QUESTION
Our CEO has notified our loan officers that she will not accept any applications where credit repair has taken place. Some of our loan officers now threaten to leave the company because they view credit repair as a legitimate business.
Maybe it is and maybe it isn’t. I am not in a position to know. But I do know that the CFPB has been very litigious against credit repair companies for all sorts of violations. And the CFPB has been getting some hefty settlements.
We have been tasked with drafting a pamphlet to give applicants about the hazards involving credit repair. We are supposed to say that our company will not process applications if a credit repair company is used.
Since you have written about the scams to consumers and challenges to lenders from credit repair companies, I hope you can provide a brief outline for our pamphlet.
What should our pamphlet say about the scams and dangers of credit repair?
ANSWER
I think there is a tendency to take the whole credit repair industry to task because of the frauds perpetrated by several of its members, large and small. It is better to educate consumers about the risks than to tar all credit repair services with the nefarious actions of bad counselors. Many credit repair companies make a positive contribution to consumers’ financial welfare.
Generally, credit repair organizations[i] sell, provide, or perform any service in return for the payment of money or other valuable consideration for the express (or implied) purpose of improving a consumer’s credit record, credit history, or credit rating or providing advice or assistance to a consumer with respect to any such activity or service.[ii]
You are correct in stating that there have been substantial settlements involving credit repair companies, two of the largest being CreditRepair.com and Lexington Law. The settlement was reached in litigation with the Consumer Financial Protection Bureau (CFPB). Both companies are now bankrupt, each owned by PGX Holdings, Inc., which is reorganizing in bankruptcy.[iii] The settlement, among other things, states that the companies collected illegal advance fees for credit repair services through telemarketing in violation of federal law.[iv]
The stipulated judgment will impose more than $64 million in civil monetary penalties and a $2.7 billion judgment for redress. Plus, it will require notices about the settlement to be sent to enrolled consumers, including information about canceling the service. Finally, for ten years, the settlement bars these companies from doing business with certain marketing affiliates and bans them from telemarketing any credit repair services or others marketed through telemarketing.
I won’t second-guess the reasons why your CEO has decided not to take a loan application if the applicant used a credit repair company, but considering the case of CreditRepair.com and Lexington Law, and the CFPB’s far-reaching the CFPB’s examination and enforcement authorities, she may be mindful of the legal, regulatory, and operational risks.
Providing a pamphlet about credit repair to the applicant is a good idea. It is proactive. If you offer a pamphlet but do not accept loan applications from people who use or plan to use credit repair, it would be helpful to state the company’s position in the pamphlet and appropriate disclosures. But this is not just a business decision.
Suppose you take the application but discover that the applicant used a credit repair service, and you have a blanket policy that rejects such applications. In that case, you may need to reject the application, possibly based on an inability to verify credit eligibility. That decision would cause the issuance of Regulation B disclosure (i.e., Adverse Action), which requires you to disclose why you rejected the application. The Equal Credit Opportunity Act (ECOA)[v] and Fair Credit Reporting Act (FCRA)[vi] would likely apply. In fact, there are several moving parts, regulatory, legal, credit underwriting, and operational, to the decision not to accept applications where credit repair is used. The decision to implement a blanket policy to ban all applications where consumers have used credit repair or credit relief guidance is fraught with risk. Before implementing these plans, I suggest you discuss them with competent counsel or compliance professionals.
However, in general, issuing a pamphlet to applicants is worthwhile. You don’t have to discourage an applicant from using credit repair services if you offer the pamphlet to warn applicants about potential scams, frauds, ripoffs, shams, deceptions, swindles, and telemarketing crimes. The warning may be enough!
Legitimate credit repair services follow numerous federal laws, including the Credit Repair Organizations Act[vii] and, as applicable, the Telemarketing Sales Rule,[viii] both of which forbid credit repair organizations from using deceptive practices and accepting up-front fees.
The CFPB has provided substantial guidance to consumers. Several years ago, the CFPB issued a Consumer Advisory called Don’t Be Misled By Companies Offering Paid Credit Repair Services.[ix] The Bureau also published an article on How To Avoid Credit Repair Service Scams, which is easy to adapt to a pamphlet format.[x] A fine pamphlet on credit repair fraud, entitled Consumer Pamphlet: Credit Repair Fraud, is provided as a public service for consumers by The Florida Bar.[xi] In drafting your pamphlet, consider including these publications in your review.
It would help if you listed some caveats in the pamphlet that can assist consumers in evaluating credit counselors. A well-known resource for finding a credit counselor is the National Foundation for Credit Counseling. Contact information about it can be offered in the pamphlet.[xii]
Whatever caveats you choose, such a list should at least include these five Red Flags:[xiii]
1. They demand payment upfront.
The company wants you to pay before it provides any services. Under the Credit Repair Organizations Act, credit repair companies can’t request or receive payment until they’ve completed the services they’ve promised. Some companies will structure monthly payment plans to avoid this requirement, and you should know that no form of upfront payment is legal.
A simple rule to follow is “Don’t pay upfront.” If the company uses telemarketing such that the Telemarketing Sales Rule applies, the company may not request or receive fees until it has provided you with a credit report generated more than six months after the promised results that shows the results.
2. It sounds too good to be true.
The company tells you it can get rid of the negative credit information in your credit report in a short period, even if that information is accurate and current. Also, if they promise a specific increase in your credit score or guarantee a certain result.
No one can guarantee this. It simply takes time to repair your credit file.
3. They can’t answer questions.
The company representative can’t explain the specifics of the services they are offering you or the total cost for those services.
Asking a few simple questions can help you determine if you are dealing with a reputable organization.
4. They hold back or provide misinformation.
The company doesn’t inform you of your rights, including your right to obtain a written contract outlining the details of your arrangement, as well as having the ability to cancel your contract with the company within three business days. The company does not disclose the full cost of its services, and/or the company suggests that you should not (or cannot) contact any of the nationwide credit reporting companies directly (you can).
5. They ask you to misrepresent information.
The company suggests that you try to invent a “new” credit identity – resulting in a new credit report – by applying for an Employer Identification Number instead of your Social Security Number.
Jonathan Foxx,
Ph.D., MBA
Chairman &
Managing Director
[i] See §1679a(3)(A)(i)-(ii), 15 USC
Chapter 41, Subchapter II-A: Credit Repair Organizations, From Title 15:
Commerce and Trade, Chapter 41—Consumer Credit Protection
[ii] Ibid. §1679a(3)(A), Credit repair
organizations include entities that can or will sell, provide, or perform
credit repairs.
[iii] Credit repairer PGX begins
bankruptcy with $12 million loan, Knauth, Dietrich, June 6, 2023, Reuters. PGX
also owns Credit.com.
[iv] CFPB Reaches Multibillion Dollar
Settlement with Credit Repair Conglomerate, Press Release, August 28, 2023,
Consumer Financial Protection Bureau; Bureau of Consumer Financial Protection v
Progrexion Marketing, Inc.
[v] Equal Credit Opportunity Act
[vi] Fair Credit Reporting Act
[vii] 15 USC §§ 1679-1679j, FTC; Title IV of
the Consumer Credit Protection Act, prohibits untrue or misleading
representations and requires certain affirmative disclosures in the offering or
sale of "credit repair" services. The Act bars companies offering
credit repair services from demanding advance payment, requires that credit
repair contracts be in writing, and gives consumers certain contract
cancellation rights.
[viii] 16 CFR 310, FTC; The Telemarketing
Sales Rule requires telemarketers to make specific disclosures of material
information; prohibits misrepresentations; sets limits on the times
telemarketers may call consumers; prohibits calls to a consumer who has asked
not to be called again; and sets payment restrictions for the sale of certain
goods and services.
[ix] Don’t Be Misled By Companies Offering
Paid Credit Repair Services, Consumer Advisory, Consumer Financial
Protection Bureau, issued September 20, 2016, updated December 3, 2019.
[x] How To Avoid Credit Repair Service Scams,
Brown, Desmond, September 23, 2016, updated July 30, 2019, Blog, Consumer
Financial Protection Bureau
[xi] Consumer Pamphlet: Credit Repair
Fraud, The Florida Bar, updated June 2023, https://www.floridabar.org/public/consumer/tip005/.
Note, the article appears to be copyrighted, so contact the organization for
permission to publish it in whole or in part.
[xii] The nonprofit National Foundation for
Credit Counseling has a website at https://www.nfcc.org.
Its telephone is 800-388-2227.
[xiii] Op. cit. x
