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For Rent: Your Credit Score

Loophole in FICO Enrages Lenders

By Martin H. Bosworth
ConsumerAffairs.com

June 5, 2007

Borrowers are repeatedly told to demonstrate good financial behavior not just for its own sake, but to ensure that their credit score stays high enough to receive approval from lenders. And a score that doesn't meet with lenders' approval can keep otherwise responsible borrowers from getting a home or car loan for years.

So it should come as no surprise that companies like InstantCreditBuilders.com (ICB) and Addatradeline.com have devised a way to game the system -- in this case, by paying people with high credit scores to let low scorers "piggyback" on their ratings and receive boosts to their own scores as a result.

The new trick takes advantage of a loophole in the credit system. People who have little or no credit histories, such as college students, can be added as an "authorized user" to credit cards that are ultimately paid for by Mom and Dad.

In this case, the "authorized user" with good credit is paid several hundred dollars to "rent" their credit score out to someone else, with the agency taking their cut from the potential piggybacker.

Lenders Object

Although the Federal Trade Commission has been taking a wait-and-see approach to the issue, the financial and mortgage industries are already on the warpath.

The National Association of Mortgage Brokers (NAMB) is planning to release a statement opposing the practice. Mortgage lenders say the practice undermines the trust lenders place in the FICO score, which is by far the most widely-used scoring system for new loan approvals.

"We have become so dependent on FICO scoring that we rely on it almost to the point that FICO is the decisionmaking process," Bremer Mortgage president Jim Miley told the Minneapolis Star-Tribune. "If we can't get assurances that FICO scores are accurate, then we will definitely go back to manual underwriting of loans, a time-consuming and expensive process."

Unforeseen Consequences

Fair Isaac, creators of the FICO score, has said that it will close the "authorized user" loophole in its credit scoring model to protect against "piggybacking." John Ulzheimer of Credit.com says that the move is going to "screw consumers royally."

"A lot of people are going to get penalized for something a few bad apples did," Ulzheimer said in an interview with ConsumerAffairs.com. "The value of any authorized user on a credit card is now totally lost."

Ulzheimer said that anyone who has built a credit history as an additional user on a card, ranging from college students to married couples and divorcees, will have to "rush out" and open up new credit accounts to rebuild or maintain their scores and credit histories.

"It won't be as big a rush as people filing bankruptcy before the new laws took effect," Ulzheimer said, "But you'll see it happen."

Ulzheimer, who formerly worked at both Fair Isaac and Equifax, said companies like ICB are liable for enforcement under the Credit Repair Organizations Act (CROA), which mandates the rules that so-called "credit repair organizations" work under. "The minute they take money in advance, they're liable under CROA," he said. "This is a case of merchants ripping off businesses, and some consumers ripping off lenders."

Bad Data

FICO became dominant largely because it streamlined the formerly cumbersome and detailed process of lending down to a simple number.

Whereas local credit bureaus and mortgage lenders would previously look at a person's entire financial history and make calls based on individual judgment, the modern system relies almost totally on the proprietary algorithm developed by Fair Isaac, and based on information in credit reports that is very often inaccurate.

The ease with which credit could be approved led to an explosion of availability of lending to people who would not ordinarily have qualified, but the mania to approve credit and sell reports and scores to lenders also led to constant errors and mistakes in reports that are very difficult to correct.

Now the housing market is in the doldrums, thanks to subprime loans going into default and foreclosure accross the country. Even the Federal Reserve is reconsidering the easy access to credit that consumers have come to take for granted.

And the closing of the "authorized user" loophole won't just make building credit tougher for consumers -- it's exposed a vulnerability in the FICO score that has competitors like the credit bureau-backed VantageScore ready to pounce.

John Ulzheimer had previously criticized the new score, which is sold right from the three bureaus, as "an effort to confuse consumers and unsophisticated lenders."

Now, he said, "I wouldn't be surprised if there was an all-hands meeting at VantageScore Solutions to discuss what to do" about the loophole in the FICO score. "They're licking their chops."

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