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 sub-par histories - ostensibly without breaking any law.
The companies claim to raise FICO credit scores by 50 to 250 points or more by adding low-scoring borrowers as "authorized users" onto 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 sub-par credit.
Federal law permits authorized users to be added to credit card accounts. Typically the users are relatives or friends of the primary cardholder. For example, a parent might add a son or daughter onto a Visa card in order to provide access to credit for the child or for use in emergencies.
Federal law, however, does not limit the number or prescribe the type of authorized users permitted on any single account. Nor does it 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 cardholders with high limits combined with perfect payment histories.
Big bucks - and a strong potential for fraud on mortgage applications - are involved. Some Web site promoters say they can add 80 to 120 authorized users onto a high-quality credit card account before banks or lenders get suspicious. Each account can rent for as much as $1,500 to $2,000 for a 180-day usage. The primary credit cardholder receives a cut of the rental fee, often hundreds of dollars for each authorized user added to the account.
The person seeking a higher credit score does not obtain actual access to the credit card. But within 30 to 90 days of being added to the account, the national credit bureaus incorporate the primary cardholder's account information into the files of the authorized user. The score-raising attributes of the primary cardholder's stellar payment record then flow through to the new user.
One company based in Tampa, Fla., recently solicited mortgage brokers promising FICO score boosts of 150 to 205 points for applicants "in as little as 30 days" for the "discounted" price of $750 per trade line.
That widely distributed pitch prompted one state financial regulator to issue a "fraud alert" warning that "consumers, brokers and lenders that complete, submit or participate in the completion and submission of an application for credit that contains misrepresentations or false information are subject to administrative actions and potential criminal penalties by the state."
The Nevada Mortgage Lending Division termed the inflating of FICO scores through additions of authorized user accounts "deceptive" because it makes credit-impaired applicants appear to be more creditworthy than they actually are. Mortgage lenders might grant them lower interest rates and lower fees than they otherwise could obtain.
Some Web sites advertise and price high-quality credit card trade lines on the basis of their credit limits and time on the account. A site called AddaTradeline.com recently offered a card history with a $25,000 credit limit and 2 3/4 years of perfect payments for a fee of $1,025.
Adam Wheeler, who identified himself as the owner of AddaTradeline.com, based in Orange County, Calif., said his business "is legal, although some people might say it's unethical."
Wheeler insisted that his firm does not approve of efforts by clients to mislead lenders. "If they are going to lie to lenders," he said, "that is not good."
Asked for comment on the rental of trade lines to artificially inflate mortgage applicants' FICO scores, Steven Baker, Midwest director for the Federal Trade Commission, would say only: "We are aware of it. We are concerned about it, and we are looking into it."
Donald Girard, spokesman for Experian, one of the three national credit repositories, said "these are nothing more than new credit repair scams." However, he said, Experian "does support authorized user relationships such as ... parents helping a son or daughter establish credit with their first credit card."
Fair Isaac Corp., developer of the FICO score, said the "inappropriate use" of trade lines is "an industrywide issue," and that the company is in discussions with the FTC.