Biden has just made the credit system fairer, but did not get all of its bugs fixed

Holds space while article actions load

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

But that may be changing. The White House recently ordered federal agencies to eliminate medical debt as a factor when taking out federally guaranteed agricultural, mortgage and small business loans. The administration’s action is based on a recent pledge by major credit bureaus to remove medical debt of less than $ 500 from consumer credit reports.

These measures will make the credit rating system fairer by eliminating debt that disproportionately affects low-income and minority groups. “As an industry, we remain committed to helping create fair and affordable credit for all consumers,” boasted the credit bureau’s executives.

This is just the latest chapter in a long history of politicians and activists trying to make the country’s private credit reporting system more equitable by eliminating evaluation categories – such as race and gender – that explicitly reproduce inequality in American society. Yet previous efforts to make credit reporting gender- and race-blind reveal, although it is beneficial that as long as public services are linked to creditworthiness and structural inequality characterizes the economy, Americans’ ability to do everything from buying a car to getting a job renting a home will remain odd.

Credit has always been central to American capitalism, and accessing it necessarily depends on credit information. To begin with, such information tended to be local – rumors circulated in a community about someone’s reputation. As the U.S. economy expanded across the continent in the 19th century, merchants and manufacturers increasingly needed to know if their distant trading partners were creditworthy.

Join companies like RG Dun & Co., which developed nationwide commercial surveillance networks. Business agents, often small-town attorneys, reported on the reputation and personal habits of local business people. At its New York City office, Dun & Co. distilled tens of thousands of Americans’ financial identities – their capacity, their capital, and their character – to ledger entries in large, leather-bound volumes.

The explosion of mass consumer credit at the beginning of the 20th century fostered the growth of local credit bureaus. In the same way as Dun & Co. built nationwide credit files on companies and business people, inhaled, compiled and sold these local firms credit information on individual households. The inferred individuals’ ability and willingness to pay their debts based on repayment histories. But they also relied on identifying categories such as occupation, gender, race, and national origin, as well as “markers of a personal nature,” including religion, marital happiness or discord, alcoholism, and “laziness.”

This highly subjective system depended on applicants meeting with credit managers whose individual assessments determined whether the applicant received a loan or not.

These credit reports were also secret. It made consumers struggle to adapt to opaque and highly subjective expectations. Not surprisingly, the process reproduced racial, gender, and class inequalities. White male borrowers topped the credit hierarchy.

Under the New Deal, politicians tried to encourage credit spending to lift the nation out of the Great Depression. To do so, they introduced federal credit programs, particularly low-cost, state-subsidized mortgages from the newly established Federal Housing Administration. These mortgages made it possible for homeowners to become the basis for building up household wealth in the post-war period.

However, it is crucial that politicians build a credit welfare state that channels public services through private lenders. Only creditworthy households could access these loans, and the same private credit bureaus – with their inherent biases and prejudices – made these decisions, even though the benefits came from the government.

This strengthened the role of reporting agencies as gatekeepers, now with the power to put Americans on the path to wealth and prosperity with a state-sponsored mortgage – or to destroy their hopes.

Over the ensuing decades, white households benefited overwhelmingly and continue to benefit as federal credit policies were expanded to include not only agricultural and mortgage loans, but also small businesses and student loans. As the latest White House statement explains, the federal government became “one of the largest players in the consumer credit markets.”

Meanwhile, imbalances in credit reporting ensured that many groups of Americans were excluded from participation.

In a way, the inclusion of race and gender as factors in the assessment of creditworthiness represented the prejudices of credit professionals. Yet deeper structural factors also made these categories objective and rational reflections of credit risk in the decades after 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 faced 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 privileged 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 more risky to lend to black and female borrowers – exactly what the credit bureaus intended to determine.

Two trends converged to hit race and gender categories from consumer credit scoring.

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

Women’s and civil rights groups also sought to eliminate racial, gender and other biased categories from the lender’s consideration. Led primarily by upper-class women who despised being treated as “deadly blows,” these groups secured the Equal Credit Opportunity Act (1974) and amendments to it (1976), which ruled out discrimination against any credit applicant, “on the basis of race, color, religion. , national origin, sex or marital status or age. “

Their crusade to challenge the old norms of subjective, invasive credit ratings based on deep personal information was boosted by new computer technology that offered an alternative to balancing creditworthiness: statistical scoring systems that emphasized a limited set of “relevant” financial and demographic data. Credit scoring promised to remove the individual prejudices of credit administrators in favor of a fairer, “impartial” evaluation.

But hopes for the Equal Credit Opportunity Act and the transition to “objective” analysis proved too optimistic. While categories such as race and gender were no longer directly included in decisions, they still played an indirect role through variables such as employment, length of employment or whether one rented their home.

In other words, because the socio-economic structure of the United States remained racist and gendered, a person’s race and gender were still driven by their access to credit, now indirectly through other scoring metrics. Apparent justice did not mean that the system was actually fair. Although efforts to weed out the most damaging secondary variables, such as zip codes, have been successful in recent years, minority Americans still have lower credit scores because racial imbalances continue in education systems and labor markets.

Eliminating medical debt from credit score could be a similar achievement. Low-income and minority groups bear the disproportionate burden of medical debt disproportionately. 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 exacerbated through the credit scoring system. Many households will see their credit score rise.

Yet the reality is still that credit access can never be fair if the underlying economic structures have built-in biases. As long as government services depend on individual credit, and as long as structural inequalities ruin the U.S. economy, deep inequalities will affect who gets a mortgage, a small business loan, what rates they pay on car loans, and more.

Leave a Reply

Your email address will not be published.