Everyone knows that I love Second Nature. I’ve got my own coveted purple jacket, even! But it’s also no surprise to all of my friends at Second Nature that I do not like the idea of positive-only credit reporting, which is their default credit product in the RBP (Resident Benefits Package). I’ve tried everything I can to convince them to change this, so this newsletter is the latest volley in an attempt to move them on this, because I truly do believe that property managers and landlords are getting screwed over by only reporting positive reports to credit agencies, and I also think there are very real ethical concerns here. And it’s not just Second Nature. Basically everyone offering credit reporting of tenants is doing positive-only reporting as their default mode, with the exception of CredHub.
The Promise of the “Triple-Win”
The “Triple-Win” is a term popularized by Second Nature several years ago to describe an ideal product or service offered in the property management space. The idea is that the offering benefits all three parties: the owner, the resident, and the property manager. I love this concept, and I’ve frequently used it as a guide when developing my own programs within my PM company, altering them to make sure that what’s offered is truly benefiting everyone.
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Within your RBP, it’s pretty easy to make an argument for why most items qualify as a “triple-win.” From renter’s insurance to online payments to 24 hour maintenance hotlines, everything fits the bill pretty well. But credit reporting is the lone standout here.
Positive-Only Credit Reporting is a Single Win
Now, to be clear, this article isn’t a criticism of Second Nature. They do offer both positive and negative credit reporting. You just need to ask for it. And frankly, Second Nature is probably my favorite vendor in the PM industry. No, what this article is is an attempt to convince you to call up Second Nature and tell them to turn on negative reporting also for your RBP. And to gently encourage them to make this the default going forward. Why? Because positive-only credit reporting mutilates the triple-win concept and creates a single-win scenario, at least for this portion of the RBP.
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In a positive-only reporting model, the tenant gets all of the benefits. If they pay on time, they get a boost to their credit score. In fact, a BIG boost. Estimates vary from between 40-70 points on the average credit score improvement after rent payments are added into the mix. But if the tenant doesn’t pay on time? Eh, no problem! No one is ever going to know, unless it gets to the point of filing an eviction. Rarely is all carrot and no stick a smart way to go about things. Incentives work on some people, but some people need deterrents for proper motivation. If all you’ve got on offer are carrots, then people who aren’t motivated by them will be unmoved. And let’s be honest, the kind of person who is prone to paying their rent late is usually the same kind of person who isn’t going to be motivated by a boost to their credit score that will come later. They need to feel the sting of the stick ASAP. So yes, your RBP with positive-only reporting is providing a benefit (to one party), but it’s not providing a triple-win.
Positive-Only Reporting is Patently Dishonest
There is no part of this in which the owner is winning (and we’ll get to the PM in a moment). The obvious loss here is that the owner has an opportunity with credit reporting to deter late payments, but it’s not being used, so owners who have non-paying tenants aren’t getting any benefit at all. But it goes beyond that and is far deeper.
Positive-only credit reporting is a lie. Landlords and property managers rely upon credit scores heavily in screening tenant applicants. Let’s say you’ve got a tenant who has been renting from you for two years. For the first 20 months, they paid on time, every month. Guess what? That tenant has achieved the full benefit of their RBP credit reporting. Their credit score has skyrocketed thanks to you. But now, in the final months of their lease, they stop paying. They even abandon the property right before you file eviction. Does the tenant suffer any consequences to their credit? Nope! They got that 70 point boost to their credit score on the back of your landlord, and then skipped town owing two months of rent with no negative consequences to their credit score. In fact, when they go looking for their next rental, the new landlord or PM is going to see an amazing credit score because of that first 20 months of positive reporting jacking up their score. You have effectively lied to every landlord and PM about the payment performance of this tenant. Not to mention every other creditor that uses credit scores to determine risk, such as banks, car lenders, insurance companies, etc.
This isn’t just a minor problem. It’s not something we can brush aside and just chalk up as an unavoidable consequence of providing positive credit reporting as a benefit. You aren’t just leaving out data that is important for landlords and PMs, you are actively lying about creditworthiness because of how credit scores work. It would be different if the tenant’s credit score magically snapped back to what it was prior to the positive reports coming in as soon as a non-report month came along, but that' doesn’t happen. The tenant retains the benefits of the on-time payments, distorting their actual creditworthiness. Frankly, this isn’t just a bad practice, it should be straight up illegal. Real landlords and lenders are suffering as a result of these bogus credit scores.
Property Managers Lose Too
But it’s not just the owner who gets screwed over here. The PM is also a victim in this scenario. You have one hand tied behind your back, preventing you from doing what you can to actually collect the rent, which is what you literally have a fiduciary obligation to do. You are effectively stuck in the middle, with the landlord angry that their rent isn’t collected, but you not able to impose any real consequences on the tenant aside from filing an eviction, which obviously has its own downsides for both you and the owner.
Is this going to result in a negative review from the owner on Google? Quite possibly. Will they terminate their contract? Could happen. We all know that non-paying tenants frequently trigger management terminations. And what about your team who has to take the brunt of these complaints from owners? That’s not exactly great company culture you’re creating there. A good Broker would use the tools at his or her disposal to help their owners and make their team’s job easier. Why are you allowing one hand to be tied behind your back?
Even Good Tenants Lose
In the end, the people who are really going to suffer here are the good tenants. Because this isn’t going to go on forever. Fair Isaac Corporation (the inventor of the FICO score) is in business to provide accurate data to creditors. Much like Google’s entire business model relies upon the usefulness of its search results, FICO’s entire business model depends upon the accuracy of its predictions on payment performance. If Fair Isaac sees that credit scores of tenants are being artificially inflated by these positive-only reports on a systematic basis, they are going to either eliminate rent reporting from their model, or they’re going to drastically underweight it so that it no longer provides that 40-70 point bump. When that happens, the good tenants are the ones who suffer. They’ve paid reliably and have rightly gotten the improvements to their credit score as a result, but because the bad tenants weren’t suffering credit consequences and FICO pulls rental data from the calculation, they’re going to lose that bump to their credit score.
This isn’t an unfounded fear. This has already happened in other industries. For example, utility bills and payday loans generally don’t show up in FICO’s standard model, because they were too inconsistent in reporting. It was the opposite in that case: these companies were ONLY reporting the negatives, and not reporting the positives, so FICO relegated them to their FICO XD and UltraFICO alternative models, which lenders generally don’t use. Because, and this is very important, FICO wants reliable, consistent, and honest data. And really, that’s what all of us should want, too.
The Counter-Arguments
The counter-arguments on this are weak, but let’s cover them. I’ve heard it said that “you can’t call something a benefit if it can hurt someone’s credit.” The weakness of this argument is overtly obvious. Someone can’t get hurt unless they literally violate the terms of the contract that they’ve signed. In fact, not only do they have to violate that contract, but they have to do so in glorious over-the-top fashion by not paying their rent for over a month, since you have to be more than 30 days late for it to show up as a negative mark on your credit report. Do you seriously want to argue to me that credit reporting isn’t a benefit simply because people who pay more than 30 days late won’t get the benefit? What are you, a legal aid attorney trying to help people squat in homes? Because frankly, it’s easier for me to defend that than it is to defend this. At least that attorney can hang his hat on the argument that he’s just upholding due process. You have no such defense for this.
The other argument I hear is “bad credit reports can cause PR problems with bad reviews and such.” Let’s carry this argument to its logical conclusion. Are you also not going to send a notice to pay or quit for the same reason? How about not filing the eviction? Just how much does your owner client (you know, the person to whom you owe a fiduciary duty) have to get screwed over before you say enough is enough and just accept the possibility of a negative Google review?
These are the only two semi-coherent arguments I’ve heard in favor of this positive-only practice, but hey, if you’ve got new ones, be sure to send over!
What a Triple-Win Actually Looks Like
The only true triple-win when it comes to credit reporting is full-spectrum reporting. You should be reporting every single month, regardless of payment status, for every single property you manage. When you do, this is what the triple-win looks like:
Owners - enjoy lower delinquency rates because of the carrot and stick approach that leads to maximum on-time payment of rent, which creates a higher ROI
Tenants - have real opportunities for significant improvements to their credit scores simply by doing exactly what they’ve agreed to do in paying the rent on time
PMs - enjoy a more efficient business with fewer delinquencies to chase down and have an easier time screening tenants because the rent reporting data showing up from other PMs is actually true
Partial solutions don’t cut it here. This isn’t just a matter of best practices. In my mind, this is a bedrock ethical and moral requirement. Reporting only positive reports to the credit agency is a straight up lie, and it’s a lie that harms real landlords, PMs, and other creditors. Stop it!
Action Items to Restore the Triple-Win
You all know that I’m not much of a fan of simple prose that doesn’t deliver actionable content. I’m not writing these articles just because I enjoy it, I’m writing these to give you real steps that you can take in your businesses. So with that in mind, here’s what steps you should take:
If you don’t already have an RBP, you need to get one. Talk to Second Nature to sign up. Or if you already have your own RBP and you just need to add credit reporting, talk to CredHub.
You need to actively demand that they include both positive and negative credit reporting in your benefits package. By default, Second Nature will only setup positive-only reports. If you ask for both and they try to talk you out of it, let me know about it. I’ve talked to the higher ups at SN, and they believe that their reps aren’t actively discouraging it, so I want to let them know if that’s not true.
When you see SN representatives at a conference, tell them that you want their policy to change on this and you want them to ONLY offer full-spectrum credit reporting. Positive-only shouldn’t even be an option, let alone the default.
Make sure your onboarding materials and your late rent notices specifically point out to tenants that their payment performance WILL be reported to the credit bureaus, good or bad. Definitely highlight the potential credit score boost, but also mention the negative repercussions of not paying on time. Carrots and sticks only work when the person knows about both of them.
A Personal Endorsement of Our Sponsor
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Open to Work
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Debate Me
Disagree with my take here? Have a different perspective? There’s nothing I love more than a good debate or even just an intelligent conversation. If you’d like to jump on a podcast recording with me to discuss this topic, please let me know!
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