'Credit washing' scams harm lenders and honest borrowers

In the debate about credit reporting accuracy, there’s a common assertion given as fact: No one can erase bad credit information from their credit report if that information is accurate. Unfortunately, this is a myth. Removing negative information from your credit report is entirely possible and is, in fact, a booming business. It’s a scam that disadvantages identity theft victims and harms the ability of lenders to accurately underwrite loans, and it’s time for policymakers to act.

This scam is called “credit washing.” First, a credit repair company will lure a consumer who has a bad debt on their credit report with promises of overnight credit score improvements. Then, the company will contact the consumer’s financial institution or the nationwide credit bureaus to falsely assert that that bad debt is the result of identity theft or other fraud.

Under the federal Fair Credit Reporting Act, in many cases, such an assertion will require the creditor stop reporting the bad debt to the credit bureaus, effectively causing the negative trade line to disappear from the person’s credit report. To be clear, in these cases there is nothing inaccurate about the information the credit washing company is disputing: This is simply a case of an industry exploiting loopholes in federal law.

With the delinquent debt “washed” off the person’s credit report and the ensuing boost to their credit score, it becomes possible to obtain more — and better — credit from a different lender. Of course, the original debt itself doesn’t just go away. It often becomes a loss for the financial institution. Moreover, credit washing undermines the credit scoring system, which is the backbone of all lending in the United States, and ultimately increases the cost of credit for all borrowers.

The rules regulating credit repair, as well as changes made by the Federal Trade Commission within the last few years related to how consumers report identity theft, have allowed this scam to skyrocket. Banks I work with report a 50% spike in claims of fraud and identity theft since the FTC — intending to help victims — changed the process in 2017 to allow identity theft reports without evidence. Some banks now receive 1,000 to 2,000 disputes each month. Of those disputes, it is estimated that over 95% are bogus attempts at credit washing.

To protect the actual victims of identity theft that are being buried by the spamming of fake disputes by credit washers, and to ensure that lenders aren’t making unsound loans based on inaccurate credit report data, policymakers need to take action. In 2019, the Consumer Financial Protection Bureau filed suit against the largest credit washing companies for violations of telemarketing rules and deceptive advertising. While presumably justified, this arrow misses the mark: The real issues stem from the lack of any accountability for credit washers in the process they currently exploit.

For example, federal regulations do not require or allow for sufficient checks or validation by a lender that a claim of fraud or identity theft is valid. In addition, there’s no way for a lender to know that a person applying for a prime-rate auto loan just “washed” their credit of a 90-day delinquent credit card at a different lender. And then there’s the thriving marketplaces that allow people to “sell” good trade lines to people with bad credit in order to help them artificially boost their credit score. In all, there is not nearly enough regulatory enforcement against, and very little oversight of, the credit washing and repair industry.

There are better and more honest ways of repairing bad credit, or building credit for those with little or none, that policymakers should look to amplify. All of this points to an urgent need for Congress, the FTC and CFPB to start paying attention. If a recent congressional hearing is any indication, it is too easy for policymakers and consumer advocates to lob barbs at credit bureaus while turning a blind eye to the real harm being done by credit washers. Choking off vital resources for real victims of fraud and identity theft, while also undermining the underwriting and risk standards used by banks to make safe and sound loans, is a practice that should not be tolerated.