It's the closing stretch of the presidential campaign and President Trump and former Vice President Biden are on the trail detailing the different visions they have for America’s future. Yet, it seems both candidates want the federal government to have a bigger role in analyzing your personal financial data and determining how worthy you are to get a loan. If it sounds worrisome, that’s because it is. More government control of private markets is an incredibly dangerous proposition for borrowers and lenders alike, all the while wasting taxpayer dollars.
Included as a key pillar in Joe Biden’s housing affordability plan is a call for the creation of a federally backed credit reporting agency. Under such a scheme, the Consumer Financial Protection Bureau would be charged with maintaining a database with the financial data of every American and determining how creditworthy each person is. In short, the government would be deciding who does, or doesn’t, qualify for a mortgage, car loan, or other sources of credit. It takes away the ability of financial institutions to make loans and instead puts it in the hands of bureaucrats.
Thankfully for now, Mr. Biden’s radical plan is merely just a thought on paper. Unfortunately, the Trump Administration has already proceeded with plans to create a similarly dangerous framework to put government in the business of credit scoring. In July, the Office of the Comptroller of the Currency (OCC) announced a framework to establish an alternative credit scoring method to make the credit reporting process more inclusive and equitable. Inclusiveness and equitability are of course vital goals. Furthermore, the public-private advisory structure OCC put together for the initial phase of its project has produced some successes in other parts of government. Unfortunately, the bigger concern is where the project will head next. While the details of how OCC plans to implement such a system remain scarce, the outcome could be an undesirable one: a waste of taxpayer dollars, less predictive scores, and higher costs of credit for consumers.
Mr. Trump rightfully criticizes those in Washington who want a government takeover of healthcare and energy markets, yet why is his administration pursuing plans that could lead to an outsized role for government in the credit system? Instead of moving closer to this unwanted, unnecessary outcome, Congress should work to make it easier to correct inaccurate credit report information, resolve disputes, and call for the inclusion of more data into credit reports, such as telecommunications data. Working with the tools private business is already providing will lead to better results for consumers who are scored, the credit invisible, and taxpayers.
NTU identifies three major problems that could arise if Trump’s OCC, or a future Biden administration, creates a government utility entrusted with credit reporting and credit scoring.
1. Cost
The federal government currently has no existing infrastructure when it comes to maintaining credit reports and computing a numerical credit score. Given this reality, the government either needs to build their own system or buy one. No matter which avenue, the cost is likely to be expensive. To build a new system will require thousands of employees and untold resources that will take years to complete. By that time private companies will be years ahead with innovative new models that are more predictive than whatever outdated system the government creates. Once complete, the federal government would have to retain a significant workforce to continuously update credit files, settle disputes, and derive the credit score. According to a quick internet search, the three major credit bureau’s employees 36,000 people. Taxpayers may be forgiven for worrying that a government entity would have a much bigger payroll to accomplish what the private sector can do now.
2. Functional Viability
If the OCC continues ahead with its plan, the assembly and operation of a public reporting agency will be a significant expense that will be paid for by taxpayers. Once up and running, how would pricing work and would it be profitable? If the government decides to not charge a fee, or one that is below market rates, it could impact the viability of private businesses already operating in this space. To this end, if the government runs a yearly loss would it fall on taxpayers to keep an unprofitable system running?
The OCC claims it will help the 28 million Americans that currently do not have a credit score. However, how will the OCC by itself determine who is or isn’t scored? Will it go through census data and cross reference it through data from private companies? By that time, the federal government may say it’s just easier for everyone to have a national credit score and potentially monitor every portion of an individual’s financial life. Be careful, “big brother” might literally judge you for spending too much money at the grocery store or your local coffee shop.
3. Usability
Nearly all lenders already have trusted experience with private sector firms that provide credit scores. Since the overwhelming majority already have some level of credit file, and by extension a credit score, it may not be worth the additional hassle of trying out the government-run score. As newly developed models and products move to market to meet evolving credit scoring challenges, by the time the government creates its own system it could be years behind the industry when it comes to data inclusive models. Plus, if lenders choose not to accept the government-run credit score, consumers who are forced to have this score would not have equal access to credit and would be no better off.
To be clear: consumers won’t benefit from a government-run credit reporting system. Innovation led by private market actors is working well, and delivering the most efficient outcomes for consumers and small businesses alike. If the government moves forward with a competing scheme, it could have a chilling effect on innovation in credit markets. Should the government develop its own reporting platform, it would be expensive, duplicative, inefficient and curtail development of new, more predictive private models.