Credit Washing

Credit washing is the practice of using the identity theft remedies in the Fair Credit Reporting Act to remove accurate, legitimately owed negative information from a credit report, by claiming that an account or a delinquency resulted from identity theft when it did not. The name is industry vocabulary, used by credit bureaus in their consumer material, by fraud-detection vendors and in lending trade press; it is not defined in the Fair Credit Reporting Act or in the Credit Repair Organizations Act, both of which address the conduct without giving the pattern a name. The mechanics being abused are real and exist for good reason. A person whose identity has been stolen should not have to argue account by account with a furnisher who believes the debt is theirs, so Congress built a fast, document-driven block. The same speed and the same documents are what a false claim exploits.

The block was built to be fast, and its speed is the whole design. Under 15 U.S.C. 1681c-2(a) a credit bureau must block information the consumer identifies as resulting from an alleged identity theft "not later than 4 business days" after it receives four things: appropriate proof of the consumer's identity, a copy of an identity theft report, the consumer's identification of the information, and the consumer's statement that the information does not relate to any transaction by the consumer. There is no investigation step and no accuracy finding. That is deliberate: a real victim needs the fraudulent entries off the file now, not after a reinvestigation that the furnisher will contest. The mechanics of the block, and what a genuine victim has to assemble, belong to the identity theft page; what matters here is that the standard is documentary rather than evidentiary.

The furnisher's hands are tied the moment the report arrives, which is the step that makes a false claim pay. Section 1681s-2(a)(6)(B) provides that where a consumer submits an identity theft report to a furnisher at the address it specifies, stating that information the furnisher holds resulted from identity theft, the furnisher "may not furnish such information that purports to relate to the consumer to any consumer reporting agency, unless the person subsequently knows or is informed by the consumer that the information is correct." A lender that is certain the debt is real cannot simply keep reporting it. It has to establish that the information is correct, which takes time and costs money, while the tradeline is already gone from the file and the borrower is already applying elsewhere.

The statute does not leave this unanswered, and the answer sits in two places. The first is the bureau's authority under 1681c-2(c)(1) to decline to block, or to rescind a block, where it reasonably determines that the information was blocked in error, that it was blocked on the basis of "a material misrepresentation of fact by the consumer relevant to the request to block," or that the consumer obtained possession of goods, services or money as a result of the blocked transaction. The last of those is squarely aimed at this pattern: someone who drove the car or spent the balance obtained the goods or the money, whatever the report says. A rescinded block reinstates the information, and the consumer must be notified promptly. The second answer is in the definition of the report itself. Section 1681a(q)(4) requires an identity theft report to be, at a minimum, a copy of an official, valid report filed with an appropriate federal, state or local law enforcement agency, including the United States Postal Inspection Service, and states that its filing "subjects the person filing the report to criminal penalties relating to the filing of false information if, in fact, the information in the report is false." The document that unlocks the block is a law enforcement report, and filing a false one is a crime under the law of the place it was filed.

Where a company is selling this, a second statute is in play. The Credit Repair Organizations Act provides at 15 U.S.C. 1679b(a)(1) that no person may make, or "counsel or advise any consumer to make," any statement which is untrue or misleading, or which on the exercise of reasonable care should be known to be untrue or misleading, about a consumer's credit worthiness, credit standing or credit capacity to a consumer reporting agency or to a creditor. A firm that tells a client to report a genuine repossession as identity theft is inside that prohibition on its face, and the client is the one whose name is on the police report. This is the practical warning the term is worth knowing for. A service promising to remove accurate, current negative information is either doing nothing or doing something that exposes the customer, not the firm, to the criminal risk.

One caution deserves to be stated plainly, because writing about the abuse carries a cost. The existence of false claims is not a reason for a real victim to hesitate. The block is the strongest remedy in the statute, it is meant to be used, and the safeguards described here are aimed at misrepresentation rather than at people with a genuine claim they cannot fully document. The obligation a real victim has is accuracy: identify the information that is actually fraudulent, and say what is true.

1. A real, accurate negative entry exists, such as a charge-off, a repossession or a run of late payments.

2. An official law enforcement report is filed alleging that the account or the delinquency resulted from identity theft, because 15 U.S.C. 1681a(q)(4) will not accept anything less as an identity theft report.

3. The report goes to the bureau and to the furnisher, with proof of identity, identification of the entry and a statement that it does not relate to any transaction by the consumer.

4. The bureau blocks within four business days and notifies the furnisher, which is then barred from re-furnishing the information unless it establishes that it is correct.

5. The file now reads differently, and applications made in that window are assessed against a history that no longer shows the entry.

6. The counter-remedies run afterwards, and are slower: the bureau may decline or rescind on a material misrepresentation or because the consumer obtained goods, services or money from the transaction, and the false police report stands on its own as a criminal matter.

Take an example from the lender's side, which is where the cost lands. A borrower with a $9,800 auto deficiency balance and two accounts reported 90 days late has those three entries blocked after filing a report claiming identity theft. Six weeks later a different lender approves a $34,000 vehicle loan against a file that shows none of it. Three monthly payments of $610 are made, $1,830 in total, and the loan then goes to default, leaving $32,170 outstanding on a vehicle that has already depreciated. Both bureaus and the original furnisher may unwind the block once the misrepresentation is established, and the borrower faces the false-report exposure the statute describes. None of that returns the $32,170, which is the reason lenders and fraud-detection firms track the pattern under a name of their own.

This is a fraud rather than a product, so what follows is why the mechanism is open to abuse and what limits it.

Why it works

• The block is documentary and fast by design, with no investigation step and a four-business-day deadline.
• A furnisher that receives an identity theft report is barred from re-furnishing the information until it establishes that the information is correct, so certainty alone does not let it keep reporting.
• The cost of being wrong falls on a lender who has not yet met the borrower, while the benefit lands with the applicant immediately.
• Filing a police report is free and, in most places, can be done without a detective ever reviewing the underlying facts first.

What limits it

• A bureau may decline or rescind a block requested on a material misrepresentation, or where the consumer obtained goods, services or money from the blocked transaction.
• The identity theft report must be a copy of an official law enforcement report, and the statute states that filing false information in it carries criminal penalties.
• A credit repair firm that advises it is violating the Credit Repair Organizations Act, whatever it calls the service.
• The consumer, not the firm, is the person whose signature is on the report.
• Reinstated information returns to the file, so the effect is often a window rather than a permanent erasure.