Talking to consumers about how their borrowing and payment decisions will impact their credit reports and credit scores is a critical part of helping them make solid financial decisions.

But legal restrictions originally intended to regulate credit repair companies may ultimately deter companies from engaging in those types of discussions.  

The Ninth Circuit Court of Appeals in Pasadena, Calif., in February, issued an opinion in the appeal of Stout v. FreeScore LLC concerning the scope of the Credit Repair Organizations Act (CROA). The court reversed a lower court ruling and held that FreeScore was a "credit repair organization" for purposes of the CROA because of representations made on its website and in television advertising that it offered a service, in return for money, for the purpose of helping consumers improve their credit history or credit rating.

While the Ninth Circuit’s decision departs from the text of CROA, it falls in line with a broad view asserted by the Federal Trade Commission and class action attorneys.

The significance of the ruling extends beyond FreeScore and sends the message: If you think you’re not a credit repair organization, check again. Review any consumer-facing messages. Companies that talk about credit and credit-related products and services must consider CROA as part of their compliance program.

CROA, which took effect in 1996, prohibits untrue or misleading representations and requires certain affirmative disclosures in the offering or sale of credit repair services. The law further bars credit repair companies from demanding advance payment, requires that credit repair contracts be in writing and gives consumers certain contract cancellation rights.  

In the FreeScore case, the defendant offered credit scores, reports and consumer credit information via a website and television advertising. The plaintiff in a putative class action alleged that the defendant was subject to the strict requirements of CROA. The defendant argued that it did not make any promises of credit improvement and therefore was not subject to CROA. The district court agreed and held that the plaintiff failed to demonstrate that any of defendant’s representations were made for the express or implied purpose of improving a consumer’s credit record, credit history or credit rating as required by CROA.  

On appeal, the panel reversed the judgment of the district court and remanded the case for further proceedings. According to the appeals court:

"From the plain language of the statute, it is clear that under the CROA, a person need not actually provide credit repair services to fall within the statutory definition of a credit repair organization.  Instead, the person need only represent that it can or will sell, provide, or perform a service for the purpose of providing advice or assistance to a consumer with regard to improving a consumer’s credit record, credit history, or credit rating."

The Ninth Circuit found that FreeScore’s advertisements clearly go beyond merely providing information about one’s credit. FreeScore even goes so far to recommend a course of action to consumers, as its advertisements tell consumers to use to "spot damaging inaccuracies," and use "instant email alerts" that notify them when "critical changes appear on [their] credit report so [they] can make corrections fast!" The court concluded that the overall impression communicated by is that to repair a damaged credit score the best solution is to use services such as credit monitoring that can have an immediate credit score impact.

The appeals court noted similar decisions including Zimmerman v. Puccio, (1st Cir. 2010), where the court concluded that services or “credit counseling aimed at improving future creditworthy behavior is the quintessential credit repair service;” and Helms v., Inc.(N.D. Ala. 2005), where the court concluded that a company only offering educational information, such as credit reports, credit scores and credit monitoring, was a credit repair organization.

That said, the scope of CROA is not settled. Indeed, some courts have been able to distinguish between credit repair and credit monitoring under CROA. As the Ninth Circuit noted, other courts have found that the definition of “credit repair organization” does not encompass entities that provide credit information so consumers can improve their own credit. See Hillis v. Equifax Consumer Servs., Inc., (N.D. Ga. 2006); Plattner v. Edge Solutions, Inc., (N.D. Ill. 2006).

CROA can be enforced by the Federal Trade Commission, state Attorneys General and by private plaintiffs in court (including as class actions). Consumers can sue to recover the greater of the amount paid or actual damages, punitive damages, costs and attorney's fees for CROA violations.

Jonathan L. Pompan is a partner in the Washington, DC office of Venable LLP, and co-chair of the firm’s Consumer Financial Protection Bureau Task Force. His practice focuses on representing nonbank financial products and services providers, advertisers and marketers and trade and professional associations, before the CFPB, the Federal Trade Commission, state Attorneys General and regulatory agencies. He can be reached at: 202.344.4383.

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