models and reports.
Additionally, political pressure to use alternative credit-scoring models, such as artificial intelligence, may pose risks. According to research from Stanford University, credit score algorithms are biased against lower-income Americans because they have limited credit histories, which makes the borrower data “less accurate in predicting creditworthiness.”
The best way to expand access to credit and mitigate credit risk is to use one credit score that is “highly effective in distinguishing between good and bad loans.”
Deregulation of private lending should be promoted instead of artificially scrubbing credit reports. In the mortgage market, stringent capital requirements and restrictive capital stress tests imposed by government rules have inhibited banks from being able to more actively allocate capital to lower-income Americans.
Loosening capital requirements combined with maintaining a credit score model that uses reports with accurate borrower data is paramount to allocating additional capital to American households while simultaneously ensuring housing market stability.
Using a credit score model that whitewashes borrower information, while maintaining current government regulations, could lead to the corrosion of underwriting standards. This could also lead to an increase in the prominence of risky lending that devolves into systemic risk in the U.S. housing market.
Instead of altering credit score models to ignore relevant borrower information, regulations that currently restrict mortgage lending and servicing should be lifted to allocate more credit to lower-income households.
• Bryan Bashur is a federal affairs manager at Americans for Tax Reform and executive director of the Shareholder Advocacy Forum.