Selling Your Credit Score

by: Barry Ritholtz

Here's the latest scam to hit the Real Estate/Mortgages/Credit/FICO market: Buying and Selling FICO scores to qualify sub-prime applicants for tightened standards.

Kenneth Harney explains how this loophole is now being used:

When your credit scores don't qualify you for the home mortgage you want, where do you turn? That's an especially timely question now, as banks and mortgage companies tighten underwriting standards for applicants with less than perfect credit.

But federal and state authorities fear that some borrowers are turning to a fast-growing business on the Internet: companies that claim to boost credit scores by transplanting the credit DNA of people with excellent payment histories into the credit files of people with subpar histories -- ostensibly without breaking any law.

The companies claim to raise FICO credit scores by 50 to 250 points by adding low-scoring borrowers as "authorized users" on the credit card accounts of people with FICO scores well in excess of 700. The positive payment information from such cardholders then flows into the files of the persons with subpar credit.


This takes advantage of a loophole in the Federal credit law, which does not limit the number of "authorized users permitted on any single credit card account."

As this article makes clear, the law does not "prohibit the rental or sale of authorized user designations. Exploiting that loophole, numerous companies have popped up on the Internet offering to buy and rent out the credit card "trade lines" or accounts of credit card holders with high limits combined with perfect payment histories."

The online firm referenced up top markets itself to mortgage brokers, as a way to rehabilitate sub-prime borrowers, making them appear better than sub-prime to lenders.

The potential for fraud is there -- especially with the way loan originators offload mortgages. As long as everyone involved keeps the loan going for a few months (3-6 months) prior to default/foreclosure, the loans can get easily sold and not represented to the originator.

Consider how easy it is if a few players are in on the fraud: If the appraisers over-value their estimates of the home, it allows excess purchase prices to be paid. The RE agent gets their commissions, the mortgage brokers get paid, the originator who did the loan got its fee. The buyer who magically qualified for much more house than it could afford gets a seller's concession in cash/check. They only have to make a certain number of payments, and then they can walk away.

Psst: Want to buy a better credit history?
Kenneth Harney
Washington Post Writers Group, April 20, 2007 – 12:08 PM

Appraisal Inflation
Kenneth R. Harney
Washington Post, Saturday, April 21, 2007; Page F01

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