Improving Credit Scores For Rental Housing, Not Banning Them, Is The Answer

Across the country, worries about how and why people are failing to qualify for rental housing are growing. Activists claiming to look out for the best interests of prospective residents of rental housing have sought to ban criminal background checks, previous eviction records, and credits scores as part of the risk assessment used by housing providers to screen tenants. In Minneapolis, for example, the City council imposed limits on the use of credit scores. The Councilmember supporting the intervention said that rising prices and housing scarcity, “puts some urgency to support people who are the most vulnerable renters.” But is limiting or banning checks on credit the best way to help people with thin, bad, or no credit?

A recent report from the Consumer Finance Protection Bureau (CFPB) might add fuel to the fire. The report, awkwardly titled, Tenant Background Checks Market, inventories every conceivable grievance with risk assessment by housing providers. Here’s my favorite one about eviction data:

“Collecting this data, particularly civil and criminal public records data, and correctly matching the collected data to an individual prospective tenant, can be challenging. For example, according to one study of 3.6 million eviction court records, 22 percent of state eviction cases are ambiguous or false records. As a result, the data reported in tenant screening reports and relied on in generating the proprietary tenant risk scores are often ambiguous or out-of-date and can be erroneous.”

This made me laugh out loud because an entire industry has developed claiming that the country is facing an “eviction crisis” or “epidemic.” This demonstrably false and one reason it’s easy to reach that conclusion is exactly because there is no clear or consistent data on evictions. In today’s world it is impossible to make any statement about eviction – defined as actual removal by force from a rental property – is exceedingly rare. After filing, most evictions result in dismissal or ambiguous outcomes. Only a small number result in law enforcement appearing to haul things out of an apartment. Still, aggressive advocates want it both ways; data indicate a “crisis” but the data is bad, don’t use it for screening.

The litany at the opening of the report might accurately reflect the frustration about consumers having to expose themselves to risk assessment; but renting housing is not an entitlement and not a “right” by any definition. I’d add a “yet” to that, since this is exactly what advocates claim, that indeed it is any person’s right to demand access to private property to live in regardless of risk profile.

Some of us view housing as a commodity, and renting it just like renting a car or any other item. Assessing risk makes rental housing possible and without the ability to screen or review past performance, smaller, more affordable housing would disappear. The view that housing is a right, and that any human being can take another person’s property to have housing is a dangerous one and threatens to undermine private rental housing. It is worth having a hardy and rigorous debate about this.

But what is the solution to the real problem of people who have less money and are struggling in the economy having a higher risk profile and thus a greater challenge finding housing? One answer is to ban screening or limit it in such a way that the only option to mitigate risk would be raising rents. Advocates want to limit this too, of course, with rent control. Rent control makes housing inflation worse, creating scarcity and rationing.

The real solution is improving credit scores and building incentives for people who rent housing to pay rent on time. When they can’t, cash help is what is most needed. But are there market incentives to build credit and improve the risk profile of renters?

The CFPB report says this about credit scores:

“Prior rental payment history, which would seem to be highly relevant for a landlord’s decision to rent, is overwhelmingly not reflected in tenant screening reports or risk scores. Industry estimates of the coverage of rental payment history in the consumer reporting system range between 1.7 to 2.3 percent of U.S. renters.”

A private company, Piñata, has come up with a business model that does exactly this. Piñata combines direct marketing with management of rent collection. When a resident who is in a building managed by company that uses Piñata, and pays rent on time, the resident can get points for rewards from popular brands. Think of it as a frequent flier program for renters. Piñata also reports positive rent information to credit bureaus. The incentives for residents are real, with free offers for products they need and a better credit score.

I talked with Lily Liu the CEO of Piñata if she’s concerned about new regulations especially of platforms that gather applicant and resident information at scale. “Algorithms with massive data sets, are getting so good that it’s hard to see how they won’t be integrated into these decisions,” said Liu, “albeit in fits and spurts until it becomes more normalized.” She touts Piñata as a solution for residents since it is “a dynamic interactive product that helps renters understand their ‘mistakes’ and the repercussions of certain actions and helps them amend their behavior to build a better financial future for themselves.”

There is no doubt that many tenant advocates would despise this model; people shouldn’t have to pay rent at all, and why should we bait them with free deals at AmazonAMZN
to do what they shouldn’t have to do. Fine. That is an internally consistent argument for a socialist. However, in the real world, expanding a program like Piñata’s for people who already have bad, thin, or no credit would actually help people build better credit and make their lives as renters better in the future. Almost all of the complaints cited in the CFPB report could be resolved with this kind of incentive-based consumer model, even for people with less money.

The answer to the problem of bad credit or other defects in rental history isn’t blotting it out, but to offer real help and incentives to improve people’s record and reward them. This builds investment in success not just for the housing provider who sees rent collections at 100%, but also for consumers who begin to see positive credit that will help, possibly, lead to improved buying power including homeownership. Assessing risk will never go away in a rental economy, and if it is regulated away, smaller, more affordable businesses will stop renting, there will be more housing scarcity and higher rents. That doesn’t help anyone, especially people struggling with credit issues.