Federal and state regulators say it's one of the fastest-spreading new scams in the mortgage market: Internet-based companies that artificially raise loan applicants' FICO scores by 50 to 200 points by implanting credit accounts of consumers with outstanding payment histories into the credit files of borrowers with low scores and bad payment histories.

Worse yet, officials say, the companies may not necessarily be breaking any law themselves, even though their clients may be committing fraud.

Here's how it works: Say you want to buy a house but your FICO score is subprime -- a 580 mid score. You sign up with one of dozens of companies now offering to make you an "authorized user" on a credit card account of a person with a perfect payment history and a high credit limit.

You will not physically receive the credit card, and thus you won't be able to charge anything on that account. But as an authorized user, all the years of perfect payments on the card will be transferred into your credit files at the national bureaus -- Equifax, Experian and Trans Union.

That, in turn, will raise your FICO scores almost immediately, possibly by 50 to 100 points. If you need higher score boosts, the Internet sites offer two or three additional "authorized user" accounts -- at package prices that often are in the thousands of dollars -- and promise to push up your FICOs by 200 points or higher.

Nevada's Mortgage Lending Division recently issued a fraud alert on such services. It also warned consumers and brokers who use these companies in connection with loan submissions that they will be "subject to administrative action and potential criminal penalties."

The Federal Trade Commission says it is aware of these firms, and is looking into what, if anything, to do about them. A spokesman for one of the credit bureaus, Experian, said "piggybacking" schemes involving authorized user accounts "are nothing more than new credit repair schemes to charge consumers hundreds of dollars to be added to another person's established credit account for the purpose of raising the first person's credit score."

Mortgage loan applicants with higher FICO scores receive better quotes -- lower rates and fees -- than applicants with subprime credit histories and low FICO scores. Lenders who believe they are providing mortgages to applicants with excellent credit may be duped into extending credit to individuals with terrible repayment histories.

Websites such as www.addatradeline.com offer to "rent your credit cards" for a fee -- often hundreds of dollars -- and then sell those accounts to people with low FICO scores. For example, a Visa card with 15-plus years of on-time payments and a $50,000 credit limit might command a fee of $1,500 to $2,000, according to Adam Wheeler, owner of AddaTradeline.com. The primary card holder would receive 20 percent of that fee -- $300 to $400 -- every time it was sold to a new applicant. Wheeler said that as many as 80 to 100 authorized users could be added to that single card account without triggering alarms at the credit bureaus.

Federal law sanctions authorized users on credit accounts -- typically children or other relatives who are permitted by the primary card holder to be co-users of the card. But federal law does not limit the number or type of authorized users permitted on any account, nor does it ban the sale or rental of authorized user relationships.

In an interview, Wheeler said his business "is legal," but he conceded that "some people might say it's unethical." He also said he does not condone fraud against mortgage institutions. "If (clients) are going to lie to lenders," he said, "that is not good."

(You can see some of the companies involved in this business by entering words such as "renting credit tradelines" into Google or other search engines.)

Published: April 9, 2007

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.