'Piggybacking' Roils Credit Industry

Alipio Estruch is shown at his home in Weston, Fla., Thursday, May 31, 2007. Only a low credit score stood between Alipio Estruch and a mortgage to buy a $449,000 Spanish-style house in Weston, Fla., a few miles west of Fort Lauderdale. Instead of spending several years repairing his credit rating, which he said was marred by two forgotten cell phone 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. (AP Photo/Alan Diaz) (Alan Diaz - AP)

So far, federal authorities have yet to make a ruling 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."

Lenders, who depend on credit scores to assess a person's ability to pay back a loan, are closely watching the practice's growth. It also comes at a time when the industry is reeling from the a soaring default rate on subprime mortgages, home loans for people with bad credit. As a result, they've tightened lending standards, but the credit-renting practice threatens to undermine their efforts to reduce exposure to risky borrowers.

Ninety percent of the largest U.S. banks base their loan decisions on FICO scores, which currently include authorized user accounts. However, after discussions with lenders and industry officials, Fair Isaac said it intends to announce this week that all future versions of its FICO score methodology will no longer consider authorized user accounts, said Tom Quinn, Fair Isaac's vice president of scoring solutions.

The next version is slated to roll out in September to one of the three main credit reporting agencies _ Equifax Inc., Experian Information Solutions Inc. or TransUnion LLC _ with the other two agencies receiving the new version some time in 2008.

The change won't be a quick-fix for lenders trying to weed out credit renters. Corey Carlisle, senior director of government affairs for the Mortgage Bankers Association, said it takes time for lenders to transition from one scoring system to another.

"All lenders have their own guidelines and parameters on how to use and incorporate the FICO score. It would take time to understand what's in a new credit score," Carlisle said.

Quinn also noted that some lenders generate their own scores using authorized user accounts in their calculations, so the practice may not be easily negated.

"It's an industrywide issue and there are other scores out there," he said. This is a phenomenon that impacts more than just FICO scores."

Other consumers besides credit renters stand to lose with the change, namely those for whom authorized user accounts were designed: college students on their parents' cards and spouses with little to no credit of their own.

But there's no way to distinguish these from the latest crop of strangers trying to augment their scores. Lenders who want to find out more information about others on credit card accounts are hindered by the Fair Credit Reporting Act and privacy laws.

"As with any decision, there's a trade-off," Quinn said. "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."