Bill Clark/CQ Roll Call via AP Images
Sen. Pat Toomey arriving for a Senate Banking Committee hearing last July
Life is great during the pandemic if you’re a big bank. JPMorgan Chase, the nation’s largest bank, announced record trading revenue earlier this month, and while preparations are being made for future loan losses, most of the giants increased profits over last year (with the notable exception of Wells Fargo). In addition, regulators have consistently rolled back rules put in after the last financial crisis, using the excuse of COVID-19. In the most recent development, banks may not have to hold as much capital to absorb losses, if Senate Republicans place a repeal of the Dodd-Frank Act’s leverage requirement in their coronavirus relief package.
But all of this isn’t enough for the financial industry. They’ve also been hard at work making sure that ordinary Americans struggling with the economic collapse suffer for years to come. Specifically, banking interests have sought to block a measure that would temporarily ban negative items from appearing on credit reports for the duration of the pandemic. And one of their biggest champions and financial beneficiaries in Congress, Sen. Pat Toomey (R-PA), has made sure the request will be honored.
You might think that the “big three” credit reporting bureaus—TransUnion, Experian, and Equifax—would prominently feature in any corporate pushback to legislative activity on this topic. But that’s not how credit reporting battles go in Washington. “The credit bureaus themselves don’t drive the train they ride on,” says Ed Mierzwinski of the Public Interest Research Group (PIRG). “The banks drive that train.”
It’s important to understand why consumer advocates believe that barring negative credit reporting is necessary right now, before explaining why Toomey and the banks are so desperate to stop them.
When a consumer fails to make rent or a utility bill or loan payment, a negative credit item is sent to the credit reporting bureaus, and factored into the credit score that determines peoples’ ability to secure a loan or mortgage, find an apartment to rent, or even get a job. Negative credit items stay on reports for seven years.
These types of defaults have to be seen in the context of the current crisis, advocates say. “Consumers that lose their jobs or are economically devastated from COVID, their inability to pay bills isn’t meaningful at a time like this,” says Chi Chi Wu, an attorney at the National Consumer Law Center. “Nothing going on is a good reflection of the creditworthiness of borrowers.” But because of the seven-year term for negative credit items, the hit would stay with them until 2027, harming their ability to move through financial life because of something completely out of their control.
Advocates tried to get the moratorium on negative credit reporting placed into the CARES Act in March. Instead they got a more limited provision: If a consumer manages to get an accommodation from their lender to miss payments, known as forbearance, then that missed payment won’t be reported. This requires a borrower to seek forbearance from every one of their lenders (despite difficulties in getting through to call centers during the crisis), requires the lenders to agree to it, and requires the call center employee of the lender to remember to properly code the forbearance as an accommodation that doesn’t trigger a negative credit item. “You have to make an inquiry to the bank, you have to say ‘pandemic’ in the conversation, and you have to hope that the frazzled essential worker fills in the code correctly,” Mierzwinski says. “It’s a mess.”
Why was this Rube Goldberg procedure adopted instead of just halting negative credit items? A little-noticed statement from Sen. Sherrod Brown (D-OH), ranking member on the Senate Banking Committee, provides some of the answer. Speaking at the Consumer Federation of America’s Virtual Consumer Assembly on May 6, Brown discussed the negotiations on getting the provision into the CARES Act. “We thought we had it, we thought we were very close, and then [Senate Majority Leader Mitch] McConnell stripped it out at the behest of the junior senator from Pennsylvania,” he said.
That refers to Toomey, an executive at two different banks before entering politics. Toomey, a senior member of the Senate Banking Committee who would be in line to become the chair if Republicans retain the Senate in the November elections, has long been a major recipient of banking industry cash. According to the Center for Responsive Politics, Toomey has received over $2 million from members of the securities and investment industries from 2015 to 2020. Among his biggest donors are Goldman Sachs and PNC, the Pennsylvania-based large regional bank. In short, if companies like PNC wanted to keep negative credit reports coming, they would work through someone like Pat Toomey.
Banking interests have sought to block a measure that would temporarily ban negative items from appearing on credit reports for the duration of the pandemic.
Consumer groups were successful in inserting a ban on negative credit reports into House Democrats’ follow-up coronavirus response bill, the HEROES Act, in May. But it does not appear in the HEALS Act, the Senate Republican follow-up engineered by McConnell. Negotiations are under way to reconcile those two bills.
Sen. Toomey’s office did not respond to a request for comment. Sen. Brown, who has introduced legislation to put a moratorium on negative credit items, said in a statement, “Americans shouldn’t have to worry about their credit scores as they work to make ends meet. Congress must include protections for consumers like protecting their credit scores.”
Why would banks care so much about credit scores, especially when negative credit items accumulated during a pandemic don’t provide an accurate picture about creditworthiness? “The consumer community believes strongly that inaccurate information is preferred to no information,” says Mierzwinski. “They would rather mix you up with a deadbeat than mix you up with a good credit risk.”
One key element of this is that interest rates and other pricing details for loans and credit cards are based on credit scores. If negative credit information is supplied, it allows banks and lenders to raise fees and rates on customers. “They want to make loans but they would rather make them at a higher prices and charge people more,” Mierzwinski says.
Banks are already complaining that they cannot discern credit risk during the pandemic because of the relatively modest credit score protections in the CARES Act. Wu chalked it up to “credit dogmatism,” saying that “the threat is that if there’s a moratorium they won’t lend, or will only lend to people with an 800 credit score. It’s the same argument as Dodd-Frank: If you regulate us that will choke off the supply of credit.”
This form of blackmail, forcing borrowers to suffer for years for the sake of bank profits, only adds to the notion that there’s something very broken about the entire credit reporting system. Since March, the Consumer Financial Protection Bureau consumer complaint database has seen a 109 percent year-over-year increase in complaints about “incorrect information” on credit reports. This is endemic to the credit reporting system, where lives are ruined based on erroneous records, and private companies snatch and profit from your personal information (and sometimes let hackers take it too).
The ultimate solution here would be a public credit registry, cutting private entities out of the equation and lessening the influence of bank creditors. The Biden campaign has surprisingly embraced this concept, including it in their racial-equity agenda, which is fitting as shoddy credit reporting particularly exacerbates racial disparities.
The ultimate solution here would be a public credit registry, cutting private entities out of the equation and lessening the influence of bank creditors.
In the current moment, a public credit registry would make it easier to suspend negative reports during a moment of economic crisis. “It could be built into the law,” says Amy Traub of Demos, the architect of the public credit registry concept. “If there’s a local crisis like a hurricane or a national recession, you could require that credit reports are handled differently. In the hands of a private company, they don’t have an interest in doing that.”
And banks, along with senators like Pat Toomey, apparently have even less of an interest in protecting the public from a stain that will tangibly impact them for years through no fault of their own. “To say that people post-crisis, as they try to rebuild their lives, have to carry the impact of this,” says Traub, “is just another round of disadvantage and discrimination.”
