The folly of a government-issued credit score

The ability of individuals to borrow funds has long been integral to achieving economic advancement in the United States. It is also essential to the strength of the nation’s economy, as borrowers use the funds provided through lenders to generate and drive economic growth through major purchases, capital investments or building a business.

The risk in advancing credit is borne by the lender, which must determine the ability and likelihood of the borrower to repay the funds being advanced. As evidenced by the subprime mortgage crisis of 2007-2009, economic calamities can and do result if lenders fail in their mission to offer credit responsibly — even if they do so to advance government objectives or comply with government regulations.

A proposal threatening the ability of lenders to fulfill their vital economic role is beginning to be discussed in Congress. On June 29, the House Committee on Financial Services, chaired by Rep. Maxine Waters (D-Calif.), will hold a hearing entitled, “A Biased, Broken System: Examining Proposals to Overhaul Credit Reporting to Achieve Equity.”

The hearing will highlight a policy initiative from Demos, a progressive think tank, to establish a government-run public credit registry (PCR). The organization’s proposal, contained in a report entitled, “Data Capitalism and Algorithmic Fairness,” has been gaining some traction on Capitol Hill. Yet, there are some serious questions about what Demos is proposing and the claims it makes in support of its scheme.

Assuring responsible oversight of credit reporting agencies and addressing inequities in our financial system are laudable goals supported by many across the ideological spectrum in the public and private sectors. Demos, however, is proposing scrapping the entire system and replacing it with a government monopoly during a time of heightened antitrust activism, an extreme remedy that puts all of our financial futures into the hands of bureaucrats and politicians in Washington.

In its report, Demos gets basic facts about credit scoring wrong, drawing into question the validity of its arguments supporting a PCR. Demos characterizes credit scores as a “black box,” implying that the data generated is capricious, a total fallacy and something they should understand given the heavy compliance requirements of the Fair Credit Reporting Act (FCRA) and other numerous regulations. Scores have reason codes and full transparency, assuring that they are both standardized and understandable.  Demos inaccurately claims that credit scores contain ZIP Codes. They don’t. 

The PCR Demos wants would put one of the most personal and financially determinative aspects of Americans in the exclusive hands of the government. As evidenced by what citizens experience when they run afoul of a regulatory agency, disagree with a decision by the IRS, or attempt to track down an undelivered package, their prospects for redress to inaccuracies in their credit ratings – now assured by statute – would vanish. Existing state and federal oversight ensuring adherence to the Fair Credit Reporting Act, as well as myriad laws and regulations that protect consumers, will be effectively abolished.

Are the major credit reporting bureaus – Equifax, Experian and TransUnion – infallible? Of course not. If they were, they wouldn’t be in competition with one another. But it is that private sector competition that makes these firms better. They are constantly innovating, updating their proprietary models and algorithms with increased data points to hone their accuracy and predictive abilities.

Under the PCR system, these bureaus – and their 30,000 employees – would be eliminated in seven years. And they will take their extensive technical expertise and irreplaceable institutional knowledge with them.

According to Demos, the creation of a PCR would eliminate what it calls “data capitalism.” What is data capitalism? It is a euphemism used to discredit the empirical evidence – an individual’s history of paying bills – compiled by private credit reporting agencies. In effect, the PCR scheme assumes that keeping track of someone’s record of honoring obligations is inherently inequitable.

It is that prospect of government manipulation of credit reporting that is genuinely reckless, holding the most severe implications for the economy. If credit were to be extended not on the borrower’s likelihood of repayment but on a political agenda, the entire system of lending would ultimately collapse. Determining creditworthiness based on who you are rather than how you handle credit is a recipe for disaster.

Credit reporting is essential to the continued growth of our economy. As Congress begins considering eliminating the current system and replacing it with a government monopoly, it is endangering prosperity, not just in the near-term, but permanently. Improved oversight of credit rating agencies can achieve the results progressives seek but without a government-run solution that would harm consumers, lenders and our economy. As this debate ensues, every American holds a stake in seeing wiser, practical and pragmatic voices prevail.

Gerard Scimeca is an attorney, co-founder and chairman of CASE, Consumer Action for a Strong Economy, a free-market oriented consumer advocacy organization.