Gerard Scimeca – CASE
October 19, 2020
Few Americans are likely familiar with the role of the Office of the Comptroller of the Currency (OCC) or even that this agency exists, but that may change in a hurry. The OCC, an independent bureau within the Treasury Department, is charged primarily with ensuring that our nation’s nearly 1,200 national banks and savings associations operate in a safe and sound manner, an admirable and important role for sure. They also play a role in seeing that financial institutions engage in fair and non-discriminatory lending practices as defined through the Community Reinvestment Act (CRA).
But recently there are rumblings that the OCC may be working on creating a new government-run credit scoring model, a development which is at least curious if not potentially concerning. Dubbed “REACh,” for Roundtable for Economic Access & Change, the potential project’s stated intent is to expand home ownership by helping lower-income Americans, minorities especially, qualify for mortgages. While efforts to see that creditworthy borrowers can obtain a mortgage is a laudable goal, for a host of reasons the likelihood of REACh furthering this outcome is dubious at best.
As it stands now, the plan appears to be to rush a new credit scoring model to market before the end of the year. As Acting Comptroller Brian Brooks explains, lower-income individuals are much more likely to be “credit invisible,” meaning they don’t have an accessible record at the credit bureaus, or any information at all; and without such information there is no way to generate a traditional credit score for this population. Project REACh proposes to fill in the blanks with financial data derived from a variety of sources, for example by looking at a borrower’s history paying utility bills, rent, or maintaining a bank account in good standing.
Though expanding access to mortgages is commendable and economically desirable, the problem with this potential alternative is that it is entirely unnecessary and potentially disruptive. For years now companies in the private sector have expanded scoring models to include alternative data, including utility and rent payments and cash flow management in checking and savings accounts. At best REACh can only offer a credit model built on less data and one that includes no additional factors to measure a potential borrower’s credit worthiness. It is a red flag at the very least that a plan targeting the expansion of access to credit is built upon a model with less quantitative and qualitative data, further raising questions about how banks would be expected to approve and deny loans and at what scoring thresholds.
Currently around 92 percent of consumer applicants have sufficient information to generate a traditional credit score, an indication the current system is working for a significant portion of the population. While millions of Americans still lack a credit score, this can easily be remedied through any number of widely available secured or starter credit accounts, or through lenders adopting alternative data credit models, thus putting an end to credit invisibility.
Most importantly the OCC already plays a substantial role in expanding access to home mortgages through their regulatory enforcement of the CRA. The law sets the rules for non-discriminatory lending which not only protects consumers but provides clear guidance to banks, which benefit as much as anyone in making loans to creditworthy borrowers. This sound framework has served as a pillar of expanding access to mortgages for under-served communities for decades. The OCC’s introduction of an alternative credit score is, if anything, a dilution, not an enhancement, to this mission.
The bottom line is there is no short-cut to building creditworthiness, but there are many paths available to consumers at all income levels to do so. The REACh model is a solution in search of a problem, and a puzzling foray into the private sector by a government agency that will have a difficult time making the case that the significant resources it will be required to spend will produce any discernible consumer benefit. It is a head-scratching endeavor, and one that would unnecessarily muddy the waters between market oversight and market participation.
Meanwhile private sector credit scoring models are not only working exceptionally well but remain highly calibrated to anticipate and respond to economic and market forces. Our current framework scores millions of new consumers every year from all income levels, the most vital step in building a financial foundation leading to home ownership. Government activism is not going to improve on this through less-tested credit models composed of fewer data points. Believing otherwise could certainly be considered a reach.
