A large swath of American adults can’t qualify for a mortgage due to “credit invisibility,” reporting inaccuracies and racial disparities. Expanding credit access could be one way to increase minority homeownership. The Biden administration’s proposed plan for a public credit reporting agency could offer another solution, but the idea has many critics.
Home sales in 2020 spiked to levels not seen since 2006. That record-setting pace is set to continue throughout 2021. Despite the active market, 26 million credit-invisible Americans, particularly Black and Latinx adults, can’t qualify for a home loan. This is at least in part because they have poor or no credit history. An additional 19 million Americans’ credit records were considered unscorable by a commercially-available credit scoring model. Combined, that’s 45 million unscorable and credit invisible U.S. consumers—almost 20% of the entire adult population.
Homeownership is one of the fastest and more reliable ways to grow wealth, but achieving it is credit-dependent. Among all buyers, 72% must get a loan to help pay for their home. That rate is even higher for minority homeownership, with Black applicants at 78% and Latinx applicants at 77%. Without a good credit history, applicants must pay more for the same services or are disqualified from obtaining a loan altogether.
Despite increased knowledge, racial disparity in the mortgage market hasn’t decreased much in the last 40 years. Black and Latinx loan applicants are more likely to be denied a loan than white applicants. When they are approved, they’re more likely to be offered high-cost loans, according to a 2020 Northwestern University study.
Biden’s Plan to Revamp Credit Scoring
One of President Joe Biden’s campaign platforms included increasing minority homeownership. Biden as a candidate suggested creating a public credit reporting database that would first supplement and eventually replace the big three bureaus—TransUnion, Equifax and Experian. Biden’s campaign proposal would create a Consumer Financial Protection Bureau-administered public registry.
Consumer advocates say the for-profit agencies are rife with errors and inaccuracies, and leave many Americans out of the scoring system. The sources they use to generate credit scores—things like car loans and revolving credit lines—are payments many minority adults don’t have. Proponents of the plan say a public reporting agency would provide consumers with easier access to their scores, make errors simpler to fix and eradicate biases and disparities.
Critics think the idea is dangerous. The Consumer Data Industry Association (CDIA), for example, a trade group that represents the three credit reporting bureaus, wrote that “a government-owned credit bureau would create a volatile and unstable lending environment, riddled with inconsistent policies, swing(ing) back and forth from election to election, leaving consumers with higher prices and limited options for credit.” Francis Creighton, CDIA president and CEO, said it’s “troubling” to think that the federal government would be in charge of underwriting.
Dave Uejio, Biden’s recently appointed CFPB director, has stated publicly that promoting racial equity is one of his priorities, but hasn’t mentioned the possibility of creating a public credit reporting agency.
Solutions for Minority Buyers
While a full restructuring of the current credit reporting system is a long-term solution, there are more immediate options available for increasing levels of minority homeownership. “Credit invisible” adults are all potential homebuyers who simply don’t have traditional credit sources to illustrate their creditworthiness.
For example, Zillow reports that small banks (those that received fewer than 1,000 loan applications) denied just 7.4% of mortgage applications in 2019, whereas large institutions denied 17.2%. For small banks, only 2.6% of all mortgage applications were denied based on credit, which was less than half the rate (5.7%) of denials by large banks. Even in counties with high rates of subprime credit scores, credit invisible residents and people with poor credit history, small institutions were still less likely to deny mortgage applications than were large banks.
Non-traditional mortgage lenders like Quicken Loans, loanDepot and EnTrust Funding are options for some buyers who don’t have qualifying credit sources. Companies like Wisconsin-based Waterstone Mortgage over the last several years have begun offering “Non-Traditional Credit Program” options in which underwriters look at payment history indicators like cell phone bills, monthly rent, utilities and insurance premiums.
Minority-owned lending institutions lead the way in lending to minority applicants. Among the black-owned mortgage lenders in the U.S. are Alamerica Bank in Birmingham, Alabama; Broadway Federal Bank in Los Angeles, California; and Industrial Bank, which serves the Washington DC area. You can see a list of 10 minority-owned lenders here.