Kamala Harris says credit scores should include rent, cell phones and utilities
By Jacob Passy
Published: Jul 10, 2019 11:07 am ET
Legislation to reform how credit scores are created has received bipartisan support
Senator Kamala Harris is calling for reforms to the way in which credit scores are calculated in order to boost black homeownership.
Senator Kamala Harris wants to add more data to how credit bureaus calculate credit scores
as part of a broader plan to address the black homeownership gap in the U.S.
The Democratic presidential candidate from California unveiled her plan last week during an appearance at the Essence Festival in New Orleans, an annual music and culture festival sponsored by Essence magazine.
Harris
called for amending the Fair Credit Reporting Act to require credit reporting agencies to include payments of rent, cellphone bills and utilities when calculating credit scores.
There are an estimated 26 million people who are “credit invisible” and another 19 million who are said to have “unscorable” files,
according to the Consumer Financial Protection Bureau. These people don’t have enough bank or credit-union accounts to have a credit score by today’s standards.
While the traditional FICO score, named after the Fair Isaac Corporation
FICO-0.2% mainly considers payments on debt such as credit cards, mortgages and auto loans, the credit scores have always been designed to consider telecommunications and utilities payments since they were first released in 1989, said Joanne Gaskin, vice president of scores and analytics at FICO. The latest version of the credit score, FICO Score 9, is also designed to incorporate rent data.
The problem is that the necessary data hasn’t been collected. FICO relies on consumer data gathered by the three major credit reporting agencies (CRAs) — Experian
EXPGY+0.31%Equifax
EFX-0.84% and TransUnion
TRU+0.96% — to produce its scores for consumers. But those agencies don’t have much of this “alternative” data.
“Today, we have a voluntary system of furnishing data which means not all providers report payment information to the CRAs,” Gaskin said. For instance, while roughly 92% of U.S. consumers have cell phones, only 5% of consumers have telecommunications-related data in their credit bureau files.
“We applaud Sen. Harris’ proposal to responsibly expand access to credit through the use of alternative data such as telco, utility and rent payments and bringing greater attention to the lack of this information being reported to the three main CRAs,” Gaskin added.
Read more: How ‘redlining’ still hurts home values
Legislation to amend the Fair Credit Reporting Act has already received bipartisan support. A bill
introduced in 2017 by former House Representative Keith Ellison, a Democrat from Minnesota, that would require this additional data in credit scoring managed to pass the House of Representatives. The
Senate version of that bill, which was authored by Senator Tim Scott, a Republican from South Carolina, attracted both Democratic and Republicans co-sponsors, though Harris was not among them.
Scott’s bill, which FICO supports, would also encourage telecommunications and utility companies and landlords to supply credit bureaus with information regarding on-time or delayed payments.
And previous legislation that was signed into law by President Trump included provisions that sought to broaden the range of information lenders consider when underwriting mortgages. The
2018 bill that rolled back Obama-era financial regulationsrequired Fannie Mae
FNMA+1.82% and Freddie Mac
FMCC+1.5% to accept loans that lenders provided using alternative forms of credit scores in the underwriting process.
Meanwhile, companies have developed alternative credit scores, such as the FICO XD, that rely on data from sources other than the major credit bureaus to assess consumers’ creditworthiness. Equifax, Experian and TransUnion have also developed the VantageScore as a competitor to FICO — while the score relies on the same data as traditional FICO scores, the data is weighted differently. Experian also has a tool that will include certain utility accounts included in your credit report.
Proponents of alternative credit scoring models argue that millions more Americans would be able to loans if their credit scores were calculated using additional data such as rent and utility payments.
Also see: More Americans are taking longer to pay off their credit-card debt
However, others have argued that the added data alone may not be much of a game-changer in terms of creating a new pool of potential home buyers. The 2018 legislation, for instance, didn’t require lenders to abandon the traditional FICO score altogether. As a result, some argued lenders may choose to ignore the alternative scores or, if they used them, consider those borrowers to be riskier and thus charge them a higher interest rate.
Others have also suggested consumers’ credit scores
could potentially go down if this additional data is added in earnest to the calculations. For instance, utility companies can already report late payments to credit bureaus, but typically only do so after several months have passed. If utility companies were obliged to report all consumer payment information to the credit reporting agencies, consumers could be dinged for a single late payment, even if they quickly resolved the situation.
Black and Hispanic consumers are more likely to be unscorable or credit invisible. About 15% of blacks and Hispanics are “credit invisible,” compared to 9% of whites and Asians,
according to 2015 data from the Consumer Financial Protection Bureau.
This disparity contributes to the racial gap in homeownership, Harris has argued. The homeownership rate among white Americans is 73.2%, whereas the rate among black Americans is just 41.1%,
per the U.S. Census Bureau.
She also proposed giving $100 billion in down-payment and closing-cost assistance — up to $25,000 per household — to help black families purchase homes in parts of the country that were traditionally “red-lined,” meaning that people of color were historically denied mortgages to purchases homes in those neighborhoods.
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