Credit Reports May Be on the Verge of a Major Overhaul

In 2020 the House passed two bills that could have a dramatic impact on credit reports. The Comprehensive Credit Act and the Protecting Your Credit Score Act of 2020(21). Both are similar and provide pretty extreme changes to what some consider to be a very unfair credit reporting system.

To summarize, there are five main points to these bills:

  • Prohibit the use of credit scores for employment purposes or any purpose not related to a credit decision. However, this point still has a small loophole: the employer can still request a credit report but the decision to hire is not supposed to be based on the score.
  • Provide student loan relief. Late payments on student loans would not be reported.
  • Limit medical debt reporting. A collection agency that has taken over an unpaid medical debt would not be able to report the account for one year as opposed to the three months that stands now.
  • Reduce the amount of time derogatory information stays on a credit report. Late payments and collections would fall off after four years instead of seven years.
  • Eliminate all late payments and collections reported during the pandemic or going forward prohibiting the reporting of these items during any natural disaster.

There is also a notice under review right now to replace the three main credit reporting agencies (which are privately owned and for profit) with a non-profit public credit reporting agency. This new agency would operate under the umbrella of the Consumer Financial Protection Bureau (CFPB). The way it is set up currently is that a consumer has multiple credit scores with each of the three bureaus. Those scores differ based on the industry codes from which they are generated. For example, insurance, credit cards, auto, mortgage, and personal scores all widely vary. If there are mistakes on a credit report, a consumer has to deal with all three different agencies as well as with the creditors to get it resolved, which can take a lot of time. Some advocates in Washington feel that having only one public credit bureau with one score would eliminate a lot of problems for consumers and make the playing field much fairer for everyone.

For this to actually happen though means that the industry as a whole would have to make some major changes. The Fair Credit Reporting Act (FCRA) would have to be amended. But more importantly, Fannie Mae and Freddie Mac would have to completely overhaul their underwriting process to accept only one score instead of looking at the middle of three scores. This will probably be one of the main obstacles of anything like this ever happening. As it stands now, there are two scoring models that have been around for a while that are still not accepted by Fannie and Freddie. Even though these models, FICO 8 & 9 and Vantage have algorithms that do reduce if not eliminate medical debt. They still only accept the older and much less forgiving models of FICO 5 for Equifax, FICO 2 for Experian and FICO 4 for Trans Union.

Opponents of the two bills that have passed the house feel that they are too lenient and would not provide an accurate history of a borrower’s ability to repay a debt.

Does the credit reporting system as it stands now need an overhaul? Absolutely. And it is something that the three main credit bureaus are willing to consider. Right now, both bills are in the Senate and the idea of one public credit reporting agency is under review. Given the roadblocks, it is difficult to imagine that any of this is going to happen in the immediate future but there is a possibility of it down the road.