Biden just made the credit system fairer, but didn’t fix all its flaws

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American families are overwhelmed by more than $88 billion in medical debt. Unpaid medical bills weigh on their credit report, making it harder to buy a house, rent an apartment, or find a job.

But that can change. The White House recently federal agencies ordered eliminate medical debt as a factor when underwriting federally guaranteed farm, mortgage and small business loans. The administration’s action builds on a recent pledge by major credit bureaus to remove medical debt under $500 from consumer credit reports.

These measures will make the credit scoring system fairer by eliminating debt that disproportionately affect low-income and minority groups. “As an industry, we remain committed to helping foster fair and affordable access to credit for all consumers,” credit bureau CEOs boasted.

This is just the latest chapter in a long story of politicians and activists trying to make the country’s private credit reporting system fairer by eliminating rating categories – such as race and gender. – that explicitly reproduce inequalities in American society. Yet, while beneficial, past efforts to make credit reports blind to gender and race reveal that as long as government benefits are tied to creditworthiness and structural inequality permeates the economy, Americans’ ability to doing everything from buying a car to getting a job to renting a home will remain unequal.

Credit has always been at the heart of American capitalism, and accessing it necessarily relies on credit information. At first, this information tended to be local – rumors circulating in a community about someone’s reputation. However, as the American economy expanded across the continent in the 19th century, traders and manufacturers increasingly needed to know if their distant trading partners were creditworthy.

Enter companies like RG Dun & Co., which have developed nationwide commercial surveillance networks. Company agents, often small-town lawyers, reported on the reputations and personal habits of local businessmen. In its New York office, Dun & Co. distilled the financial identities of tens of thousands of Americans – their ability, capital and character – into ledger entries in thick leather-bound volumes.

The explosion of mass consumer credit around the turn of the 20th century encouraged the growth of local credit bureaus. In the same way that Dun & Co. created national credit files on corporations and businessmen, these local businesses inhaled, compiled, and sold credit information on individual households. They inferred individuals’ ability and willingness to pay their debts from repayment histories. But they also relied on identifying categories, such as occupation, gender, race, and national origin, as well as “personal character markers,” including religion, happiness, or marital discord. , alcoholism and “laziness”.

This highly subjective system depended on applicants meeting with loan officers, whose individual judgments determined whether or not the applicant was granted a loan.

These credit reports were also secret. This has left consumers scrambling to conform to opaque and highly subjective expectations. Unsurprisingly, the process reproduced racial, gender and class inequalities. White male borrowers were at the top of the credit hierarchy.

During the New Deal, policymakers sought to encourage credit spending to pull the country out of the Great Depression. To do this, they introduced federal credit programs, including low-cost government-backed mortgages from the new Federal Housing Administration. These mortgages enabled home ownership to become the foundation of post-war household wealth building.

Most importantly, policymakers built a credit welfare state that channeled public benefits through private lenders. Only creditworthy households could access these loans, and the same private credit reporting agencies – with their inherent biases and biases – made these decisions even though the benefits came from the government.

This reinforced the role of rating agencies as gatekeepers, now with the power to set Americans on the path to wealth and prosperity with a government-backed mortgage — or dash their hopes.

In the decades that followed, white households largely benefited, and continue to benefit, as federal credit policy expanded to include not only agricultural loans and mortgages, but small business loans as well. and to students. As the recent announcement from the White House explains, the federal government has become “one of the largest players in the consumer credit markets.”

Meanwhile, biases in credit reports have resulted in many groups of Americans being excluded from participation.

In a sense, the inclusion of race and gender as factors in determining creditworthiness represented the biases of credit professionals. Yet deeper structural factors also made these categories objective and rational reflections of credit risk in the decades following World War II. Compared to white households, black families lacked wealth and secure employment. Women’s employment was more vulnerable to family interruptions, and they had fewer job opportunities and lower pay than men (even when performing the same roles). These factors, shaped by racist and sexist labor markets, meant that biased categories had predictive power.

“Credit decisions that favored men over women and whites over African Americans were a reflection of real structural inequalities in American society,” writes historian Josh Lauer. These real structural inequalities, in turn, made it riskier to lend to black and female borrowers – exactly what the credit reporting agencies aimed to determine.

Two trends have converged to remove racial and gender categories from consumer credit scoring.

First, the social movements of the 1960s and 1970s agitated to make the retail credit market more consumer-friendly. Consumer groups demanded access to credit files, as well as the right to correct credit and billing errors. Their advocacy prompted Congress to pass the Fair Credit Reporting Act (1970) and the Fair Credit Billing Act (1974).

Women’s rights and civil rights groups have also sought to eliminate racial, gender and other categories from funders’ consideration. Led mostly by upper-class women who despised being treated as “dead”, these groups won the Equal Credit Opportunity Act (1974) and its amendments (1976) which prohibited discrimination against any applicant for credit, “on the basis of race, color, religion, national origin, sex or marital status, or age”.

Their crusade to challenge the old norms of subjective and invasive credit judgments based on deeply personal information received a boost from new computer technology, which offered an alternative for assessing creditworthiness: statistical scoring systems that put the focus on a limited set of “relevant” economic and demographic data. . Credit scoring promised to eliminate the individual biases of credit managers, in favor of more fair and “impartial” assessment.

But the hopes surrounding the Equal Credit Opportunity Act and the shift to “objective” analysis proved too optimistic. Although categories such as race and gender are no longer directly factored into decisions, they still played an indirect role through variables such as occupation, length of employment, or whether one rented his house.

In other words, because America’s socioeconomic structure remained racist and gendered, a person’s race and gender still dictated their access to credit, now indirectly via other credit rating measures. The appearance of fairness did not mean that the system was really fair. Although efforts to eliminate the most pernicious secondary variables, like ZIP codes, have succeeded in recent years, minority Americans still have lower credit scores because racial bias persists in education systems and labor markets.

Eliminating credit rating medical debt could be a similar achievement. Low-income and minority groups disproportionately bear the burden of medical debt. The new measures will mean that the consequences of their exclusion from high-quality insurance schemes and certain areas of employment will no longer be compounded by the credit-scoring system. Many households will see their credit rating increase.

Yet the reality remains that access to credit can never be fair if the underlying economic structures have built-in biases. As long as government benefits depend on individual creditand as long as structural inequality hurts the American economy, deep inequality will affect who gets a mortgage, a small business loan, the rates they pay on auto loans and more.

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