'Piggyback' score inflation still going on

WASHINGTON -- So-called "piggyback" credit-score inflation schemes for mortgage applicants haven't been reined in, despite industry pledges to do so at the end of summer. As a result, lenders continue to be misled into treating loan applicants with poor credit as prime-credit candidates -- worsening already critical fraud and delinquency problems in the mortgage market.

Fair Isaac Corp., developer of the FICO score widely used for home loan underwriting, confirmed that its "FICO '08" scoring model is not yet available at any of the three national credit bureaus. The new model, announced with fanfare last June as an antidote to piggyback fraud, was to have been activated in September at one of the bureaus, Experian.

But Experian says it has no firm timetable to make the model available. The two other bureaus -- Equifax and TransUnion -- are not scheduled to receive the model until sometime in 2008, according to Craig Watts, a Fair Isaac spokesman.

The piggybacking problem involves Internet-based firms that "rent" high-quality credit account histories to people with bad credit. Web sites claim to be able to raise consumers' scores by 100 to 200 points -- or more -- within anywhere from 30 to 90 days. They do this by paying credit card holders with excellent payment histories money to open their accounts to "authorized users" who sometimes are charged $1,000 to $2,000 for the privilege.

Once listed as an authorized user -- even with no physical access to the Visa or MasterCard itself -- the positive credit history of the cardholder flows through to the credit files of the piggybacker. Consumers with FICO scores in the mid-500s can add multiple authorized user accounts to their files, promoters claim, and boost their scores into the mid-700s.

Loan officers processing mortgage applications typically would be none the wiser. They assume the FICO scores they receive are legitimate, and they quote applicants the appropriate interest rate. A FICO of 750, for example, would qualify the applicant for the lowest interest rates from most lenders.

Credit and mortgage industry experts say score-inflation fraud is contributing to the unusually high rate of delinquencies and foreclosures now roiling the financial markets.

Lenders have complained to Congress, state banking regulators and the Federal Trade Commission about piggybacking for more than a year, but to date there have been no crackdowns on promoters. Some regulators privately concede that the piggybacking schemes are exploiting a loophole in the federal Equal Credit Opportunity Act.

That law sanctions authorized user accounts but does not limit the number of accounts permissible on a single credit card and does not ban rentals of authorized user accounts by cardholders. As a result, some piggybacking companies say they rent out high-quality credit card trade lines to dozens of individuals at a time, producing substantial monthly income -- with no effort -- for participating cardholders.

In June, Fair Isaac announced that its latest model of the FICO score software -- FICO '08 -- would eliminate consideration of authorized user accounts in computing scores and help cripple the fraudsters. But for that to happen, the three national credit bureaus would need to install the new model, and mortgage lenders would need to switch to the improved scoring system.

A complicating factor in all this: The three major bureaus have created their own credit score -- known as Vantage -- which also excludes consideration of authorized user accounts. No major mortgage company has announced adoption of the competing Vantage score -- FICO still has near-total dominance -- but some retailers have adopted it, according to Donald Girard, an Experian spokesman.

Meanwhile a new player has jumped into the market with a solution it says mortgage lenders can adopt immediately at minimal cost: An electronic "filter" that allows loan officers to look at all credit scores with, and without, consideration of authorized user accounts.

CreditXpert, Inc., a Towson, Md., technology firm active in the credit industry, says its new filter enables loan officers to calculate just how sizable an impact applicants' authorized user accounts are having on their FICO scores.

For instance, a homebuyer with poor credit might use piggybacking to boost his FICO to 720. But the filter would let the lender see through that score by subtracting the points attributable to the authorized user accounts. The applicant's true score might be 100 or 150 points lower, revealing him to be a serious credit risk.

David Chung, managing director of CreditXpert, says the filter should also be helpful for consumers making the more traditional use of authorized user accounts: Parents helping their kids build credit on their own. The benefits of the parents' excellent card payment histories could still flow through to the kids' credit scores rather than being blocked.

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