In the News
Renters Getting a Chance to Make Credit (Report) History
From: American Banker
Friday, November 1, 2002
By Laura K. Thompson
Credit card, student loan, and car payments all show up on credit reports, but the largest expenditure for nearly 40% of Americans - rent - is never tracked.
As a result, many renters have been unable to establish sufficient credit histories to be considered for a mortgage.
But an Annapolis, Md., company has developed and applied for a patent on software that would track rent payments and make records of them available to credit reporting agencies. Michael Nathans, the founder of Pay Rent, Build Credit Inc., said pilot programs should be running in New York, Baltimore, Washington, and Miami by yearend and that he hopes to release the software nationwide within three years.
Mr. Nathans is seeking bank partners, and so far three large banks have expressed "serious" interest while several others are considering it, he said. The few smaller banks Pay Rent has approached are not ready to commit until they can see measurable results, he said.
The goal is to simplify the payment process for property owners and help renters establish a credit history. Though the initial focus is on renters in federally subsidized housing, the system is meant to benefit tenants of all income levels.
"If someone pays their rent on time for 24 months, it should improve their chances of obtaining a new apartment or affordable credit and becoming a homeowner," Mr. Nathans said. "But right now it doesn't count in automated credit risk management models, and it should count a lot."
Here's how it works. Apartment owners establish a lockbox account at a participating bank, then tenants pay rent directly into that account - either through an automated clearinghouse transaction, debit card payment, or money transfer from a check casher. Using the Pay Rent software, the receiving bank then reports the transactions to Pay Rent's data repository.
Pay Rent would make money by selling the reports to underwriters and other professionals that run credit histories. Banks would get new deposits and the chance to win new business from renters and apartment owners.
"The beauty of the system really is that it encourages financial service providers to broaden their market and offer a valuable service to the consumer," Mr. Nathans said. "And this could lead to many cross-selling opportunities."
Banks would also receive Community Reinvestment Act credit. Mr. Nathans said he has received an opinion letter from the Federal Reserve Board stating that such a service to low- to moderate-income renters would qualify.
Cy Richardson, a program associate with the National Urban League in New York, said this is the first time he has heard of a system that establishes a credit record of rent payments. His group, a social services and civil rights organization for African-Americans, welcomes Pay Rent and will encourage members to use it, Mr. Richardson said.
"A lot of our constituents don't have traditional credit," he said. "And several studies have shown that access to credit and poor credit are the No. 1 barriers delaying homeownership for our folks."
Pay Rent has also lined up several property owners. Claire Raley, a senior vice president with Greater Miami Neighborhoods, said that her property management company is interested because the software would simplify rent collection and give the company a direct means of improving its low-income tenants' finances.
One potential stumbling block: Ms. Raley said renters might be hesitant. Many Hispanics have had bad experiences with banks in their home country and are leery of them, she said.
Said Mr. Richardson, "On paper it may work well, but in practice it is going to take some heavy lifting to get the word out and make the case that it is beneficial."
Mr. Nathans said series of seminars for renters conducted by the Urban League and other community groups will mitigate these concerns. Among other topics, the seminars will cover the payment systems structure, where to find cost-effective bank accounts, and the importance of building credit.
Mr. Nathans' goal had been to get the system into every apartment building across the United States, but now he wants to expand into other countries too. "This could work anywhere there is a banking system and people paying rent," he said.
Copyright 2002 Thomson Financial. All rights reserved.
