Posted on 06/04/2007 10:05:27 AM PDT by Hydroshock
Only a low credit score stood between Alipio Estruch and a mortgage to buy a $449,000 Spanish-style house in Weston, Fla., a few miles west of Fort Lauderdale.
Instead of spending several years repairing his credit rating, which he said was marred by two forgotten cell phone bills and identity theft, the 37-year-old real estate agent paid $1,800 to an Internet-based company to bump up his score almost overnight.
The result was a happy ending for Estruch, but the growing practice is sending shivers through the mortgage industry. Federal regulators are also reviewing the practice. And after being contacted by The Associated Press for this story, Fair Isaac Corp., the developer of the widely used FICO score, said it will change its credit scoring system beginning later this year in a way it contends will end this little-known but potentially high-impact mortgage loan loophole.
Instantcreditbuilders.com, or ICB, helped Estruch boost his score by arranging for him to be added as an authorized user on several credit cards of people with stellar credit who were paid to allow this coattailing. Parents also use this practice when they add their children to their credit cards to help them build solid credit.
The pitch to those who are essentially renting their credit history for pay is seductive: You don't need to worry about users of this service receiving duplicate copies of your credit cards, account numbers or any of your personal information. It's essentially free money, they are told.
Brian Kinney, 44, a retired Army officer in Glendale, Calif., pulls in more than $2,500 a month by lending out 19 credit card spots on two old Citibank cards with strong payment histories. Kinney, whose FICO score is above 800 on the scale of 300 to 850, quit his job working at a Farmers Insurance agency and uses the ICB income to tide him over until he starts his own insurance agency.
Lenders are worried, however, that they're taking on greater default risks by unknowingly offering lower interest rates than they otherwise would to applicants who artificially boost their credit scores. Their trade group has complained to the Federal Trade Commission and is talking with the credit reporting bureaus in case the practice becomes more widespread.
Estruch paid $1,800 in December for three credit card spots, and by January, his FICO score jumped from 550 to 715. In mid-March, he closed on his four-bedroom beige stucco house after obtaining a 30-year fixed-rate mortgage from a unit of American Home Mortgage Investment Corp. It carried a 7.5 percent interest rate and required no down payment.
"Everything now is score driven. I had a great mortgage history, but I got hurt because of my credit score," said Estruch, who also works as a mortgage broker, had bought and sold two houses previously, and currently owns another home in New York. Estruch said he's current on his mortgage payments.
Companies like Largo, Fla.-based ICB are sprouting on the Internet with little overhead and no-frills marketing. They post ads on community Web sites like Craigslist and have sponsored links on Google and Yahoo. Competitors of ICB have even reached out to mortgage brokers, lenders and real estate agents, flooding their e-mail with advertisements.
Jason LaBossiere, who founded ICB a year and a half ago, said his company receives 100 to 150 new leads daily — a number that has been growing — and those inquiries lead to 10 to 20 new clients a week.
ICB charges $900 for the first credit card account, with a discount for additional ones. The cardholder allowing the piggybacking on his or her credit history can receive $100 to $150 per slot, depending on the age and credit limit of each card. ICB pockets the rest.
The effect on a credit score can vary depending on what else is in a client's report. But one borrowed credit card account can increase a score between 30 and 45 points, two between 60 and 90 points, and five between 150 and 205 points, according to ICB. That's because the computer program that calculates scores is essentially tricked into believing the credit renter has a better repayment history when it sees the added accounts, and that helps lift the credit score.
Once the credit card company files an updated report to credit bureaus — leading to a higher FICO score — the credit renter is removed from the account of the person allowing the piggybacking. However, the credit card's payment history remains on the authorized user's credit report forever, and lenders have no way of knowing how the credit borrower is related to the cardholder.
A higher credit score can save a consumer an enormous amount of money because it usually means a lower mortgage interest rate. It also can mean the difference between qualifying for a loan or not, as in Estruch's case.
According to Fair Isaac, lenders would probably demand about a 9.8 percent interest rate on a $300,000, 30-year fixed mortgage for an applicant with a credit score between 500 and 579. That would translate into a $2,585 monthly payment for principal and interest.
But a borrower with a score between 760 and 850 seeking the same loan would qualify for about a 6 percent rate that would cost just $1,796 a month for principal and interest. That savings of $789 each month would total $284,040 over 30 years.
Kinney, the retired Army officer in California, said those borrowing his good credit history don't get his personal information, full credit card number or credit card expiration dates. Any sensitive data is handled through ICB, and Kinney adds the users himself by calling his credit card company. ICB also destroys any duplicate cards that are issued to the credit renter, according to its contract.
Instead of being worried about risks he may be assuming, Kinney said borrowers are the ones vulnerable to scammers posing as do-gooders. Those seeking a credit hike give the cardholder their names and Social Security numbers, which, in the wrong hands, could lead to identity theft. Kinney said he also receives credit card offers in the mail for the credit borrowers on his accounts, opening up another possibility for fraud, but he throws them away.
"I know the whole thing sounds kind of odd and not very legitimate, but it is for now," Kinney said. "I don't know how long before someone will decide it's illegal. But I'm not counting on this for the long-term."
Ginny Ferguson, a mortgage broker in Pleasanton, Calif., and a credit expert for the National Association of Mortgage Brokers, considers the practice mortgage fraud, and the trade organization is about to release a policy statement against it.
"These companies are encouraging consumers to commit fraud. On a standard home loan, there's a clause that says the consumer is not omitting pertinent facts that could impact his or her ability to repay the loan," Ferguson said.
ICB's LaBossiere said he sees his business as a second chance for the consumer who has had little financial education to make good decisions.
"People who are our clients are spending an incredible amount of money to get their finances back in order," he said. "They've learned through a school of pain that it's such an important aspect of regaining control of their lives again."
So far, federal authorities have yet to make a ruling on the practice. "What I've gathered from attorneys here is that it appears to be legal" technically, said FTC spokesman Frank Dorman. "However, the agency is not saying that it is legal."
Lenders, who depend on credit scores to assess a person's ability to pay back a loan, are closely watching the practice's growth. It also comes at a time when the industry is reeling from the a soaring default rate on subprime mortgages, home loans for people with bad credit. As a result, they've tightened lending standards, but the credit-renting practice threatens to undermine their efforts to reduce exposure to risky borrowers.
Ninety percent of the largest U.S. banks base their loan decisions on FICO scores, which currently include authorized user accounts. However, after discussions with lenders and industry officials, Fair Isaac said it intends to announce this week that all future versions of its FICO score methodology will no longer consider authorized user accounts, said Tom Quinn, Fair Isaac's vice president of scoring solutions.
The next version is slated to roll out in September to one of the three main credit reporting agencies — Equifax Inc., Experian Information Solutions Inc. or TransUnion LLC — with the other two agencies receiving the new version some time in 2008.
The change won't be a quick-fix for lenders trying to weed out credit renters. Corey Carlisle, senior director of government affairs for the Mortgage Bankers Association, said it takes time for lenders to transition from one scoring system to another.
"All lenders have their own guidelines and parameters on how to use and incorporate the FICO score. It would take time to understand what's in a new credit score," Carlisle said.
Quinn also noted that some lenders generate their own scores using authorized user accounts in their calculations, so the practice may not be easily negated.
"It's an industrywide issue and there are other scores out there," he said. This is a phenomenon that impacts more than just FICO scores."
Other consumers besides credit renters stand to lose with the change, namely those for whom authorized user accounts were designed: college students on their parents' cards and spouses with little to no credit of their own.
But there's no way to distinguish these from the latest crop of strangers trying to augment their scores. Lenders who want to find out more information about others on credit card accounts are hindered by the Fair Credit Reporting Act and privacy laws.
"As with any decision, there's a trade-off," Quinn said. "The many honest consumers who learn good credit skills with the help from a family member, that feature will be removed. But the challenge for us is maintaining the integrity of the FICO score."
So if you create an artificial method of “scoring” people’s creditworthiness you can hardly be surprised that people find a way to maximize their “scores” since the whole thing is a construct in the first place.
FICO scores have very little credibility. The credit agencies themselves have been abusing the system for years. Granted there are deadbeats out there BUT there are a LOT of good credit people who have been victimized by the agencies.
Yep, my thoughts as well.
“FICO scores have very little credibility. The credit agencies themselves have been abusing the system for years. Granted there are deadbeats out there BUT there are a LOT of good credit people who have been victimized by the agencies.”
It’s also immensely hard to get incorrect data removed from your credit report. I’ve been working for months to get no less than 6 serious errors in my report addressed.
In one case there was a collection agency that said I owed a cable company $44. The cable company said I didn’t owe them anything, and they do work with that collection agency, but they’re not sure why the agency thought I owed them money. The collection agency said it was up to the cable company to notify them. The cable company said they had no one to call at the collection agency, that the collections people had to call them. Finally I had the cable company send me a letter saying I owed them nothing, and sent it to the collections agency. The collections agency now agrees I owe them nothing, but despite promises haven’t notified the credit bureau yet. I filed challenges (had to do it with all 3!) and am waiting for a response. That is just one of the errors...
The whole credit ranking industry is a fraud. I have years of ontime mortgage, car, and other payments.. and a couple reporting errors for amounts like $44 and $300 led to my fiancees student loan being turned down, with me as a cosigner.
I took me two months to clear up a couple of SNAFUs. Just keep on top of it.
I agree 100%. There is a simple solution; if there is mistake that is not the consumer’s fault, they should be able to sue the credit reporting agencies for actual and punitive damages. I was denied a mortgage three years ago, because I never looked at my credit score, assuming it was perfect. There were THREE errors in it from companies I had never even heard of. By the time I had gotten it cleared up, it had taken four months, and many hours on the phone to all parties involved who were belligerent and completely unconcerned about my time. I was so angry, I can’t even describe it... I couldn’t believe I couldn’t sue them— my employer bills my time at $120/hour, so I think it only fair that I at least get that for the time I spent trying to straighten their mistakes out. Their negligence in verifying negative information was directly responsible for me not being able to buy the house of my dreams, and yeah I’m still a little angry about it.
Cool! I’m gonna rent spots on my summa cum business school transcript to people who want to get into business school but had lousy college grades. And I’ll rent spots on my ATP license to people who can’t fly but want an airline job. I can retire!!
I recently started receiving calls from a collection agency regarding a debt to Washington Mutal for a little over $200. Interesting since we have NEVER done any biz with WM.
I talked to a supervisor at the collection agency (that was very hard) and the social security number on file was really mine. They told me I have to contact WM to get it taken care of.
Meanwhile the calls were coming in at least 5 times a day, very nasty calls.
We complained online to the California Attorney General and received a reply from the collection agency that they will never call us again.
Guess that $200 is still on my credit report even though it is not mine and never was. After numerous calls to WM they just said sorry it is yours.
It is all a big joke since our social security numbers are floating around everywhere out there and damn near available to anyone.
In California you can’t even have surgery without a social security number, the state keeps stats on health that way.
I just don’t care anymore. I pay cash for everything now and figure if I can’t pay cash for it, I don’t need it.
This is the stupidest part of the whole thing, and I agree it is a fraud. Years of paying hundreds of thousands of dollars on time can be instantly derailed over a $10 mistake... from some idiot who is completely unaccountable.
The FICO score system is an abject JOKE. When you are punished for paying off your debts rather than carrying them (and yes, this is how the system works) you don’t have a system that remotely indicates anything meaningful.
When someone can have a BK and have a 750 credit score a year later, when another pays off $100,000 in debt and never missed a payment but can’t get above 650, your system is broken.
Automated lending is a scam, system has been relying on its nonsense for years, and now is upset that others are finding ways to manipulate in in their favor... Piss Off.
Manually Underwrite and you wouldn’t have had the problems you are currently having.
I have a hard time feeling bad for the credit bureaus. When my husband and I purchased our first home, we found out that he had a terrible credit rating. Turns out that he declared bankruptcy in 1990. Yep, that’s right. He filed for bankruptcy when he was 11 years old. The credit bureau guy was not amused when my husband asked “What do you think happened? My lemonade stand went under?” It took us several months the clear up that “problem.”
I have absolutely no sympathy for the agencies or lending institutions that base their scoring solely on FICO scores at all. I found out that the reporting agencies get paid by the subscribers for every derogatory item listed in a persons credit file. That is why it is so hard to get erroneous items removed. Until a law with real teeth and real penalties for such practices is past the agencies will continue to victimize the consumer.
This was talked about on Fox News this morning. First I had ever heard about the practice.
bump for later
The persons renting their good credit are stealing from banks who have to pick up the tab for loans that will be defaulted on.
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