Mitigating the challenges of ‘piggybacking’

Plug “buy a tradeline” into any search engine, and the results might be surprising. Instead of landing in some unsavory corner of the “dark web,” you’ll find fully realized, highly sophisticated storefronts on par with many other online marketplaces.

These are not scams. Right there, in the clear light of day, a person can purchase access to another individual’s legitimate tradeline by becoming an “authorized user,” boosting their own credit report with the seller’s ostensibly better credit score and better-seasoned, higher-limit account.

This practice, known as “piggybacking,” is a significant challenge for financial institutions. While not technically illegal and not always done for nefarious reasons, it frequently manifests as a type of deliberate first-party fraud that distorts the true creditworthiness of a potential borrower. The result is that it’s harder to accurately price for risk, along with fueling synthetic identities and leading to higher losses from charge-offs.

Piggybacking is rooted in well-intended regulatory action from a bygone era. In 1975, the Federal Reserve promulgated its final rule implementing the Equal Credit Opportunity Act, commonly known as Regulation B, that allowed women to share the credit history of joint accounts.

That approach has since been clarified and expanded: “[I]f the creditor allows the designation of spouses as authorized users, the creditor may not refuse to accept a non-spouse as an authorized user.” This regulatory blessing granted abusive forms of piggybacking an imprimatur of legitimacy, requiring creditors to effectively turn a blind eye to most authorized-user applications.

Pricing risk: Like the first-party-fraud practice of credit washing, abusive piggybacking is designed to hide a borrower’s true creditworthiness and risk from a financial institution. Buying access to a better tradeline gives the purchaser’s credit a boost, potentially elevating their credit score into a higher band. Thus, an applicant who would otherwise receive subprime pricing may instead get a prime-rated offer.

Synthetic identities: A synthetic identity is created when someone applies for a financial product using a fabricated combination of a name, date of birth and Social Security number.

To leverage a fake credit identity to obtain credit, a fraudster needs to develop the synthetic ID into a reasonably attractive profile. The easiest way to accomplish this is to purchase an authorized user tradeline. In fact, at SentiLink, we observe that about 50% of synthetic identities have at least one authorized user tradeline associated with their credit reports.

Increased charge-offs: Credit extended to an abusive piggybacker masking their true credit profile distorts a lender’s ability to manage risk. This is certainly cause for concern; in fact, our analysis suggests authorized user tradelines account for an outsize proportion of poorly performing accounts and losses from charge-offs.

Financial institutions seeking to mitigate abusive piggybacking frequently encounter competing internal challenges. Product and marketing teams see the significant revenue potential of extending credit to more legitimate authorized users; compliance teams feel hamstrung by the “it’s fraud, but it’s also legal” nature of this problem; and credit-loss teams see the threat but have limited ability to directly stop it. The best approaches, therefore, are more indirect.

First, when this type of fraud is suspected at scale, focus more resources on identifying synthetic identities at the point of application. As discussed above, fraudsters often buy authorized user tradelines to enhance the credit appearance of a synthetic identity. Employing better tools to flag and stop these identities early can help stop abusive piggybacking.

And when specific cases of abusive piggybacking are suspected, consider a step-up strategy such as income verification. We have seen strong anecdotal evidence that abusive piggybackers are more likely to inflate annual income in disclosures. Tools such as the 4506-C income verification process with the Internal Revenue Service can help prevent scams by creating friction for would-be fraudsters and sending helpful signals to dubious lenders.

The legality of abusive piggybacking is not likely to change anytime soon, so innovative approaches are essential to filter out fraudsters from those pursuing authorized user tradelines for legitimate means.

Jason Kratovil is head of public policy and external affairs at SentiLink.

Find out where things stand with fraud protection and how it can be done more efficiently and effectively in the BAI Executive Report, “Finding an edge in fraud’s cat-and-mouse game”.