TransUnion, Equifax, and Experian, the three credit reporting bureaus, would be rivaled or perhaps even replaced by a national public credit reporting agency if President Joe Biden’s campaign trail promise comes to fruition.
Under Biden’s plan, the three private companies would no longer monopolize credit reports. Instead, there would be a public registry housed in the Consumer Financial Protection Bureau (CFPB). The idea was proposed in a paper by the Demos think tank in 2019. The CFPB, whose new acting director, Dave Uejio, recently replaced Trump appointee Kathleen Kraninger, declined to comment on whether it was pursuing plans to establish a national public credit registry. But the idea is being discussed at the CFPB, according to Demos associate director Amy Traub, who wrote the paper.
Critics and researchers have blasted the role that the three credit bureaus have played in entrenching economic inequality. Credit scores have a discriminatory effect against African-American and Latino communities, numerous research studies have shown, even though they don’t take race into account. On top of that, false credit reports are common and notoriously difficult for consumers to correct.
Concerns about credit have taken on new urgency because policymakers fear that the pandemic could impact peoples’ future creditworthiness due to economic hardships that are no fault of their own. For example, on Twitter back in March, Vice President Kamala Harris, then a senator, called for all negative credit reporting to be suspended for the duration of the pandemic. Indeed, consumer complaints to the CFPB about credit reporting and credit repair services more than doubled in 2020, and now eclipse every other category put together.
Against that backdrop, it’s little wonder that consumer advocacy groups have renewed calls to abolish the credit bureaus. Traub said she was “thrilled” to hear that Biden was campaigning on her proposal.
“Credit is a part of our public infrastructure, and is something that we rely on to thrive in the economy as it is structured,” Traub said. “But it is controlled by these three private companies that have set up the rules without public input, or even telling the consumer exactly what the rules are.”
Credit ratings rule the financial lives of consumers, dictating what kind of mortgage they can get, how much they will pay for a car loan, the terms of borrowing money, and innumerable other factors. Some employers even use credit scores to pick job candidates, a practice that Traub said would stop under a public credit rating system.
Biden’s campaign materials do not go into great detail about how the agency would work, but it borrows ideas from the Demos paper. The new public credit agency would aim to “minimize racial disparities, for example by ensuring the algorithms used for credit scoring don’t have a discriminatory impact, and by accepting non-traditional sources of data like rental history and utility bills to establish credit.”
Racial disparities affect credit scores not because the formula used to calculate them explicitly includes race, Traub said, but because they inevitably incorporate the effects of past discrimination. Racist laws throughout history have hindered Black families, for instance, in education, buying property, and accumulating resources to pass down to their children. This means that white consumers are more likely to have generational wealth to fall back on in case of unexpected expenses such as medical bills, and are less likely to have to take out predatory loans that can damage their credit scores.
By excluding things like medical bills from credit scores, and instead using utility bills, for example, the scores could better show how reliably consumers pay their bills instead of reflecting and perpetuating the effects of racial discrimination, Traub said.
“Creating a public credit registry and making changes to credit reporting alone are not going to be enough to totally reverse this historic discrimination,” Traub said. “We need other social changes.” But transparency and public input into how the scores are calculated would “minimize as much as possible that discriminatory impact.”
The proposal is still just that—a proposal—and it faces fierce opposition from industry lobbyists. The Consumer Data Industry Association, for example, a trade group that represents the credit bureaus, wrote in a September article that a new credit bureau was “a dangerous idea” and that “a government-owned credit bureau would create a volatile and unstable lending environment, riddled with inconsistent policies, swing back and forth from election to election, leaving consumers with higher prices and limited options for credit” among other criticisms.