Topics and Issues

COVID-19 (41) Data Suppression (19)

A paper was released in June 2020 by Clifford V. Rossi, Ph.D. of Chesapeake Risk Advisors, LLC.  The paper, Economic Impacts of a Moratorium on Consumer Credit Reporting, was also summarized in a posting.  In summary, economic theory suggests that in the absence of viable mechanisms to effectively distinguish between high and low risk borrowers, lenders will ration credit. Under a credit reporting moratorium, the reliability of credit scores to distinguish between borrower risks would come into question. Lenders would respond to the proposed credit reporting moratorium by raising minimum credit score requirements and/or raising borrowing rates as a credit uncertainty premium to offset the risk they face from the moratorium. During the 2008 financial crisis, lenders raised credit score minimums on FHA loans, for example, beyond those set by the agency as a response to uncertainty over indemnification provisions that posed significant costs to lenders. And today, during the coronavirus, a number of Ginnie Mae originators have raised credit scores to blunt some of the risk they face due to requirements to pass-through mortgage payments to investors, including those in default or subject to forbearance.  A credit reporting moratorium would severely restrict credit to millions of consumers, with potentially disproportionate impacts on lower-income, minority, and first-time homebuyer borrowers while significantly delaying the timing, speed and trajectory of economic recovery.