I've have a lot of discussions over the last couple of months concerning the “Renting” of FICO scores to obtain a mortgage that is credit score driven. I have had multiple phone calls on how the mortgage industry is combating this fraud… and here it is below. The sad part (as in a lot of things), innocent people will be affected.
"Putting a Stop To a Credit Ruse"
By Kenneth R. Harney
The days may be numbered for dozens of Internet-based companies that promise to quickly boost FICO credit scores by 200 to 300 points.
Fair Isaac, the developer of the widely used FICO score, plans to introduce key changes designed to derail schemes that transplant high-quality credit card histories to the files of people with low FICO scores.
The credit-boost companies, easily found on the Web by searching for "credit trade line," claim that they violate no federal laws and are not seeking to defraud mortgage lenders. But mortgage industry groups, federal and state regulators, and credit industry leaders say the programs represent significant threats to the home lending system -- opening the door to fraudulent home loan applications.
Using a FICO-boost service, for example, a mortgage applicant with a history of late and missed payments and a FICO score in the 500s could puff up his or her score well above 700 and be eligible for the best interest rates and fees.
How could that happen? Check out the online pitch of one promoter: "Rent your credit and earn thousands," it proclaims. The company offers cardholders with sterling payment histories on cards with high balances "as much as $10,000 a month or more" simply by accepting unseen borrowers with poor credit backgrounds as "authorized users" on their card accounts for 90 days.
Although the add-on users receive no access to the credit card and cannot rack up charges, Fair Isaac's FICO model allows the cardholders' excellent payment histories to flow directly into the credit files of all authorized users on the card. The addition of the high-quality credit quickly raises the scores of any authorized users -- even though the add-on users may still be poor credit risks.
Authorized users traditionally have been cardholders' children, close relatives or friends with little experience with credit and insufficient histories to generate FICO scores. Many parents allow their high school or college family members to tag on to Visa or MasterCard accounts as authorized users to help them learn about and build their credit skills. But under federal law, there are no limitations on who can become an authorized user or on the number of authorized users. Nor are there bars to treating payment histories as financial commodities and renting them out.
One Web site promoter claims that some cardholder "investors" are "able to accommodate as many as 99" authorized users simultaneously and have "as many as 22 qualifying cards" for rental, creating "thousands of dollars per card" of extra income monthly.
Fair Isaac, worried that its credit scoring system is being gamed to facilitate fraud, is readying a crackdown. Starting in September, the updated version of the FICO software available to lenders -- the "FICO 08" model -- will no longer consider authorized-user accounts in computing credit scores, said Craig Watts, Fair Isaac's public affairs manager.
That, in effect, will block holders of good credit from renting their account histories to authorized users to artificially boost scores. Watts said that once fully implemented, Fair Isaac's change should eliminate much of the problem.
However, some credit experts say there could be a downside: Children and other legitimate authorized users no longer will get the benefits of their sharing of their parents' or grandparents' high-quality credit. Their FICO scores will be depressed or might even disappear.
As an illustration, a college student with little credit history on file might get a 100-point increase by virtue of being an authorized user on her mother's Visa card with perfect payments stretching to the 1980s. Those 100 points, in turn, might lower the student's cost of auto insurance premiums, help in job applications and show her to be a creditworthy potential tenant when she seeks to rent an apartment.
If FICO score calculations ignore all authorized-user accounts, however, the student's score could be 100 points lower.
Terry Clemans, executive director of the National Credit Reporting Association, said that while he understands "Fair Isaac's need to solve the [application fraud] problem, I would think there must be some less drastic ways to filter out" legitimate authorized-user accounts from the new breed of rented credit card accounts. Credit card companies also need to get involved, Clemans said, and "should not approve authorized user accounts" where the cardholder is clearly participating in some form of rental scheme for profit.
Bottom line: If you depend on an authorized-user account to elevate your FICO score -- whether legitimately or with cheating in your heart -- don't bank on it after September.