Credit Repair Companies Face Unfair Restrictions

The next time you talk with a credit repair company owner, ask him or her this simple question. Is it true that a credit bureau can legally ignore consumer disputes if they suspect (let alone know) they were processed or mailed by credit repair companies? If the owner answers “no”, then that credit repair organization owner is either ignorant of the law or not telling you the truth. There are no legitimate credit repair companies because they are now legally prevented from successfully disputing their clients’ credit reports using the FCRA, the Fair Credit Reporting Act. Plus other federal regulations prevent them from operating profitably so even the best credit repair companies must violate these statutes and regulations in order to receive any real cash flow to survive.

In this credit repair industry report you will discover astonishing facts and information about credit repair companies that no one is talking about. You won’t find this shocking news in other consumer financial websites or blogs. These credit repair company revelations are not what you think they are. You have not read this information before.

Under another federal law, the TSR, the Telemarketing Sales Rule, all credit repair companies engaged in interstate commerce cannot receive any payment from a client until all the work (which can take six months or longer) has been fully completed. Fully completed means the credit repair company must do all the work then wait an additional six months. At this point the credit repair organization must obtain the client’s new credit report showing all the improvements. Only after all these provisions of the TSR have been complied with, can the credit repair company send an invoice to the client and wait to be paid.

Are Credit Repair Companies Scams?

I have been involved with consumer credit issues for more than 33 years. In mid-1990s I testified in Congress in support of CROA, the Credit Repair Organizations Act which was later signed into law by President Clinton. However when I saw the final language in the law and later the Telemarketing Sales Rule (1996), rather than legitimizing the credit repair industry, I felt it was doomed. Here’s why.

Many consumer reporters write that the credit repair industry is rife with scam artists and bottom feeders. The FTC is on record saying they have never seen a legitimate credit repair company. They have held this position from the mid-1990s right through to today. The criticism goes like this… you can repair your own credit free so you don’t need a company to do it for you. However this criticism is not the full story.

Although I agree with the valuable consumer credit advice that many consumer advocates and the Federal Trade Commission offer, I don’t subscribe to the belief that most credit repair companies are scams and bottom feeders. I have met hundreds of credit repair business owners. They are honest, hardworking folks who truly want to help clients improve their credit scores. Sure, just like any field, there are some bad apples but those are exceptions and not the rule. The difficulties using a credit repair service go much deeper.

NACSO and CCA Brought A Butter Knife To A Gun Fight

Although much of the smearing of credit repair companies as fraudsters and scam artists is undeserved, the reasonable and logical response of the credit repair industry reveals that they don’t fully understand what is happening to them. Several industry trade organizations have been created to help educate credit repair company owners and employees about how to be fully compliant with CROA and other applicable statutes. These groups also try to improve the industry’s image.

One such group is NACSO the National Association of Credit Services Organizations. They seek to have members go through a strict and rigorous enrollment process to help prevent fraudulent activity in the “credit services” industry. Note that they don’t like to use the much maligned term “credit repair” industry. Another is CCA the Credit Consultants Association. They offer a seal that purportedly makes a credit repair company “board certified”. The seal stands for Excellence, Ethical and Expert. Some credit repair software companies also offer “certification”.

I’m sure these trade associations do good work but what they don’t realize is that in the eyes of the Government and credit bureaus these groups are nothing more than dog and pony shows designed to sway public opinion and improve the credit repair industry’s image. The anti-credit repair business side has no interest in improving the credit repair business image. They want to destroy the entire industry.

NACSO can put out all the press releases they want about how they support the latest FTC, CFPB or AG lawsuit against a “bad” credit repair company but it won’t make any impact on the Government’s efforts to label all credit repair organizations as illegitimate, unnecessary and a pox on the public. Credit repair trade associations and the companies they represent just do not grasp this very real and sobering fact. The Government and credit bureaus don’t want these companies operating and will do all they can to destroy them.

NACSO, CCA and the credit repair industry as a whole have approached this fight the wrong way. Proof of this is that none of the restrictive laws covered in this article has been changed one iota to help the credit repair industry survive. This has been true for decades because, except for the very beginning (when I, Mark Guimond and many others fought to remove the restrictive sections of these laws), the credit repair trade groups and business owners have offered no effective push back against the Government or credit bureaus. All they have done is try to appease the other side. They think if they just clean up the bad apples and show the bureaus and Government how squeaky clean and “compliant” they are, they will be respected and welcomed with open arms. That will never happen. The credit repair industry has completely underestimated their opponents. They have brought a butter knife to a gun fight and have been getting their butts whipped for 25 years.

To their credit NACSO did prepare an excellent white paper about the unfair treatment of credit repair companies by the FTC and how CROA was slipped in at the last moment with the Department of Defense Appropriations Act – 1997, which itself was later included within the Omnibus Consolidated Appropriations Bill when the country was facing a government shut down. Talk about bad timing for the credit repair industry! It’s an excellent defense of the credit repair industry and a thorough refutation of the FTC’s years long efforts to eradicate credit repair companies. However no significant changes to the laws discussed in this article ever came from it.

Credit Bureaus’ Brilliant Legal Strategy

Credit bureaus provide an important service to a vibrant economy. Ethical credit repair companies can certainly be a thorn in the side of the credit reporting industry. As the credit repair industry advertises and gains more customers the credit reporting agencies like Equifax, TransUnion and Experian can feel overwhelmed with disputes. This can result in more expense and less profit for the major credit bureaus.

To combat this the bureaus came up with a brilliant response. They used their considerable resources to lobby for laws that would constrict the credit repair industry’s ability to effectively help consumers and to even survive. They were extremely successful in accomplishing this. Credit repair organizations just don’t realize how successful the credit bureaus were. There are thousands of companies currently offering credit repair oblivious to the possibility that it can all come crashing down in an instant.

Years ago I spoke to a couple of Federal Trade Commission (FTC) representatives about their official position that they had never seen a legitimate credit repair company. I remember being confused and frustrated when one of them told me he did believe it because it was true. It took me a long time to finally understand what he meant and now, reluctantly, I have to agree with him. However not for reasons you might think.

The “You Can Do It Yourself” Criticism

Most fair minded folks and certainly those familiar with the benefits of ethical credit repair would be curious how the FTC and consumer advocates could be so dismissive of a service that helps consumers with credit issues. After all, this blanket indictment of a much needed service is akin to banishing tax preparation services, bookkeeping services, wedding planners, lawn mowing services, car wash companies, oil changing services, maid and cleaning services, pool cleaning services, personal chefs, dog walking services, window washers, and so many more services folks could do on their own but choose to outsource for convenience, expertise, skill, time management or a variety of other reasons and benefits.

The FTC and some consumer writers may malign credit repair companies for offering a service consumers can do themselves but this is like criticizing a lawn mowing company for offering a service to the public. It makes no sense because it’s no argument at all. So what gives?

How Equifax, TransUnion and Experian Won The War Against The Credit Repair Industry

What the FTC really meant was that there are now laws on the books that make it impossible for any credit repair company to be “legitimate”. The credit reporting industry and their lobbyists won the war against the credit repair industry. Here’s how they did it.

When a consumer hires a credit repair company to help with credit issues, the credit repair service must send disputes to the credit bureaus. Under the FCRA a credit bureau only has to reinvestigate a dispute if it came directly from a consumer. If a credit bureau suspects that the dispute came from a credit repair organization, the bureau DOES NOT have to do any reinvestigation. This means that legally the worst thing a consumer can do to repair his credit reports is to have a credit repair company help him. It sounds crazy but that is the law.

As recently as April 1, 2020 the Consumer Financial Protection Bureau (CFPB) issued a policy update for credit reporting guidance in light of COVID-19 and CARES Act where they reminded credit bureaus and creditors that they did not have to act on disputes from a credit repair company:

“The Bureau reminds furnishers and consumer reporting agencies that they may take advantage of statutory and regulatory provisions that eliminate the obligation to investigate disputes submitted by credit repair organizations…”

It doesn’t matter if the credit repair company tells the client to write what the company suggests and then mail the letter himself. If the credit repair company assists the client with dispute letters or forms, the credit bureau doesn’t have to investigate the dispute if they suspect a credit repair service helped. This means you take a great risk hiring a credit repair company. If they can’t even complete a round of credit report disputes, they are powerless to fix your credit.

Here’s the section of the FCRA that allows credit bureaus to ignore disputes generated by credit repair companies.

15 U.S. Code § 1681i.Procedure in case of disputed accuracy

• (a)Reinvestigations of disputed information
• (1)Reinvestigation required
• (A)In general
• Subject to subsection (f) and except as provided in subsection (g), if the completeness or accuracy of any item of information contained in a consumer’s file at a consumer reporting agency is disputed by the consumer and the consumer notifies the agency directly…

One consumer lawyer I discussed this with put it this way:

“You are correct, this is a critical, and I’d say crippling provision from a credit repair standpoint.”

The National Law Review explained it this way:

“In Trinity Warner v. Experian, the Ninth Circuit recently affirmed a district court’s summary judgment in favor of Experian, finding that dispute letters sent to Experian by a “credit repair agency,” Go Clean Credit LLC, were not “direct” communications from the consumer, and therefore did not trigger a duty to reinvestigate under Fair Credit Reporting Act (FCRA).

Section 1681i of FCRA provides that consumer reporting agencies (CRAs) such as Experian must “conduct a reasonable reinvestigation” when an item in the consumer’s credit file “is disputed by the consumer and the consumer notifies the agency directly . . .of such dispute.” 15 U.S.C. § 1681i(a)(1)(A).

The Ninth Circuit focused on the word “directly,” and found that dispute letters sent by Go Clean Credit LLC on behalf of the consumer were not sufficiently direct. The customer testified that he did not review the dispute letters, did not identify the items to be disputed, and “played no role in preparing the letters at all.” As such, the Ninth Circuit agreed that Experian’s decision not to reinvestigate did not equate to a violation of FCRA.

The Ninth Circuit limited the opinion to “the facts before us,” but the opinion is a must-read for credit repair companies.”

How can business owners confidently run their credit repair companies knowing the dispute services they provide can be legally nullified by a credit reporting agency’s suspicions? They can’t. But wait it gets worse.

A credit repair company needs revenue to survive and grow but two other federal laws make it virtually impossible for a credit repair organization to receive any cash flow in a timely manner. One is called CROA, the Credit Repair Organizations Act and the other is known as TSR, the Telemarketing Sales Rule.

Here are the pertinent parts of CROA.

• SUBCHAPTER II–A—CREDIT REPAIR ORGANIZATIONS §1679b. Prohibited practices

• (b) Payment in advance No credit repair organization may charge or receive any money or other valuable consideration for the performance of any service which the credit repair organization has agreed to perform for any consumer before such service is fully performed.

• (Pub. L. 90–321, title IV, §404, as added Pub. L. 104–208, div. A, title II, §2451, Sept. 30, 1996, 110 Stat. 3009–456.)

The Federal Trade Commission’s position on this is that all the services contracted for have to be fully completed before a credit repair organization can send a bill to the client. They do not accept that a company can offer an initial consultation and then receive payment after the consultation is completed. Also they do not interpret this to mean a credit repair company can complete work for one month and then be payed for those services at the beginning of the following month when the complete service may take several months. This of course is a crushing blow to credit repair services who would have to wait six months or more to receive payment.

However, the FTC’s position on this has not always held up in court. Lawyers for credit repair defendants have won some battles, for example Ducharme v. Heath, so they argue CROA law permits, and has been judicially construed to permit, a fee to be charged upon completion of “any service” in the course of the engagement, even if it is incremental, such as letter writing or telephone consultation and even if an improvement in credit is ultimately not achieved. So this is good news, right? Well not exactly.

The second regulation (which has the force of law) that cripples cash flow for credit repair companies is the TSR, the Telemarketing Sales Rule. Here’s what the Federal Trade Commission says about this regulation as it pertains to credit repair companies receiving payment.

Payment Restrictions on Sales of Credit Repair Services

Credit repair services promise consumers with a bad credit history that they can remove negative information from, or otherwise improve, a consumer’s credit history, credit record or credit rating, regardless of whether the information is accurate.

The TSR prohibits sellers and telemarketers from requesting or receiving payment for credit repair services before two events occur:

• One, the time frame during which the seller has promised services will be provided must have expired. Sellers can represent the time frame for the delivery of the services either orally or in writing, including in the contract for the services. If there’s a discrepancy between the various representations by the credit repair seller, the longest time frame represented determines when payment may be requested or received.
• Two, the seller must provide the consumer with evidence that the improvement promised in the consumer’s credit record has been achieved. The evidence must be a consumer report from a consumer reporting agency, issued more than six months after the results were achieved. Nothing in the TSR affects the requirement in the Fair Credit Reporting Act (FCRA) that a consumer report may be obtained only for a specific permissible purpose.

This prohibition is directed at the deceptive marketing and sale of bogus credit repair services; it is not directed at the non-deceptive telemarketing of secured credit cards or legitimate credit monitoring services. No one can permanently remove or “erase” negative entries on a consumer’s credit report if the information is accurate and current. Deceptive credit repair services may be able to cause negative credit information to disappear from a consumer’s credit report temporarily by flooding a credit bureau with letters disputing the accuracy of the negative entries. But once the credit bureau verifies with creditors that the negative items are accurate, they will reappear on a consumer’s credit report and stay there for up to seven years and, in the case of a bankruptcy, for 10 years.

If an item is inaccurate, incomplete, or more than seven or 10 years old, consumers can remove or correct the information themselves at no charge if they follow the dispute procedures in the FCRA. Consumers do not need the services of a third party to correct an inaccurate or out-of-date credit report. No one can do anything to “repair” a bad credit report that is accurate and up to date.

As you can see, the FTC is not fond of the credit repair industry. You may ask how any business could survive under such draconian restrictions? Well of course it couldn’t and that was the point of the law (as it relates to credit repair companies) all along. It’s another powerful example of how the credit bureaus and their lobbyists outplayed, outfoxed and outspent the credit repair industry. I know because I was there when much of this was occurring. The credit repair industry had one excellent lobbyist, Mark Guimond (who worked tirelessly for peanuts) and a couple of dozen small business folks who traveled to Washington DC every few months to talk with lawmakers on Capitol Hill. We were no match for the credit bureaus, banks, insurance companies and their deep pockets.

Why Credit Repair Companies Are Rightly Upset And Confused

You might have noticed that CROA and the TSR seem to conflict. If some courts have found that under CROA, a credit repair organization may charge a consultation fee plus monthly fees or pay-per-deletion fees shouldn’t that take precedence over the Telemarketing Sales Rule which makes a company wait a year or more to receive payment?

In a complaint brought by the Consumer Financial Protection Bureau, CFPB, a credit repair company, Prime Market Holdings LLC, tried this argument in a court motion and lost. Here’s a rundown of the case by William I. Rothbard of FTCAdLaw Court Ruling Upholds Business-Killing Telemarketing Rule .

Additionally it is virtually impossible for a credit repair company not to be classified as a telemarketer under the TSR. None of the exceptions apply to a credit repair service that makes more than one consumer phone call per year while engaged in interstate commerce. CROA and the TSR contain no exemptions for attorneys who offer services covered by these laws.

The vast majority of these small business owners aren’t trying to defraud or scam the public; they’re just legally handcuffed from offering any kind of effective service. Some owners are familiar with parts of these federal laws but few really grasp the danger they face while operating a credit repair business. In my opinion they have every right to be upset.

Didn’t CROA Make Credit Repair Companies Legitimate?

Many will object to what I am revealing here. They will cry out that the Credit Repair Organization Act established, recognized and made credit repair companies legitimate. If one truly believes that then I suggest he look at the entire picture. Study credit repair, open an office, start marketing, etc. From what we have learned above here’s what could happen.

The credit reporting agencies can legally refuse to do anything with your clients’ disputes. Your clients will not be happy. If you engage in interstate commerce you cannot receive even a penny from your credit repair customer for a year or more after you sign him up. With no cash flow you will not be happy. If you violate these laws and regulations the penalties are severe.

Two years ago respected Atlanta-based credit expert, John Ulzheimer made the claim that because of CROA, “Today, there are considerably more legitimate credit repair companies than there were 20 years ago”. In fact because of CROA, FCRA and TSR, the opposite is true. Today there are considerably fewer legitimate credit repair companies than ever before. This is unfair but indisputable. If you owned a credit repair company would you enjoy running a business with the Sword of Damocles hanging over your head?

One Credit Repair Company Is Fighting Back

Generally in America small business services are encouraged, respected and applauded. They bring jobs and tax revenue for communities. However this isn’t the case for credit repair companies. They are forced to comply with laws designed to put them out of business while being bombarded with public relations smear campaigns that paint them all as scam artists and fraudsters. Imagine the stress these credit repair companies must be under while trying to work in such a hostile environment.

In my opinion this atmosphere exists because the authorities, government agencies, credit bureaus, banks, tech giants and insurance companies consider control of consumer credit and related data bases too valuable to lose. The profit potential is staggering. Read “Zero Day Threat” by Byron Acohido and Jon Swartz where they reveal the many ways that established corporations and technology giants have fixated on controlling credit reporting and the Internet to maximize their profits, heedless of increased risks to consumers.

What chance did the credit repair industry ever have against such ruthless and formidable opponents? The only way this will change is through the courts, eventually the Supreme Court. Honest and sincere grassroots efforts and lobbying has never worked for credit repair companies. Too often politicians do the bidding of the wealthy and powerful corporations at the expense of regular folks. There is some hope for credit repair companies. Lexington Law is fighting back with an interesting and strong motion to dismiss a lawsuit filed against them by the Consumer Financial Protection Bureau, arguing the complaint does not state a claim, some of the claims are untimely, and the leadership structure of the bureau is unconstitutional. I’ll keep you updated on that case here at Credit Scoop News.