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The Credit Legislation Debate

Opinions om if Congress regulate credit reporting.

April Focus on Fair Housing, Fair Isaac and Financial Inclusion

April Focus on Fair Housing, Fair Isaac and Financial Inclusion

April is Financial Inclusion Month. It’s also Fair Housing Month. These two occasions cross paths when we consider that 138 million Americans are struggling with their financial health, and only 6 out of 10 (59 percent) households would have enough liquid savings to pay an unexpected $2,000 expense, according to reports by the Center Financial Services Innovation (CFSI) that also highlight in the event of immediate need that credit is not a viable option for more than 108 million Americans who lack traditional credit cards and even modern online lending. Fair Isaac, the company that in 1956 created the FICO credit scoring software that’s still in use today as a measure of consumer credit risk, is a tie that binds Fair Housing and the oh so difficult goal of financial inclusion when we look to the cash challenges consumers face when their credit score is less than perfect, and below the minimum requirement to secure a lease for rental housing. A quick synopsis:

The Fair Housing Act was originally passed in the late 1960s through the urging of the U.S. Department of Housing and Urban Development (HUD) following passage of the Civil Rights Act in 1968. Its primary purpose was to eliminate discrimination between buyer and seller, landlord and tenant, making it unlawful to refuse to sell or rent to an individual base on race. The law has been amended in years since with additional limitations on discrimination based, most notably, on personal handicaps with the passage of the Americans with Disabilities Act of 1990, and other considerations we take for granted today. By eliminating the ability to lawfully discriminate on who you rent to, Fair Housing laws shift attention to other criteria both smaller landlords and larger property companies, alike, turn to in evaluating payment risk with rental prospects.

The FICO score of Fair Isaac has been adopted by major financial institutions, banks, credit bureaus and the like as the standard for reviewing the financial pulse of anyone who has borrowed money or utilized some form of credit, be it a credit card, an auto loan, rental lease, etc. Using a complex weighted formula that basically tracks if you pay your bills on time and if your outstanding credit is within or outside of prescribed parameters, your FICO score is used as a barometer for extending or denying additional lending based on the lender’s threshold for risk. In recent years, alternative credit scores have come into play for consumers who (for a multitude of reasons including cultural resistance) have never assembled a credit score. These alternate scores are increasingly being added as a variable with FICO scores to help “thin file” consumers gain access to basic services where credit directly impacts the cost of entry, and as an added safeguard to protect lenders against the risk of delayed payments or default.

The cost of entry is where financial inclusion and financial exclusion are at odds. For the 108 million Americans mentioned above who lack more than $2,000 in savings, swimming in the mainstream can feel like drowning, especially when you examine access to basic services like housing.  The sub-prime mortgage bubble that burst in 2008 was an ugly reflection of how far from reach the American Dream has moved for a large segment of America’s middle class. These families and the millions of millennials who followed (with their own accumulated debt, such as college loans) that hurt credit scores have entered the rental housing market with a strike against them in applying for a lease. Let’s say these renters pass screening for criminal and rental history, two factors landlords can use to reconsider offering a lease; credit – or the likely ability to pay rent on time, which landlords as business people with operating expenses have every right to expect, becomes the sticking point in a person’s ability to qualify for a lease. The lower your credit score, the more you will be asked to pay to protect the landlord’s interest. It is fair, but it likely doesn’t feel that way to the renter who might need to take all of that limited $2,000 financial cushion we keep talking about to pay a security deposit to compensate for their credit (and by definition) associated payment risk. This scenario, while also logical, presents a roadblock to financial inclusion for those who most need of help swimming upstream.

There are a slew of innovative FinTech companies that are dedicated to finding simple and practical solutions between buyer and seller to make financial inclusion a reality for more Americans. We do it one rental lease at a time. Like April as a turning point toward warmer days, it’s a start.

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