Is the End in Sight for Credit Reporting Agencies like Equifax, Experian, and Others? What Does This Mean for Credit Rating Agencies?

The CRRI is solely focused on the larger-scale rating agencies (inclusive of ESG rating agencies), but news recently regarding Credit Reporting Agencies like Equifax, Experian, and others has the potential to be impactful upon the development of the credit rating industry. It can a little complicated to understand the differences, so in simple terms there are credit rating agencies which focus on companies and the issuance of bonds (and also structured finance instruments etc. [an easy way to think of credit rating agencies is providing services for the wider ‘capital markets’ like large-scale investors etc., though this is a massive oversimplification), credit reporting agencies that focus on businesses and providing reports on their suitability for lenders/suppliers etc., like Dun & Bradstreet, and consumer reporting agencies, which provide creditworthiness reports on individuals. It can get confusing as some provide creditworthiness reports both for businesses and consumers (like Experian with their Experian business reports) but let us stick to that three-pronged understanding. In the US, the Biden Administration had, in its campaign for the White House, suggested that legislation could be brought in to essentially nationalise the entire private credit reporting industry for consumers. Many did not think it would come to fruition but, recently, there has been movement.

 

The idea of providing for a public version of the private offering has been proposed by the Biden Administration for some time. There are question marks over whether this is to be an ‘alternative’, or a ‘replacement’, but the understanding is that the ‘replacement’ approach is perhaps too radical for the modern US. The idea, developed via the ‘Biden-Sanders Unity Task Force Recommendations’ essentially revolves around the idea that a public offering can incorporate better metrics that will have the effect of opening up lending opportunities to more people and increase inclusivity in the economic landscape. Despite only being alluded to by the Biden Administration in its initial campaign, the idea was that the new public offering would be housed within the Consumer Financial Protection Bureau (CFPB) and that there would be a ‘seven year transactional period before the full replacement of private credit reporting agencies’.

 

The idea of a public credit reporting agency is as easily dismissed as the reality of a public credit rating agency, despite the continuation of calls for both. They are not easily dismissed because of the concept – which is actually very good in theory – but because of the practical implications. Public bodies have a number of theoretical drawbacks against the private offerings, including less resources, less incentive to innovate, less competitional pressure, and more of a chance of political influencing. However, the reality of the private offerings, particularly in the private credit rating arena, is that these ‘advantages’ do not translate to reality, as the increased resources are not necessarily transferred to innovation and offering, competitional pressure is non-existent in a stable oligopoly (same for the reporting agencies of Equifax, Experian, and TransUnion), and the political influence threat is merely replaced with the for-profit threat. However, this is has not stopped the progress towards a private offering for the reporting industry.

 

A few days ago, the US House Committee on Financial Services held a Hearing entitled ‘A Biased, Broken System: Examining Proposals to Overhaul Credit Reporting to Achieve Equity’ in which the proposal for legislation creating the new public offering was put forward. Maxine Waters, the Chair of the Committee, said that ‘for too long, our credit reporting system has kept people of colour and low-income persons from access to capital to start a small busines; access to mortgage loans to become homeowners; and access to credit to meet financial emergencies’. More conservative commentators have argued that there is no basis for these claims of bias, but the research heavily suggests otherwise (see here, here, here, here, here, and here). The variance in bias that research is found is tremendous. However, despite the claims from the agencies themselves that they are already regulated and provide for access to credit, the push is now for the public agency to be established. If the plan is to provide an ‘alternative’, significant chunks of the business model of the top three reporting agencies will be directly affected, and it is likely that incentives to use the public model with the backing of the US Government will push business towards it and away from the private offerings. Whether as an alternative or replacement, the likelihood is that, if the public agency gets the full backing from the state, the private offerings will be pushed out of the sector.

 

The question is ‘will this happen?’ and the answer is a difficult one to commit to. Will there be political pressure to provide rankings to those who really cannot afford to repay their financial obligations? If so, what effect will that have? The chances of artificially creating a debt bubble are huge for a public reporting agency, and although the situation with Fannie Mae and Freddie Mac are very different and complicated, we saw how a push to increase home ownership from the State led, in some way, to the housing bubble that almost broke the system in 2008. Is there potential for a similar bubble to be repeated? Yet, for the credit rating agencies, I assume that they are looking on nervously.

 

This is because there has long since been calls for a public credit rating agency. In practice, there are so many underlying dynamics at play which prevent such an offering from practically being established, but any success in the credit reporting field may embolden such claims in the credit rating field. If the intervention of the State into what is, effectively, a private arrangement does not impede upon progression, then the calls for a public credit rating agency will likely grow louder, if not just because of the transgressive effects that the private for-profit culture in the rating industry causes. The variety of proposals concerning the rating agency, in a variety of different sectors, all tend to focus on the reduction of culturally-developed transgressive behaviour and one major option is to just do away with them all and replace it with a public body – the sentiment being that any cost associated with establishing such a public body will be dramatically lower than the cost of transgressive behaviour in the industry i.e. the cost of the Financial Crisis which has the rating agencies at the centre of the downfall will always be considerably higher than investment in a public body. We await to see. However, what is true is that this development with reporting agencies is now essentially a barometer for public bodies in this private arrangement of creditworthiness assessment and the implications can be huge for associated industries.

 

Keywords – credit reporting agencies, credit rating agencies, Equifax, Experian. TransUnion, Business, @C_R_R_I