Switzerland; the land of great skiing, hush hush banking, Roger Federer, and international neutrality. It’s that neutrality I’m going to imitate while writing this article. Why? The subject of credit repair is a powder keg, lightening rod, PR loser…chose your own metaphor. Opinions on the subject seem to be polarized, meaning you either like credit repair companies or you hate credit repair companies.
First off, what is a credit repair company? According to the Credit Repair Organizations Act (CROA), the Federal law that defines how credit repair companies must do business, a credit repair company is actually referred to as a credit repair organization (or CRO). And a CRO is anyone who “sells, provides, or performs any service, in return for the payment of money or other valuable consideration, for the express or implied purpose of improving any consumer’s credit record, credit history, or credit rating.”
There are some exceptions to that rule. If you’re non-profit and perform those duties then you’re not a CRO. If you’re a bank or a credit union then you’re also not a CRO. But if you are for profit, aren’t a bank, and sell services promising to help a consumer’s credit then you’re a CRO, whether you want to be one or not.
There are people who believe all credit repair is illegal. That’s not true. “Credit repair is anything but illegal if you do it the right way,” says Edward Jamison, a lawyer and the founder of CreditCRM, a developer of credit repair business software. And, the “right way” means you fully comply with the requirements of CROA and any state equivalent. How exactly do you comply with CROA? According to credit repair experts, CROA states that a CRO must do the following things, and others, in order to be in compliance:
1. Provide mandatory disclosures letting consumers know, among other things, that they can dispute credit information directly with the credit bureaus.
2. Avoid making any misleading or untrue statements about any consumer’s credit worthiness. You can’t say, “We guarantee we can remove your negative credit items.”
3. Avoid charging or receiving any money in advance of any services, which have not been fully performed. You can’t charge $100 for services that will be rendered over the next 30 days or you could become FTC road kill like these guys.
Credit repair services dispute information on your credit reports in an effort to get negative items removed. The exact volume of disputes isn’t known but according to Stuart Pratt, President of the Consumer Data Industry Association, the trade organization of the credit reporting agencies, the volume represents “no less than 30% of disputes.” This dispute volume is accomplished, according to Pratt, by “flooding” the credit bureaus with dispute letters in an attempt to “break the system” thus resulting in the removal of the offending credit entry.
Further, according to Pratt, “…credit repair efforts most often end up in failure.” However, on their website Lexington Law, a credit repair company, claims to have removed over 1 million items in 2009 alone including collections, late payments, charge offs, liens, bankruptcies, repossessions, foreclosures, and judgments. Given that the credit bureaus house over 200 million credit reports containing countless credit data items, that number represents a very small percentage as a whole of alleged errors but might be very meaningful for their much smaller customer base. It, however, omits the fact that many of the items would have been removed anyway if the consumer attempted to have them removed on their own, rather than paying a monthly subscription in exchange for credit repair services.
The credit industry has taken a beating thanks to CROA. In fact, both FICO (FICO) and Equifax (EFX) have settled class action lawsuits alleging they violated the act. Does anyone honestly believe that FICO or Equifax is a credit repair organization? This has lead to industry veterans, this one included, to call for a change in CROA so that it keeps the scam artists out of the industry, but allows for reputable companies to operate without fear of class action lawsuits for negligible or technical violations. The act seems to be overly burdensome in its requirements that might have made sense when it went into effect in 1996, but not so much in 2010.
There is also a move among credit repair industry leadership to change how the players operate so its long-tarnished reputation can be “repaired” (pardon the pun). According to Michael Citron, CEO of DisputeSuite, a developer of credit repair business software, “Most credit repair companies truly intend to do the right thing for consumers, and most are managed by good people.” He did acknowledge that, “There are some bad apples, as in any industry, however in the credit repair industry the amount of propaganda in comparison to the truth is not even close.”
Though Citron is obviously partial to the credit repair industry, he seems to be correct. According to the Federal Trade Commission, the organization tasked with enforcing the Credit Repair Organizations Act, only 2% of their complaints are specific to “Advance-Fee Loans and Credit Protection/Repair” and given the increase in advance fee loan scams the 2% figure can’t be attributed only to credit repair. To put this in perspective, the FTC receives over 250% more complaints about Internet auctions than it receives about credit repair and over 350% more complaints about lotteries.
So whether you like or dislike credit repair companies, their services are not flat out illegal, they don’t seem to be blatantly dishonest about their effectiveness and they aren’t dominating the complaint line at the FTC. But, you might very well be able to do what they do on your own.
There, now you pick a side! I’m Switzerland.
John Ulzheimer is the President of Consumer Education at SmartCredit.com, the credit blogger for Mint.com, and the author of the “credit history” definition on Wikipedia. He is an expert on credit reporting, credit scoring and identity theft. Formerly of FICO, Equifax and Credit.com, John is the only recognized credit expert who actually comes from the credit industry. He has served as a credit expert witness in more than 70 cases and has been qualified to testify in both Federal and State court on the topic of consumer credit.