Laws About Offering Credit Repair

There are federal laws about offering credit repair, and unfortunately, credit repair clinics don't hesitate to break them. The Missouri Attorney General's Office states that the Federal Trade Commission--the governmental agency charged with enforcing consumer protection laws--as well as numerous state AGs have filed suits against numerous credit repair clinics for making false promises to consumers.

Fair Credit Reporting Act

The financial advisers at Credit.com state that the typical method used by credit repair organizations is to promise to remove negative information from a consumer's credit history maintained by the three credit bureaus (Experian, Equifax and TransUnion). Once the credit repair company obtain copies of the consumer's credit reports, they then challenge negative information that is both accurate and timely on behalf of the consumer for a hefty fee. However, the Federal Trade Commission notes that the Fair Credit Reporting Act authorizes consumers to dispute information on their credit reports directly if it is inaccurate or erroneous--something that credit repair organizations fail to mention. Under the FCRA, credit bureaus are not required to investigate disputes they consider frivolous or irrelevant.

Credit Repair Organizations Act

The FTC advises consumers to be wary of credit repair organizations that demand payment upfront. The Credit Repair Organizations Act forbids these companies from making consumers pay until they have actually delivered the services as promised. Additionally, under this law, a credit repair organization cannot render services until a consumer signs a written agreement and a three-day waiting period is completed. During this time, the consumer is given the opportunity to cancel the agreement without being charged any fees.

File Segregation

A highly illegal tactic used by some credit repair organizations is to encourage consumers to violate the law by obtaining an employer identification number (EIN) from the Internal Revenue Service which they use in lieu of a social security number. File segregation offers consumers a new credit identity to use to obtain new credit. This is a violation of the CROA as well. The FTC warns that its a federal crime to obtain and use an EIN under false pretenses for the purpose of hiding a Social Security number attached to poor credit. Additionally, consumers who take the route may be prosecuted for mail or wire fraud if they use the mail service, telephone or Internet to apply for credit using falsified information.

FTC Involvement

Credit repair services are a well-established scam. In February 2006, the FTC initiated Project Credit Despair to crack down on credit repair organizations that deceived consumers into believing that accurate negative information could be removed from credit reports (and who paid for the services). Consumers who feel that a credit repair organization has violated the law should contact the FTC's Consumer Response Center at (877) 382-4357) or file a complaint through the agency's online form (see Resources).