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'Piggybacking credit' is a new practice that helps consumers improve their credit scores by paying to become 'authorized users' on established accounts. Authorized users are not liable for paying an account, but because of Regulation B (which implements the 1974 Equal Credit Opportunity Act), the account's history factors into their credit scores. As a result piggybacking can be used to manipulate the signal of creditworthiness that scores provide and may help borrowers obtain credit for which they would not have otherwise qualified. This article investigates the policy questions raised by piggybacking. First, we evaluate whether the credit history disparities that motivated these provisions of Regulation B have persisted since they were written. Then, we assess the potential for score improvement through piggybacking. Finally, we evaluate the likely score effects of allowing credit scoring models to exclude authorized-user accounts, the most widely proposed policy response to the emergence of piggybacking. [ABSTRACT FROM AUTHOR]

The widespread use of credit scoring in the underwriting and pricing of mortgage and consumer credit has raised concerns that the use of these scores may unfairly disadvantage minority populations. A specific concern has been that the independent variables that comprise these models may have a disparate impact on these demographic groups. By 'disparate impact' we mean that a variable's predictive power might arise not from its ability to predict future performance within any demographic group, but rather from acting as a surrogate for group membership. Using a unique source of data that combines a nationally representative sample of credit bureau records with demographic information from the Social Security Administration and a demographic information company, we examine the extent to which credit history scores may have such a disparate impact. Our examination yields no evidence of disparate impact by race (or ethnicity) or gender. However, we do find evidence of some limited disparate impact by age, in which the use of variables related to an individual's length of credit history appear to lower the credit scores of older individuals and increase them for the young. [ABSTRACT FROM AUTHOR]

The Fair and Accurate Credit Transaction Act of 2003 (the FACT Act) directed several federal agencies to conduct studies related to the credit reporting industry. A primary concern was the accuracy and fairness of the credit reporting and scoring systems. In this article, Federal Reserve System Board economists report on a study in which they examined various issues related to credit scoring, including how credit scoring has affected the availability and affordability of credit. In a responding commentary, Calvin Bradford notes flaws and deficiencies in the Federal Reserve System study. [ABSTRACT FROM AUTHOR]

Although credit scoring offers benefits to lenders and borrowers, its use raises important statistical issues that may affect the ability of scoring systems to accurately quantify an individual's credit risk. The evidence from a national sample of credit-bureau records suggests that concerns about omitted-variable bias may be justified, as local economic factors show significant correlations with credit scores. [ABSTRACT FROM AUTHOR]