Lawmakers Weigh Credit Score Changes

September 22, 2014

During a recent hearing of the House Financial Services Committee, lawmakers reviewed credit reporting and scoring system practices. Some advocated changes to help erase blemishes faster from a credit report and urged other factors to be considered in the scoring process.

For example, a new bill proposed by Rep. Maxine Waters (D-Calif.) aims to change the federal Fair Credit Reporting Act to require the national credit bureaus to delete most blemishes from a person’s credit report within four years, instead of the current seven. These blemishes would include delinquencies on credit cards and mortgages, foreclosures, short sales, and more. The bill proposed bankruptcies stay on file for seven years instead of the current 10. If this law is enacted, it means that many of the hardships consumers faced during the recession would be deleted from their credit reports.

Adopting a four-year standard would end “the unreasonably long time periods that most adverse information can remain on a credit report,” Waters says. “The predictive value of most negative information contained on a credit report gradually diminishes after two years.”

However, officials from the credit industry disagree. They argue that if a borrower has undergone a delinquency or foreclosure it is still relevant and predictive of future delinquencies for more than four years. They say removing such information sooner than the current seven years would harm lenders’ ability to evaluate the true risk potential borrowers’ may pose.

“It doesn’t seem right to us coming out of the Great Recession that we would erase predictive data” that lenders now use to underwrite applications for mortgages and other credit, says Stuart K. Pratt, president and chief executive of the Consumer Data Industry Association.

Also during the Congressional committee meeting, legislators weighed the feasibility of adding consumers’ monthly payments to utility companies, cable services, and rent to the credit score calculus. The national credit bureaus are in general favor of supplementing their own information with alternative credit data such as rental payment histories, but some consumer groups don’t agree with such a move.

During the hearing, Chi Chi Wu, staff attorney for the National Consumer Law Center, says her group opposes such inclusion of utility payments into credit reports because it could hamper consumers’ scores. She pointed to research that has shown consumers lower the priority of paying their monthly energy payments when money is tight. Therefore, she argues that a large number of consumers – particularly those with lower incomes – could wind up with 30- to 90-day delinquencies in their files if utility payments are included.

Source: “Blemished Credit? Congress Weighs Changes That Could Boost Scores,” Washington Post Writers Group/Los Angeles Times (Sept. 21, 2014)