Fraudulent credit activity has seen a significant rise in recent years, costing both lenders and consumers considerable financial losses. TransUnion is introducing a solution to combat credit washing—a fraudulent practice where criminals remove legitimate negative credit data temporarily to improve their scores and secure loans they do not intend to repay.

A Possible Solution

According to TransUnion, these schemes have become more prevalent in recent years. Approximately 5% of U.S. consumers experienced charge-off accounts being suppressed due to atypical reasons just this year. The company estimates that $10 billion in debt will be removed from credit reports by the end of the year.

TransUnion’s solution involves directing suspicious consumers for manual review, which helps reduce early charge-offs. This product includes a Credit Washing Default Score that identifies consumers with a history of charge-off suppression who may have an elevated risk of defaulting on new accounts within 12 months. Additionally, it features algorithms tracking changes in reported charge-offs across various lines of business, such as auto loans and bank cards.

An Unfortunate Side Effect

Credit washing is enabled by the Fair Credit Reporting Act, initially designed to assist victims of identity theft. Under this act, if a consumer reports being a victim of identity theft, their financial institution and credit bureaus are legally required to block disputed account impacts within four days while the claim is investigated. Denial or revocation of these claims can be difficult to prove within the narrow timeframe allowed by law.

The tricky aspect of credit washing lies in its first-party fraud component, often indistinguishable from legitimate fraud claims,” said Suzanne Sando, Lead Analyst of Fraud Management at Javelin Strategy & Research. Without robust fraud detection that can identify and analyze the right signals to determine if a dispute is indeed legitimate, these claims get approved, negative marks are removed, and credit scores improve enough for loans to be granted without further scrutiny.”