WASHINGTON — Former Vice President Joe Biden’s endorsement of a public agency to compete with the three credit bureaus could set up a battle over the government's role in credit decisions.
The proposed Public Credit Reporting Agency was included earlier this month in a Democratic document — developed by a task force of Biden and Bernie Sanders supporters — of policy ideas that could gain traction if Biden wins the White House.
While consumer advocates welcome the prospect of a government agency to compete with Equifax, Experian and TransUnion, the credit reporting and financial services industries are pushing back against what they view as potential government overreach that could diminish the quality of credit reports.
“We would be handing the government the ability to determine who gets loans and who doesn’t get loans,” said Francis Creighton, president and CEO of the Consumer Data Industry Association. “Banks and others would no longer be in charge of their own underwriting systems. The government would be, and that’s troubling to us.”
Under the proposal by the unity task force, federally backed lenders — including mortgage originators — would be required to use the new agency's reports to evaluate applicants for credit. The new agency would be housed within the Consumer Financial Protection Bureau.
With the private bureaus taking heat in recent years over the accuracy of its reports and data security — particularly after the Equifax data breach in 2017 — consumer groups say more competition is needed in an industry now dominated by three companies.
“It just makes a heck of a lot of sense to provide some sort of way that there could be a database that isn’t controlled by the three credit bureaus that forms a counter to their data,” said Ed Mierzwinski, senior director of the federal consumer program at the U.S. Public Interest Research Group. “It would theoretically be more accurate and independent.”
But banking industry representatives worry that credit reporting information managed by the government would carry its own bias.
Paul Merski, group executive vice president for congressional relations and strategy at the Independent Community Bankers of America, said that “lenders need to rely on unbiased information on individuals’ creditworthiness and existing debts.” He added that it “would be near impossible to keep politics out of a public credit reporting agency.”
The Biden-Sanders proposal specifies that the type of lending targeted by the new agency would include "but would not be limited to federal home lending, PLUS loans (parent loans backed by the U.S. government), other loans that are guaranteed by the U.S. government, as well as any employment through federal agencies or for federal contracts."
In addition, the proposal says private credit bureaus would be required to provide data to the federal agency.
"The federal credit agency will also ensure the algorithms used for credit scoring don’t have discriminatory impacts, including accepting nontraditional sources of data like rental history and utility bills to ensure credit," the document says.
But beyond that, the details are unclear. For example, while the agency would be housed within the CFPB, it is not clear whether the consumer bureau would have authority to manage and oversee the credit reporting agency. On top of that, creating the agency would definitely require an act of Congress, meaning Democrats could need to gain a sizable majority in the Senate.
“I think that there are issues with structure,” said Isaac Boltansky, director of policy research at Compass Point Research & Trading. "Who has oversight of this new entity? What models will be used? How will the algorithm be structured? I think there are political concerns regarding Big Brother. Who is choosing the inputs and the outputs of the algorithms to then lead to credit extension?”
Amanda Fischer, policy director at the Washington Center for Equitable Growth, said a public option would give consumers more control over their data.
“If there was a public credit reporting agency that actually gave consumers more choice and control of their data, that would probably push the industry to be better,” Fischer said.
A focus on reforms for the credit reporting process isn't new.
After the 2017 Equifax data breach, which compromised the personal information of roughly 148 million Americans, a number of Democratic lawmakers introduced legislation to impose penalties on the credit bureaus if they breach consumers’ data, as well as legislation to give consumers more control over their data.
But little has been enacted into law, aside from a few provisions in a 2018 bank regulatory relief bill that gave consumers free credit freezes and limited the inclusion of veterans’ medical debt in credit reports.
“Even after the Equifax breach, there wasn’t anything of substance that could become law,” Boltansky said.
Fischer, who was a staffer on the Senate Banking Committee when the 2018 regulatory relief law was being debated, said the credit reporting industry has had a fairly powerful lobbying arm that has helped prevent structural reforms.
“There were basically problems" with the Department of Veterans Affairs "that medical debt was being reported as past due when in fact it had to do with the dispute between the patients and the VA health care system," Fischer said. "And even dealing with that extremely narrow issue for an extremely important industry, I remember was incredibly prolonged and difficult and required endless negotiation. ... They employ a lot of lobbyists, they employ a lot of people, they have a lot of sway in Congress and that cannot be overlooked."
Consumer complaints about the credit reporting agencies persist.
The CFPB said that 53% of consumer complaints submitted to the agency's public portal this year as of July dealt with credit or consumer reporting. Among credit reporting-related complaints that mentioned the coronavirus pandemic, 55% of consumers cited false information on their report as the primary issue.
U.S. PIRG also found that half of all complaints to the CFPB last year concerned credit reporting. The three credit bureaus garnered the most complaints of any companies in the bureau's complaint database.
The credit reporting industry, on the other hand, has argued that the data it uses and the reports it produces give banks the best picture of a consumer’s creditworthiness in the loan underwriting process.
Creighton pointed to a 2010 Federal Reserve report that found “no evidence of disparate impact by race (or ethnicity) or gender” in the credit scoring system.
“How," Creighton said, is the Biden proposal "going to address racial disparities if they acknowledge that our system is basically already accurate? We don’t believe that we are contributing to that.”
Creighton added that a public credit reporting agency would limit the information banks have in determining a borrower’s creditworthiness.
“Banks, who would be doing mortgage, or student loans, or any federally related loan, would have to use the federal system,” Creighton said. “So we would reduce the number of credit reports in those cases from three to one.”
But others argue that the government option in the credit reporting field better serves the interests of the general public.
Chi Chi Wu, a staff attorney at the National Consumer Law Center, noted that Equifax, Experian and TransUnion must answer to their shareholders.
“You’ve got this almost-public-utility-like entity and yet its highest duty isn’t to consumers or the American public, or the American economy, it’s to their shareholders,” Wu said. “Of course there are always issues with a government agency having issues, but at least the government is accountable to the voters, whereas a company like Equifax is ultimately accountable to shareholders.”
The conversation over a whether a public credit reporting agency has a chance will only pick up steam if Democrats take control of the White House and Senate after the November elections.
“I just think some of the Republicans in Congress want to take a lighter-touch approach that does not fundamentally disrupt the monopoly that the three credit bureaus have over the industry,” Fischer said.
