Credit Scores: Not-So-Magic Numbers

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A study by credit-rating agency Fitch Ratings, which looked at loans with average FICO scores of 686, found that 16% had employed the "authorized user" ruse to boost the applicant's score. Fair Isaac says FICO 08 will close this loophole.

BUSY HACKERS

Yet Hall contends he can raise a troubled borrower's score by 50 to 200 points even without piggybacking. He has figured out another ingenious trick: issuing proprietary credit accounts to customers. For $395, he'll report to the credit bureaus that he's opened an account for a customer with a $5,000 limit. The new account—and its low balance-to-credit-limit ratio—helps improve the customer's score, even though the customer can't actually tap the credit line.

If anything, business has gotten better for credit doctors since banks began raising their lending standards. "It's going to spread and grow more popular now that we're in a tighter lending environment," says Evan Hendricks, author of a book on credit scores and editor of the newsletter Privacy Times.

Cory Lamb, for example, sought out Hall's counsel last fall to spiff up his score so he could qualify for a mortgage. The 26-year-old owner of adult-oriented Internet sites says Hall has already helped him raise his score from 513 to roughly 600. On Hall's advice, Lamb flooded credit bureaus with letters disputing that older accounts shown as delinquent or defaulted were his—and demanded that the creditors produce the original loan contracts, a stipulation of the Fair Credit Reporting Act. Given that defaulted loans can be sold two or three times between collection agencies, the strategy is a bet that the current creditor has no idea where the original paperwork is. Lamb was able to remove 14 different debt blemishes from his record. In a few more months, he says, "I'll have a clean slate." Fair Isaac says it's sending cease-and-desist letters to credit doctors (though it won't comment on individual "doctors") and is reporting them to federal authorities.

Credit doctors weren't the only ones manipulating FICO scores during the housing boom—many independent mortgage brokers found ways to cheat the system, too. One software program, PDF Password Remover 2.5, is easily found on the Web. It's designed to help users override the passwords on protected documents; brokers have misused it to hack into the credit reports being sent from credit bureaus to lenders to boost FICO scores. The tactic "was common enough that everyone on the underwriting desk made sure they pulled credit reports [themselves] so they won't get duped," says one mortgage underwriter in Dallas.

Whole companies have formed to help brokers exploit FICO's flaws. Credit- Xpert, a Towson (Md.) startup founded in 2000, claims to have reverse-engineered the formula. With its tools, which are legal, mortgage brokers can run endless "what-if" scenarios to see which moves would boost their customers' scores enough to qualify for a loan. "Demand for our services has gone up dramatically," says CreditXpert CEO David G. Chung. "We're now getting more requests from brokers for advanced user training." Says Fair Isaac's Greene: "We don't believe it's possible to reverse-engineer the FICO scoring formula."

Until a few years ago, FICO was just one factor in the underwriting process. But as Wall Street grew hungrier for mortgages it could stuff into securities and sell to investors, it came to value FICO as an easily understood risk measure. Lenders were all too happy to use it as a substitute for laborious underwriting. "There were investors around the world demanding more and more deals, with investment bankers happily supplying the business," says Ron Chicaferro, a mortgage consultant in Scottsdale, Ariz. "It trickled down to the lender, who told their sales force, The faster you can get me a score and close a loan, the better. We'll forgo the documentation.'"

Throughout the housing boom, Fair Isaac promoted FICO's usefulness for other purposes, too. Bond rating agencies relied on it to assign grades to mortgage-backed securities and other more exotic bonds.