Monday, June 4, 2007
Yara Zakharia, Esq.
The new and growing practice of paying internet-based companies to repair a poor credit rating is being viewed with suspicion and concern by the feds and the mortgage industry. Federal regulators are keeping a close eye on this new trend, whereby online companies like Instantcreditbuilders.com (ICB) offer customers the opportunity to bump up their credit score by credit renting, including them as authorized users on the credit cards of consumers with perfect credit who, in turn, are compensated for accepting this piggybacking. In an effort to close this still relatively-obscure yet problematic mortgage loan loophole, Fair Isaac Corp., the creator of the extensively-utilized FICO score, announced that it will change its credit rating system later this year.
The trade organization representing lenders has aired its grievances before the Federal Trade Commission and is currently raising the issue with credit reporting bureaus, in the event that the scheme spreads any further and becomes more prevalent.
Lured by the internet's low overhead costs and simplified marketing, more and more credit-boosting companies like Florida-based ICB are popping up on the world-wide web. In fact, ICB's competitors are leaving no stone unturned: They are also targeting lending institutions, real estate agents and mortgage brokers in their electronic ad campaign.
ICB commands a fee of $900 for the first account on which a customer is added; for subsequent credit card accounts, charges are discounted. The cardholders authorizing the coat tailing on their credit history are paid between $100 and $150 per placement, depending on the credit limit age of the credit card; ICB cashes in the rest.
With a good credit score, consumers can benefit from huge savings since it typically translates into a lower mortgage interest rate. A higher credit rating can also enable them to qualify for a home loan. Ginny Ferguson, a credit expert representing the National Association of Mortgage Brokers and a mortgage broker in California, characterizes the new scheme as mortgage fraud, and the trade group is set to issue a policy statement condemning the practice. "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 stated.
Lending institutions, who rely on credit ratings to determine a person's loan repayment potential, are closely monitoring the credit-renting scheme's expansion. They fear that the practice will adversely impact their efforts to diminish exposure to potentially-defaulting borrowers.
A vast majority (90%) of the largest U.S. lenders utilize FICO scores in deciding whether or not to issue loans, and their assessment presently takes into consideration authorized user accounts. However, following meetings with industry representatives and banks, Fair Isaac's vice-president of credit rating solutions, Tom Quinn, stated that it would announce sometime this week that all upcoming versions of its FICO scoring system will exclude authorized user accounts. Although the change is not expected to be a quick-fix for banks seeking to abolish the credit-renting practice, it is a good start.
The change, however, will also affect consumers for whom authorized user accounts were initially intended, that is, spouses with little or without credit and college students who were added on their parents' credit cards. This is unavoidable, since it is not feasible to separate this group of credit-worthy consumers from the group that is resorting to the credit-renting scheme to raise their scores. "As with any decision, there's a trade-off," Quinn explained. "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."
