Since the beginning of the current economic crisis, financial institutions have tightened lending policies, raising the minimum FICO credit score for their best rates to around 720. Unfortunately, recent figures reveal that 25.5 percent of consumers—nearly 43.4 million people—now have a credit score of 599 or lower, caused in many cases by the rise in foreclosures, job loss, reduction or loss of credit lines, or bankruptcy. These individuals have trouble getting credit cards, auto loans or mortgages under the tighter lending standards.
So, ads promising a new credit identity and fresh start are enticing. Some credit repair companies provide this new identity in two very questionable ways: by requesting an employee identification number (EIN) from the Internal Revenue Service (IRS), or by selling the consumer a credit profile, credit privacy or credit protection number (CPN) for use in place of the individual’s social security number (SSN) when applying for credit. Consumers need to know that providing a number other than an SSN on a credit application in the allocated space is illegal and can result in criminal prosecution.
Credit repair with EINs is often pitched to consumers who have filed for bankruptcy or suffered through foreclosure. Using public records, credit repair companies target these vulnerable individuals with marketing materials that warn of their inability to get credit cards, personal loans or any other type of credit for 7 to 10 years.
An EIN scheme usually requires consumers to pay a fee for this service. They are directed to apply for an EIN from the IRS. EINs, which resemble SSNs, are legally used by businesses to report financial information to the IRS and the Social Security Administration. After the EIN is received, consumers are instructed to use it in place of their SSN when applying for credit, and to use a new mailing address and some credit references. Creditors are then misled about the consumer’s creditworthiness because the unfavorable credit information is hidden behind the EIN. This process is called “file segregation” and is illegal. In fact, it is a federal crime to make any false statements on a loan or credit application; yet that is exactly what is done when an EIN is substituted for an SSN. It also is a federal crime to obtain an EIN from the IRS under false pretenses.
A CPN scheme creates a clean credit file for a consumer. But unlike an EIN hoax that victimizes the creditor and the IRS, CPN schemes victimize some of our most vulnerable populations—children and the elderly, as well as the incarcerated.
CPN schemes are promoted by companies claiming that they can clean up credit and/or guarantee a credit score of 700-800 in a short period of time. These companies find random SSNs, which are run through public databases to determine their status. If they’re clean— validated as an active SSN that is not on file with credit bureaus—they are offered for sale. People with no credit activity or a positive history—including children, longtime prison inmates and the elderly—are the most likely source of such numbers. The companies are very careful not to call these “social security numbers.” They use several names, all with an acronym of CPN, including “credit profile number,” “credit privacy number” or “credit protection number.” But they are really stolen SSNs sold to consumers who are desperate to escape bad credit.
CPN schemes are illegal. Those who purchase a CPN and use it to establish a clean credit file are committing several crimes, including identity theft and making false statements on a loan or credit application.
Parents or guardians usually secure SSNs for children shortly after birth and then forget all about the numbers until tax time rolls around each year. Most people do not even conceive of an SSN being used to create a child’s credit history that could show thousands of dollars of debt. Unfortunately, CPN schemes have created that scenario for millions of children.
Children’s SSNs are not usually checked for credit activity until they buy their first car or apply for a credit card or student loan. This makes them easy targets for identity thieves, who are able to misuse a child’s personal information over a long period of time, wreaking havoc on the child’s financial future and potentially leading to the denial of credit, student loans, housing or employment at a time when that individual may need it the most.
Experts disagree as to the best way to check for fraud associated with a child’s SSN. Some argue that parents should pull a free credit report for their children along with their own each year; others say this is not a good idea. These reports can provide the needed information. But experts who oppose this process say most children do not have a credit file; repeated requests for one may make credit bureaus artificially create a clean file, making the child more vulnerable to this type of identity theft. Another issue is that reports ordered by consumers don’t reveal all entries connected to an SSN; only entries precisely matching a name, SSN and other personal information appear on these reports. According to the three major credit bureaus, accounts opened using an SSN with a different name are often omitted.
Fortunately, there is middle ground between these two points of view. Unless there is a specific reason to suspect identity theft, credit reports should not be requested until a child is 15 or 16 years old, or about a year before the child will need to begin obtaining credit. This leaves adequate time to clear up any problems and avoids the risk of creating an empty clean credit file.
Individuals who are incarcerated for a number of years often have a clean credit file. As with children, these people typically do not regularly check their credit activity, making them easy targets for identity thieves. When they are released from prison, this fraudulent credit history is another impediment to securing employment, housing or access to credit.
It is important for incarcerated individuals to monitor their credit report, especially within two to three years of their release. A trusted family member who may already be handling the individual’s financial affairs would be a good person to monitor the credit report.
Unlike children and incarcerated individuals, the elderly may have better and longer credit histories that have been clean for many years. Studies show that people over the age of 60 are less likely to have frequent activity and transactions on their bank accounts and therefore don’t monitor them as often as younger account holders. This makes them prime targets for credit repair companies looking for clean SSNs.
While a relaxing retirement is a dream most share, it should not mean relaxing one’s guard against identity theft and fraud. An individual’s SSN is used for many purposes, including Medicare coverage. Aging can also mean more help is needed with routine daily activities, provided more often by hired services than by family members. The elderly should remain vigilant about protecting their personal information and pull a credit report each year, regardless of whether they have sought or used credit, to ensure they have not become a victim of identity theft.
Lenders and Issuers of Credit
Lenders and other creditors should be aware of these schemes to help guard against issuing credit to non-creditworthy individuals. There is no way of knowing how extensive these schemes are, but we do know that at least 25 percent of consumers face being denied credit or access to prime rates in the current environment. Some federal officials have expressed concern that extensively used CPN schemes could quickly become the next threat to our financial system.
With heavy reliance on credit scores, it is vital that lenders and creditors know their customers. While consumers may be less than pleased with added paperwork, increased verifications and a longer timeline for completing transactions, the added security of these measures is necessary to maintain a safe and effective financial system.
According to the Federal Trade Commission, as many as 10 million Americans are victims of identity theft annually. Prevention of negative impacts on a recovering financial system will take precautionary efforts from the government, individuals and lenders.
Social Security System Safeguards
The Social Security Administration does have some safeguards in place to help consumers monitor earnings connected to their SSNs. The association notifies the parents or guardians of minors under the age of 6 about earnings activity connected to the child’s SSN. And consumers can call a toll-free number (800-772-1213) to review wages linked to their and their dependents’ SSNs.
Rights under the Credit Repair Organizations Act
The Credit Repair Organizations Act (Title IV of the Consumer Protection Act) prohibits false claims about credit repair and makes it illegal for these operations to charge consumers until the company has performed the services. Credit repair companies must provide this in a written contract, which should include the following:
There are also many state laws governing credit repair companies. Problems should be reported to the state attorney general or a local consumer affairs office, where available.
The FTC is another source for reporting problems with credit repair companies. The Commission cannot resolve individual credit problems, but it can act if there is a pattern of possible violations. Complaints can be filed online at ftc.gov or sent to: Consumer Response Center, Federal Trade Commission, Washington DC 20580.
Uses of Victim Information
Costs of Identity Theft
Identity Theft Resource Center’s Identity Theft: The Aftermath 2009 www.idtheftcenter.org
Fed in Print: An index of the economic research conducted by the Fed.
FedCommunities.org is a portal to community development resources from all 12 Federal Reserve Banks and the Federal Reserve Board of Governors.