Piggyback My FICO

If you're a subprime borrower with a low credit score, don't despair, and don't settle for an Option ARM or other exotic mortgage loan. Dallas Morning News business columnist Pamela Yip profiles the latest and greatest fraudulent innovative scheme to artificially boost that score: piggyback the high FICO score of a "prime" borrower.

The latest strategy is a real doozy. It lets those with poor scores "piggyback" on – or mooch off – someone else's good credit record.

These companies say they can boost your credit score by having you added as an authorized user on the credit cards of strangers with stellar credit, for a fee. This raises your credit score.

The strangers get paid based on the quality of their credit, with the promise that the new "authorized users" won't actually be able to buy anything on their cards or even get any of their personal information.

The bottom line: People with bad credit can pay a fee to get better credit. If they have a history of late payments, they can get the same low interest rate as someone who always pays on time.

Sounds like it ought to be illegal, doesn't it? The regulators aren't certain that it is.

"We're still trying to get a good fix on what this is and how it works, and what the issues are," said Steve Baker, director of the Midwest region of the Federal Trade Commission, which enforces the nation's credit laws. "One concern is whether this might violate the Credit Repair Organizations Act."

Under that law, it's illegal to charge consumers money before performing the promised credit repair services.

Lenders think that it's just GOT to be fraudulent.

"Someone is artificially elevating their credit score beyond the risk level they deserve based on their own payment history and payment patterns," said Ginny Ferguson, a member of the Credit Scoring Committee of the National Association of Mortgage Brokers. "If we can't trust the credit score to give us a good indicator of the likelihood of someone repaying their loan, the score isn't good to any of us."

It might be tough to prove fraud, however. There's the practical problem of discovering the existence of the piggybacking in the first place. Moreover, if the rules of the credit score providers don't prohibit the practice of adding "authorized users" to your credit accounts, then this tactic appears to be a "loophole" that you could drive a tank through. After all, the loan applicant isn't forcing the lender to rely on a FICO score in  underwriting a loan nor to assign it any particular weight versus other factors, nor is he or she determining what factors are used by the credit scoring companies in establishing the score. The fact that the score might not be any good to the lender is not the same thing as the borrower committing fraud against the lender. It smells like fraud to me, but I could argue with gusto either way, depending on who was paying my monthly invoices.

Traditionally, Ms. Yip has been no fan of lenders, and she's not shedding any crocodile tears in this case.

[L]enders' single-minded focus on credit scores and the fact that they've become so pervasive – even being used by insurance companies to determine what premiums to charge – has forced consumers to take desperate measures to raise their score.

That sounds like an "ends-justify-means" argument, which is less than persuasive. Nevertheless, her conversations with representatives of "score renting" companies about their "services" and how they price them make you shake your head in begrudging admiration at the enterprising skill of folks for whom the word "ethics" has no meaning.

This all appears to be an academic discussion for the long-term, however. Fair Isaac, the "dominant" credit score provider, intends to hobble this one-trick pony.

In response to credit renting, Fair Isaac says that starting in September, authorized users on someone else's account will no longer benefit from the account holder's good payment history.

"We will do whatever it takes to protect the reliability and accuracy of FICO credit scores for lenders, and to ensure lenders can continue to use FICO scores with confidence when making their most important customer decisions," said Mark Greene, Fair Isaac chief executive. "We will continue working with lenders, regulators and others in the credit reporting industry to end deceptive practices that fraudulently misrepresent consumer credit histories for profit."