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The “credit washing” mess and how banks can avoid it

May 10, 2022 / Fraud Prevention
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In recent years, an increasing number of Americans have walked away from their credit history through a maneuver known as “credit washing.”

Jason Kratovil, head of public policy at SentiLink, explains what credit washing is and the cost it’s imposing on the banking industry.

A few takeaways from the conversation:

  • He says a 2017 rule change by the FTC made it easier to game the system and spurred a sharp upswing in credit washing cases.
  • Banks and credit unions are hurt by credit washing via abandoned debt, investigation costs and difficulties in pricing credit risk.
  • Financial institutions should focus on spotting patterns in customer behavior that can help identify potential credit washers.

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Below is a full transcript of my interview with Jason Kratovil.

Jason, I’m not that familiar with credit washing, so could you get our conversation going with an overview of what credit washing is?

Yeah, sure. Happy to. To do that, you got to go back a few years. That was when, back in the 90s, Congress recognized that victims of identity theft should have some tools at their disposal to protect themselves. They built into a law called the Fair Credit Reporting Act the ability for a consumer to say, “Hey, you know what, listen, credit bureaus, financial institutions, I’m a victim of identity theft. Please take steps to help protect me.” You’ve got that consumer right that’s been out there for quite a while. Well, clever fraudsters have recognized that it’s not too hard to game the system. And by falsely asserting, either on behalf of another consumer or the consumer doing it directly themselves for a variety of reasons that we can get into later, that, “Hey, look, I’m a victim of identity theft,” even though you’re really not, you can still take advantage of that consumer protection law that I mentioned a moment ago and have potentially, say, a delinquent credit card debt that for whatever reason, you don’t feel like paying anymore, you don’t want it impacting your credit, suppressed from appearing on your credit score and impacting your credit score. It is certainly a problem that is increasing in size and is becoming very, very costly for financial institutions. It’s also a problem for the people that are actually victims of identity theft as well.

For financial institutions, is it an emerging issue, a new kind of issue? If that’s the case, what happened to make this something that banks and credit unions need to worry about now?

It is definitely a newer trend. You can look back, and there was a moment in time when something did change. In 2017, the FTC made a decision no longer will a police report be something that is required when you are asserting your rights and saying, “Hey, I’m a victim of identity theft.” Prior to that time in 2017, it was required that the person would need to go to a police station, file a police report, and then provide that police report when they were disputing a potentially fraudulent tradeline on their credit report. In 2017, FTC said, “You know what? We want to minimize friction for victims.”, so they dropped that requirement. Without that little bit of friction in the way, it allowed people who wanted to, for lack of a better way to describe it, game the system and take advantage of that, to do so in very large scale. When you look at the data after that time in 2017, these reports of disputes of identity theft, it’s like a hockey stick-shaped spike – very, very dramatic. It was really at that point when it really took off.

All of us worry to some degree about identity theft, given how widespread it’s gotten and how complex and how frustrating it is to fix your credit report after that’s happened to you. That said, what you’re talking about with credit washing, should we be thinking about the no-police-report-needed change as perhaps allowing the pendulum to swing too far the other way by making it too easy or too risk-free to claim identity theft?

It’s pretty clear that the laws of unintended consequences have certainly kicked in. Obviously, the idea of removing that requirement for a police report was well-intentioned. Unfortunately, that change really did kind of open the floodgates to these fraudulent claims of identity theft. The challenge, of course, is what’s the right approach to figuring out what to do now. How do you bring a little bit more balance back to this, while finding ways to effectively prevent abuse of the system while also ensuring that legitimate victims can exercise their rights as Congress intended.

If I’m a person with some problems on my credit report and assuming I haven’t paid all that close attention to changes in the Fair Credit Reporting Act, how would I know about trying to wash my credit?

Terry, it’s shockingly easy to figure it out. I have spent some time going down some dark rabbit holes on the internet, and it really does not take a lot of internet sleuthing to find entire websites dedicated to showing you how to do it. Even YouTube videos – there are some pretty extensive YouTube channels with robust followings of people just explaining how to do what we’re talking about today. It’s pretty remarkable, to say the least.

You say anybody could just go online and type in some Google terms. That strikes me as kind of a slow and inefficient way for word to spread through the world. Opportunities to exploit the rules tend to get discovered. Do we have organized groups that have figured this out too and have found ways to make money from it?

It’s truly remarkable, and I’m really not exaggerating when I say that there are entire industries that popped up, not only to make the dispute process easier, but the other side to it that’s probably worth mentioning is, unfortunately a lot of the times credit washing takes on the veneer of credit repair. That’s a real challenge, because there are obviously many very legitimate credit repair organizations that really work to help consumers who have run into trouble with their credit. But one that we’ve seen pretty extensively is the window dressing of credit repair that is actually just credit washing and getting people to probably pay fees and then these firms will dispute and claim identity theft on the person’s behalf.

Again, I’m the person with credit trouble and I Google a term like, “How do I get rid of my bad credit score?” I get a hit with Jason the credit fixer, Jason, the credit repair man. So I call you to be my solution provider. Because you know the angle, because you know what’s going on in the industry here, your plan is to claim that I’m an identity theft victim. Do I, as the customer, know upfront that you’re going to file an identity theft claim in my name?

You have to know what you’re looking for. You would have to be an educated consumer to do that. I’ve seen a good number of what these dispute process outcomes and letters look like. You would have to understand inside some legalese. “I am asserting my rights under the Fair Credit Reporting Act, Section 605 B.” You have to have some understanding of the statutes that provide these rights to consumers. If you just read the letter itself, you wouldn’t understand what’s happening. It’s technically there, but I think for the average person who’s not intimately familiar with the law, they wouldn’t understand exactly what’s happening.

What sense do you get as to how widespread credit washing is? You mentioned earlier in our conversation about a hockey stick-shaped curve here, but I don’t know from what sort of base we’re talking about. And what sorts of challenges is this presenting for the banking industry now?

If you think about it, fundamentally, the problem with credit washing from a financial institution’s perspective is it distorts that institution’s ability to price for risk. Anytime you and I, as consumers, if we’re applying for a credit card, a car loan or mortgage, the lender that we’re talking to is relying on an accurate credit history to determine what rates and terms you and I would qualify for. Credit washing, if you think about what we’ve been talking about, it completely distorts that. If I am that person who is delinquent on my credit card bill, I see my credit score tanking, I decide to wash my credit of that bad credit card account that has dropped my credit score to subprime. Now, all of a sudden, I’ve washed it, I go to apply for a new car loan and suddenly I look like a pretty decent credit risk. Maybe I’m a 650 or 700 – not perfect, but not awful. Maybe I’m going to be able to get credit that I otherwise wouldn’t qualify for. That’s really the most significant problem for financial institutions. The second issue that I think it’s really worth mentioning is, and I’ve talked to a number of banks who are really feeling this, is the human resource drain. Every single one of the disputes or claims of identity theft – whether it’s a credit bureau or a lender receives – have to, according to the law, be investigated. We’re not talking mega banks. We’re talking just like mid-size regional financial institutions can see thousands of these disputes a month. They all have to be processed. They all have to be investigated. Due diligence has to be performed. Sometimes that involves direct outreach to consumers. But in any case, there are statutory requirements and deadlines that kick in once an institution or credit bureau receives that dispute. There’s the financial side and the risk side to what happens to a bank’s ability to price for risk. Then also just the resource drain that takes place when you’re dealing with thousands and thousands of these having to be processed every month.

I get that the person who is falsely claimed to be an identity theft victim may be able to borrow more money for, say, a car than they might otherwise, or they might be able to borrow that money on better terms. But are they also not paying off that new car loan, so what develops is a cycle playing out of lying, borrowing, defaulting, then lying again, then borrowing again? Are banks eating losses as a result of this?

It’s absolutely a cycle. It’s wash, rinse, and repeat. That’s the point of it. The first time you dispute something, you’re really not credit washing. Where it becomes a problem is the second time you go back. The first time you claim you’re a victim of identity theft, OK, that triggers something. But then it’s leveraging what you’ve just done when the cycle then starts to move forward, because you’ve disputed a trade line with Bank A. Now you go to Bank B and you get another loan. Then that cycle can just keep perpetuating itself. And I’m going to throw another wrinkle at you with regard to this cycle. We spend a lot of time at SentiLink thinking about synthetic identity fraud. Just as a very quick aside, it’s the idea of a completely fictitious credit history made up for the purposes of getting credit. What we’ve seen is, you’ve got a person who has created a synthetic identity – fictitious name, date of birth, Social Security number – and that has generated a credit report. They then, through authorized user tradelines or things like that, have built up a credit history. They then use that synthetic identity to apply for and receive credit. Then of course, they leverage that credit, they max it out, they don’t pay it off. That goes delinquent. Then we’ve seen as the next step in the cycle, the person disputing identity theft for the fake synthetic identity. Now you’ve got claims of identity theft for an identity that doesn’t actually exist. It really is a cycle that can take on different permutations, both with legitimate people doing it to just continually game the system and get out of their obligations and get more credit, and synthetic identities being able to do it to accomplish the same thing and continue to get more credit.

Contrary to my earlier scenario, you in real life, Jason, of course, are not a shady operator making false claims about identity theft. You’re on the solution side of that. What can banks do to try to counter the growth in credit washing?

Terry, the reality is, it’s challenging for one specific individual institution to solve it. The reason for that is when you think about the scenarios that you and I have been talking about, credit washing involves more than one financial institution. There is the first institution that has – we’ll just use this as an example – the credit card account that has gone delinquent that the consumer wishes to wash off of their credit. Once they accomplished that, then they can’t go back to that same institution because that institution is going to know. “Hang on, we’re not going to lend you more things. We already know that you’re delinquent on the account that you have with us.” Naturally that means they have to go to another institution to apply for credit. That second institution won’t be able to see what’s going on at the first institution, just as the first institution doesn’t know that the consumer is now trying to get credit at the second institution. So, fundamentally, what I’m touching on is the keep challenge with all of this is the system is not designed – and by “the system,” I mean the credit-reporting system generally – it is not designed to allow a single bank a holistic view of what’s going on around it. That first bank with the credit-card account can see what’s happening within its own four walls, but it doesn’t know what’s happening somewhere else. That makes the challenge of spotting credit washing much more difficult. Fundamentally, what you need to do is spot patterns. Without that view outside of the single institution, it’s very, very challenging. A critical thing that banks are constantly thinking about is, they want to make sure that legitimate victims of identity theft are not getting caught up as they’re trying to spot and investigate credit washing. That’s why looking for patterns is so critical, and how that limiting factor that I was talking about is so important when a bank needs to be able to say, “Hey, look, is this person demonstrating certain patterns and behaviors? Have they disputed with us many, many times? Are there other characteristics in what they’re doing that are indicative of credit washing? Are they quickly requesting credit-line increases? Are they quickly running up those balances and maxing them out?” A single institution can start to put together a picture that gives them the confidence to say, “OK, I think what I’m seeing here is credit washing and not a legitimate victim of identity theft.”, because banks definitely don’t want to be in the business of second guessing a legitimate victim. But it is definitely a challenge for institutions to be able to filter out legitimate victims from credit washers.

But given the importance of the legitimate identity theft victims being able to really get their recourse, being able to get their process and not have everything gummed up by all of these false claims, is it time to get Congress involved here, maybe to revisit the Fair Credit Reporting Act for that? And also maybe to look at the police report issue as well? The idea for Congress being that “we meant it to be a good thing by making it easier to report ID theft,” as you said. “These unintended consequences, we made it too easy, and in doing so, we encouraged large scale fraudulent behavior.” Do you think that could happen? Even if it did, would that be much of a fix now? Could we put the genie back in the bottle?

I’d say the ball’s in FTC’s court. They made this decision in 2017. I think there would be a tremendous enthusiasm on the financial institution side, and folks like us who are trying to find elegant solutions here, that thread that needle from ensuring identity theft victims can exercise their rights, versus keeping enough friction in place to dissuade people who want to credit wash from doing so. I think that’s the first way I would answer that question is to say, if the FTC would be willing, I think they have a very receptive audience, both from the industry and from, I’m sure, consumer advocates, to find a way to ensure that victims are protected and fraudsters are prevented from gaming the system. The second thing I’d say is whether it’s the Fair Credit Reporting Act or … There are statutes on the books specific to credit repair that haven’t been touched or really looked at in decades by Congress. You look at how scams like what we’re talking about – credit washing – have evolved due to circumstances. I think you could legitimately make the case that it’s probably overdue for Congress to start paying attention to the laws that are currently on the books and how they’re being taken advantage of by the modern ecosystem today.

Maybe as the extent of credit washing and its impacts become better defined, that will create an impetus for lawmakers or agencies to address the issue. Jason Kratovil, head of public policy at SentiLink, many thanks again for sharing your perspectives with us on the BAI Banking Strategies podcast.

Thank you, Terry. I really enjoyed it.

Terry Badger, CFA, is the managing editor at BAI.