I'm not easily blown away by anything I read these days. But I just read a post on The Butterworth Group Blog that floored me…
An Associated Press article titled, "Bad Credit, Use Someone Else's, and this Little-know Loophole, to Buy a House", appears on AZCentral.com today (and 233 other news sites).
In a nutshell: There is a company out there that (for a hefty fee) will connect two people — one with poor credit and one with excellent credit. Mr. Poor Credit is simply added to one of Mr. Excellent Credit's accounts as an "authorized user". The credit bureaus then see Mr. Poor Credit on an account in good standing and *poof* up goes Mr. Poor Credit's FICO score.
Just like magic. And with no effort what-so-ever on Mr. Poor Credit's part. Well no effort other that taking a crow bar to his wallet and forking out $900 bucks — a portion of which now lines Mr. Excellent Credit's pockets.
My first question was simply, "is this legal"??? Apparently it is. For now.
My second question was really more of a statement: This is fraud, plain and simple.
Read the article. There's an example of a real estate agent / mortgage broker that did this and raised his FICO score from 550 to 715 and secured a mortgage based on his completely falsified FICO score. (wonder if he did his own loan too?)
Now there are many who say that lenders put too much emphasis on FICO scores. And there may be some plausible arguments for that case. But that does not change the fact that "renting" someone's credit, "piggybacking", what ever you want to call it is wrong. Is is fraud.
All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated.
Source: Black’s Law Dictionary, 5th ed., by Henry Campbell Black, West Publishing Co., St. Paul, Minnesota, 1979.
I'd love to hear other's opinions on this, particularly some of our Mortgage Broker / Banker readers out there.
Updated: I'm no attorney. In *my* book this is fraudulent activity. Is it legal fraud — I can't say, though it has got to be really toeing the line if it's not crossing it. It's most certainly "moral fraud". Check out the comments as some lending folks begin to chime in…
More bloggers opine: Blown Mortgage, HousingWire, CalculatedRisk, XBroker, Santa Fe Team, CreditBloggers
Technorati Tags: mortgage fraud, FICO scores
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Hi Jay,
Thanks for the nice mention, especially when you could have just as easily cited AZCentral.com! I don’t usually get too fired up over things, but this one rubbed me the wrong way - I’m interested to see what your mortgage readers have to say (or realtors whose clients have used this trick.) And it’s one of those stories to keep our eyes on in the background…
Chris - you’re more than welcome. I give credit where credit is due and I read it at your place first. You folks crank out some good stuff (and a lot of it!) over there!
And yeah, it *really* rubbed me the wrong way too…
Hopefully some of the mortgage folks will stop by.
I guess I’m officially getting old. This is a new one to me.
I’m sure it would work. I imagine it’s legal. Does it seem right? I don’t think so.
I have never been a huge fan of credit alteration other than improvement due to incorrect information. I’m a bit skeptical of stories of scores rising from sub 600 ro 700 plus due to minor improvements.
Again, I might be egtting old but it just SEEMS like you’re gaming the system if you try this.
I saw this on Fox this morning and to be honest, I have to wonder how stupid good credit guy has to be. Seriously. The bad credit person has already proven himself unworthy of credit, and then somehow proves themselves more trustworthy by going around the system to get a home? What stops said bad credit guy from stealing more than just good credit guys score… This is just stupid but it goes right to the heart of what is wrong with our credit rating system that we have resorted to this. Insanity.
I have a post coming on this as well but here is my take on it:
Is it fraud? I’m no lawyer but by the definition above I think it is probably questionable at best. Consider “get an advantage over another by false suggestions or suppression of the truth”
Is it a false suggestion? Not really - their credit score did improve via having an authorized signer relationship with the good credit person. Is it suppression of the truth? Not really - the authorized signer’s card appears on the credit report. So does any derogatory information. The derogatory information doesn’t disappear. There isn’t any law (as far as I’m aware) that states that the authorized signer needs to be a relative or friend before putting a person on a card. People have been using co-signers (and authorized users) from their parents and friends for years.
Whether it is fraud or not is up to the lawyers. I think that it is gaming the system. People will always find ways to game the system; then the system responds and then people game some more. The proverbial cat and mouse game.
With all that being said I don’t like it one bit. It definitely makes me feel dirty. It finds another way to make mortgage people look like scum. What are we going to come up with next? Renting social security numbers?
BR - The way the company describes it is that the bad score person has zero access to the good credit score person’s card, account information and other data needed to utilize the credit for purchasing power or identity purposes.
Thanks all for responding. Maybe “fraud” is too strong a word, and I’m not an attorney either. But it just seems wrong. You apply for a loan and basically say, “here is MY credit rating”. But it’s NOT *your* rating, it’s some guy’s rating that you bought.
And wouldn’t Mr. Good Credit’s score go DOWN once Mr. Poor Credit latched on to his coat tails? Yeah that’s just what I need is someone dragging down my score so I can get a hundred bucks.
It’s gaming and manipulation. In my book that = cheating. Maybe from a legal technicality cheating does not = fraud, but it’s awfully damn close. If it’s not legal fraud, it’s “moral fraud”.
Jay I agree - I’m calling BS on these shenanigans. It’s definitely morally wrong. I spewed, I mean posted a bit more over at my home base:
http://www.blownmortgage.com/b....._sale.html
Thanks for the great topic.
Morally fraudulent is the right term…and it’s wrong
The way I read it, Mr. Bad gets added to Mr. Good’s account for a month or so, then gets dropped off. The account in question continues to show up on Mr. Bad’s credit report forever as an account he was a part of, even though he doesn’t have & never had access to using that account. Mr. Good’s credit shouldn’t go down, since he’s not assuming any of Mr. Bad’s credit, and he’s not letting Mr. Bad skip out on not making payments.
Mr. Bad gets a world of new opportunity for better loans.
Mr. Credit Broker gets $800.
Mr. Good gets $100.
Mr. Mortgage Company gets increased risk for his return on investment, only without having knowledge of it.
Doesn’t seem like a win-win. And it still feels to me like cheating…
When the comment I was previously writing got to three involved paragraphs, I decided I had better put it on the list of things to blog:)
Jay, I think you are spot on in your assessment - I am not so sure “fraud” is too strong. I think that it is a false suggestion. You are presenting to the mortgage company that this buyer is due good consideration based on the facade of a relationship with somebody of good credit. The relationship is engineered.
The thing that jumps out at me is the stupidity of the good credit guy. I don’t care what the company says. If somebody can steal your credit without your open participation, how much easier is it when you open the door for them?
I arrived at this post a bit too late - another thing in the blog world - minutes are days, days are months and months are years! Anyway I had posted on this topic on my blog yesterday and didn’t make much of it. This is a loop hole that a rep from a credit scoring company told me about a few years ago. I was glad that Fair Isaac finally changed their scoring model.
When I heard about this I likened it to all the different tax breaks and deductions the IRS offers and how some companies re-locate to offshore destinations to avoid paying taxes. Is this fraud? It’s a loophole and I put the onus on the rule maker to change the loophole.
I think fraud is certainly a stronger word than necessary in this situation - as Morgan said earlier and Jay agreed to in a subsequent post. Gaming the system is a better term. I bet that on this issue lawyers would take a position based on who they are representing.
The one instance where I did see it being used involved a woman helping her father re-establish some credit. He became an authorized user on one or two of her accounts and as a result his score improved. She told me he wasn’t planning on buying a home, he already had a home free and clear, he was more interested in getting back into the system so he could do things down the road. He wanted a credit card and some flexibility with creditors.
I guess in a situation like that the daughter used a loophole in the system to help family - she certainly used her smarts, but I don’t think there was any harm intended. Did she commit fraud? Does a credit improvement company have to do this on a mass scale to make it fraud?
Besides this isn’t the only loophole in the credit rating system. Credit improvement companies repeated take advantage of the legally required 30-day response period from creditors to boost their clients credit score. I think this is also gaming! In short when people say they can improve your credit score in less than 60 day’s they are gaming the system. This is because the only true way to be worthy of your credit score is to pay your bills on time.
I think FairIsaac is already on to it.
http://tinyurl.com/2dw44r
I don’t see how this isn’t “Fraud.” Dictionary.com says “1.deceit, trickery, sharp practice, or breach of confidence, perpetrated for profit or to gain some unfair or dishonest advantage.” In my opinion, the situation above fits perfectly into the definition.
I am not a credit expert so two questions I have:
-Does this have any impact at all on the good credit score?
-When an individual who has purchased their way on a good account goes to take out a loan, doesn’t the institution see only one account in good standing with a host of accounts that are not? Would that one account be enough to make a difference?
David,
To answer your questions:
1. This tactic does not affect the good credit score. This is because the shared good account goes to the bad credit score. None of the bad accounts get included back.
2. Lenders want to see a few accounts in good standing - depending on the lender it could be 1 account or as many as 5 accounts. Sometimes they like to see a combination. So, 1 good for 36 months or 3 good for 12 months etc.
The score is still the primary driver. If the score is 720+ then one or two good standing accounts is sufficient.
Thanks,
Shailesh
Jay I think your were right starting off as fraud and I’d stay there. This is an intentional misrepresentation of the bad dudes financial history and could lead some lender to suffer a material loss. It’s fraud pure and simple.
My only question is then: Is it fraud when you add your son or daughter to your credit card as an authorized signer to improve their credit/purchasing power? Even if you don’t plan on giving them direct access to the credit?
Jeff C. - good link. Let’s see how many cows got out before the barn doors were closed.
Second question - how many kids’ credit scores are going to absolutely tank now?
Morgan - who the heck is “Jeff C”? Have ya lost your mind?
I’m thinking you meant Christoph S.?
Good point on the kids credit thing. Many spouses also do the same thing to help the other out…
Rather than just go from one extreme to the other, wouldn’t it be possible to allow authorized signers to improve their credit if they are “immediate family”? Of course someone would claim their third cousin twice removed was “immediate family”, but there are generally accepted definitions of immediate family in place for many otehr things.
Adding my kid or wife to my account is one thing. Adding a complete stranger because he paid me to do it is another. Seems like that distinction wouldn’t be all that difficult to codify.
Jay - Good Job. Seller beware. This is out and out wrong. Every industry has is schemers. With talor made drugs the chemistry is varied just enough to make it legal. With this it is not much different. Sounds like something for the Arizona Real Estate Commissioner to look at and rule on under the guidelines of disclosure. Sure sounds like failure to disclose to me.
Lending professionals who work to prevent or minimize mortgage fraud have been aware of piggybacking for at least a year now. These same professionals also pretty much have a similar definition of mortgage fraud which boils down to material misrepresentation(s) resulting in the lender making a loan they would not otherwise have made.
Jay, you are right to state that piggybacking is FRAUD - pure and simple. While the technology will catch up soon, consumers, realtors, mortgage brokers and the broader real estate community need to know this practice is wrong and does hurt us all.
By the way, the FBI and the Mortgage Bankers Association are promoting lenders to display and/or have applicants sign something acknowledging this: http://www.mortgagebankers.org.....gFinal.pdf
So what will happen when the rule changes? Do you think we’re going to see a lot of credit scores, that were previously inflated as a result of having a parent or relative add them as an authorized user, drop?
Or do you imagine that they will somehow be granted amnesty? I understand the fraud aspect, but at the same time, I can imagine there’d be a bit of an uproar for the legit folks out there that suddenly saw a drop in their credit score.
Any ideas?
Sorry Jay - Jeff C posted the same link on my blog about the story and I was crossed up - whoops!
I agree there is definitely a difference between family and those that paid for the service - it will be interesting to see how that distinction is made by the law/companies involved, etc…
I can’t believe FICO has actually decided to change their scoring formula because of this issue! One of our bloggers, a former FICO insider, has posted about this major change:
http://www.creditbloggers.com/.....the_f.html
Simply, if it’s not 100% truthful, it’s fraud. Using someone else’s credit score is not truthful.
Thanks everyone for participating in this discussion. It’s been quite interesting and I appreciate everyone’s insight and opinions!
And thanks Emily for posting that link! creditbloggers.com is a great blog.
Jay, any idea on my question?
I’m curious if you guys foresee a gigantic wave of dropped credit scores when this change takes effect?
Seeing as how they haven’t made a change this drastic in 10 or so years, I wonder if we’ll see any blowback from the consumers on this one.
Either way, curious to see how this will go..
Eric - I can;’t really say, probably one of the lenders would have better insight. Check the link that Emily has in her comment up above this one. That writer seems to feel credit scores may drop, perhaps significantly…
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Give me a break!
Definition of Fraud: All multifarious means which human ingenuity can devise, and which are resorted to by one individual (read: “CREDIT CARD COMPANY”, “MORTAGAE BROKER”, et al)) to get an advantage over another (read “unsophisticated consumer) by false suggestions (you can “always refinance later”) or suppression of the truth (hiding late charges/ over-limit fees/ option to re-price credit based on criteria completely external to the creditor-borrower relationship, etc.) criteria. It includes all surprises (”we have increased your interest rate to 28%), tricks (universities colluding with credit card lenders to issue credit cards UNDER THE UNIVERSITY to its students so the debt will be considered a “student loan” and NOT DISCHARGEABLE IN BANKRUPTCY - Have you HEARD THAT ONE?, cunning or dissembling, and any unfair way which another is cheated.
Wake up. Modern economic & behavioral metrics allow these people to analyze human behavior sufficiently to rig the system to create a literal mine-field of “gotcha” debt for the average consumer the 25 (not 30)-day credit card billing cycle, for example. Late fee heaven.
And finally, what the hell makes any of you cool-aid drinkers think the FICO credit scoring model is a measure of anybody’s credit “worthiness”? THE FICO SCORE IS A STATITICAL MODEL DESIGNED TO QUANTIFY RISK - NOT CHARACTER, NOT “WORTHINESS” - JUST RISK, and it does a poor job of even that! There are a literal dozen scenarios where the MODEL, being “blind” to data and behavior (good or bad) for which it was NOT PROGRAMED and thus fails to give a score the is in any measure indicative of the true risk quotient of a particular person.
My take is if anybody has figured out a method of “gaming” the system without breaking the law good, because the system sure-as-hell games us.
“My take is if anybody has figured out a method of “gaming” the system without breaking the law good, because the system sure-as-hell games us.”
I agree that if the system is broke, then fix the system rather than knocking those who are positioning themselves as best possible under the current system. A spouse is going to help the spouse’s credit score, if needed, as will a parent who’ll help their child’s credit score.
my question is …how long does the person have to stay on the Mr.Goodcredit credit for? Can they be removed as soon as they get the loan? and also even tho you think this is fraud, doesnt the Mr.goodcredit have a chance of getting his credit screwed?? please send me a email with your thoughts…..this is very interesting…..
Jay, I thought I’d jump in a little late on this one because Fair Isaac has not done away with the auth user loophole but they claim they have found a way to spot the nefarious users and have the credit score reflect [ie remain unchanged] for these folks. More on this in my video update at http://www.videocreditscore.com/fico-08-update/ . Time will tell to see if the Fair Isaac system is working.
Andys last blog post..Average Credit Score
The Fair Isaac estimates that 50 million consumers are “legitimate” authorized users on someone else’s credit card.
Authorized user accounts do impact your FICO scores, but they aren’t a major factor in and of themselves.
Here are factors a legal authorized user must consider. Being either an authorized user or a primary accountholder carries risk. Authorized users could see their credit scores plummet if the primary cardholders default on the accounts. Primary cardholders are liable for any debt incurred by the authorized user, and high balances could damage their credit scores.
Issuers must report authorized-user information when the authorized user is the accountholder’s spouse, thanks to the Equal Credit Opportunity Act of 1974. Issuers decide whether to report payment history data for other authorized users.
What FICO and the Credit Reporting agencies should concentrate on is how to eliminate the bogus inquiries and bogus accounts in consumer files. Credit reports they are issuing to lenders have a ninety percent inaccuracy rate. In other words 90% of their reports have one or more errors that depress a consumers scoring. I think this is evil.
How is this fraud when it shows “Auth. User” on the credit report? That does not seem to be hiding anything to me, or in Jay’s words - FRAUD? If someone wants to go on a friend/family member’s good credit card as an AU to bump scores up a bit to get a better interest rate then so be it…….I am happy for them that they figured that out. The credit system is so flawed anyway. It takes a creditor no time to put a late pay on someone’s account, but if that was an error then it can take them a lifetime to take that late pay off. I am pro consumer in this battle so AU on as long as it is legal!
Candy -
I had to go back and re-read this post since I wrote it over a year and a half ago.
You mention going on a friend/family member’s credit card as an authorized user. I see that differently than what this article talks about — selling an “authorized membership” to a complete and total stranger for the express purpose of raising their credit score.
If I want to put a family member on a card, and they are really going to use it and help pay it and work on their credit, fine. But selling that credit to a complete stranger violates (in my opinion) the “spirit” of what it’s intended for.
As I mentioned, I don’t know if it constitutes legal fraud. But it’s “moral fraud” in my book.
I’m “pro consumer” too. Heck, I AM a consumer. But I also believe in doing the right thing. And to answer some of the comments from way back, just because the credit system is flawed and “screws us” doesn’t make being deceitful right..
I can understand that this is doable. I mean I don’t know if it’s legal or not but they can actually use a person with a good credit to buy a house. The thing I don’t understand is if the person with a good credit knows that his/her credit good credit is being used for this purpose because who in the world can risk such a thing? What happens if the buyer with bad credit falls behind the payments on the house? who is responsible? the whole thing sounds a little bit fishy to me.
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