By Emma Ockerman
So far, renters have been largely excluded from the credit benefits homeowners get for on-time mortgage payments.
When tenants pay their rent on time, it does little to improve their credit rating, while landlords reap the benefits of better credit by making their mortgage payments.
This unbalanced situation is beginning to evolve in favor of tenants. Fannie Mae (FNMA), the government-backed mortgage giant, announced on Tuesday that it is launching a pilot program under which owners of multi-family properties can share rent payments on time with the three major credit bureaus – Experian , TransUnion (TRU) and Equifax (EFX) – in a move he hopes will spread across the multifamily ownership industry. Fannie Mae will cover the cost of the program for multi-family borrowers for one year.
Payment data will be collected by providers Esusu Financial, Jetty Credit and Rent Dynamics, Fannie Mae said in a statement. Renters can opt out of the program, and those who miss a payment will be “automatically unenrolled to preserve their creditworthiness.” Information, once included in a credit report, can be factored into a consumer’s credit score.
“Lack of sufficient credit history reduces a renter’s ability to access housing in higher opportunity neighborhoods, obtain a mortgage, and obtain credit at lower cost, such as car loans and education financing,” Michele Evans, executive vice president and head of multifamily lending at Fannie Mae, said in a statement. “By enabling easier and wider adoption of positive rent payment reports, we can remove this long-standing barrier to building credit and help more consumers begin to build a strong financial and credit foundation.”
Evans noted that blacks and Latinos are disproportionately represented among the 20% of the US population who have little or no established credit history, while black consumers have a disproportionately high credit score. subprime, which may prevent them from renting high-quality apartments or buying a house. Fannie Mae is already helping lenders incorporate on-time rent payments into the single-family mortgage credit assessment process, it says.
Wemimo Abbey, CEO and co-founder of Esusu Financial, one of the companies working with Fannie Mae, said in a statement that reporting rent payments on time “allows us to create pathways for black and minority communities who have historically been disadvantaged, while also laying the foundation for accessing other financial tools that contribute to the generational wealth-building opportunities that come with good credit.”
Acknowledging that people were missing a chance to improve their credit, Experian also announced earlier this month that through beta testing at more than 1,500 property management companies, consumers would be able to contribute rent payments. positive on their credit reports.
One-time payments made either directly to these management companies or through platforms like AppFolio Property Management are eligible for the program, called Experian Boost. But payments made in cash, through a mobile payment transfer app or by personal check are not, according to Experian’s website and a statement from early September.
The question of whether to include alternative data in consumer credit scores has become part of the push for economic justice, given the disparities between those who maintain good credit in the United States and the barriers to home ownership. In 2017, the Consumer Financial Protection Bureau launched an investigation into the benefits and risks of using alternative data, including rent, cell phone bills and utility payments.
In October 2020, 31.5% of Hispanic consumers and 45.1% of black consumers had subprime credit scores, generally defined as a credit score below 619, compared to 18.3% of white consumers, according to the group of Urban Institute reflection. These lower credit scores are partly a legacy of redlining, which prevented black Americans from buying homes or receiving lower-cost loans because of the perceived risk of lending in black neighborhoods, as well as the likelihood higher than creditors are suing black consumers for debt collection, among other cases of systemic racism, columnist Michelle Singletary wrote in The Washington Post.
The extent to which the use of alternative data could reduce these disparities is the subject of debate. The National Consumer Law Center, a nonprofit consumer justice group, says that while positive for some consumers, there are many caveats to inserting alternative data into credit reports because “all data that relies on financial information will always reflect racial disparities given the unequal economic positions of households of color and white households” and could ultimately contribute to algorithms that further magnify disparities.
“Rent payment data is often aggressively promoted as an alternative form of data, and it may hold promise,” the National Consumer Law Center said in a brief. “A pilot study of residents of affordable housing found that 79% saw their credit score increase by an average of 23 points due to the reporting of rent payments. However, rent payments must be reported in a way that helps and empowers tenants who may benefit, but does not hurt households struggling with housing costs.”
(END) Dow Jones Newswire
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