Back at the end of January, I posted a blog entry that contained the following statement:

To fix the [sic:credit enhancement} problem, credit reporting agencies need to change the formulas they use to calculate credit scores so that the credit scores of additional cardholders do not benefit from the primary cardholder’s credit history. For many homeowners who participate in credit enhancement schemes, the benefits are temporary at best. All of us should be after the three main credit-reporting agencies–Equifax, Experian, and Trans Union–to see what, if anything, they are doing to remedy this problem.

But I digress…

Are you in the market for a mortgage loan with a low interest rate? Instead of qualifying for a discount rate by earning a good credit score, you can simply buy your way to a great credit score—the kind of score that convinces lenders to loan you money at lower interest rates. You simply piggyback on someone else’s excellent credit history. Here’s how it’s done:

1. A credit enhancement company pays people who have excellent credit histories to allow others to be listed, temporarily and in name only, on their credit cards.
2. The credit enhancement company then allows people with lousy credit scores to buy positions on the credit cards of people with good credit histories.
3. The low credit scores get a boost, often allowing high-risk borrowers to qualify for loans with much lower interest rates.

What’s so bad about that? After all, people who sell their good credit profit from the good credit histories they have earned, borrowers with bruised credit have lower monthly payments (and they are the people who really need it), the credit enhancement company provides a valuable service and earns a good profit, and the lender gets another happy customer. Everybody wins, right?

Wrong!

Why? Because these piggybacking schemes are another type of mortgage fraud. Essentially, the borrower is lying to the lender—claiming to have a better credit history than they really have. This practice fools the lender into making a decision to approve a loan based on false information. I don’t know about you, but if someone who was asking to borrow money from me misled me about his or her ability to pay it back, I would get more than a little upset. Just because a bank or other institution rather than an individual is lending the money doesn’t make it any less wrong to lie.

As citizens, one of our responsibilities is to protect the American Dream, and one of those dreams is the American Dream of Homeownership. If we begin to turn the other way when people are committing obvious fraud, we place the entire system at risk. Homes will begin to cost more money, loans will be less accessible, and someday our children and grandchildren will no longer be able to afford their own homes.

Credit enhancement companies who engage in this sort of activity claim that they are not breaking any laws. But no matter what they say, using trickery and schemes to beat the system will eventually catch up with all of us, and we will get stuck with the bill—somebody always does. Borrowers need to earn credit scores that honestly reflect their ability to pay back a loan, not fraudulently manipulate authorized user credit card accounts.

Fortunately, Fair Isaac Corp. (the company that computes the most commonly used credit scores) has recently decided to fight back, announcing that its next version of the FICO score “will no longer consider certain types of credit card accounts,” closing a loophole that allowed strangers to coattail on a cardholder’s good credit. See “Fair Isaac combats credit manipulation,” for more details. In essence, the new rule will remove authorized user accounts from consideration by the scoring model in FICO 08, the newest version of the Classic FICO credit score which Fair Isaac expects to become available to lenders starting in September 2007.

Piggybacking on someone else’s good credit may not qualify as a crime, but anyone looking at it can see that it is just plain wrong.

I field a lot of phone calls from newspaper reporters trying to understand the 3 S’s of real estate and mortgage fraud: Size, Scope, and Specifics. Any mention on my part that ‘credit enhancement’ is one specific we should all be concerned about, and I am usually greeted with uncomfortable silence followed by something along the lines of, “What’s credit enhancement?”

The last time I wrote about this topic was March 6 of last year, so for those of you who aren’t familiar with the term, )from a real estate and mortgage fraud perspective) credit enhancement is any action taken by an individual that intentionally results in falsely boosting one’s credit score for the sole purpose of obtaining a real estate-related loan. Practically speaking, the most popular way of enhancing one’s credit is to have their name and Social Security number added as an authorized user to a credit card account connected to an individual with stellar credit.

Unfortunately, this practice is not illegal, but it should be. The idea behind this is that by listing a family member or trusted friend as an ‘authorized user’ on your credit card account, you are establishing some sort of “collective” credit history. That practice certainly makes sense in families in which members trust one another and actually operate as a team to ensure financial stability and build wealth as a unit. Unfortunately, though, and more often than not, credit enhancement is a service people buy, and in the end, no one but the fly-by-night credit enhancement companies actually benefit from the practice.

These credit enhancement companies that seem to be popping up all over the place apparently want to create an “extended family” that consists not only of family members but also includes complete strangers. Many credit card companies enable you to legally add anyone to your account, so someone with poor credit can ride the coattails of a more responsible borrower. I would strongly caution account holders from adding the name of anyone they do not know and trust implicitly to their account. After all, if they default on a loan, your credit suffers. Moreover, the practice is unethical. It dupes lenders into approving loans for those who have less stellar credit ratings, and provides those people with lower-interest loans that they would otherwise be unable to qualify for.

To fix the problem, credit reporting agencies need to change the formulas they use to calculate credit scores so that the credit scores of additional cardholders do not benefit from the primary cardholder’s credit history. For many homeowners who participate in credit enhancement schemes, the benefits are temporary at best. All of us should be after the three main credit-reporting agencies–Equifax, Experian, and Trans Union–to see what, if anything, they are doing to remedy this problem.

Far West Credit, Inc., a Salt Lake City, UT-based company that creates consumer credit reports for use by mortgage industry professionals, has agreed to pay a $120,000.00 civil fine to settle Federal Trade Commission (FTC) charges that it recently violated the Fair Credit Reporting Act and the FTC Act. Far West Credit, which now operates as LandAmerica Lender Services, was purchased in February of 2004 by Info1 Holding Company, Inc., a subsidiary of LandAmerica Financial Group, Inc. (NYSE: LFG).

Background: Far West Credit/LandAmerica Lender Services buys individual consumer credit reports from all of the major credit reporting agencies, and then merges the reporting agencies information about a particular consumer into one all-encompassing report that it provides to mortgage lenders. According to the FTC, if there is insufficient information about a particular consumer’s credit worthiness from the major credit reporting agencies, Far West/LandAmerica Lender Services attempts to collect ‘additional information’ to demonstrate the consumer’s credit worthiness. That ‘additional information,’ which comes from cable companies, utilities, rent-to-own businesses, and insurance companies–all of whom do not report on a normal basis to the credit bureaus–is added by Far West/LandAmerica Lender Services to reports they prepare for their mortgage industry-related clients.

At issue with the FTC was this: Far West/LandAmerica Lender Services provided erroneous consumer reports to Keystone Mortgage and Investment Company, Inc., a Phoenix, AZ-based home lender, which in turn approved consumer mortgage loans insured by the Fair Housing Administration (FHA) of the U. S. Department of Housing and Urban Development, and that otherwise would not have been approved.

Terms of the Settlement: In addition to paying the $120,000.00 civil fine, Far West now has to have in place reasonable procedures to assure the maximum possible accuracy of information in the consumer reports it prepares, and must adhere to strict record keeping and reporting requirements that allow the FTC to monitor compliance.

Commentary: Here’s what’s really interesting about this case. Keystone had an interest in making the loans. So much so that Keystone’s own employees provided documentation of borrowers’ credit accounts to Far West/LandAmerica Lender Services to be used in creating consumer reports for those borrowers (Note that Far West/LandAmerica Lender Services didn’t even bother to gather the information itself… rather, it relied on its own customer–Keystone–to gather the information for them… boy, does anyone else see a massive conflict of interest here). Anyway, the FTC charges that the information provided by Keystone’s employees was not verified by Far West/LandAmerica Lender Services, and that Keystone of course provided false information for many of its customers. For example, according to the FTC, in many cases, Keystone provided documentation about accounts with utility and cable companies that didn’t even service the areas where the loan applicant lived.

And what about Keystone Mortgage and Investment Company? Well, according to an article that ran in the January 18th edition of the Salt Lake Tribune, Keystone Mortgage and Investment was audited last year by HUD, who found a pattern of fraudulent loans at the Phoenix-based company. A HUD spokesman told the Tribune that HUD is “unable to disclose anything about any actions HUD has taken against Keystone,” a company which is now apparently no longer in business.

It’s clear from the Far West/LandAmerica Lender Services FTC settlement that real estate-related fraud comes in many shapes and sizes. Long gone are the days when it was just the consumer who tried to get something past their mortgage lender. More and more we’re seeing mortgage industry professionals, i.e., the Keystone’s of the world, and their vendors, i.e., the Far West/LandAmerica Lender Services types, conspiring to beef up consumer credit scores. The problem of course is that for every one FTC settlement like Far West/LandAmerica Lender Services’, there are thousands of other instances where something similar is happening but no one seems to care enough to stop it.

Always remember and don’t ever forget, committing real estate fraud is no accident, and neither should stopping it!