Two bills introduced in Congress, H.R. 6370 and S. 3508, ‘‘Disaster Protection for Workers’ Credit Act of 2020’’ would impose a moratorium on credit reporting of “adverse information” for the duration of the coronavirus crisis. Credit scores are an integral part of the consumer credit underwriting process as their power to predict the likelihood of borrower default is well-established empirically. Consequently, lenders have come to heavily rely on the integrity and information content of credit scores as a critical measure of a borrower’s creditworthiness.
Economic theory suggests that in the absence of viable mechanisms to effectively distinguish between high and low risk borrowers, lenders will ration credit. Under a credit reporting moratorium, the reliability of credit scores to distinguish between borrower risks would come into question. Lenders would respond to the proposed credit reporting moratorium by raising minimum credit score requirements and/or raising borrowing rates as a credit uncertainty premium to offset the risk they face from the moratorium. During the 2008 financial crisis, lenders raised credit score minimums on FHA loans, for example, beyond those set by the agency as a response to uncertainty over indemnification provisions that posed significant costs to lenders. And today, during the coronavirus, a number of Ginnie Mae originators have raised credit scores to blunt some of the risk they face due to requirements to pass-through mortgage payments to investors, including those in default or subject to forbearance.
A credit reporting moratorium would severely restrict credit to millions of consumers, with potentially disproportionate impacts on lower-income, minority, and first-time homebuyer borrowers while significantly delaying the timing, speed and trajectory of economic recovery. Policy recommendations are as follows:
The CFPB should ensure that financial institutions or mortgage servicers reporting credit information to credit reporting agencies on federally-backed mortgages in forbearance are correctly reporting this information pursuant to CARES Act provisions on this issue.
Consumers would be better off by having access to credit counseling and financial education programs during the crisis funded either by the next coronavirus stimulus package or out of the CFPB Civil Penalty Fund with appropriate oversight.
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