The Consumer Credit Protection Act. No doubt you’ve heard of it but, unless you’re a consumer protection lawyer or a masochist, you’ve probably never sat down and read it. Sure, everyone knows that law prevents “evil corporations” from taking advantage of consumers, but did you know that it also might penalize you or your company for trying to help your potential clients?
That’s right; you can be sued by the CFPB for providing assistance to your potential clients. This may seem counter-intuitive, but the way the law is written, if you or anyone in your institution attempts to help clients clear up some blemishes or inaccuracies on their credit reports with the goal of qualifying them for one of your financial products, you can be sued under a sub-part of the Consumer Credit Protection Act commonly referred to as The Credit Repair Organizations Act.
At this point you’re most likely thinking, “I work for a lender. We don’t provide credit repair, nor do we work with any credit repair companies. This can’t be true.” The alarming part is that you are not alone in making that assumption. Although the law was drafted to protect desperate consumers from people and entities that would otherwise prey upon them, in practice, it could potentially have a disparate impact upon upstanding lenders and others that work in the financial sector.
A multitude of lenders often provide seemingly innocuous advice with the intent of helping potential clients when their FICO scores fall short of the qualifying range.
However, in doing so, they’re actually violating federal law and breaching contracts with vendors without even knowing it. This article will provide you with a basic explanation of the Credit Repair Organizations Act, give some examples of how it has recently been enforced, and provide some tips on how to avoid potentially putting yourself or your company at risk.
Credit Repair Organizations Act
The Credit Repair Organizations Act (“CROA” or the “Act”) is a federal law, which falls under the broader Consumer Credit Protection Act. It was enacted to address growing concerns about unfair and deceptive trade practices in the Credit Repair Service industry. Specifically, the purpose of CROA is twofold: 1) to ensure potential customers have sufficient information to evaluate whether to purchase credit repair services; and 2) to protect the public from false advertising and deceptive business practices.
Prohibited Practices and Statutory Rights
CROA prohibits deceiving any credit reporting agency or any potential creditor, whether directly, or by counseling a consumer to provide misleading information. Furthermore, it specifically bars any credit repair organization from charging an up-front fee for its services, or otherwise defrauding potential clients.
In addition to prohibitions, CROA also dictates the manner in which credit repair companies must engage new clients. All credit repair companies need to provide a written service agreement to any potential clients prior to performing any services. Specifically, the service agreements must set forth the total amounts of any payments to be made, a detailed description of services, and estimated deadline for completion of services, and the right of the customer to cancel the contract within three business days of execution. Furthermore, the customer must also be given duplicate copies of any form that requires a signature.
In addition to a written service agreement, credit repair companies must provide a separate list of statutory disclosures regarding the rights of the consumers. Among them are the right to access and correct information on consumer credit reports, the right to sue under the Act, and the right to dispute information found on consumer credit reports. The complete list of disclosures may be found under § 1679c of CROA. These disclosures must be provided to potential consumers independently from any service agreement or other documentation, and must be retained for two years after the consumer signs off, acknowledging that they were, in fact provided.
Penalties for Non-Compliance
CROA was drafted to be narrowly interpreted. What this means is that any contract that fails to strictly adhere to all requirement set forth in the Act is automatically void; it cannot be enforced in any state or federal courts. Furthermore, the consumer may not voluntarily waive any provision of the statute, and any attempt to do so will be void as well.
Aside from contract enforcement issues, the statute also allows consumers to sue credit repair companies if those companies violate the provisions of CROA. In addition to being liable for all fees collected under the service agreement, credit repair companies who violate CROA will be liable for any financial harm sustained by the consumer, attorney’s fees, and potential punitive damages. The punitive damages, as the name indicates, are meant to punish companies that violate the provisions in the statute. Although the statute does not set forth a specific amount, factors taken into account when deciding an appropriate award are: 1) how often the company violates the statute; 2) the type of violation(s); 3) whether the violation was intentional; and 4) the number of consumers affected by the violation.
So what? I already told you that I don’t do credit repair.
Many lenders have this reaction after being forced to read through the seemingly irrelevant, dense legalese, above. However, few ask the fundamental question that really puts everything into perspective: How does the law define “credit repair organization”? The answer surprises almost everyone who is not intimately familiar with this law.
A “credit repair organization” is obviously any person or entity that provides a service with the aim of improving a person’s credit. However, the law also deems any person or entity that provides any advice or assistance to any person with the goal of improving their credit is a credit repair organization. That’s right. If you, as a lender, provide advice or assistance to any potential client in order to help that person improve his or her credit to qualify for one of your products, your organization falls within the definition of a “credit repair organization”.
Lenders’ innate desire to help their existing customers and potential clients qualify for loans and other products may, unfortunately, lead them down a slippery slope that could potentially impute unwanted and unintended liability. Once a lender takes any action to land itself under the purview of the statute, not only are they subject to potential law suits from consumers and the CFPB, they are also at serious risk of losing the ability to pull credit for violating the terms of service agreements.
The Consumer Financial Protection Bureau (commonly known as the CFPB) is a governmental agency that was formed after the 2008 financial crisis. The agency was established with the aim of protecting consumers from deceptive and unfair trade practices, and operates with the goal of acting as a watchdog and consumer advocate across a wide range of industries, which includes the prosecution of CROA violations in the credit repair industry. The CFPB has made itself a prevalent force in recent years by vigorously prosecuting violations of the law. When the CFPB gets involved, those companies that find themselves in its crosshairs are usually subject to hefty penalties. Below are two examples of recent cases in which companies were sued for violating the law.
CFPB v. Commercial Credit Consultants, et al.
In June 2017, the CFPB filed suit against three companies and two individuals in the U.S. District Court for the Central District of California. In its complaint, the CFPB alleged that the defendants charged upfront fees, made misrepresentations about their ability to remove negative entries on credit reports and ability to improve credit scores, failed to adequately disclose the terms of their “money back guarantee”, and misrepresented the costs of their services. On June 30, 2017, the Court entered an order granting an award of $1,530,000.00 against the Defendants.
CFPB v. Federal Debt Assistance Association, LLC, et al.
In its most recent filing against credit repair companies in Maryland, the CFPB coupled its consumer protection allegations with violations of the Telemarketing and Consumer Fraud and Abuse Prevention Act. In the Complaint, three companies and two individuals were accused of deliberately misleading consumers to make them think that the defendants were affiliated with the federal government, falsely advertising that they could reduce consumer debt by at least sixty percent, encouraging consumers to stop paying debts without advising as to consequences of non-payments, and collecting up-front fees for their services. This case is still pending as of the date of this publication.
Credit Reporting Companies
Credit repair companies are generally viewed in a negative light because of a few bad actors in the industry. Public perception is easily skewed when most publications and news outlets only report about companies defrauding their clients and/or cases in which the CFPB is prosecuting claims of statutory violations. In fact, this view is so prevalent, that some credit reporting agencies have even incorporated prohibitions on working with credit repair companies into their contracts with lenders.
Many of the largest providers of independent verification services in the financial services industry require lenders to certify that that they are not credit repair companies. These prohibitions are commonplace in the contracts across the industry, and have the unfortunate effect of preventing lenders from forming partnerships with credit repair companies to help their prospective clients begin taking steps toward credit-worthiness. This also means that if you or your company do, in fact, provide the type of assistance or advice contemplated by CROA, you could very well lose the working relationship with credit reporting companies and ability to pull credit, along with it.
It would be very simple to just swear off companies that provide credit repair, altogether, and conduct business by only marketing to those consumers who already qualify for your products. The issue with this mentality is that, according to a 2016 study published by the Federal Reserve Bank of New York, over one-third of all Americans have a FICO score below 620. If banks simply refused to work with or help these people, they would be, in effect, writing off over 80 million potential clients. That is a very large, untapped market that can’t just simply be disregarded. So, how can you help these consumers qualify for your products and get the funding that they need without violating the law? The answer in short: responsible strategic partnerships that do not run afoul of the law.
Under federal law, not-for-profit companies are specifically exempt from being classified or designated as credit repair organizations. The rationale behind this carve-out is that the primary purpose of those companies is to aid consumers in need, rather than maximize revenue. Referring unqualified consumers to one of these non-profits is a great way to ensure that the your potential clients receive the help they need, while simultaneously growing your pool of qualified applicants.
When choosing a partner, it is imperative that you are able to identify and choose a reputable, full service company that not only provides credit remediation services, but also provides consumers with a wealth of resources such as coaching and education. The company should focus on educating the consumers so that they are able to understand ramifications of their financial decisions to ensure responsible borrowing in the future, which will help consumers and lenders, alike. By referring these potential clients to these non-profit companies, lenders can insulate themselves from potential liability and help consumers get the assistance they need to become financially healthy.