Things tend to move fast in the fintech world, but lately Capitol Hill has been keeping up. Recently several bills from Congress came out of committee that, if passed, would have a profound effect on both the credit industry and the credit of millions of people across America. Of these bills, there is one that offers the greatest change to the country’s credit system since the creation of the Fair Credit Reporting Act – the National Credit Reporting Agency Act.
If passed in its current form, the National Credit Reporting Agency Act would create a new credit reporting agency that would be run by the government, specifically the Consumer Financial Protection Bureau. This new agency, Public Credit Registry would be a new credit bureau alternative to the existing credit bureaus that have been around for decades – Equifax, Experian and TransUnion.
According to the bill, the impetus for this new agency is to provide a new credit scoring model aimed mostly at underserved communities, namely those who have had the hardest time raising their credit scores or success receiving loans due to racial discrimination and biases.
For the PCR to reach these citizens with a truly different model, it will need to establish a baseline for how to rank peoples’ credit scores, and that is where the problem lies. How is the CFPB/PCR going to establish a baseline that is equitable without input from the private banking, fintech and credit sectors?
At this moment, the biggest problem with the bill is that it does not establish the baseline criteria that the PCR plans to use for evaluating credit. Moreover, in its current form the bill doesn’t allow for risk adjustments. If lenders have to abide by a new score (as opposed to the old reporting agencies), it can become riskier for them to use it for loan qualifications if the standards aren’t clear. The risk is in the rate, and that is when credit gets more expensive e.g., higher interest rates on loans.
There is also an organizational issue with the PCR becoming the responsibility of the CFPB. One of the biggest issues for the traditional credit agencies is credit report disputes, which would also become a responsibility of the PCR.
But would it be able to handle the influx of consumer reporting? The CFPB is not as large as other federal bureaus and not as established, as it has around 1,500 employees. This is a problem because the credit agencies already receive eight million or more credit disputes a year, which is a lot to handle even for them, much less a nascent government credit agency.
Open The Private Sector Discussion
The creation of the PCR is a good idea, as the overall goal of the bill is to make finance equitable for all and to offer a new alternative for Americans with borderline credit.
The three credit bureaus, however, have a different set of priorities, as they have 10 major banking clients that they care most about, all which have a lot of influence in the financial world. The issue is that the CFPB couldn’t care less about these banks, all while the bureaus are not incentivized to do anything the CFPB is designed to do.
When these varied interests collide, trillions of dollars are at stake.
As the National Credit Reporting Agency Act progresses, the best bet for Congress is to welcome an open discussion with the private credit, fintech and banking interests. Financial equity is great, but if the PCR exists in a vacuum and/or becomes just another reporting agency disguised as a public registry, then it really won’t make much of a difference to the disenfranchised Americans it is designed to reach.
Helping these people is not just about credit scoring, but how they can get started with credit to begin with. This is why establishing relationships with non-profits (a part of this bill) is great, but private sector lending opportunities for this population needs to expand in tandem.
Congress needs to engage the financial community to help innovate the PCR in these early stages when it is much easier to establish an alternative credit model/baseline moving forward. This applies to the credit reporting side as well because if the CFPB/PCR is going to help take on those eight million plus credit disputes with a small staff, it’s going to be impossible for it to do so without the tech and automation to back it up.
By taking these steps, Congress will be able to establish from the get-go a new way to level the credit playing field for millions of Americans, doing so while partnering with the lending sector that can most stand to benefit from it. If all parties have a chance to be heard, the PCR could truly become a win-win-win.
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