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					  ARE THEY

A Study of the Credit Repair and
  Debt Settlement Industries,
Complaints, Laws & Enforcement

               Better Business Bureau Serving Eastern Missouri & Southern Illinois
                           211 N. Broadway Ste. 2060 St. Louis MO 63102
                      314.645.3300 | www.stlouis.bbb.org | bbb@stlouisbbb.org
    ARE THEY                                           A Study of the Credit Repair and
                                                         Debt Settlement Industries,
  CREDITABLE?                                          Complaints, Laws & Enforcement

        INTRODUCTION                                     lines separating the terms are often blurred. This
                                                         study will use primarily the following two
As outstanding consumer debt in the country              terms—credit repair to describe the activity in
soared to $2.5 trillion in January 2012 at an annual     which a consumer seeks the aid of a company to
rate of increase of 8.6 percent, consumers are           improve his or her credit report or score, and
seeking ways to reduce their debts or improve            debt settlement in which a consumer seeks a
their battered credit scores. Amid this scramble,        company’s help in lowering his or her debt or
unscrupulous companies and individuals are               monthly payments.
taking advantage of beleaguered consumers.
Sharply rising complaints filed with Better
Business Bureaus (BBBs) around the country
reflect this. Consumers seeking help from BBBs           Sources used in this study include the following :
to resolve their credit and debt problems with a         St. Louis and national BBB databases; the Federal
multitude of companies have increased more than          Trade Commission (FTC); state attorneys gen-
800 percent in five years, from 930 in 2006 to           eral; the Federal Reserve Bank; states’ laws; the
8,070 in 2010. The complaints tailed off in 2011 to      U.S. Code; U.S. Supreme Court; mainline news
6,096.                                                   media; company Web sites; and trade associa-
Federal and state authorities have enacted laws in
the past few years to counter the increased
activity on the part of questionable operators. In              PART I - CREDIT REPAIR
this study, the St. Louis BBB explores the rea-
sons for the surge in complaints and actions
taken by authorities to counter the activity, and            They Provided No Services
makes recommendations for changes.
                                                         For someone who is hampered by a bad credit
                                                         score, the ads that flood the Internet are enticing.
There are many terms describing activity in this
                                                         A Google search of “credit repair” brings up 16.4
area, such as debt relief, debt settlement, debt
                                                         million hits. Among them are these ads: “Fast
negotiation, credit counseling, credit repair, debt
                                                         Credit Repair - $29 – Raise Credit Score up to 130
consolidation, debt management plan, and the             pts,” or “Powerful Credit Score Analysis. One

Million Negatives Removed in 2010” and “Get            it “was born of the urgent need in the industry
Approved for Things You Want. 100 percent              for a regulating body that would serve to sepa-
Guaranteed, Get Started Today!”                        rate member credit repair companies from the
                                                       scammers and fly-by-night businesses who
In its brochure, “Knee Deep in Debt,” issued in        masquerade as professionals.”
February 2011, the FTC warned: “You should be
cautious of claims from so-called credit repair            There Are Laws
clinics. Many companies appeal to consumers
with poor credit histories, promising to clean up     While the growth of credit repair activity has
credit reports for a fee. But you already have the    increased dramatically, which may be because of
right to have any inaccurate                                                  the downturn in the
information in your file cor-                                                 economy, the questionable
                                          Consumers Paid an                   practices of some compa-
rected. And a credit repair
clinic cannot have accurate                                                   nies prompted Congress
                                           Average of $816 for
information removed from                                                      to enact a law regulating
your credit report, despite                     No Services                   the industry 15 years ago.
their promises.”                                                              In enacting the Credit
                                                                              Repair Organizations Act
A study of complaints filed with the St. Louis                                (CROA), Congress noted,
BBB underscores this statement. Although              “Certain advertising and business practices of
consumers paid credit repair companies an             some companies engaged in the business of
average of $816, 85 perecent of the complainants      credit repair services have worked a financial
said no services were provided by the companies.      hardship upon consumers, particularly those of
The companies refused refunds to most of the          limited economic means and who are inexperi-
complainants, while two consumers said they           enced in credit matters.”
received partial refunds.

The credit repair industry has boomed alarm-           BBB Complaints vs.Credit Repair Companies
ingly in the past few years. BBBs processed 133
complaints against credit repair companies in
2006 and 1084 in 2010. A Web site that promises
to help others in setting up their own credit
repair company promises earnings up to $88,000
per month. Other Web sites offer software for
credit repair companies.

The public perception of the industry is often
unsavory. Even trade associations reflect this in
their names. There is the National Association
of Responsible Credit Repair Advisors
(NARCRA) which says it is “dedicated to im-
proving the reputation and quality of the credit
repair industry.”
                                                                 (The figures reflect complaints closed
The Ethical Credit Repair Alliance (ECRA) says

A key element in the Act states: “Payment in         of the federal statute.
Advance. No credit repair organization may
charge or receive any money or other valuable            They’re Clamping Down
consideration for the performance of any service    In 2006 and 2008, several states, including Mis-
which the credit repair organization has agreed to  souri and Illinois, joined the FTC in sweeps of
perform for any consumer before such service is     credit repair organizations, filing numerous
fully performed.” However, an examination of        lawsuits alleging violations. The action in 2006
complaints filed with the St. Louis BBB shows       was called Project Credit Despair and in 2008 it
that 97 percent of the complainants paid the        was Operation Clean Sweep. The 2006 effort
company before services were provided.              targeted 20 credit repair operations, which
                                                    charged hundreds of dollars in advance with
In one of its lawsuits, the                                                  promises to remove
FTC alleged that a company        ‘The Membership Agreement                  accurate information
violated the law by charging                                                 from consumers’ credit
advance fees and noted that    attempts to disguise the advance reports.
the company “has called its
credit repair sales contract a     fee for credit repair services’           A spokesman said the
‘Membership Agreement.’                                                      FTC wanted to put
The Membership Agreement attempts to disguise       “credit repair firms on notice that we are on the
the advance fee for credit repair services by       beat,” and “to alert consumers that there is
stating that the agreement includes “a twelve       absolutely no reason to pay for credit repair –
month credit repair program free to our mem-        ever.”
                                                    In 2008 the FTC and 24 state agencies announced
The CROA also requires a credit repair company      a “crackdown on 33 operations that deceptively
to provide the consumer with a contract setting     claim they can remove negative information from
out the cost of services to be provided, and a      consumers’ credit reports, even if that informa-
written statement of the consumer’s rights under    tion is accurate and timely . . .Companies that
state and federal laws.                             promise they are able to scrub your credit re-
                                                    ports of accurate, negative information for a fee
While states have the right to enforce the CROA,    are lying - plain and simple.
several also have their own laws regulating the
credit repair industry. Missouri, as part of its    “Under federal law, accurate, negative informa-
Merchandising Practices Act, requires credit        tion can be reported for up to seven years, and
repair companies to be licensed and prohibits       some bankruptcies can be reported for up to 10
them from charging advance fees unless they have    years.” In the cases in which the FTC filed suit,
a surety bond or surety account.                    the defendants allegedly made statements in
                                                    advertising that negative items on credit reports
In Missouri, a company also is prohibited from      “CAN BE LEGALLY ERASED!.” Another
“guaranteeing to ‘erase bad credit’ or words to     promised: “You WILL see results in 60 days, or
that effect unless the representation clearly       your money will be refunded in full . . .” (but
discloses that this can be done only if the credit  refund requests were almost always denied.)
history is inaccurate or obsolete.” The Illinois    Another stated the company could remove
Credit Service Organizations Act mirrors CROA       “ANY or ALL Negative Accounts From Your
and in some places uses verbatim the phraseology    Credit Report.”

Enforcement actions by both federal and state         Louis BBB, consumers said no services were
authorities have continued since then.                provided by the company, and 68 percent said
                                                      the company refused to provide a refund. A few
However, consumers who would use the CROA             consumers received partial refunds averaging
in class action suits were dealt a setback in Janu-   $256, far below what they had paid for the alleged
ary 2012 when the U.S. Supreme Court ruled that       services. After he had paid $400 a month for
compulsory arbitration clauses in credit card         four months with no action in settling his debts,
contracts, which advertised improvement of a          one consumer told the BBB that the company
consumer’s credit rating, prohibited consumers        said “they couldn’t negotiate any debts with those
from filing suit under the CROA.                      companies until those balances go into collec-
Although the CROA requires credit repair
companies to provide a consumer with a docu-          The FTC warned in February 2011: “Some debt
ment stating the consumer’s right to sue, that        settlement companies may claim that they can
statement was trumped by laws governing arbi-         arrange for your debt to be paid off for a much
tration clauses, the court held. “The only con-       lower amount, anywhere from 30 to 70 percent
sumer right (the document) creates is the right to    of the balance you owe . . .The firms usually tell
receive the statement,” it noted.


    Monthly Fee, Little Results
Financial losses incurred by consumers who are
scammed by some debt settlement companies are
significantly higher than losses incurred in the
credit repair industry. While consumers who
filed complaints with the St. Louis BBB against
credit repair companies lost about $816 on
average, those that complained against debt
settlement companies lost about $2,000 each on
average. One consumer said he had lost $17,000
and another, $15,000. Nationally, complaints
filed against debt settlement companies with
BBBs shot up from 86 in 2006 to 6,096 in 2011.
                                                      you to stop making payments to your creditors,
Consumers using debt settlement companies             and, instead, send payments to the debt negotia-
usually are required to pay a monthly fee which
                                                      tion company . . . There is no guarantee that the
the company is supposed to use to pay down the
                                                      services debt settlement companies offer are
consumer’s debts after negotiating lower out-
                                                      legitimate. There also is no guarantee that a
standing balances with the creditors. But the non-
refundable fees often outweigh the reduction in       creditor will accept partial payment of a legiti-
debt. In half of the complaints filed with the St.    mate debt.”

    New Twist in FTC Rule                                Although they can enforce the federal regula-
                                                         tions, several states have their own laws.
 “Starting on Oct. 27, (2010) debt relief                Missouri’s Debt Adjusters and Collection Agen-
telemarketers are on notice – if you charge              cies law requires debt settlement companies to
consumers before actually helping them, you will         operate under a Debt Management Plan (DMP)
find the FTC and state enforcers knocking at             and post a bond. It limits setup fees to $50 and
your door to enforce the Rule.” So stated                monthly fees to $35 or eight percent of the
Jon Leibowitz, chairman of the FTC, in hailing           amount distributed to creditors. A violation of
the revised telemarketing rule governing debt            the law is a misdemeanor and lawyers are exempt
settlement companies (the FTC                            from the law.
uses the term debt relief to de-
scribe debt settlement compa-                                                     Illinois requires a debt
nies). A major change in the             ‘You Will Find the FTC and               settlement operator to be
rule is that it applies not only to                                               licensed and to provide a
companies that offer debt                        State Enforcers                  contract with the client.
settlement programs over the                                                      Companies are allowed
telephone, but it also applies             Knocking at Your Door’                 to charge an enrollment
when consumers call a company                                                     fee of $50, and a settle-
in response to its advertising.                                                   ment fee of 15 percent of
                                                        the savings. Companies may not advise consum-
The FTC noted that over the past decade, the            ers to stop making payments to their creditors.
FTC and state enforcers have brought over 250
law enforcement actions to stop deceptive and           But while federal and local authorities are adopt-
abusive practices by debt settlement companies          ing new or tightening existing regulations, the
that have targeted consumers in financial distress.     debt settlement companies are hard at work also.
States have the authority to enforce the rule.          The Association of Settlement Companies
                                                        (TASC) boasts on its Web site that it has
The new advance fee ban specifies that fees for         “stopped legislation that would have seriously
debt settlement services may not be collected           impacted the ability to perform debt settlement
until the company settles or changes the terms of       in” eight states including Missouri, and that it
at least one of the consumer’s debts, there is a        “has been working through local lobbyists in”
debt management plan in place, and the consumer         seven states. The trade group announced it had
has made at least one payment to a creditor as a        recently hired “a Federal lobbyist to promote the
result of the agreement with the company.               understanding of debt settlement within both the
                                                        U.S. Congress and the Executive Branch, particu-
Rules that took effect a month earlier require          larly the Federal Trade Commission.”
debt settlement companies to disclose to poten-
tial clients: Its fees and any conditions on its             Not All Are Winners
services; how long it will take to get results; how
much money you must save before it will make            Suits seeking redress for consumers are being
an offer to each creditor; and the possible nega-       filed continuously by federal and state officials.
tive consequences of stopping payments to               The FTC notes in its 2011 Annual Report: “Over
creditors.                                              the last several years, the FTC has filed 27 actions

against advertisers and providers of phony debt       actions that they themselves could have com-
relief services. States also have been active in      pleted at little or no cost. The laws, some re-
pursuing debt settlement companies that violate       cently enacted or enhanced, are strict. And
the law.”                                             authorities have been active in pursuing law
                                                      violators. But they won’t keep up with the tide
But the suits have not always resulted in victories   until consumers themselves are much more
for the authorities. In March 2012, a federal judge   cautious in vetting companies with which they do
in Dallas dismissed a lawsuit instigated by the       business.
Federal Trade Commission against three Dallas
debt settlement companies, saying the agency
failed to prove its case.

The FTC accused the companies of making               Based on its findings in this study, the BBB
deceptive claims about the results they achieve       recommends the following:
for debt-laden consumers. According to the
FTC, the three companies told consumers who             • That consumers follow the FTC advice and
enrolled in their programs that they could elimi-       not hire credit repair companies. Only out-
nate 30 percent to 60 percent of their credit card      dated or inaccurate information can be re-
debt and be out of debt in 18 to 36 months. But,        moved from a credit report.
the FTC noted, the companies “rarely negotiate
                                                        • That consumers consider a trustworthy not-
settlements for all accounts entered into the debt
                                                        for-profit organization to resolve their debt
relief service by consumers.”
                                                        and credit problems.
U.S. District Judge David C. Godbey countered
                                                        • That consumers scrutinize a debt settlement
that the savings claims and the timing claim were
                                                        contract and thoroughly check out a company
true for a majority of the customers of the
                                                        with which he or she is considering doing
companies who completed the program.
                                                        business with the BBB, FTC or attorney
                                                        general’s office.
                                                        • That federal and state authorities increase
                                                        their efforts in rooting out the unscrupulous
It has been noted that there are scammers who           operators in both the credit repair and debt
feed on consumer greed and those who feed on            settlement industries.
consumer need. In the case of unscrupulous
credit repair and debt settlement companies, it is      • That Congress amend the CROA to specifi-
the latter. Beset by the fallout of a weakened          cally rule out compulsory arbitration in law-
economy, thousands of consumers have found              suits alleging violations of the Act.
themselves deeper in debt than their means can
handle. Lured by attractive ads on the Internet         • That consumer-oriented agencies increase
and elsewhere, consumers have paid thousands of         their efforts to educate consumers of the
dollars for services that weren’t provided. It is a     pitfalls in seeking help with their debt or
great irony that in the case of credit repair           credit.
companies, consumers have paid these sums for                               Robert H. Teuscher, Researcher
                                                                            St. Louis BBB April 2012