A San Diego software company has developed a way to help banks identify whether applicants got improper credit score boosts by being listed as authorized users on other people's credit accounts, a task that has proven difficult but increasingly important for evaluating mortgage applications.
Cogent Road LLC's tool measures the probability that a loan prospect's credit score has been manipulated through an authorized-user arrangement. In early deployments, it has found that two of every 100 borrowers have had their credit scores inflated by 10% or more in this way.
William DiPaolo, Cogent Road's managing partner, said the software can give banks a better understanding of applicants' creditworthiness and will put them in "a better position to make a decision" on whether to underwrite a loan or, if the loan has already been made, to "pull the loan for added verification or drop it altogether."
"It's a ticking time bomb because it means 2% of a bank's files are potentially at risk for default," he said. "Authorized-user accounts mask the true credit risk." Cogent Road introduced the software last month.
Authorized users typically are family members, primarily college-age children. In the past, they also tended to be spouses, but many married couples today have joint credit accounts, experts say.
Improper use of authorized-user arrangements emerged as a significant problem during the mortgage crisis, typically among people who wanted to improve their credit scores or get better terms. A cottage industry of so-called credit repair services sprang up, charging people with poor credit to be listed as authorized users of a stranger's account. The account holder gets a cut of the fee. The authorized user gets a credit score boost but does not get card access to the account.
This month Fair Isaac Corp. said it would change the newest version of its FICO score to consider authorized-user accounts. The company had said last year it would pull authorized users out of FICO 08, the upcoming version its credit score mechanism, which will be available by yearend.
Fair Isaac said it reversed course because several banks notified the company that they relied on FICO to meet a requirement of the Equal Credit Opportunity Act that lenders consider the credit of a spouse when evaluating creditworthiness.
The ECOA and, specifically, Regulation B contain restrictions and enforcement tools to end race and gender discrimination.
Mr. DiPaolo said Cogent Road found that 33.4% of credit files included an authorized user, which he blamed on "the broken reporting methodology" used by the major credit bureaus. The credit bureaus should create separate credit accounts for authorized users based on their actual payment histories, he said, and "the problem would disappear."
Equifax Inc., Experian Information Solutions Inc., and TransUnion LLC either did not return calls or would not make executives available to comment last week.
Cogent Road's software lets banks and credit unions run its program on a portfolio of loans, assigning a numerical value to identify which loans have been influenced by authorized users, Mr. DiPaolo said.
A bank can then "look at which loans should be put into a proactive call center to detect financial distress that would lead to foreclosure," he said. The existence of fraudulent authorized users can help explain why borrowers with FICO scores of 720 or better have defaulted, he said.