Americans may see the formation of a new federally-backed credit bureau if former vice president and presumptive Democratic presidential nominee Joe Biden is elected in November, thanks to the efforts of a task force appointed by Biden and Vermont Senator Bernie Sanders in May.
This week, the task force of Democrats presented Biden with a 110-page document of policy recommendations. NBC News first reported on the policy wish list on Wednesday. Although the document contains a wide range of initiatives from health care to immigration, the policy recommendations also focused on ways the U.S. can work to close the racial wealth gap, including creating a more level playing field when it comes to credit reporting.
"We've seen with horrifying clarity the cost of systemic racism," Biden said in a speech given Thursday in Pennsylvania. "We need a dedicated agenda to close the wealth gap."
During the last economic downturn, Black families experienced a 44.3% decline in median net worth, almost double that of White households, which only experienced a 26.1% drop, according to the Brookings Institution.
To help narrow the gap, the policy roadmap proposes creating a public credit reporting agency housed within the Consumer Financial Protection Bureau. This federally-backed credit bureau would "provide consumers with a government option that seeks to minimize racial disparities," according to the document.
The federally-backed credit bureau would be required to ensure that credit scoring was not discriminatory and that algorithms used for credit scoring would include non-traditional sources of credit data such as rental history and utility bills.
Once established, all federal lenders would be required to use and accept the federal credit agency's scoring, including for programs such as federal home lending, PLUS loans and other loans that are guaranteed by the U.S. government.
"There is a persistent, pernicious racial wealth gap that holds millions of Americans back, with the typical White household holds 10 times more wealth than the typical Black family," the document says.
How credit scores play into the racial wealth gap
Credit reporting plays a major role in the racial wealth gap, experts say. While the major credit bureaus, Equifax, Experian and TransUnion, say their scoring does not take into account age, race, gender, income or geography, multiple studies have shown that Black Americans routinely have lower credit scores than White consumers. Earlier this year, the Urban Institute found that while more than 50% of White households maintained a FICO credit score above 700, only 21% of Black households were able to achieve the same.
Not only were scores lower, but 1 in 3 Black households did not have enough credit information to generate a credit score (known as having a 'thin' credit file), while only 18% of White households had a thin file.
That lack of credit, or lower credit, is a key factor in why Black Americans find it more difficult to get approved for car loans, credit cards and mortgages. A 2018 Center for Investigative Reporting analysis found that even when controlling for income, loan amount and neighborhood, African Americans and Latinos were more likely to be denied conventional mortgage loans than White households.
The reason these racial disparities exist in credit scores is because of historical and current discrimination, says Chi Chi Wu, a staff attorney at the National Consumer Law Center focusing on consumer credit issues.
Up until about 50 years ago, many U.S. banks participated in a practice known as redlining, denying Black Americans access to credit and financial services. That pushed many Black households to be unbanked or to turn to alternative lending options, such as payday loans, car title loans and pawn shops.
The fallout from those policies continues into today. Federal disaster loans are distributed in a racially disparate manner because they are primarily based on an applicant's credit score, recent studies have shown. Additionally, incarceration status affects credit scores, recently published research from the Washington Center for Equitable Growth found. Incarcerated Black Americans surveyed in Baltimore had FICO credit scores nearly 50 points lower, on average, than scores of White Americans who had faced prison time.
But again, incarceration only explained some of the score differences. The research found that despite having more assets and less debt, Black Americans with no incarceration history still had FICO scores that were 77 points lower on average than those who were incarcerated and White.
It's a "vicious cycle," Wu says. If a Black family has trouble staying on top of their bills, when they hit a rough spot they don't have the same cushion as a White family that is more likely to have assets like a house. If their credit score dips because they miss a payment or two, it's then harder to get a mortgage and become homeowners themselves. "You're shut out of homeownership, so you're shut out of the very thing that would give you the cushion to survive financial difficulties," Wu says. "Credit scoring, unfortunately, perpetuates the vicious cycles."
If you've got a tool with racial disparities baked in that's used to decide whether to give people credit or a job, Black families are going to suffer more, Wu says. "The common mantra is credit scores are objective," Wu says. "Yeah, they're an objective measurement. But when you go ahead and use them, you're perpetuating the racial biases that they measure."