The Credit repair industry is the highest-risk industry as far as all financial services go, but it’s a federally protected right. There are two main credit repair laws that guarantee consumers the right to correct errors in their credit reports. Each state has its own laws that credit repair companies must follow.
Credit repair is legal in only 50 states. Federal law guarantees consumers the right to dispute information in their credit reports to have it corrected. The federal law also outlines how credit repair companies can provide services to consumers. These two laws basically set the foundation for how credit repair works in the United States.
There are two Major Federal Credit Repair Laws you need to know
Federal Law #1: Fair Credit Reporting Act (FCRA)
The Fair Credit Reporting Act (FCRA), 15 U.S.C. § 1681, is U.S. Federal Government legislation enacted to promote the accuracy, fairness, and privacy of consumer information contained in the files of consumer reporting agencies. This law created the industry of credit repair which started in 1970. Small private companies started providing consumer credit histories in summary reports to banks starting in the 1960s. The reports helped banks make lending decisions for local customers. But consumers found that these reports weren’t always entirely accurate. Since this affected people’s ability to qualify for loans, the federal government stepped in to regulate credit reporting.
Your Rights under the FCRA
The FCRA did not just give birth to the industry of credit repair, It also provided the following protections for consumers:
- It limits who can view your credit report. No agency, person, or organization can view your credit report without your authorization.
- There are limitations to what a data furnisher can report on your credit report as well as how long it stays on.
- It guarantees the right to accuracy.
- There are strict criteria by the FCRA which determine what is accurate and what isn’t. If there is one inaccuracy on the report, you guessed it must be removed.
Rights to credit repair granted by the FCRA
When it comes to credit repair, the Fair Credit Reporting Act outlines the process credit bureaus must follow.
- Credit reporting agencies (CRAs) must accept disputes from consumers free of charge.
- They must respond within 30 days, but if there is any follow up then they have an additional 15 days to respond.
- The bureau must contact the lender or original provider of the information to verify it within 5 business days.
- The agency has a right to terminate a dispute if it’s deemed frivolous or irrelevant. If they do, they must inform you of the termination within 5 business days.
- If a disputed item cannot be verified, it must be removed.
- The CRA must then provide you with a free copy of your credit report so you can confirm the item is gone.
- If the item can be verified, the dispute gets rejected.
- If this happens, the consumer has a right to include a 100-word statement in their credit report. This explains your dispute to lenders reviewing your report. However, the negative information would still affect your credit score.
Federal Law #2: Credit Repair Organizations Act (CROA)
While the FRCA created the credit repair industry, the Credit Repair Organizations Act regulates the credit repair industry. It’s the law that grants you the right to authorize a qualified third party to make disputes on your behalf. Basically, this means that you can hire someone to do the work for you, reducing the time and aggravation of repairing your credit.
Regulations set by CROA
The purpose of the Credit Repair Organizations Act is to ensure that prospective buyers of credit repair services from credit repair organizations are provided with the information necessary to make an informed decision. It intends to protect the public from unfair or deceptive advertising and business practices by credit repair organizations. It enumerates prohibited practices, required disclosures, contract requirements, liability, and penalties for non-compliance and the procedure to report non-compliance
The CROA strictly prohibits:
No person may— make any statement, or counsel or advise any consumer to make any statement, which is untrue or misleading (or which, upon the exercise of reasonable care, should be known by the credit repair organization, officer, employee, agent, or another person to be untrue or misleading) with respect to any consumer’s credit worthiness, credit standing, or credit capacity to(A) any consumer reporting agency (as defined in section 1681a(f) of this title); or (B) any person—(i) who has extended credit to the consumer; or (ii) to whom the consumer has applied or is applying for an extension of credit;
Make any statement, or counsel or advise any consumer to make any statement, the intended effect of which is to alter the consumer’s identification to prevent the display of the consumer’s credit record, history, or rating for the purpose of concealing adverse information that is accurate and not obsolete to (A) any consumer reporting agency; (B) any person (i) who has extended credit to the consumer; or (ii) to whom the consumer has applied or is applying for an extension of credit;
Make or use any untrue or misleading representation of the services of the credit repair organization; or engage, directly or indirectly, in any act, practice, or course of business that constitutes or results in the commission of, or an attempt to commit, fraud or deception on any person in connection with the offer or sale of the services of the credit repair organization. (b) Payment in advance No credit repair organization may charge or receive any money or other valuable consideration for the performance of any service which the credit repair organization has agreed to perform for any consumer before such service is fully performed.
State laws that regulate credit repair
In addition to the two federal credit repair laws, almost every state has its own credit repair laws, as well. Most state laws stipulate that a credit repair company must have a state-licensed attorney on staff. In other words, only a credit repair attorney authorized to practice in that state is legally allowed to make disputes on your behalf. This gives you an easy way to make sure that a credit repair company is legitimate. If they don’t have state-licensed attorneys for your state on staff, then buyer beware! The service may be a scam.
Some states require the company to be bonded to work for clients in that particular state. Other states establish more specific systems for when fees can be assessed and prohibited acts that credit repair companies can’t engage in without breaking the law. Disclaimers and disclosures that are legally required can also be set by the state, as well as standards for advertising and making claims during sales calls.
If you want to know your state’s specific consumer protections for credit repair, contact your state Attorney General’s office. They can provide information about your state’s credit repair laws and help you understand the legalese, so you don’t have to read the law yourself to know what rights you have.
What to do if you think you’re the victim of a credit repair scam
If a company violates any of the rights outlined above or doesn’t follow the laws in your state, you have a right to sue and a right to file a formal complaint against the company. Here’s what you should do if you think a company didn’t follow the letter of the law and tried to scam you:
- File a complaint with the Federal Trade Commission at https://www.ftccomplaintassistant.gov/
- Then contact your state Attorney General’s office to file a complaint with that office as well.
Note that complaints made to the FTC don’t mean that they will help you sue the company. You usually must pursue a civil lawsuit on your own. The point of filing complaints is to get the company into the federal database of consumer complaints. If they receive enough complaints, then they go after the company with fines and possible business closure. By contrast, your state AG’s office may decide to file a class action lawsuit against a company if they receive enough complaints. But if you believe you’re the victim of a scam, don’t wait for your AG to act! Instead, talk to an attorney about pursuing a civil lawsuit on your own.
The credit manager is responsible for implementing the credit-risk strategy approved or established by senior management. In addition, credit professionals remain responsible for developing and implementing policies or procedures for identifying risk, as well as for measuring, monitoring, and controlling risk. Credit granting authority and credit granting criteria should be carefully documented and thoroughly understood by everyone with the authority to extend credit or release orders.
Credit professionals should have a written process for approving new accounts, as well as for periodically re-evaluating existing customers. In addition, creditor managers need to periodically update every active account. How frequently should this be done? The answer depends in part on the company’s credit risk strategy. If the company wants to invest the time and money necessary to update every active customer account every year, not surprisingly the number and severity of payment delinquencies will likely decrease [assuming the credit department takes appropriate action in response to indications that the customers identify in this annual review as representing higher risk of default or payment delinquency are managed accordingly]. However, the company needs to provide the credit department with the resources necessary to conduct these reviews along with the authority to react to individual customers’ deteriorating creditworthiness.
One useful tool that involves evaluating the credit risk environment involves scoring customers on the basis of their degree of credit risk. Customers identified as high risk should be subject to more stringent follow-up if and when the account becomes delinquent and should be scheduled for more frequent credit file updates.
One final comment: Many companies look at payment history, but payment history is not necessarily a good indicator of the risk associated with extending credit to a customer. At least some high-risk customers will pay certain creditors on time fearing that if they fail to pay some creditors consistently they will not be able to secure open account terms from new suppliers.
© 2012. Michael C. Dennis. All Rights Reserved.