There remains tremendous uncertainty surrounding the global COVID-19 pandemic as a health care crisis. There is also uncertainty about the economic collateral damage being caused by the pandemic—primarily around the slope of the economic recovery curve (will the curve be “V-,” “U-,” or “L-shaped?”). Whatever recovery trajectory different affected economies ultimately travel along, the following facts are universally true:
• Credit markets are being massively harmed owing to the necessary social distancing/shutdowns in many countries;
• No one thinks it fair to punish borrowers and tarnishing their credit reports for years owing to these circumstances;
• There is no easy answer to the tension created by twin policy objectives of protecting borrowers while preserving the integrity of a nation’s credit data—but there is a viable answer.
Lawmakers around the globe are scrambling to address this complex issue. When asked how they were approaching the matter, one senior U.S. regulator told me: “We are spending a lot of time on it. It is like juggling steak knives while wearing a blindfold.” To be fair, while decision making may be difficult, this is not a “Sophie’s choice.” There are options for achieving both objectives. For instance, in the U.S. and U.K. codes already exist for reporting on loans that have been modified or are in forbearance as a result of a natural disaster, such as a pandemic.
Thankfully, the International Committee on Credit Reporting (ICCR) stepped forward and assumed a leadership role in this policy challenge. After soliciting input directly from plenary members including central bankers from 17 of the G-20 nations, as well as regulators and industry associations from every continent, the ICCR issued guidance on how to handle credit reporting given the COVID-19 pandemic.
The guidance from the ICCR encourages private credit bureaus and public credit registries to utilize tools including special codes indicating “paid as agreed” and “deferred” for all credit trade-lines modified by lenders owing to the global coronavirus pandemic. It also enumerates a range of other options including suppression/deletion but cautions against using the latter as a long-term approach owing to the harms it can inflict upon the entire financial sector by distorting credit data.
Protecting People is the Priority: Within the policy discourse, there has arisen the issue of how to protect consumers from harm to their creditworthiness resulting from the pandemic. In the U.S., the Coronavirus Aid, Relief, and Economic Stimulus (CARES) Act, which at section 4021 amends the Fair Credit Reporting Act, allowing lenders who have made payment accommodations for their borrowers to report those accounts as “paid as agreed.” This is the right thing to do, and more drastic data deletion or suppression measures, which may gain appeal as the pandemic and economic crisis continues, will end up damaging the economy in the long-term and slowing recovery. This sensible approach best balances data integrity and consumer protection—and is recommended by the ICCR.
Suppressing Credit Data Does Not Solve Credit Problems: The proposed Disaster Protection for Workers’ Credit Act of 2020 in the US is very well-intentioned, but proposes a nation-wide, complete suppression of negative credit data. As with a price-freeze, a suppression on reporting negative payment data is at best a very short-term, stop-gap measure until the broader underlying problems are solved with supplementary policies. Negative data suppression will not solve the underlying economic problems caused by the pandemic; it will only paper over it. Credit problems can only be solved by lenders.
Data Integrity is Important and Imperative for Recovery: If a policy of negative credit reporting suppression is implemented either in isolation (owing to the incorrect belief that it is a stand-alone solution) or if it is implemented for an extended period (e.g. more than 60 or 90 days), then suppression shifts from being a potentially helpful stop-gap measure to being part of the problem. In the U.S., the Disaster Protection for Workers’ Credit Act of 2020 proposes the suspension of negative or adverse data until 120 days after the disaster declaration is lifted. Since it is conceivable that the crisis could last a year or more, this could result in the suppression of all negative data for well over a year. Given that it is the most recent credit data that is of the utmost value to credit reports and credit scores, this could cripple these tools of credit underwriting and credit access just as they are needed for the recovery. This will likely cause the policy to backfire as credit would then be reduced in the face of less reliable underwriting procedures.
Conclusion: In sum, the integrity of the national credit reporting system must be maintained. Failure to do so will hamper the recovery and begin to eat away at the safety and soundness of the financial system. Negative data suppression will quickly become a growing liability after the very short-term.