On October 4, 2022, The Washington Times published an op-ed by ATR Federal Affairs Manager Bryan Bashur. The op-ed discusses the recent attempts by the Biden Administration and congressional Democrats to pressure credit reporting agencies to alter credit reports and models.
The piece begins by explaining that Democrats have pressured credit reporting agencies to alter credit reports, which is likened to the financial irresponsibility that led to the housing crisis in 2007. Instead, the op-ed argues, policymakers should promote deregulatory policies that will allow financial institutions to allocate private capital to American households.
The article then goes on to explain how Democrats and the Consumer Financial Protection Bureau 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.
Next, the op-ed asserts that the housing market should rely on credit score data that accurately models the risks 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.
The piece then notes how some industry participants have caved to left-wing pressure on this issue, including VantageScore, which announced it would no longer factor medical debt in their credit scores. Three credit reporting agencies also announced that they would not factor medical debt less than $500.
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.
The article goes on to explain that political pressure to use other credit-scoring models, such as artificial intelligence, may also pose risks. It argues that 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.”
Finally, the op-ed argues that the best way to help individuals with low credit scores is to deregulate private lending, not artificially scrub credit reports. In the mortgage market, capital requirements and stress tests imposed by government rules inhibit banks from being able to allocate capital to lower-income Americans. Reducing the government pressure on these banks will allow them to allocate more capital to American households without placing our housing market’s stability in jeopardy.
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.
Click here to read the full op-ed.