A term that has been in use for some time but has gained significant prominence in recent years as a major fraud risk, is “credit washing.” Credit washing refers to the illegal practice of unlawfully suppressing or removing legitimate, accurate negative information from a consumer’s credit report. In most cases, the negative information involved consists of charged-off accounts.
According to a fraud analysis done by Trans Union, consumer-initiated charge-off suppressions has increased 700% in the last two year. Trans Union further states that “an estimated 10 billion in debt has been erased from credit reports, the results of up to 5% of consumer in the US having charged off accounts suppressed for atypical reasons.”
How is it done? There are various forms of credit washing but the two most common are:
- Identity Fraud – The consumer makes a false identity theft claim.
- Exploiting Human Trafficking protections – the consumer submits a false claim that they were a victim of human trafficking and coerced into the debt.
When a borrower disputes items in one of these ways the credit bureaus will remove or suppress the account during the investigation. This is mandatory under the FCRA that disputed data be removed or blocked during an Identity Theft claim. The result being an artificially increased credit score.
Credit Washing is an abuse and exploitation of legitimate systems. There are, of course, multiple repercussions from this type of activity.
- Lender losses. It hides true financial risk which can lead to mispriced loans and a higher default rate.
- For true Identity Theft Victims – With the large number of false claims, it clogs the system which provides slower results for those that are truly victims of identity theft or human trafficking.
- For Consumers – Credit Washing is illegal and can lead to criminal charges. Also, the “fix” is only temporary. When the investigation is complete the accounts will return unless it can be determined that the consumer was actually a victim of fraud.
What to look out for:
- A sudden jump in credit scores. If a consumer applies for a loan and is denied based on derogatory items and a month or two later reapplies and the derogatory items are gone.
- Inconsistencies with older accounts: Accounts with lengthy payment histories that are charged off or have multiple late payments yet are only now being challenged as fraudulent.
- A consumer with a clean credit report but suddenly has multiple new inquiries for
various reasons, i.e., credit cards, auto, mortgage.
The dispute process is a legitimate mechanism intended to protect consumers by providing a means to address accurate inaccuracies on their credit reports. Credit washing, however, represents a serious abuse of this process. Unfortunately, it is a rapidly increasing practice that can have negative consequences for both lenders and consumers.