Washington continues to consider a wide variety of financial relief packages to help consumers and workers weather the current crisis. Unfortunately, there are several ideas now wafting through the halls of Congress that, well-intentioned as they may be, will trade short-term assistance for long-term financial pain for the very consumers these proposals aim to help. And nowhere is this disconnect between intent and effect more stark than in the proposals being floated to alter the rules on credit reporting.
Every lawmaker should be well-appraised that data-driven credit-scoring models are the beating heart of our consumer credit industry. Credit models are vital to small businesses that need access to capital and to consumers making a significant purchase, such as for a home or car. With over 36 million Americans now having been furloughed or put out of a job entirely, it is clear that congressional leaders – in cooperation with lenders themselves – made the right move in offering a reprieve for borrowers unable to stay current on their loans.
This life raft came in the form of the CARES Act, which allows borrowers financially impacted by the COVID-led economic downturn to receive forbearance from their creditors and continue to be reported as “current” with the credit bureaus. This is absolutely critical in not only shielding distressed borrowers from destroying their credit scores, but in calibrating consumer lending for economic recovery. A reliable, analytically derived credit-scoring model will be crucial in helping lenders determine whether businesses and consumers have the necessary financial profile required for the loans and capital pools that will put America back to work. Absent this vital tool, the long-term prospects for recovery and consumer relief suffer immensely.
Our consumer credit industry works precisely because it is built on a highly predictive data-driven scoring model. So it should concern everyone that several Democratic lawmakers are pushing legislation that would shake up the scoring model like a snow globe, creating chaos that will lead to fewer consumers having access to credit while gouging America’s chance for a more timely recovery. The bills in question would require that all negative reporting to credit bureaus be suspended, regardless of whether it is related to the pandemic. They have also floated the idea of extending repayment grace periods for borrowers for up to a year, regardless of financial circumstances. Both of these ideas would be unimaginably harmful and lead to a financial setback for millions of U.S. consumers.
First, such proposals are patently unfair to the responsible, conscientious borrowers who remained current on their payment obligations until struck by pandemic-related adversity. The CARES Act was designed to cushion the blow for actual economic victims, not serve as blanket amnesty for borrower non-payment. An across-the-board freeze on credit reporting would needlessly punish those in a COVID-related forbearance by making their credit profile nearly indistinguishable from unexcused non-payment. Their reward for playing by the rules will be higher costs and potentially less access to credit.
Further, a freeze on reporting would give people with no valid COVID-related hardship an incentive not to pay on their outstanding credit obligations, an absolutely reckless idea in the midst of an economic contraction. Lenders who serve as the bridge to consumers’ financial advancement would suffer significant strain from plummeting revenue, shrinking the pool of available capital which would further push lending rates higher.
Most importantly, with a scoring model diluted through an overly generous and arbitrary freeze on reporting, lenders would essentially be operating in the dark, and have no choice but to ration and restrict access to credit to all but the most affluent and well-qualified. Suspending negative information will result in unreliable scoring data, which effectively degrades credit scores across the board. A dented scoring model raises the risk level for everyone, leaving only those with ample collateral and extensive borrowing history a chance to qualify for loans, and cutting off capital to small businesses and consumers precisely when it is most needed. The overall impact on the average consumer is more financial pain, and a longer road to economic recovery.
There are certainly ways Washington can extend protections to borrowers — for example, by having creditors take more affirmative steps to initiate contact with their customers, and promote a clear, standardized process to access hardship assistance. But we must draw the line at proposals that undermine the validity and accuracy of the scoring models, or which reward non-payment of credit obligations unrelated to the COVID crisis. A blanket freeze on credit reporting is a disastrous idea that will freeze millions out of the credit market, and lead to much higher costs for others. As Americans go back to work with hopes of better days, this is one idea that should stay in quarantine.
Gerard Scimeca is an attorney and co-founder of CASE, Consumer Action for a Strong Economy, a free-market oriented consumer advocacy organization.
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