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March 14, 2003
Credit Reporting Companies Obstruct Positive Credit History Reports
by William Baue
Credit reporting companies readily accept negative credit reports, but require positive credit
report submissions in batches of 100, preventing many microlenders from reporting.
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The path to bad credit can be a downward spiral, as one financial mistake can blemish an
individual's credit history indelibly. Mainstream financial institutions generally deny loans to
those with tainted credit. Community development financial institutions (CDFIs), however, fulfill
their mission of building vibrant communities by making credit available to people who often have
bad credit histories or no credit histories at all.
Yet CDFIs and other
microcredit lenders often have loan repayment rates that rival or better bank and other traditional
financial institution repayment rates. That is because they use intensive financial education and
other innovative tools to ensure the success of their borrowers. But while the borrowers are making
timely payments and repaying their debts, CDFIs and other microcredit lenders are unable to report
this positive information to credit reporting companies.
The reason is credit reporting
companies generally require credit report submissions to be in batches of 100 or more. Because
CDFIs and microlenders operate on such a small scale, this effectively prevents them from
reporting.
"I hit brick walls with the three main credit reporting agencies," said Kim
Jacobs, executive director of Westchester Housing Fund, a small CDFI based in New York that
recently ventured into the realm of consumer lending. "What they're telling me is that I can report
a single bad credit experience at any time, but in order to report a good one, I have to do it in
large batches."
Experian only
accepts batches of over 500 reports, while Equifax (ticker: EFX) and TransUnion accept batches of over
100.
"It will take us several years to reach that number of borrowers, and it seems
unfair to those who have repaid fully and on time not to report, so we are baffled," said
Ms. Jacobs.
Yanki Tshering, the director of the Business Center for New Americans, echoes
Ms. Jacobs's sentiments. The Business Center for New Americans is a department of the New York Association for New Americans (NYANA) and
provides financial education and assistance to refugees and émigrés.
"A few years ago, we
worked with Equifax," Ms. Tshering told SocialFunds.com. "'If you don't have 100 accounts, you
cannot report electronically,' they said. 'You have to do it manually.'"
"When we
submitted data on our borrowers manually, we noticed that the credit bureau accepted the negative
data. But since we didn't have 100 accounts to report on, they returned the rest of the forms with
a small note saying, 'We only accept negative data,'" said Ms. Tshering.
When Donald
Girard, Experian's director of public relations, was asked to comment, he said, "I don't think I'm
familiar enough with microlending agencies to make a comment one way or another."
Mitch
Haws, Equifax's vice president of public relations, did not return calls from SocialFunds.com.
The batch requirements carry ramifications not only for individual borrowers but also for
the economy as a whole.
"The implications for borrowers with poor credit histories is
that they have no opportunity to rebuild their credit records when they become good payers with a
microcredit lending program," said Karen Dabson, a senior consultant with the Institute of Social and Economic Development (ISED), which
helps disenfranchised individuals enter the economic mainstream.
"The economy stands to
lose as well, as the 'buying power' of these citizens is seriously undermined," Ms. Dabson told
SocialFunds.com. "We will continue to have a sizable underclass of citizens who are unable to
participate in mainstream financial services."
Ms. Tshering conceived of banding together
with other microlenders to pool reports into batches of 100 or more.
"I asked the credit
reporting companies, and they said they don't allow pooling," Ms. Tshering said.
"The
problem with what is called 'piggyback' of data [or data pooling] is that the credit reporting
companies still have to address each one of the lenders individually," said Doug Spahr, president
of Spahr Systems, which converts credit
reports to the proper format for submission to credit reporting companies.
CDFIs and
microlenders have floated the idea of pooling positive credit reports through a credible
intermediary organization, such as the Association for Enterprise Opportunity (AEO), which
deals with thousands of small lenders who have this challenge.
"It's been suggested that
we take a proactive role in gathering and submitting data from around the country," said Meredith
Trimble, AEO's program manager for public awareness and fund development. "Possibly, we could be
the body to do this, but right now, we're still assessing the feasibility of establishing that
infrastructure."
However, it remains to be seen whether credit reporting companies will
accept this kind of arrangement.
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