New Law Helps California Renters Build the Credit They Deserve
Earlier this summer, California became the first state in the nation to require landlords who own rental housing that receives direct government subsidy (think LIHTC credits, or project-based Section 8 vouchers) to help their tenants report rental payment information to the three major credit agencies. On the surface, SB 1157 may sound like a dry, technical piece of legislation, but in fact it’s a momentous advance that represents much-needed progress in helping those with limited credit histories gain a foothold toward financial security. This payment data is vital to helping people, particularly low- and moderate-income earners, establish a positive credit history, increasing their access to a wide variety of financial opportunities such as an eventual home mortgage or small business loan. This trailblazing law is an important step in addressing deeply rooted barriers in our economic system that too often work to reward people who have easier access to capital, and penalize those who don’t.
The personal credit score dates back to the late 1800s and in its early days was rife with discriminatory practices and blatant disregard for consumer privacy. The Fair Credit Reporting Act of 1970 introduced better consumer protections, creating more transparency in ratings, requiring negative information to be removed after a certain period, and prohibiting one’s race, sexuality, religion, or disability from influencing one’s credit score. While the Fair Credit Reporting Act helped bring structure and impartiality to the personal credit rating process, the landmark legislation did not codify which types of payments were to be reported to the emerging “Big Three” credit reporting agencies. What followed were widely held practices in which monthly car, home, student loan, and credit card payments generally were reported to the credit bureaus, partially because this type of debt is generally centralized with larger entities with greater capacity to report and potential benefit from doing so. On-time payments in these areas contributed to a positive credit rating.
Conversely, payment of bills such as rent or utilities, which face more fragmented systems of oversight, typically were not reported to the credit agencies. Instead, these financial responsibilities could only negatively impact credit ratings if consumers fell behind on payments and the bills were turned over to collection agencies for recovery. As you might imagine, this has created huge challenges for families on the margin. The single parent who has always rented her home, relied on public transit, and maintained one credit card at a time has comparatively little to no credit history relative to someone with other forms of financial obligation. This gives her little opportunity to demonstrate her ability to pay back a small business loan, for example, and as a result she may be denied access or charged higher interest rates as compared to a similarly skilled applicant with more credit history. Further, her credit score is more likely to be irrevocably damaged by a single late payment or slip-up (something most of us encounter at some point in our lives) due to the lack of other credit data points to ballast against. Though it is reasonable for a financial institution to be concerned about unproven credit history when making lending decisions, this practice works to perpetuate and harden existing socioeconomic hurdles.
As owners of naturally occurring low-to-moderate income housing, Turner Impact Capital is deeply familiar with these types of challenges, faced by many of our residents. Through the free enrichment programs and services we offer to residents onsite — including after-school academic support, health and environmental programming, safety initiatives, and much more — we seek to support our residents in meeting their personal goals, whether related to financial well-being, education, health, or other areas. For many, this includes home ownership, which requires a strong credit score to access an affordable mortgage. This was one of many reasons we piloted a positive rent reporting program with Experian RentBureau starting in 2017, which we comprehensively rolled out across our portfolio in 2020. Through this program, Turner Impact Capital and its property manager TI Communities provide residents the opportunity to have their rental payment information directly reported to Experian, one of the three primary credit reporting agencies, helping them receive the credit they deserve for their on-time monthly payments. The results of this roll-out have been breathtaking, with over 6,700 residents electing to participate in year one. Sixty-five percent of these residents did not have a credit score prior to this program. After the inclusion of their rental payment history, these residents were newly scored at an average of 679, falling in the “Prime” or least risky credit tier. Of the 35% of residents who participated and had a credit score previously, their score improved on average 20 points.
SB 1157 is a small drop in the bucket of helping to right some of the imbalances in our financial systems and reduce disparities in economic outcomes driven by credit reporting. Nonetheless, it is an important example for other states to look to. The legislation applies to landlords who accept direct government subsidy — meaning it would not apply to Turner Impact Capital’s apartment communities, given the underlying financing of our model — but it may also have a broader impact, encouraging other property owners to commit the time and energy needed to establish these reporting pipelines on their residents’ behalf. It is estimated that poor credit can cost an individual over $200,000 over the course of their lifetime in higher interest rates and denied access to financial opportunities. Turner Impact Capital’s rent reporting initiative helps thousands of individuals and families in our communities across the country avoid that hardship. Thanks to this new law, many more low-income renters in California will be provided that same chance.
