A new report released by the Policy & Economic Research Council (PERC) found that proposed data suppression/deletion measures to address the economic fallout of COVID-19 will dramatically reduce access to credit should they be implemented. The report, titled “Impacts from System-Wide Suppression of Derogatory Data in Credit Reporting,” simulated the impacts of largescale suppression and deletion of negative credit information.
For the past 18 months, policymakers in the US and globally struggled with the complex issue of market shutdowns from the necessary healthcare measures. Domestically, the relatively narrow and targeted credit reporting response from the CARES Act seems to have been largely successful. However, there were calls by some members of Congress for an outright system-wide ban on credit reporting of adverse information, covering all consumers during (and for some period after) the COVID-19 crisis—a policy referred to as “suppression and deletion.”
While the pandemic is heading in the right direction in the US, the country is by no means out of the woods. With 22% of the US population unvaccinated, and much lower vaccination rates globally, there is abundant opportunity for the healthcare crisis to go sideways. If this happens, lawmakers could be tempted to enact suppression/deletion measures to protect consumers. Moreover, narrower applications of this approach have recently been introduced in Congress as amendments to the National Defense Authorization Act (NDAA). While well-intended, as with the broader measure, narrower applications would more likely be harmful to borrowers than helpful—in this case active-duty military personnel.
The PERC report found that with a broader suppression/deletion policy in place, average credit scores rise – but not enough to match the concurrent rise in the cut-off score used by lenders to decide which borrowers to reject and which to accept. For example, after just six months of suppression/deletion, the cut-off score rises to 699 while the average credit score increases to just 693. The gap between the two widens over time, meaning the longer a policy of suppression is in place, the more people who will be denied access to affordable mainstream credit.
The evidence from the new study also shows that younger borrowers, lower-income borrowers, and borrowers from minority communities will experience the greatest negative impacts. In one example, while credit acceptance for the entire population decreased 18%, it dropped 46% for the youngest borrowers. Another scenario, including the moral hazard impact from a policy of suppression/deletion, found credit access for 18- to 24-year-olds reduced by an astounding 90%. Such a widespread impact on one age group would likely have an enduring effect on their ability to generate wealth and build assets—notable as Millennials have struggled on this front relative to Gen-Xers and Boomers at the same age. By income, it dropped 19% for the lowest income group but 15% for the highest—a 27% difference. For members of households in white, non-Hispanic majority areas, it dropped 17%, but in black-majority areas, it dropped 23%, and in Hispanic-majority areas, it dropped 25%.
PERC’s almost two decades of research has focused on the responsible use of data to expand financial inclusion. This study was a continuation of a previous white paper titled “Addition is Better than Subtraction: The Risks from Data Suppression and Benefits of Adding More Positive Data in Credit Reporting.” It reviewed previous research on data deletion and presented consistent findings that data deletions are harmful to borrowers. In contrast to suppression/deletion, PERC research has found that adding non-financial payment data to consumer credit reports increases access to credit dramatically for credit invisibles (primarily lower income persons, younger and elderly Americans, minority communities and immigrants).
The report recommended adding positive (on-time) payment data of telecoms, cable and satellite TV, and broadband companies into the credit reporting system, rather than deleting negative (late) payment data. The inclusion of predictive data through consumer-permissioned channels may also help offset the degradation of traditional credit file data resulting from the pandemic.
PERC President and CEO Dr. Michael Turner stated, “US policymakers have achieved a delicate balance with CARES Act provisions—which have worked. Moving forward, however, our study shows they must tread carefully.” Dr. Turner pointed to the likelihood that people excluded as a consequence of suppression/deletion would turn to high-cost lenders (pawn shops, payday lenders, title lenders) to meet their real credit needs. “We think it is the time for Congress to act to promote the inclusion of alternative data in consumer credit reports,” Turner added.
The Society for Financial Education & Professional Development (SFE&PD) Founder and President Ted Daniels added, “PERC’s report on credit reporting contains extremely useful information because it details how proposed COVID-19 data suppression/deletion measures actually reduce access to credit for consumers, especially minority populations. Moreover, the PERC report shows the need for fair and accurate disclosure of all credit data – such as positive payment data of telecoms, cable and satellite TV, and broadband – into credit reports.”