(November 1, 2002)--Although the greatest expense for nearly 40% of Americans is rent, payment histories for rent don't show up on credit reports. Without a track record — even though their payments have been on time for several years, many renters find it impossible to get the apartment of their choice, or a homeowner’s mortgage.

Some simple software can give these people a break. Pay Rent, Build Credit Inc. a company in Annapolis, Md., is ready to test a computer application that will document rent payments and make the information accessible to credit-reporting agencies. Michael Nathans, the founder of the company, said the testing will take place in Baltimore, Washington Miami and New York by the end of this year. Making the software available nationwide will take another three years, he estimates.

To get the concept under way, banks that offer mortgage loans have to sign on. To date, three large banks have expressed "serious" interest, Nathan says. Several others are thinking about it. Smaller banks aren’t ready to commit until they can see measurable results.

The objective is to make payments easier for property owners while helping them create a credit history. Renters of federally subsidized housing are the first group targeted, but the concept can be applied at all income levels.

People who pay rent on time for two years should have their dependability rewarded when they want to move to a new apartment, Nathan says, and if they want to buy a home, the terms should reflect their exemplary record. "But right now it doesn't count in automated credit risk management models, and it should count a lot."

Here's the way it could work: Owners of rental property set up a special account at a commercial bank into which a tenant pays rent directly—either personally or through an automated clearinghouse transaction or check casher. The bank in turn reports the transaction to Pay Rent’s data file Using the Pay Rent software.

How would Pay Rent support the service? By vending reports to underwriters and credit bureaus. Banks would benefit from the new deposits and the opportunity to get new business from property 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," Nathans says, "And this could lead to many cross-selling opportunities."

The Federal Reserve Board has sent a letter of opinion to Nathan stating that such a service to low-to moderate-income renters would qualify Banks for Community Reinvestment Act credit.

The National Urban League in New York welcomes Pay Rent and will encourage members to use it, says Cy Richardson, a League program associate. This is the first program he’s heard of that helps renters establish credit records by including rent payments. The Urban League is an organization that offers social services and civil rights protection for African-Americans "…several studies have shown that access to credit and poor credit are the No. 1 barriers delaying homeownership for our folks," Richardson says.

Senior vice president Claire Raley with Greater Miami Neighborhoods, says that the software would simplify rent collection for her property management company and give them a direct means of improving their low-income tenants' finances.

A possible problem that Raley pointed out is that some Hispanic renters might be hesitant to participate because of bad experiences with banks in their home country.

Urban League’s Richardson says that "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."

Pay Rent’s Nathans hopes a series of seminars for renters conducted by the Urban League and other community groups will lessen these concerns. The seminars will include how the payment system works, where to find participating banks, and the importance of improving credit records.

Nathans' first objective is to get the system working in every apartment building in the United States. He’s already thinking about expanding into other countries as well. "This could work anywhere there is a banking system and people paying rent," he said.

Pay Rent, Build Credit Inc. has applied for a patent on their software.

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A story including this information appeared in American Banker, Friday, November 1, 2002, written by Laura K. Thompson