One year in high school the national debate topic was homelessness. One of the strategic ways to be successful was to advocate a position that your opponents wouldn’t have thought through and researched in advance. If you had mountains of evidence to back up a position that caught the other team by surprise you were in a great position.
- My partner and I started the year off arguing that what the homeless really needed was access to competent legal counsel. That way they could sue for benefits!
- Later in the year we argued that what the homeless needed was P.O. Boxes. Since they’re homeless they have nowhere to receive benefits checks and getting processed for services required listing an address, so…
I couldn’t help but think back to that when I read about Kamala Harris’ plan to increase homeownership. Since you need a decent credit score to get a mortgage, why not just give people better credit scores?
She’s proposing to amend the Fair Credit Reporting Act to require credit scores to take into account more types of payments. Paying rent, cell phone bills, and utility bills on time would give you a better credit score. And a better credit score gives you better access to credit, the theory goes.
Currently credit scores are used as a proxy for credit risk. How likely is a bank going to get back the money they lend? Credit scores are especially useful, too, because they’re a numerical metric that they can use as a basis for decision-making that also protects them against claims of discrimination in lending practices.
However if we legislate changes to what goes into a credit score, we may be making the credit score a less useful tool for evaluating risky borrowing.
What Senator Harris’ plan supposes is that,
- There’s a great opportunity for banks to issue mortgages to poorer and minority customers
- They aren’t doing this — they’re leaving money on the table — because FICO scores leave out important information
- Banks aren’t smart enough to figure this out on their own, instead they leave profits on the table
So Senator Harris is going to push for a law to help the banks make more money. Banks are conservative in their lending in many cases, perhaps even too conservative, because there’s regulatory risk in taking chances. Sadly legislating changes to the formula for credit is an unlikely way to get banks to issue mortgages to people who aren’t getting those mortgages today.
Seems like good politics: tell voters that they’re being treated unfairly by a scoring system that doesn’t have the complete information about how good they are, and tell them a simple technocratic change can make things better. On the other hand though anything that promises to make more points available to more people has to be a good thing, right?