FTC Cracking Down on Credit Repair Practices

A crackdown on credit repair clinics is under way, as the Federal Trade Commission prepares a major initiative in early April.

Driving this offensive is the agency's telemarketing sales rule, which went into effect at yearend. The rule, part of the Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, declares war on credit repair services, forcing them to dramatically alter the way they conduct business.

"The sales rule allows us to prove that credit repair clinics are doing something illegal," said David Medine, an attorney with the FTC.

At the heart of the grievances against the industry is the deceptive manner in which credit repair companies advertise and market their services, which they claim will eliminate incorrect information from consumer credit reports.

For example, earlier this month, the FTC announced a settlement with two New York city law firms claiming to have "successfully facilitated the removal of late payments, foreclosures, repossessions, loan defaults, tax liens, judgments, and bankruptcies," from clients' credit reports.

The FTC charged that the law firms cannot remove accurate derogatory information from credit reports, as they had implied in their advertisements. Moreover, the FTC disputed the law firms' claim of having substantially improved thousands of clients' credit reports.

Some credit repair clinics also encourage consumers to start a fresh credit history by creating a new identity with a new social security number, new addresses, and a "new taxpayer identification number."

Following such instructions is a violation of federal and criminal law, said the FTC.

While credit bureaus also object to these practices, their complaints against the credit repair industry are more bottom-line. Such companies cost credit bureaus money and time.

John Ford, vice president, privacy and external affairs for Equifax Inc. says about 25% of consumer disputes involving credit report information the Atlanta-based credit bureau receives are generated by credit repair companies. "This kind of inundation does not allow us to respond as quickly to others," said Mr. Ford.

The credit bureaus have become adept at spotting disputes from consumers working with credit clinics, because often such consumers cite legislation and write form letters.

Typically, credit clinic clients claim that a negative account does not belong to them, said Mr. Ford.

By law credit bureaus must verify the information within 30 days, and if they are unable to do so, the disputed information must be removed from the consumer's report.

The new telemarketing rule is aimed at closing the loophole this 30-day requirement leaves open for credit repair companies.

Credit clinics are now forced to prove that their services, which range from $500 to $2,000, are effective. If a credit bureau learns from the credit grantor after the 30-day period that the account in question was indeed late, for example, the late payment is reinstated in the credit report. Credit clinics, therefore, must wait more than six months before they can collect fees for their services to make sure that only inaccurate information is deleted.

Credit clinics, usually small independent operations with less than five employees, have been scrutinized in past years, but this latest legislative salvo appears to have immobilized them.

Charles Rosseel, president of National Credit Group, a small credit repair operation in Boston said, "This could wipe out the entire industry. I'm hoping there will be a court challenge to this provision, but I think everyone is too shell-shocked."

The only organization that seemingly could speak out on behalf of credit repair clinics is the American Council on Credit Reporting Accuracy, which represents about 50 such companies.

Top officials from the council would not return telephone calls.

The telemarketing rule has forced many of Mr. Rosseel's colleagues to stop advertising, lay off employees, and restrict their business to their local market.

"I am prevented from doing business across state lines unless someone is referred to me," said Mr. Rosseel.

While the FTC and the Associated Credit Bureaus, a trade group representing credit bureaus, believe the number of credit repair organizations has increased, they cannot substantiate their observation with actual statistics.

The accuracy council calculated several years ago that there were 9,000 such operations. The group also claims that 47% of all credit reports have errors.

Norman Magnesun, a spokesman for the Associated Credit Bureaus, countered that only one in a thousand reports contain errors that would affect a consumer's ability to get credit.

Associated Credit Bureaus formed a task force eight months ago to closely follow the credit repair industry, which Mr. Magnesun said is difficult to keep track of because it is not well organized and companies do not stay in business long. The Internet, however, is becoming the venue of choice for credit repair companies, making it more difficult to monitor them.

"In the old days credit clinics had an office. Now they are doing things electronically at (minimal) cost," said Mr. Magnesun "The FTC is concerned about this."

In fact, the FTC has charged nine companies doing business on the Internet with fraudulent practices since November 1994.

The April initiative to highlight the telemarketing sales rule will likely sweep up more such cases. Associated Credit Bureaus, the FTC, and the National Association of Attorneys General are preparing this joint effort.

As part of the campaign, the partners hope to convince newspapers across the United States to run disclaimers in their classified sections, which are popular advertising spots for credit repair companies.

"We are asking newspapers to bear some responsibility for the ads they run," said Mr. Medine.

At least one bold credit repair advocate is fighting back.

Bruce J. Danielson, founder and chairman of Masters of Money and Credit Corp., a Dallas-based credit repair company, filed a lawsuit in January against the three major credit bureaus, the National Foundation for Consumer Credit and its Dallas affiliate, and Texaco, alleging that the defendants are engaging in monopolistic and collusive practices aimed at putting Masters of Money out of business.

"I hope Bruce knows what he's up against," said Mr. Rosseel. "That's a real David and Goliath story."

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