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In an effort to help renters build credit vital to buying homes, Freddie Mac has launched an initiative that will encourage operators of multifamily properties to report on-time rental payments to credit bureaus.

On-time rental payment history is reflected in the credit scores of less than 10 percent of renters, Freddie Mac said in a statement, noting the barriers renters face when trying to access credit or obtain competitive rates on financial products.

Through a partnership with financial technology company Esusu Financial Inc., Freddie Mac will offer incentives to multifamily property owners to report online rental payments. Esusu’s property management software platforms will send on-time payment data to the three major credit bureaus, while automatically unenrolling renters who miss payments. Freddie Mac said this will prevent harm to renters who struggle financially.

The initiative follows Fannie Mae’s recent decision to update its systems to allow rental payment history to be considered as part of its risk assessment processes, giving mortgage borrowers an opportunity to benefit from having a positive rental payment history in an underwriting decision. As with Freddie Mac’s initiative, Fannie Mae’s system does not harm borrowers with a negative rental payment history.

“Rent payments are often the single largest monthly line item in a family’s budget but paying your rent on time does not show up in a credit report like a mortgage payment,” Michael DeVito, CEO of Freddie Mac, said in the statement. “That puts the 44 million households who rent at a significant disadvantage when they seek financing for a home, a car or even an education. While there remains more to do, this is a meaningful step in addressing this age-old problem.”

To encourage participation in the initiative, Freddie Mac said it would provide closing cost credits on multifamily loans for rental properties owners who agree to use Esusu’s platform to report on-time rental payments. The government-sponsored enterprise also said it has negotiated discounted fees for Esusu’s services.

Freddie Mac said administrative and compliance burdens have been the largest hurdles facing industry efforts to report rental data, noting that Esusu’s technology eliminates these burdens. The platform can also report up to 24 months of past on-time rent payments.

“At present, the most common way for rents to be reported to the credit bureaus is when there is a missed payment that has gone to a collections agency,” Alexis Sofyanos, senior director of equity in multifamily housing at Freddie Mac, said in the statement. “Freddie Mac wants to flip that script, so that renters who pay their rent on time and in full each month get credit for doing so, while also putting in safeguards for the most vulnerable.”

Credit Score Disputes

Also highlighting barriers consumers face with their credit scores is the Consumer Financial Protection Bureau. In a report released earlier this week, the CFPB said that consumers in majority Black and Hispanic neighborhoods, younger consumers, and those with low credit scores were far more likely to dispute information on their credit reports.

The research is part of a series of reports that the CFPB said is focusing on trends in the consumer financial marketplace. The research uses data on auto loan, student loan, and credit card accounts opened between 2012 and 2019.

“Families living in majority Black and Hispanic neighborhoods are far more likely to have disputes of inaccurate information appear on their credit reports,” CFPB Director Rohit Chopra said in a statement announcing the results. “Error-ridden credit reports are far too prevalent and may be undermining an equitable recovery.”

In nearly every credit category reviewed, the CFPB said consumers residing in majority Black areas were more than twice as likely to have disputes appear on their credit reports compared to consumers residing in majority white areas. The discrepancy was even higher for auto loans, with consumers in majority Black areas more than three times as likely to have disputes appear on their credit reports.

The Fair Credit Reporting Act gives consumers the right to request that credit reporting companies correct inaccuracies on their reports. The CFPB said its research showed that these kinds of disputes are common.

“When credit reporting is sloppy or rife with errors, this can limit fair and equitable access to individuals and families nationwide,” the agency said. “The CFPB is committed to further researching the root causes of credit information disputes, as well as investigating the reasons for the demographic disparities found in the report.”

The CFPB this week also issued an advisory opinion that background screening companies cannot use name-only matches when checking credit scores, a practice that the CFPB said can produce inaccurate matches.