BusinessReport.com

In the latest hit from the lingering subprime meltdown, Fair Isaac Corp. (FICO) is closing a credit card loophole that people are using in order to fraudulently get mortgages.

Anyone with a marginal or poor credit history can pay a fee to an “instant” credit repair company to buy a “piggyback” or the option to become an authorized user on the credit card of someone with a good credit history, says Layne McDaniel, president and CEO of Noesis Data, a Baton Rouge-based independent agent for Equifax.

These authorized users don’t gain access to the cardholder’s credit and can’t hinder it. But they do receive an improved credit score almost overnight because Fair Isaac’s formula to calculate it doesn’t distinguish between the main cardholder and user.

“You’re pirating their good credit histories,” says Craig Watts, spokesman for the Minnesota-based Fair Isaac Corp. “This is nothing less than loan fraud. This is a consumer deliberately deceiving a lender.”

McDaniel says a borrower must have at least a 580 credit score to get in a lender’s door, but a piggyback can bump the score and their debt ratio. With debt counting as 30% of the score, the bump makes the difference in getting a loan.

In September, Fair Isaac changed the formula to exclude authorized user accounts from a cardholder’s credit history. But Watts says it could be early next year before the impact of the change begins to be felt.

Although piggybacking has been allowed since Fair Isaac created the highly influential FICO in 1989, Watts says banker concerns over the loophole escalated last year with increasing media reports about more people using quick credit fixes to get mortgages. Because an estimated 75% of the nation’s mortgages are decided in part by FICO scores, the loophole could add yet another dark cloud on the subprime horizon.

“We don’t really know how much this had contaminated the FICO scores,” Watts says. “Lenders have not shared with us data yet as to how big a problem this is, and how big it is over the last couple of years when the subprime problem really became pronounced.”

Fair Isaac is working with lenders to determine how much risk they’ve incurred from the loophole. Watts says they’ve been advising lenders to be cautious with applicants who are authorized users on multiple credit cards. Some states like Florida are cracking down on people using instant credit fixes.

McDaniel says a tighter FICO formula will discourage credit card fraud and scams like piggybacking, which has been compromising credit scores.

Florida-based Instant Credit Builders, which posted an online petition that drew hundreds of signatures nationwide, contends the move is discriminatory. The company could not be reached for comment.

The petition states: “It is my belief that the new scoring model will discriminate against certain groups, especially women, under the Equal Credit Opportunity Act (ECOA). Lenders must report trade lines in the names of both spouses so that each will benefit from trade lines that were opened by one person. The new scoring model will undermine those protections. The ECOA also provides that a scoring model must pass strict validation standards before it can be used.”

Watts and McDaniel both say the change will “slightly” affect 25% to 30% of Americans, particularly young adults and senior citizens where women are typically authorized users on their spouse’s credit cards.

“While this new methodology for calculating credit scores may make it more difficult for some consumers, including young adults, to qualify for credit, it’s not necessarily a bad thing,” McDaniel says. “If a consumer does not qualify for credit on their own, perhaps they are not ready for the responsibility. The intent of a credit score is to measure the credit worthiness of a consumer based on, among other things, their past payment history, not the past payment history of another. I think this change will make credit scores even more predictive.”

A woman who’s been an authorized user on the couple’s credit cards but is getting a divorce may be hard hit by the change. They would suddenly have no credit history, but he says can still get a smaller account like a department store card to establish credit although it may cost more until then.

While some people will have to adjust to the change, McDaniel maintains it was necessary: “It’s not fair because that’s not your actual credit worthiness. They can borrow more money and that’s the problem… that decision to lend was based on now inaccurate information.”