Credit repair organizations after regulation: wolves in nonprofits' clothing?

• Author: Moakley, Marta Lugones

Some time has passed since "credit repair" organizations emerged on the commercial landscape and led regulators to take notice in the 1980s. A product of modern American society's tendency to overspend and overfinance, credit repair organizations entice consumers with products and services that would "repair" a consumer's credit report in order to avoid future problematic and embarrassing rejections for credit. As with most advertised quick fixes, many products and services offered by credit repair organizations were not viewed by consumers as effective as had been initially marketed. Companies routinely advertised to take consumers out of debt in record time despite limited possibilities of doing so utilizing lawful means. Some even encouraged consumers to engage in fraudulent acts to accomplish such extraordinary results.

Consumers invested funds with credit repair organizations which would have been better spent toward reducing their own mounting debt. Many consumers became disappointed when negative credit information remained on their credit reports for the usual legal time periods, which range from three to seven years for ordinary debts, and can be as much as 10 years for bankruptcies. In some instances, debt collectors continued to contact consumers, and the lack of a healthy credit history resulted in continued embarrassing rejections for financing and other extensions of credit.

In response to rampant consumer dissatisfaction, many enforcement agencies sponsored legislation to prevent such deceptive practices on the part of credit repair organizations. Some businesses implemented the legislative mandates and continued operations in a legitimate manner. However, numerous targeted businesses sought to identify loopholes in the new legislation and initiated changes in their organizational structure or certain key promotional tools that could exempt them from the new laws.

In order to make informed decisions, consumers should be aware of the evolving tactics used by credit repair organizations in their marketing and business practices. As is discussed below, it is important for consumers to identify "credit repair," even if it is not so termed, and understand the services for which they are contracting.

What Does Credit Repair Look Like?

Many organizations currently engaging in "credit repair" services no longer use the term. At first, businesses used the term due to its appeal to consumers with negative credit histories. However, "credit repair" has taken on negative connotations in recent years, akin to the much-maligned term "telemarketer." "Credit repair" companies have been the subject of many a consumer advocate's cautionary tale: They have been portrayed as scam artists who pitch quick financial stability only to eventually destroy credit ratings and perhaps force consumers into bankruptcy. Indeed, the practices of a few companies have given the entire industry a black eye--so much so that even bad actors have recently distanced themselves from the name "credit repair."

A typical credit repair scheme is predicated upon the use of marketing claiming that a consumer's bad credit will be repaired by purchasing a particular company's financial services. (1) Certain credit repair companies have claimed to erase errors on a consumer's credit report by exploiting technicalities, while others have promised to provide a consumer with stellar credit by arranging for new federal tax identification numbers. Some engage in debt consolidation services and even employ elements of multi-level marketing. Certain organizations actually forego a hands-on financial services approach and simply provide limited services, such as mailing literature or holding a training seminar, in order to provide the tools to "repair" a consumer's credit. Prior to regulation, the hallmark of most credit repair organizations was the billing of advance fees to consumers before any credit repair services were provided.

Other iterations of credit repair schemes include advance fee secured or unsecured credit card promotions, which market such cards as a way to build up credit, but can often result in consumers paying hefty fees for credit card applications or worthless "pay as you go" cards. Other programs are billed as methods to rebuild credit and consolidate debt, but which often charge additional undisclosed and significant fees. Related schemes include mortgage assistance frauds, where, for a hefty advance fee, companies promise consumers assistance in saving a home from foreclosure, only to eventually fail to do so, all the while depriving the consumer of their legal rights.

Whereas some schemes are obviously fraudulent, others are deceptive or less conspicuously unfair. For example, where success in a plan has been predicated upon a consumer engaging in fraudulent acts such as assuming a name or using another's social security number, such business practices are clearly fraudulent. In addition, schemes that failed to provide adequate disclosures to consumer or demanded illegal advance fees resulted in consumer harm. (2)

The problem inherent within all such schemes is that, even if each company charges only a small amount of money as an advance fee to each consumer, the percentage or relative loss to the consumer is enormous. (3) The companies engaging in outright credit repair scares, however, are preying on some of the most vulnerable segments of the consuming public: those on fixed incomes, such as seniors; those with major debts, perhaps brought on by illness; and those who simply cannot afford their own bills, much less oppressive advance fees.

At the root of the problem is the tendency of these schemes to take a consumer's money and put it toward high and possibly unnecessary fees prior to any services being provided, when the consumer is desperately trying to make ends meet. In many instances, even the work of reputable credit repair organizations may be accomplished easily and economically by the consumer's directly dealing with creditors. (4) A consumer could be much better off placing whatever funds to which they have access toward the payment of already existing bills, rather than to a new creditor's advance fees.

The proliferation of such business practices by credit repair organizations caused investigations by law enforcement agencies at all levels of government. In addition to the traditional methods of enforcement available to agencies against such scams, new regulations were enacted in order to specifically address many of the abuses perpetrated on the consuming public by credit repair organizations.

Regulators' Response to Credit Repair Organizations

In order to combat the ill effects of credit repair organizations' business practices on consumers, regulators at the federal and state levels enacted a number of statutes addressing these practices, both on a broad and on a specific basis.

Traditionally, consumer protection regulation has consisted of barring trade practices which are misleading, deceptive, unfair, or unconscionable, or in any way restrict trade. Laws which have been employed in regulating credit repair organizations are discussed in detail below.

* The Federal Credit Repair Organizations Act

The Federal Credit Repair Organizations Act (CROA) is a consumer protection statute enacted September 30, 1996. The CROA is a sub-chapter of the Consumer Credit Protection Act. (5) The CROA was enacted because "[c]ertain advertising and business practices of some companies engaged in the business of credit repair services have worked a financial hardship upon consumers, particularly those of limited economic means and who are inexperienced in credit matters." (6)

A credit repair organization, as defined by the CROA, is any person who uses an instrumentality of interstate commerce or the mails to provide services that improve a consumer's...