— Do you think you'd have a better chance to qualify for a home mortgage if negative items in your credit files were erased in four years rather than the current seven?
How about if your credit reports included information on your utility bills, rent, cable, mobile phone and other monthly payments? Wouldn't this give a nice jolt to your credit scores, assuming that you've paid these bills on time? 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 recent hearing before the House Financial Services Committee touched on these and other possible legislative fixes to the national credit system. But some of the answers that emerged weren't as straightforward as you might guess.
Start with removing negatives from credit reports. A new legislative proposal from Rep. Maxine Waters (D-Los Angeles) would amend the federal Fair Credit Reporting Act to require the national credit bureaus to delete most negative information — delinquencies on credit cards and mortgages, foreclosures and short sales among others — within four years. Bankruptcies would remain on file for seven years, rather than the current 10.
In effect, this would erase most traces of the credit troubles many consumers encountered during the housing bust and recession. It would also administer adrenaline boosts to their credit scores and create opportunities for huge numbers of renters who would like to buy houses but can't meet today's high credit score requirements.
Waters, the ranking Democrat on the Financial Services Committee, said adopting a four-year standard would end "the unreasonably long time periods that most adverse information can remain on a credit report." Since "the predictive value of most negative information contained on a credit report gradually diminishes after two years," she said, a change would treat borrowers more fairly and better conform to practices in other major economies. In Sweden, Waters said, the standard retention period is three years, while in Germany it's four.
But the credit industry says no way — it's a terrible idea. The fact that a borrower experienced a serious delinquency or foreclosure is still relevant — and statistically predictive of future delinquencies — for more than four years. Dumping information too early would hamper lenders' capacity to evaluate the true risks posed by loan applicants. Ultimately it would be harmful to everybody, lenders and borrowers alike.
Stuart K. Pratt, president and chief executive of the Consumer Data Industry Assn., testified that although a handful of developed countries have more lenient rules, 82% of credit systems worldwide require credit bureaus to retain negative data for four to 10 years.
After the hearing, Pratt told me that "it doesn't seem right to us coming out of the Great Recession that we would erase predictive data" that lenders now use to carefully underwrite applications for mortgages and other credit.
What about including in credit reports rent performance, utility bills, cable and other services requiring monthly payments and factoring them into scores?
As a general rule, few if any of these payments — although they are directly related to consumers' creditworthiness — are given any weight in credit scores. Wouldn't mandatory consideration of them help people who pay their bills on time but don't have extensive credit files?
Sounds like a no-brainer. But it isn't. Although the national credit bureaus generally favor supplementing their own information with alternative credit data such as rental payment histories, some consumer groups think it's not a great idea.
At the hearing, Chi Chi Wu, staff attorney for the National Consumer Law Center, said her group opposes inclusion of utility payments in credit reports because it could depress many consumers' scores, especially those with lower incomes. Studies have shown, she said, that many consumers prioritize their monthly energy payments, and when money is tight, 20% to 30% of them choose to pay utilities late rather than the rent or other bills.
They make it up subsequently, but if utilities reported late payments to the credit bureaus, large numbers of consumers could end up with 30- to 90-day delinquencies in their files and see their credit scores plunge.
Bottom line from the hearing: 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.