Access to own credit report and the retail mortgage market


This blog is part of a series of articles published this year by doctoral students on the the job market.

How does making it easier for consumers to access their credit reports affect the performance of the retail mortgage market?

In my labor market paper, I study this question using the establishment of the www.annualcreditreport.com in the United States in 2005 under the provisions of the federal Fair and Accurate Credit Transactions Act of 2003 (FACTA). Consumers could access their reports for free through this website with just a few clicks from each of the three national credit rating agencies each year. Prior to 2005, reports could only be requested with a phone call or letter mailed to a credit reporting agency and after paying a fee (in limited circumstances, the fee could be waived). I show that easier access to reports for consumers has led to an increase in mortgage approvals and a decrease in subsequent defaults . The increase in approvals was larger for low-income borrowers and for regions with more creditworthy borrowers. In addition, mortgage refusals due to credit history have decreased and more first-time buyers have taken out mortgages. Overall, giving consumers easier access to their credit reports improves the candidate pool in the mortgage market.

Why is access to your credit reports important?

The role of credit reports in a mortgage application is analogous to that of a transcript or SAT score in college admissions. Universities use the information in transcripts and SAT scores to assess potential students for admission. If students have decided which universities to apply to without knowing their transcripts and SAT scores, they may end up applying to universities that don’t match their scores. Those who overestimate their score may apply to a school ranked very high and be rejected, while those who underestimate may apply and be admitted to a university ranked lower than where they could have been admitted.

The process is similar for mortgage loan applications. Lenders primarily rely on information from consumers’ credit reports to assess their claims. When consumers have less information about what is on their credit reports, they can misjudge the likelihood of getting a mortgage. Those who overestimate the probability may apply and be rejected. Such rejections can increase the likelihood of rejections of future credit applications and increase interest rates. On the other hand, those who underestimate the probability may not even apply for a home loan and suffer the consequences of lack of access to credit.

Research design

Simply comparing the results before and after the website was created does not tell us whether the observed changes are due to simplified reporting or other factors that may have changed simultaneously. To establish a causal link, we need to compare the actual results with a counterfactual, results that would have occurred had it not been easier to access credit reports.

Such a counterfactual, although not observed, can be approached. Due to state regulations that were passed many years before the enactment of FACTA, access to credit reports was already easier in six states, but not in others. All six states – Colorado, Georgia, Maryland, Massachusetts, New Jersey, and Vermont – had made credit reports available free of charge to state residents since 1997, 1996, 1992, 1997, 1995, and 1992, respectively. . As expected, the use of credit reports in these early states was much higher than in other states before the website for providing credit reports was released. Thus, these six states can serve as counterfactuals, as the effect of easier access to reports should be small for these first states than for the others.

Since states differ in many ways, not only in the ease of consumer access to credit reports, consumers may respond to these other factors. To work around this problem, I only compare results in counties on the border between the first states and contiguous states. Specifically, the counties highlighted in navy blue in Figure 1 are compared to those highlighted in red. Residents of Navy counties had easier access to reports through the website (treated areas), while those in Red Counties (control areas) already had easy access due to existing state laws, so that the differential change in results provides an estimate of the effect.

Figure 1: Research design

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Effects of Easier Access to Credit Reports

The main findings of the paper are illustrated in Figures 2 and 3. Figure 2 shows that approval rates increased in areas where credit reports became easily accessible compared to border areas where credit reports were already. easily accessible.

Figure 2: Mortgage Approval Ratios

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Conclusion

Credit reports are the backbone of consumer credit markets. While lenders necessarily use the reports to assess potential borrowers, consumers often do not. In the early 2000s, less than 8.4% of American consumers using credit looked at their credit reports. As of late, 12% of consumers say they don’t know their credit scores and 20% say they never checked their reports or verified more than two years ago (SCE Credit Access Survey of NYFED, 2013-2020).

I find that making it easier for consumers to access their credit reports improves the results of the mortgage market. Policies that encourage individuals to check their reports before making credit decisions and make it easier to access their credit reports and scores can help them make good credit decisions and positively affect the retail credit markets. Perhaps with this in mind, during the COVID-19 pandemic, all three credit bureaus in the United States were offering free weekly credit reports online.


Amit Kumar (@amit_fina) is a PhD candidate in Finance at the Business School of Hong Kong University of Science and Technology (HKUST). More information about his research can be found here.

Disclaimer

World Bank Group published this content on November 09, 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on November 10, 2021 02:18:01 PM UTC.


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