A Government Credit-Rating Monopoly? If you like the DMV and TSA, you'll love giving government sole control of credit reporting.

• Author: Zywicki, Todd

The country is engaged in an ongoing reckoning about its history of racial inequality. One way in which this sad legacy continues to manifest itself is in consumer finances. Decades after the enactment of the Equal Credit Opportunity Act (ECOA) and a battery of federal programs aimed at improving the well-being of the least well off", black families on average continue to have--relative to white families--lower credit scores, less wealth, less financial stability, and less access to mainstream credit products such as mortgages and credit cards.

Closing the racial wealth gap by enabling more minority families to access high-quality financial services is a moral and economic imperative. Remedying this gap begins with recognizing the sordid historical role of the federal government in promoting "redlining" and other discriminatory practices, and how state and federal regulation blocked efforts by private companies to provide greater choice and competition to traditionally underserved communities. Other facially race-neutral policies, such as usury ceilings and competitive barriers to the entry of new banks and credit unions, also disproportionately harmed black families relative to whites.

But instead of learning from these decades of examples of how ill-conceived federal regulation harmed the least well-off, the Biden administration and some members of Congress want to destroy the single greatest success story in American history of breaking down discrimination and promoting financial inclusion: the consumer credit reporting system. Under a proposal inspired by the left-wing activist group Demos, the current competitive system (dominated by Experian, Equifax, and TransUnion) would be replaced with a government-run monopoly operated by the Consumer Financial Protection Bureau (CFPB). This proposal ignores the history of the credit reporting system in opening doors to minorities and others who were traditionally excluded from the financial mainstream and threatens to undo many of the beneficial consequences of that history.

RISE OF THE CREDIT BUREAUS

Easy access to quality financial services--bank accounts, credit cards, and mortgages--traditionally was limited to middle-aged white men. Lending was done according to the so-called "five Cs" of lending: character, capacity, capital, collateral, and conditions. But often more important was a sixth C: "connections." Bank officers preferred customers with whom they played golf and went to church, usually middle-aged white men like themselves. Although a single woman could get a bank account and charge card at the local department store, her credit history was merged with her husband's when they married. Minorities and immigrants needn't bother applying because they were foreclosed from the high-class downtown department stores. Instead, they shopped for overpriced goods in local stores in their neighborhoods, primarily because those were the only merchants that would extend them credit. Once tied to this local network of retailers offering credit, financial exclusion became a self-reinforcing dynamic, blocking minority families from access to the financial mainstream.

The emergence of comprehensive credit reporting democratized financial access. For the first time, creditworthiness was based on a proven record of personal financial responsibility, not the applicant's race, sex, golf handicap, or chumminess with the bank manager or loan officer. As economic historian Louis Hyman observed in his 2012 book Debtor Nation, the traditional "five Cs" of lending have given rise to another: the computer. Little wonder that the architects of the ECOA pushed for reliance on credit reporting as the vehicle for overcoming traditional disparate lending patterns and improving access to credit for previously excluded Americans.

The results have been profound, especially for lower-income Americans, who have experienced transformative growth in access to financial services. According to Federal Reserve data, in 1970 only 16% of American households had general-purpose credit cards, but that number rose to 73% by 2001. Whereas only 2% of low-income households had credit cards in 1970, by 2001 that figure...