The Unconvincing Case for a Public Credit Registry

Public provision—whether public options or public monopoly—has become all the rage in some progressive circles. I’d like to claim early mover status in this regard—back in 2009 I wrote a piece calling for public provision in payments, and in 2013 I wrote a piece underscoring the importance of public options and public provision in housing finance. One public provision proposal I haven’t previously commented on, but which has been troubling me for a while is the idea of a public credit registry. I’m sympathetic to consideration of public provision as a tool in the regulatory toolbox, and the idea is supported by a bunch of folks whom I very much respect, but I just don’t see the case here at all.  Public provision just isn’t a solution to most of the market failures in credit reporting. Moreover, even if there were a case, of all the possible priorities in consumer finance regulation, this seems really far down the list and a poor use of limited agency resources. 

Now let’s be clear.  There are several key problems with the current credit reporting system: 

 

(3) credit scores can be racially discriminatory.

(4) consumers lack the ability to choose who credit reports on them or “exit” as a response to poor service.  Put another way, there is a monopoly problem of sorts.  

 

These are all real problems that demand policy attention. But I don’t think a public credit registry addresses the first three, and it is not obviously the right answer to the fourth problem. 

 

Private credit reports are rife with inaccuracies, but that seems to be primarily a function of inputs (garbage in, garbage out), not of the private ownership of the system. To be sure, there is little market discipline ensuring accuracy, as the user of credit reports has no ability to determine if there are in fact inaccuracies.  But it isn’t clear why public ownership would solve that problem. Why would the federal government do a better job at ensuring accurate reports?  Provision of retail services is not a core competency of the federal government, and the service would likely be outsourced, so we’d be back to square one.

 

Indeed, I am hard pressed to think of a situation where the government warrants the accuracy of records that it has not itself generated (birth certificates, driver’s licenses, and the like). Even for something as important as liens, neither county land records (other than for the small number of Torrens system jurisdictions) nor the state UCC security interest system guaranties the accuracy of filings. These systems report only that a filing was made at a certain date and time and whatever information was reported in the filing, accurate or not.  The issue isn’t with the party that is collecting the data, but the parties that are providing it. If inaccurate data reporting is the concern, wouldn’t it be more effective to strengthen furnisher liability? Solve the garbage in problem, and garbage out should solve itself. 

 

What about thin file consumers?  That’s a problem of consumers not having credit in the first place. The way you get credit is to already have credit, which is a Catch-22. The three major bypasses are federal student loans (not underwritten), secured credit cards, or co-signors (meaning you’ve got family/friends who are in the system). The inability for lower-income consumers to break through the Catch-22 is a major problem, but it’s not clear what it has to do with private provision.  Credit reporting agencies have every incentive to want to get as much data as possible about as many consumers as possible. Their problem is that lots of credit providers do not report. And why should they?  One of the real puzzles of credit reporting is why lenders engage in credit reporting. Lenders are not paid for reporting (as far as I know), and they are letting other lenders free-ride off of their data. We don’t usually see massive free-riding societies forming among commercial rivals.  The best explanation I have is that lenders like to credit report because of the leverage it gives them over a debtor. A lender that credit reports can credibly threaten to impose costs on a debtor that fails to repay by raising the cost or availability of the debtor’s future credit. Some lenders are likely to see this leverage as more valuable than others, but unless credit reporting is mandated (and that raises some 1st Amendment issues), the thin file problem is going to persist whether or not there is public or private provision of credit reports.  

 

Credit scores can be racially discriminatory. That’s mainly a function of the algorithms that produce the scores, not who compiles the data. Provision of credit scores is a somewhat distinct activity from provision of credit reports. A credit report provides the inputs for a credit score, but a credit score can be generated from inputs taken from credit reports produced by someone else.  In other words, if the problem is credit scores, that does not suggest a need for public provision of credit reporting.  At most it suggests a need for a public credit scoring model, and it could more readily be addressed by more vigilant enforcement of ECOA. While public provision is all the vogue among progressives, I fear many of its proponents have not really thought through the implications of government provision of credit. It opens up a really complicated can of worms, as it politicizes the provision of credit.  I am certainly receptive to the fact that there are implicit political decisions in a private credit system, but let’s not pretend that public provision is problem free. There’s good reason why the United States has never done public provision of underwritten credit for anything other than programs designed to help lower-income consumers. Even when there was postal banking, it never included credit or even payments that posed temporary credit risk—the postal bank accounts weren’t checkable, but were passbook accounts.  

 

As for the lack of consumer ability to choose who (if anyone) provides credit reports on them, the lack of choice evokes monopoly concerns. But it's important to recognize that credit reporting is not a service provided to a consumer. Consumers are not the market for credit reports. They are being reported about, not to. The issue is less a monopoly problem than a privacy problem. To the extent that it's a privacy problem, it's strange to think that government provision is an improvement. But to the extent we think of it as a monopoly problem, I think the best way to approach the issue is to think of credit reporting agencies as akin to utilities. They might be privately owned, but they are subject to regulation to ensure quality of service.  We don’t exactly think of the regulation of credit reporting that way—although FCRA is a quality-control statute—but I think it’s a more promising model than public provision.    

 

What I see, then, is a solution—public provision—that is very appealing to a certain strain in progressive economic thinking, but that has no clear relationship to most of the actual problems in credit reporting. At best, it relates to the lack of ability to choose a provider, but even then, it is far from clear that public provision is the best tool. Indeed, if monopoly is the problem, why is a government monopoly (as opposed to a public option) a better solution?  

Regulatory improvements of credit reporting are important, and should be a priority for the CFPB. It makes no sense, however, for the CFPB to spend the enormous resources that would be required to produce a public credit registry and public credit scores, as public provision is simply not responsive to the major problems in credit reporting.