California’s SB 1157 has made a significant impact on the lives of tenants in subsidized housing developments. This groundbreaking state-specific law mandates that landlords who own or operate such properties offer their tenants the option to have their rental payments reported to credit bureaus.
For the past two years since the law went into effect, residents of these housing developments have had the opportunity to opt into rent reporting annually. While this initiative is state-specific for now, it could very well become a federal requirement in the near future.
Rent payments are often one of the most substantial monthly expenses for individuals, typically accounting for 30% to 40% of their income. Despite this financial commitment, traditionally, renters have not seen their timely payments contribute to their credit history.
Unlike homeowners who build their credit with mortgage payments, renters have been left without this avenue to enhance their credit profiles.
Recognizing the vital role of rent payments in individual financial success, Fannie Mae and Freddie Mac have recently started considering these monthly expenses as part of borrowers’ credit histories. This development has paved the way for private sector solutions.
The feature facilitates secure online rent payments that can be automatically reported to a credit bureau, bridging the gap for consumers who could not directly report on-time rent payments.
Building a credit history through rent payments can significantly impact loan approvals, especially for those with limited credit history, facilitating this process and empowering renters to achieve their financial goals, whether it’s securing a loan, purchasing a vehicle, or buying a home.
Rent payment reporting also has the important potential to level the playing field and address racial disparities in the housing market. Historical inequities have often limited access to credit for communities of color, with discriminatory practices leaving people of color with no choice but to often explore riskier alternatives. This has resulted in lower credit scores on average for people of color, according to research by the Urban Institute Initiative.
To combat these persistent inequities, there have been efforts to include alternative data sources like rental payment history in credit scoring. Rental payments have also been shown to be strong predictors of mortgage performance, but the majority of rent payments are not reported to credit bureaus and are thus traditionally not reflected in credit scores.
Incorporating rental payment data into mortgage underwriting has the potential to ultimately expand access to homeownership, thereby reducing the gap between black and white households. Both private companies and the federal government have taken steps to advance the use of rental payment data, but there is more work to be done.
Policymakers and regulators can consider a number of steps to create more equity in this space, including:
Incentivizing rent reporting:
According to the Urban Institute Initiative, fewer than 5% of renter households have their rental payment history on file with the major credit reporting agencies, and these data primarily come from missed, rather than on-time, payments. Regulators and policymakers can change the incentive structure to encourage rent reporting.
Encouraging lenders to accept consumer-permissioned data:
The primary barrier to increasing the use of consumer-permissioned data is lender uncertainty, exacerbated by a lack of data standardization. Rental payment history can vary, depending on factors such as utility inclusion and multiple household contributions. Updating regulatory guidance to clarify expectations would make lenders more comfortable with extending mortgage financing to a wider range of households.
More consistent rent payment reporting can help pave the way for a more inclusive financial future, regardless of their race or economic background. It’s time to give credit where credit is due and make rent payment reporting a standard practice.
Michael Lucarelli is the CEO and Co-Founder of RentSpree.
