Credit Repair Services – Cautioning the Consumer

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

Lenders Compliance Group

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[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

Credit Card Relief Scams

QUESTION 

We allow our loan applicants to pay for certain services by credit card. One service that we do not offer is credit relief. But our loan officers send applicants with poor credit to a credit relief company. The credit relief company repairs their credit, which makes it possible for us to get them a mortgage on improved terms. Most of the time, their credit problems involve credit card debt. 

Recently, an attorney for one of our loan applicants contacted us about the applicant being scammed by the credit relief company. He's threatening to contact law enforcement, the state banking department, the FTC, and the CFPB. For what it's worth, I had told the CEO not to use credit relief companies, but he ignored me. 

I know you have written about all kinds of scams over the years. I want to show the CEO your feedback. Maybe he will change his mind about using a credit relief company. 

What are some dangers of using a credit relief company? 

ANSWER 

Yes, indeed, I have written extensively about credit relief companies. They pose a threat to the banks and nonbanks in many ways. Your scenario, unfortunately, happens all the time. The Federal Trade Commission (FTC) is very aggressive in going after these companies. 

If your CEO calls me, I will tell him to knock it off! He's playing with fire. Whatever his reasons (which I assume are based on profit incentives), the risk is much too high to justify such a tactic to originate mortgage loans. 

There is a constant stream of administrative and litigious actions against credit card relief scams. I'll pick just one bad actor out of the barrel of thousands of bad actors that have been caught in the FTC's net. But other federal and state agencies are continually monitoring and prosecuting these scammers. If your company is referring clients to them, you could come in for rather unpleasant special treatment by these agencies. 

Let's take a brief look at the FTC's action against a credit card debt relief scheme operated by Sean Austin, John Steven Huffman, and John Preston Thompson and their affiliated companies that allegedly took millions from people by falsely promising to eliminate or substantially reduce their credit card debt. 

In the Complaint, Federal Trade Commission v Acro Services LLC, et al,[i] the FTC alleged that, since 2019, Austin, Huffman, and Thompson operated a network of companies incorporated in Tennessee, Nevada, New Mexico, and Wyoming that worked together as a common enterprise to support their deceptive credit card debt relief scheme.[ii] Their companies allegedly operated under multiple names, such as ACRO Services, American Consumer Rights Organization, Consumer Protection Resources, Reliance Solutions, Thacker & Associates, and Tri Star Consumer Group. 

The deceptive and unlawful tactics allegedly included:[iii] 

Deceptive Telemarketing

The operators violated the Telemarketing Sales Rule[iv] by using telemarketers to call consumers and pitch their deceptive scheme. The telemarketers often falsely claimed to be affiliated with a particular credit card association, bank, or credit reporting agency and promised they could greatly reduce or eliminate consumers' credit card debt in approximately 12-18 months. 

Making Phony Debt Relief Promises

In marketing their services, the scheme's operators claimed to use several bogus methods to reduce or eliminate consumers' credit card debt. For example, they falsely claimed that consumers may qualify for a federal debt relief program or that a consumer doesn't owe the debt because it hasn't been "validated." 

Charging Deceptive Upfront Fees

Consumers who agreed to sign up for the debt relief program were charged an upfront enrollment fee of thousands of dollars depending on a consumer's available credit. They were falsely told it is part of the debt that will be eliminated as part of the program. Consumers were also charged monthly fees ranging from $20-$35 for "credit monitoring" services. 

To compound the misery, consumers who signed up for the defendants' services were allegedly told to stop making payments to their credit card companies and communicating with those companies. Consumers, however, were never informed that as a result of such actions, they could be sued for failing to pay their credit card debt, may accrue even more debt, and could damage their credit scores, which could also harm their ability to get credit in the future, the FTC alleged. Nice guys! 

They wound up being temporarily shut down, and their assets were frozen.[v] QED 

Consumers often do not know how to spot a debt relief scam. Two signs of this fraud are (1) the consumer gets an unsolicited call from a scammer helping to eliminate their debt, and (2) the scammer asks for upfront fees. Another trick of this nasty scam is where the scammer tells the consumer to cut off communication with creditors. When a debt settlement company says the consumer must cut off all contact with the creditors and doesn’t disclose potential consequences such as collection actions or damage to the consumer’s credit, that’s a red flag of a debt settlement scam. 

Other ornery stratagems include where the scammer refuses to send the consumer information about the debt relief company unless the consumer first provides financial information (such as credit card account numbers and balances, and offering guarantees about lowering or erasing the debit. 

I do not want to paint all debt relief companies with too broad a brush. Legitimate debt relief companies can help consumers to avoid bankruptcy and get their credit back on track. Most debt relief companies are debt settlement companies whose ultimate goal is supposedly to help the consumer settle their debt, sometimes for less than what they owe. But their services are never free, and often costly, with some companies charging significant fees for their help. 

Debt settlement companies may tell the consumer to stop paying debts during the negotiation process with creditors to enable them to expedite the settlement process; however, they do not tell the consumer to cease contact with the creditors. The idea of negotiating is to convince the creditors that the consumer cannot repay the borrowed amount. Through the negotiation, leading to a debt management plan, the goal is for the creditor to settle for less rather than getting nothing by pushing the debtor into bankruptcy. 

If your CEO wants to continue to use a credit relief company, he should insist that the company comply with applicable FTC guidelines. According to the FTC, upfront, a debt settlement company must disclose the fees, conditions, and terms of service; how long it will take to achieve results; the amount the consumer must save in a dedicated savings account before the company makes an offer to each creditor on the consumer’s behalf; money in a dedicated account is the consumer’s to withdraw at any time without penalty; and the account administrator is not affiliated with the debt settlement provider and doesn’t get referral fees 

Based on your question, your company is currently at legal and regulatory risk. I have only grazed the surface. Careful planning and appropriate due diligence must be done. Until that undertaking is conducted, resulting in legally sound guidelines, your loan officers should stop referring applicants to any credit relief company. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

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[i] Federal Trade Commission v Acro Services LLC, et al, US District Court, Middle District of Tennessee, 3:22-cv-00895, November 7, 2022

[ii] See FTC Halts Debt Relief Scheme that Bilked Millions from Consumers While Leaving Many Deeper in Debt, Release, November 30, 2022, Federal Trade Commission,

[iii] Idem

[iv] The Federal Trade Commission (FTC) enforces the Telemarketing Sales Rule.

[v] Temporary Restraining Order, Federal Trade Commission v Acro Services, et al, US District Court, Middle District of Tennessee, 3:22-cv-00895, November 21, 2022