By Emma Ockerman
When tenants pay their rent on time, it largely fails to improve their credit scores, while homeowners reap the benefits of better credit by making their mortgage payments.
That lopsided situation is starting to shift in renters’ favor. Fannie Mae /zigman2/quotes/208846331/composite FNMA +0.99% , the government-backed mortgage giant, announced Tuesday that it is launching a pilot program under which owners of multifamily properties can share on-time rent payments with the three major credit bureaus — Experian /zigman2/quotes/210252954/delayed UK:EXPN +0.52% , TransUnion /zigman2/quotes/209192458/composite TRU -0.99% and Equifax /zigman2/quotes/208789454/composite EFX -0.32% — in a move it hopes will spread across the multifamily-property industry. Fannie Mae will cover the cost of the program for multifamily borrowers for one year.
The payment data will be collected by vendors Esusu Financial, Jetty Credit and Rent Dynamics, Fannie Mae said in a statement. Renters can opt out of the program, and those who miss a payment will be “automatically unenrolled to preserve their credit standing.” The information, once included in a credit report, can factor into a consumer’s credit score.
“The absence of sufficient credit history reduces a renter’s ability to access housing in higher-opportunity neighborhoods, obtain a mortgage, and attain lower-cost credit, such as auto loans and education financing,” Michele Evans, executive vice president and head of multifamily lending at Fannie Mae, said in a statement. “By enabling easier and more expansive adoption of positive rent payment reporting, we can knock down this long standing barrier to building credit and help more consumers begin to establish a strong financial and credit foundation.”
Evans noted that Black and Latino people are disproportionately represented among the 20% of the U.S. population that has little to no established credit history, while Black consumers disproportionately have a subprime credit score, which can lock them out of renting high-quality apartments or buying a home. Fannie Mae already helps lenders incorporate on-time rent payments into the single-family mortgage credit evaluation process, it says.
Wemimo Abbey, CEO and co-founder of Esusu Financial, one of the firms working with Fannie Mae, said in a statement that reporting on-time rent payments “allows us to create pathways for Black and minority communities who have historically been disadvantaged, while also laying the foundation to access other financial tools that contribute to the generational wealth-building opportunities that come from good credit.”
Recognizing that people were missing out on a chance to improve their credit, Experian also announced earlier this month that through a beta release across more than 1,500 property-management companies, consumers would be able to contribute positive rent payments to their credit files.
On-time payments made either directly to those management companies or through platforms like AppFolio Property Management are eligible for the program, called Experian Boost. But payments made in cash, through a mobile payment-transfer app or by personal check are not, according to Experian’s website and a statement from early September.
The question of whether to include alternative data in consumers’ credit scores has become a part of the push for economic justice, given the disparities in who maintains good credit in the U.S. and the barriers to home ownership. In 2017, the Consumer Financial Protection Bureau opened an inquiry into the benefits and risks of using alternative data, including rent, cell phone bills and utility payments.
In October 2020, 31.5% of Hispanic consumers and 45.1% of Black consumers had subprime credit scores, typically defined as a credit score below 619, compared with 18.3% of white consumers, according to the Urban Institute think tank. These lower credit scores are in part a legacy of redlining, which prevented Black Americans from buying homes or receiving lower-cost loans due to the perceived risk of lending in Black neighborhoods, as well as of the higher likelihood that creditors will sue Black consumers for debt collection, among other instances of systemic racism, columnist Michelle Singletary wrote in the Washington Post.
How much the use of alternative data could diminish those disparities is up for debate. The National Consumer Law Center, a nonprofit consumer-justice group, says that while positive for some consumers, there are plenty of caveats to plugging alternative data into credit reports , since “any data that relies on financial information will still reflect racial disparities given the unequal economic positions of households of color and white households” and could ultimately contribute to algorithms that amplify disparities further.
“Rent payment data is often aggressively promoted as a form of alternative data, and it can be promising,” the National Consumer Law Center said in one brief. “One pilot study of affordable housing residents found that 79% experienced an increase in their credit score due to rent payment reporting, by an average of 23 points. However, rent payments must be reported in a manner that aids and empowers the renters who can benefit from them, but does not harm households struggling with housing costs.”