Biden’s presidential campaign spoke of many new ideas including ones to transform the economy and to reduce racial inequity. One of the ways to achieve this was a proposal to transfer the consumer credit ratings from three major rating agencies to a public registry.
There are many rating agencies across the U.S. The three major ones are Equifax, Experian PLC and TransUnion. Each one of them uses different formulas and criteria to rate consumers. Bringing them under the umbrella of a public registry could also bring it under the Consumer Financial Protection Bureau (CFPB).
These three agencies analyze consumer borrowing as well as repayment schedules and put forward scores based on these two factors. These scores are used by lenders to estimate a consumer’s credit worthiness. This score plays a huge role in a consumer’s ability to buy an apartment, to get specific jobs, to borrow money and even to ascertain interest rates.
These three public limited companies earn enough to be sustainable and yet are not transparent in their proceedings. They have different assessment methods. Errors are common and there has been evidence of racial biases. Consumers can get free copies of their reports once a year. If they want it more often they have to pay for their own reports.
Earlier, the Balance had reported that a paper published in 2019 by Demos, a think tank had mentioned that decisions drawn on credit data had the ability to reproduce and spread existing racial inequality. This made the goal of reaching true economic equity difficult and the paper suggested that a public credit registry was the way forward.
Dave Ueijo, new acting director of CFPB, has said that his two main priorities were relief for consumers facing hardships due to the coronavirus and the economic crisis that followed it and racial equity. His statement has not mentioned a public credit reporting agency.
Biden’s proposal has the potential to mitigate most if the inequities mentioned but can also face a few pitfalls when government change as that leads to changes in policies. Another factor is that there are many different credit agencies, including some specifically for those with bad credit. So, the standardization of credit bureaus under a public registry could prove to be a challenging and monumental task ahead.