Addressing Credit Invisibility Through Federal Contracting Power

The Biden administration could substantially reduce the number of "credit invisible" and "thin file" consumers without legislation, simply through a determined use of federal contract regarding multi-family mortgages and wireless spectrum licenses. By requiring credit reporting as a condition of federal purchase of multi-family mortgages or sale of wireless spectrum, the Biden administration could ensuring credit reporting for a lot of renters and all cellphone contracts, which would help millions of Americans start to come into the credit system and escape the Catch-22 of credit invisibility. This would be a major step toward achieving economic equity in the United States. 

Here's the Catch-22 about establishing credit:  you need a credit report and score to get credit, but you can't get a credit report and score without having credit in the first place. Yes, there are some on-ramps: student loans, secured credit cards, and co-signors, but these aren't options that are available to everyone, particularly to lower-income individuals. A student loan requires being a student. A secured credit card requires a banking relationship (geographically difficult for some people). And a co-signor requires a close relative or friend with credit. As a result, there's 45 million people—20% of the adult population—who are "thin files" or "credit invisibles" and are denied the opportunity to fully participate in the economy. 

Yet, many thin file and credit invisibles actually do have extended transactional records showing their payment history, but it's just with the wrong counterparties:  they have histories paying on their utilities (including cellphones) and their rent. The problem is that most landlords and utilities do not credit report. And why should they? Landlords and utilities do not benefit from credit reporting. The main benefit to credit reporting is not the creation of a quasi-public good of credit report data. (I say "quasi" because the data is certainly non-rivalrous and furnishers cannot exclude users, although consumer reporting agencies can.) Instead, the main reason to engage in credit reporting is because of its in terrorem effect that helps lenders that are either unsecured (credit card lenders) or face the possibility of unsecured deficiencies (mortgages and car lenders). Creditors that have better collection capability generally don't bother with credit reporting.  Hence payday lenders don't have any need to credit report because they just hit the borrower's bank account without needing a judgment.  Similarly, landlords and utilities don't get much benefit from credit reporting. They already have substantial collection ability without the in terrorem cudgel of negative credit reporting. Landlords can in most jurisdictions evict relatively easily and utilities can disconnect nonpaying customers. 

The general scarcity of landlord and utility credit reporting means that such data may not always be included in credit scores, even when it is included in a report, and scores are generally used alone or in conjunction with a report in underwriting.  

So let me throw out an idea for how the Biden administration could make major progress in addressing the thin file/credit invisible problem:  make credit reporting a contractual requirement for undertaking certain transactions with federal entities.  Specifically: 

• Treasury (as an amendment to its preferred stock purchase agreements) could require Fannie Mae and Freddie Mac to insert a clause in their multi-family mortgage loan documentation that requires the mortgagee to credit report regarding any tenants. That would result in credit reporting in a sizable part of the rental market. 

• The FCC could require wireless providers to credit report on their customers as a condition of spectrum licenses under the term that allows incorporation of "public interest considerations into the process for assigning winning bids". Getting credit reporting on cellphone contracts would be huge because of the high penetration rate of wireless devices. 

These moves would require the assent of some independent regulatory agencies (FHFA and FCC), but critically, they would not require legislation. (An executive order would, at the very least, be quite persuasive in this area.) I don't think it's possible to reach other types of utilities—power, water—through federal contracting power, and legislation mandating credit reporting could run into First Amendment corporate speech problems. But if the Biden administration is willing to be creative about using federal contracting power, it could substantially advance the type of information—especially cellphone contracts—that is being reported and see meaningful results in reducing credit invisibility, which is a key step toward achieving economic equity.