Lenders should be on the lookout for a rise in credit-repair fraud, according to Frank McKenna, chief strategist at fraud-detection software company PointPredictive.
McKenna estimates, based on PointPredictive analytics, that this type of fraud has risen 5% over “the last few months.”
Credit-repair, or credit-cleaning, fraud occurs when a borrower disputes negative information on a credit-report tradeline and a scoring agency “cleans,” or deletes, the account from the credit report. For instance, if a borrower claims that a credit-card default on their report is a mistake, the credit bureau may remove that item from the credit report, which, in turn, will raise the credit score, McKenna said. Granted, the credit bureau will go to the lender asking for proof that the disputed item was not a mistake, but it could take up to 30 days to resolve the dispute.
In effect, fraudsters with bad credit are arguing a legitimate item so that their credit score will be boosted for 30 days, giving them time to charge a purchase on a faulty credit score.
Some fraudsters will attempt to “jam the system by submitting disputes on everything in their credit file so that the bureau and lenders get overwhelmed,” McKenna said. “When this happens, there are so many simultaneous disputes that many of the legitimate tradelines get removed because the banks and creditors don’t respond in time.
“So, temporarily, the borrower’s credit report is wiped almost completely clean,” he said.
As with many types of fraud, there is a red flag to alert lenders to credit repair fraud.
“When you’re looking at a borrower’s credit, see if they have a large gap in their credit profile,” McKenna said. “Let’s say they had some credit from 10 or 20 years ago, but then they have nothing on their credit for the last 10 years, and all of a sudden there’s a bunch of inquiries. So, they’re going out and doing a lot of shopping, and that’s going to be an indication of something has changed with that consumer.”