Study of 3.5 million credit files shows significant consumer costs if key FCRA provisions are allowed to expire
More than 88 percent of consumers’ credit scores would be affected if a patchwork of state laws were allowed to replace the current national consumer credit system, according to a report released today by the Information Policy Institute.
“There are significant tradeoffs associated with allowing our national credit system to revert to a state system,” said Dr Michael Turner, President of the Information Policy Institute and lead author of the report. “Many consumers would pay more for mortgages, credit cards and other financial services, or would lose access to credit through reduced limits or outright denials of credit.”
The report, “The Fair Credit Reporting Act – Access, Efficiency, and Opportunity,” examines impacts on price, access, and distribution of credit if states are permitted to regulate in areas where they are currently prevented from doing so. Key provisions of the Fair Credit Reporting Act are set to expire later this year unless reauthorized by Congress.
“One of two things will happen: Either the cost of credit will go up, or access to credit will be reduced,” according to Turner. “The results are straightforward: If credit information is restricted, as state level proposals would do, lenders will have less information to judge credit worthiness, and will have to compensate for taking on additional lending risk – a premium that will be borne by consumers.” The study finds that in the absence of the federal FCRA provisions, under various scenarios the cost of credit could rise $40 to $270 per year for the average American family.
Additionally, the report examined consumer and economic benefits derived from the current national credit system. “There’s simply no doubt we’ve got a remarkable market for consumer credit in the United States,” said Dr. Turner. “It’s intensely competitive, and we’ve made dramatic progress in terms of fairness and access for certain groups, who quite frankly, were not so well served by the marketplace ten or twenty years ago.”
The report noted that prior to automated underwriting, enabled in part by the federal credit system, approving a mortgage loan took nearly three weeks on average. In 2002, more than 75 percent of all loan applications received approval in two to three minutes. During this period the average cost of home mortgages decreased by 100 basis points due to the national credit system, resulting in a $54 billion annual savings to consumers. The report also noted that between 1983 and 2001, the minority home ownership rate increased from 34 to 47 percent, due mostly to expanded credit availability.
“Now the question of course is, are we going to reverse that progress if the preemptions sunset,” saidDr. Joseph Duncan, Institute fellow and former Chief Statistician of the United States. “We developed a very rigorous model to examine this, and the answer is an unequivocal yes. Even in a moderate scenario we looked at, 14 million Americans could lose access to credit,” continued Duncan.
“And even more troubling, this reduction in access tends to disproportionately affect lower income and minority families,” added Turner.
The study rigorously analyzed pending state legislation to determine what sort of proposals will be advanced in the absence of preemption. This data was then used to measure the effect of these proposals on the performance of 6 commercial scoring models currently in use. The analysis was conducted using 3.5 million actual anonymous credit files.
The report was released today at a conference hosted by the U.S. Chamber of Commerce today. Dr. Turner was joined at the conference by several key policymakers, including: Wayne Abernathy, Assistant Secretary, Financial Institutions, U.S. Dept. of the Treasury; Senator Tim Johnson (D-SD), Ranking Minority Member, Financial Institutions Subcommittee, Senate Committee on Banking, Housing and Urban Affairs; and Representative Michael G. Oxley (R-OH), Chairman, House Committee on Financial Services