California Law Could Pave the Way for National Rent Payment Reporting Trend

Efforts underway to advance utilization of rental payment data, but further action needed

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California’s Senate Bill 1157 — a law that came into effect in 2021 and intended to benefit tenants residing in subsidized housing developments — could eventually turn into a more national trend. 

Michael Lucarelli, CEO of RentSpree.
Michael Lucarelli, CEO of RentSpree. RentSpree

This state-specific legislation mandates landlords of subsidized properties to provide tenants with the option to report their rental payments to credit bureaus. All residents in these housing developments must be offered the chance to opt into rent reporting, with annual opt-in opportunities to follow. Although it’s currently a California initiative and specific to certain properties, this law could also present a more sweeping opportunity.

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Rent payments typically constitute a significant portion of individuals’ monthly expenses – often as much as 40 percent of their income. Despite this financial commitment, renters have historically missed out on the opportunity to have their timely payments contribute to their credit history. In contrast to homeowners who build credit through mortgage payments, renters have lacked a similar avenue to bolster their credit profiles.

Acknowledging the pivotal role of rent payments toward individual financial success, Fannie Mae (FNMA) and Freddie Mac (FMCC) in recent years incorporated these monthly payments into borrowers’ credit histories. Fannie Mae this month announced the extension of the positive rent payment pilot program through December 2024. This shift has paved the way for private sector solutions, such as Credit Builder, to enable secure online rent payments that can be automatically reported to credit bureaus. It is filling the gap for consumers unable to directly report on-time rent payments.

The incorporation of rent payment history into credit reporting holds the potential to significantly impact loan approvals, particularly for individuals with limited credit history. This process empowers renters to pursue their financial objectives, whether it involves securing a loan, purchasing a vehicle, or owning a home.

Moreover, rent payment reporting has the crucial potential to address racial disparities in the housing market and level the playing field. Historical inequities have restricted credit access for communities of color, resulting in lower average credit scores, as highlighted by research from the Urban Institute. To counter these persistent disparities, there have been initiatives to integrate alternative data sources such as rental payment history into credit scoring.

While efforts are underway to advance the use of rental payment data, further actions are needed. Policymakers and regulators can play a role in fostering equity by incentivizing rent reporting and encouraging landlords to report rental payment history. Fewer than 5 percent of renter households currently have this information on file with major credit reporting agencies.

Also, lenders need to change to accept consumer-permissioned data, promoting a wider range of households for mortgage financing.

The promotion of consistent rent payment reporting can contribute to a more inclusive financial future, transcending racial and economic backgrounds. It is time to recognize and institutionalize rent payment reporting as a standard practice, giving credit where credit is due.

Michael Lucarelli is the CEO and co-founder of RentSpree.