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Lenders Eager for FICO to Squash Piggyback Play on Scores

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Lenders Eager for FICO to Squash Piggyback Play on Scores

Lenders Eager for FICO to Squash Piggyback Play on Scores

By Scott Kersnar

1 August 2007

Mortgage Servicing News


WAYCROSS, GA -- Washington-Some have voiced concern that Fair Isaac's lengthy timeframe for updating its models for each of the three credit repositories - Equifax, Experian and TransUnion - has the potential to create a credit-scoring "Tower of Babel" as Fair Isaac eliminates "authorized users" of credit cards from the new FICO scores.


The move comes in the wake of widespread concern over credit-boosting services that allow borrowers with no or impaired credit histories to improve their scores by becoming authorized users of someone else's credit card history.


"Our members have been talking about the issue for quite some time," MBA senior director of government affairs Corey Carlisle told Mortgage Servicing News. Noting that the rival VantageScore does not allow this so-called piggybacking, he said, "We are very pleased that Fair Isaac has made an announcement that they are no longer going to allow authorized user accounts." He cited instances where a single Visa or American Express card reportedly had 90 or more users on that card to bolster their credit.


"Our members are telling us this is mortgage fraud," he said. While lenders have no objection to a parent putting a son our daughter on a card to help them establish credit, he said, "Criminals are exploiting a situation that was very innocuous. The challenge is to maintain a legitimate business purpose and still get an accurate credit profile on an individual taking out a loan. "We are talking with anyone who will listen, the FDC, the FBI. We haven't seen any prosecutions," Mr. Carlisle stated.


Earlier this month, Minneapolis-based Fair Isaac said that it will adjust its FICO scoring formula to remove authorized-user accounts from consideration by the scoring model in FICO 08 to protect lenders from abuse of authorized-user credit card accounts by services that sell consumer credit card histories to credit applicants "in order to purposefully misrepresent the applicants' own credit history to lenders and other businesses."


Changing the algorithms Fair Isaac uses to account for the data and methodologies of the three credit repositories are a daunting task that normally takes 12 to 18 months for each repository, said Fair Isaac's MyFicoScore manager Craig Watts from Fair Isaac's San Raphael, Calif., office. "They don't even keep the same categories of information," he noted. "Adapting the FICO score blueprint to get the maximum benefit from each repository is difficult because each uses unique data. When we update the FICO score we need to do that individually with each credit reporting agency. We do that by looking at the most recent credit reporting files that each repository shares with us, typically about a million credit reports. That way we can fine-tune the FICO score model so that it is the best it can be for each of these three bureaus."


How serious is the problem of authorized users? "The lending industry is trying to answer that," said Mr. Watts. At this point, he said, it's a perceptual problem. "Nobody as yet has a firm handle on the scope of the problem itself. Fair Isaac is working with some lenders to assess the impact authorized-user accounts are having. Because of the broad press coverage fraudsters are getting, we decided we needed to take action to protect the lenders and the FICO score." He observed, however, that a borrower fraudulently using piggybacking to misrepresent creditworthiness "could land in jail."


One critic who asked not to be identified charged that failing to eliminate authorized-user data for all three repositories at once might enable fraudsters to adversely select the repositories not updated first. "The only way for a consumer to target a particular credit bureau is to know in advance which bureau a lender is using," Mr. Watts countered.


"This change is not something Fair Isaac wanted to do," Mr. Watts stressed. He cited alternatives to banning authorized use, including credit card issuers simply tightening requirements for authorized use and asking repositories to include more information about authorized users in a report. Fair Isaac estimates that 1% of consumers - the ones now relying solely on authorized use - will no longer be able to get FICO scores. He said those consumers will now have to apply for credit in their own name or have someone make them a joint user of a credit card rather than an authorized user. To date, he said, lenders have been "fairly casual" about borrowers raising their credit scores via authorized use.


"It's a long time between now and October that our lenders have to live with this situation," MBA's Corey Carlisle commented.

Message 1 of 4
Frequent Contributor

Re: Lenders Eager for FICO to Squash Piggyback Play on Scores

I agree that the ones doing it illegally by paying strangers to piggyback should pay.  On the other hand, I still believe that there should be an exception for parents wanting to give their kids a good head start by adding them as an AU for a short period of time.  Oh, well....
Message 2 of 4
Senior Contributor

Re: Lenders Eager for FICO to Squash Piggyback Play on Scores

Like a broken record. Lenders could have done one or more things. They still can even before FICO implements the change and the CRAs adopt it.
1) Stop reporting AUs (but that would take away an opportunity to lean on the AU should the debt go into default, yet lenders don't talk about THAT little aspect of AUs)
2) Contact all cardholders with AUs in writing in the form of a polite AMEX style FR.
"We at the Bank of xxxx value your membership, and to do our part to combat credit card fraud we hope that you will take a few minutes to complete and return the enclosed form. We have revised our policy on authorized users and require this information in order to keep the authorized user card on your account active.
Authorized user <insert name here> is my:
a) Spouse or Partner
b) Child
c) Parent
d) Other relative (please specify)
e) Other (please specify)"
If they lie about it and get caught, just like when someone lies about their income (which is far more prevalent than AU rental I daresay), the CCC has recourse to cancel the card, revoke the AU card, report the cardholder for fraud, etc.
3) Revoke all AUs, but offer joint conversion. Naturally, the bank doesn't have to approve EVERY request for a conversion to joint status, but it seems smart to do it. Were I running a bank, this is what I'd do. Make my customers happy, because I wouldn't be one of the banks screwing them over [once the cat comes outta the bag in 6 months to a year]. And I would have reduced my liability by putting two parties on the account as responsible for the debt. Even if one of the AUs has a spotty history--just means they are perhaps more likely to default in the future and then the cha-ching of late fees and overlimit fees begins to roll in. It would completely eliminate the AU rental agency business, because no sane person participating in an AU rental business is going to add complete strangers as joint cardholders.
CCCs are quick and eager to Universal Default, but doing something to protect their customers while protecting themselves is a completely foreign notion--despite how easy it is.
Message 3 of 4
Valued Contributor

Re: Lenders Eager for FICO to Squash Piggyback Play on Scores

AUs make a convenient scapegoat for the sub-prime mortgage fiasco. "But people tricked us by piggybacking on Daddy Warbuck's credit line..."
- - - -
in a credit-scoring postnuclear Stone Age...
Message 4 of 4
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