The Slippery Slope: How Credit Repair Often Leads to Fraud
“The road to hell is paved with good intentions”. This could be the tagline for some segments of the credit repair industry.
Credit repair often begins innocently enough through services like credit counseling and credit cleanup. It is a fact, that many in the credit repair business are legitimately trying to help consumers better understand credit and how it works. They actively work to educate people and assist them in rebuilding their credit.
Often times consumers aren’t properly educated on the use of credit until it’s too late. And like a drain in the bathtub, it takes much longer to rebuild your credit than it does to empty it.
And this is where fraudsters prey.
Patience is a lost virtue, and seemingly more so each passing day. Repairing credit takes time, and that’s time that people don’t want to spend. Enter the dark side of the credit repair industry, and the act of credit washing.
Credit Washing Explained
Credit washing is the process of systematically disputing derogatory tradelines on a credit report by claiming identity theft rather than an error on the tradeline. Credit washing can result in legitimate negative information being removed from the record, which makes the borrower appear to be more creditworthy.
Exploiting Consumer Protections To Wash Credit
Banking regulations are typically passed in order to protect the consumer and to hold financial institutions accountable. For fraudsters however, these same protections can become exploitations that makes their work even easier.
One great example is the Fair Credit Reporting Act (FCRA), and the consumer protections that it provides victims of identity theft. The FCRA was created to promote transparency, fairness, and accuracy in how credit information is collected and shared. One of the provisions of the FCRA directs financial institutions and other lenders on how to properly resolve claims of identity theft.
Upon receiving an identity theft claim, and verifying the claimant’s identity, credit reporting agencies are required to block any alleged negative reporting information from the consumer’s credit report within four business days of receiving the claim. The credit issuer is also obligated to conduct a reasonable investigation within 30 days and respond to the agency and the consumer with their conclusion. If the financial institution does not complete their investigation within the 30-day deadline they are obligated to rule in the favor of the consumer.
Prior to 2017, a consumer was required to file a police report claiming that they were a victim of identity theft before they could dispute tradelines. In 2017, the Federal Trade Commission (FTC) changed these rules in order to make it easier for victims. On the surface these changes made sense and are very consumer friendly. By allowing victims to file directly through the FTC it also freed up local law enforcement to focus their attention on public safety.
Fraudsters saw this as a perfect credit repair scam opportunity. With the hard and fast deadlines dictated by the FCRA, and the claim process made easy by the FTC, credit washing became the ultimate scam.
But How Big is the Issue?
Each year the FTC releases the Consumer Sentinel Network Data Book which includes reports by consumers of fraud they have experienced. Identity theft claims have consistently grown year over year, primarily driven by the amount of data breaches that have occurred. More access to private consumer information = more instances of identity theft in the market.
Since 2001 identity theft claims have, on average, grown around 12% each year. This in and of itself is an alarming rate, but since the change by the FTC in 2017 this number jumps to 60%.
The massive growth in 2020 can be heavily attributed to government benefit fraud and claims of identity theft regarding unemployment. However, when looking at disputes around tradelines we still see an alarming increase. This is where credit washing resides.
Point Predictive recently released its Annual Auto Fraud Report which highlights major fraud trends in the automotive industry. One of the key trends identified was an increase in credit washing cases. As a part of the research, we uncovered some staggering statistics around the impacts that credit washing has on a consumer’s credit report. On average credit scores increased by 23% while the number of tradelines decreased from 9 to just 2.
These findings help support the seriousness of credit washing. Financial institutions make risk-based decisions around the credit worthiness and likelihood to repay debt. One of the major data elements used in underwriting is the applicant’s credit score. By disputing legitimate derogatory accounts, consumers can artificially increase their credit score, persuading a lender to make a decision they otherwise wouldn’t.
Two Sides of the Same Coin
Not all credit washing cases have illicit motives, however. Many consumers are persuaded by credit repair businesses that they seemingly trust. And these businesses may not actually think that they are committing a crime. They see an opportunity to boost their customers’ credit scores and they take advantage of it. Criminal? Maybe. Unethical? Definitely. There is a more nefarious element to credit washing however, and one designed for the sole purpose of committing fraud. To better explain, I’ll walk through two scenarios:
- Oblivious Consumer and Predatory Credit Repair: With current interest rates so low, Peter figured this would be the perfect time for him to purchase a home. The problem is, when the local bank pulled his credit for a pre-approval, they noticed he had multiple delinquent and charged-off credit cards. They let him know that with his current credit score, he wouldn’t be able to get approved.
Luckily, Peter lives across the street from Recovery Management Services, a credit repair business who advertises quick and easy credit repair. Peter sits down with James, a credit repair specialist at Recovery Management Services, who explains how easy it is to fix bad credit. James promises Peter that in 45 days he would be ready for a pre-approval. Too good to be true? You’d be correct. Peter hires James, and gives him his personal information to allow James to begin the credit repair process. Little does Peter know, James quickly begins disputing all negative tradelines as identity theft while impersonating Peter. Ironic, right? 45 days later Peter reapplies and instantly receives a pre-approval. Peter’s credit worthiness hasn’t truly changed, but to the mortgage lender he fits their borrower profile. This presents increased credit risk because likelihood to pay is still minimal, but the previous red flags are no longer present.
- Criminal Fraudster: Over the last few years, Dominic has been creating synthetic identities to obtain as much credit as possible in order to bust out. In that time, he has accumulated over 100 identities that he’s used to commit fraud. Instead of continuing to manufacture new identities though, Dominic realizes that he could just reuse the ones he has already worked so hard to create. Credit washing gives Dominic the perfect opportunity to clean the slate and start over again. Rinse and repeat. Credit washing takes advantage of the sensitivity of financial institutions around the FCRA, as well as the simple claim process created by the FTC. Financial institutions often times don’t have very thorough or efficient investigation practices which makes it difficult for them to complete an investigation in time to determine whether the identity theft claim is legitimate or not. Dominic takes advantage of this through a method called “credit jamming”. He rapidly disputes everything en masse with the hope that creditors won’t have the ability to respond in time and, by default, rule in his favor.
The Road Ahead
Typically, the solution to a problem should reside with the source of said problem. In this case however, the genesis of the issue is from increased consumer protection which I believe is ultimately a good thing. Thus, major changes by regulators and the FTC will most likely not occur. This means that the responsibility falls on financial institutions to ensure that false claims of identity theft aren’t successful. How can this be done? Through a more efficient claims process, and more thorough investigations.
Claims: e-OSCAR is a reporting solution created by the major credit bureaus to standardize credit reporting for data furnishers and to allow for automated dispute verification. When an identity theft claim is reported to the credit bureaus, e-OSCAR will automatically notify the financial institution. At this point the lender should have an established process to streamline communication between the staff receiving the claim and the investigator assigned to the case. By removing complexity in the claim process, it will give investigators more time to validate the dispute and come to an accurate conclusion.
Investigations: Many financial institutions don’t have dedicated investigation units, and even if they do, their approach to investigations is often cookie cutter. Identity theft claims may get treated the same as a run of the mill credit card dispute. Because of this, identity theft claims may not be prioritized, added to the bottom of a queue, and by the time they are reviewed the 30-day window is almost up. This leads to rubber stamping of disputes and the success of credit washing. It is critical to have a dedicated process for identity theft claims to be prioritized, investigated, and responded to promptly. There needs to be clear expectations for both the investigator and the consumer so that when a false claim is denied there is enough evidence to support it. It is also wise to have an approval process for denials in order to reduce the risk of adverse impact to true victims. I always told my investigators that they should treat their cases as if they would be expected to argue the conclusion in court. This created a sense of urgency, and an extreme attention to detail and evidence gathering.
Identity theft has been an ongoing problem for years, and it only continues to get worse. True victims have been given relief through government regulation and better consumer protection, but these have also created a way for fraudsters to thrive. Credit washing is just the beginning of the problem, as we will begin to see these “like new” consumers make their way back into the market yet again. With similar circumstances, but improved credit quality they will begin to be granted new credit lines that will inevitably default.