Only a low credit score stood between Alipio Estruch and a mortgage to buy a $449,000 Spanish-style house in Weston, Fla.
Instead of spending several years repairing his credit rating, which he said was marred by two forgotten cellphone bills and identity theft, the 37-year-old real-estate agent paid $1,800 to an Internet-based company to bump up his score almost overnight.
The result was a happy ending for Estruch, but the growing practice is sending shivers through the mortgage industry. Federal regulators are also reviewing the practice.
After being contacted by The Associated Press for this story, Fair Isaac Corp., the developer of the widely used FICO score, said it will change its credit-scoring system in a way it contends will end this little-known but potentially high-impact mortgage-loan loophole.
Instantcreditbuilders.com, or ICB, helped Estruch boost his score by arranging for him to be added as an authorized user on several credit cards of people with stellar credit who were paid to allow this coattailing. Parents also use this practice when they add their children to their credit cards to help them build solid credit.
The pitch to those who are essentially renting their credit history for pay is seductive: You don’t need to worry about users of this service receiving duplicate copies of your credit cards, account numbers or any of your personal information. It’s essentially free money, they are told.
Brian Kinney, 44, a retired Army officer in Glendale, Calif., pulls in more than $2,500 a month by lending out 19 credit-card spots on two old Citibank cards with strong payment histories.
Kinney, whose FICO score is above 800 on the scale of 300 to 850, quit his job working at a Farmers Insurance agency and uses the ICB income to tide him over until he starts his own insurance agency.
Lenders are worried, however, that they’re taking on greater default risks by unknowingly offering lower interest rates than they otherwise would to applicants who artificially boost their credit scores. Their trade group has complained to the Federal Trade Commission and is talking with the credit-reporting bureaus in case the practice becomes more widespread.
Estruch paid $1,800 in December for three credit-card spots, and by January his FICO score jumped from 550 to 715.
Companies like Largo, Fla.- based ICB are sprouting on the Internet with little overhead and no-frills marketing. They post ads on community websites such as Craigslist and have sponsored links on Google and Yahoo.
Jason LaBossiere, who founded ICB a year and a half ago, said his company receives 100 to 150 leads daily – a number that has been growing – and those inquiries lead to 10 to 20 new clients a week.
The computer program that calculates credit scores is essentially tricked into believing the credit renter has a better repayment history when it sees the added accounts, and that helps lift the credit score.
Once the credit-card company files an updated report to credit bureaus – leading to a higher FICO score – the credit renter is removed from the account of the person allowing the piggybacking.
However, the credit card’s payment history remains on the authorized user’s credit report forever, and lenders have no way of knowing how the credit borrower is related to the cardholder.
A higher credit score can save a consumer an enormous amount of money because it usually means a lower mortgage interest rate. It also can mean the difference between qualifying for a loan or not, as in Estruch’s case.
Ginny Ferguson, a mortgage broker in Pleasanton, Calif., and a credit expert for the National Association of Mortgage Brokers, considers the practice mortgage fraud, and the trade organization is about to release a policy statement against it.
“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 said.
So far, federal authorities have yet to rule on the practice.
“What I’ve gathered from attorneys here is that it appears to be legal” technically, said FTC spokesman Frank Dorman. “However, the agency is not saying that it is legal.”
Ninety percent of the largest U.S. banks base loan decisions on FICO scores, which include authorized-user accounts. Fair Isaac plans to drop those accounts from consideration.
