Would prospective homebuyers have a better chance to qualify for a mortgage if negative items in their credit files were erased in four years rather than the current seven?
How about if credit reports included information on utility bills, rent, cable, mobile phone and other monthly payments? Wouldn’t paying these bills on time give a nice jolt to credit scores? Shouldn’t this be federal law?
Millions of Americans have stakes in the rules governing credit, especially people who could use a little credit help to qualify for a mortgage.
A hearing before the House Financial Services Committee last month touched on potential legislative fixes to the national credit system. But some of the answers that emerged weren’t quite straightforward.
Start with removing negatives. California Rep. Maxine Waters proposed amending the federal Fair Credit Reporting Act to require credit bureaus to delete most negative information, from delinquencies on credit cards and mortgages to foreclosures, within four years. Bankruptcies would stay for seven years, instead of 10.
In effect, this would erase most traces of the credit troubles many consumers encountered during the housing bust and recession, and administer adrenalin boosts to their credit scores.
Waters, the committee’s ranking Democrat, said adopting a four-year standard would end the unreasonably long time that most adverse information can remain on a report. She said a change would treat borrowers more fairly and better conform to practices in other major economies. In Sweden, she said, the standard retention period is three years. In Germany, it’s four.
But the credit industry says it’s a terrible idea. The fact that a homebuyer experienced a serious delinquency or foreclosure is still relevant, and statistically predictive of future problems, for more than four years. Dumping information too early would hamper lenders’ capacity to evaluate the true risks posed by loan applicants.
Stuart Pratt, president and CEO of the Consumer Data Industry Association, testified that “82 percent of credit systems” worldwide require credit bureaus to retain negative data for anywhere from four to 10 years.
What about including in credit reports rent, utilities bills, cable and other services requiring monthly payments and factoring them into scores? Some consumer groups think it’s not a great idea.
At the hearing, Chi Chi Wu of the National Consumer Law Center said including utilities payments in credit reports could actually depress many consumers’ scores, especially those with lower incomes. Studies show when money is tight, between 20 percent and 30 percent of consumers pay utilities late rather than the rent or other bills. They make it up, but if utilities reported late payments to the credit bureaus, large numbers of consumers could end up seeing their credit scores plunge.
Bottom line: Congress is beginning what could be an important long-term review of credit reporting and scoring-system practices. But figuring out how to treat everybody fairly could be a challenge.
Kenneth Harney is a syndicated columnist.