FTC Staff Comment to the Hon. Tom Norton Concerning Colorado H.B. 1114 to Regulate Credit Services Organizations
us-ftc-advocacy-filings-86bf0b3013e70dab70190428a771672dFTC Staff Comment to the Hon. Tom Norton Concerning Colorado H.B. 1114 to Regulate Credit Services OrganizationsAdvocacy Filing
Matter Number
V890035
Federal Trade Commission Den\'u Rc~lonQI Office Suite 2900 1405 Curtis Street D~n... cr, Co1orndo 80202·2393 (303) 844·227 I The Honorable Tom Norton Senate Chamber State capitol 200 East Colfax Avenue Denver, Colorado 80203 Dear Mr. Norton: February 21, 1989 f COMMISSION AUTHORIZED The staff of tho Federal Trade Commission is pleased to submit this letter in response to your request for comments on H.B. 1114. 1 We believe a substantial segment of the credit repair industry presently engages in practices that injure both the general pUblic and individual consumers. Accordingly, we support the inclusion of effective disclosure reqUirements in legislation intended to prevent these injurious practices. It is our view, however, that H.B. 1114 would be strengthened by modifying the language of the disclosure requirement. We suggest that the meaning of the disclosure can be more effectively conveyed if it is short and written in simple, non-technical languago. Interest and Experience of the Federal Trade Commission staff The staff of the Federal Trade Commission -- upon request of federal, state, and local governmental bodies -- comments on regulatory proposals that may affect competition or consumers. As noted below, the Commission staff has investigated and brought a number of enforcement actions a~ainst companies that would be covered by H.B. 1114, if enacted. For this reason, we believe that we can provide some additional perspective on the magnitude of the problem addressed by the billcas well as ~ome aspects of the proposed legislation. . 1 These comments are the views of the staff 0: the Bureau of Consumer Protection and the Denver Regional Office of the Foderal Trade Commission. They are not necessarily the views of the Commission itself or of any individual commissioner. Please contact Loretta Kraus of the Denver Regional Office at 844-2271 if you have any questions on this matter. 2 The comments expressed are based on information derived through the Commission's law enforcement activittts.
pescription ot H.B. 1114
The bill prohibits credit services organizations from
committing certain acts. It affirmatively requires the
organizations to obtain surety bonds, maintainftrust accounts,
and provide purchasers with a written contract. The bill also
requires that speci!ic written disclosures be given to purchasers
of services sold by such organizations. Our comments focus'on
the disclo~ure requirement contained in Section 12-14.5-
lOS (1) (a) .3
Background on the Credit Repair Industry
The bill applies to organizations that are popularly
referred to as "credit repair clinics. 1t The credit repair
buaineS6 is a relatively recent, rapidly growing phenomenon. It
involves. the marketing of services to consumers whose credit
bureau reports contain negative information that interferes with
their ability to obtain further credit. The principal method
such businesses rely upon to improve credit bureau reports is,the
dispute procedure available to consumers under section 611 of the
Fair Credit Reporting Act ("FCRAII), 15 u.s.c. Section 1681-
section 611 is designed to provide consumers with a se~f-help
mechanism to correct credit reports that contain inaccurate or
incomplete information.
Most consumers who purchase the services of a credit repair
company do not seek to correct inaccurate information. It
appears instead that many of those who turn to credit repair
organi~ations do so in hopes of minimizing significant credit
problems they have experienced in the past. Although minor
inaccuracies may appear in their credit reports, by and large the
negative information that is reported about them is accurate.
Therefore, use of the dispute procedures of the FCRA is unlikely
to significantly improve the reports of these consumers.
Nevertheless, credit repair companies often mislead consumers to
expect that their credit reports can be improved even if the
reports are accurate. In fact, however, if adverse information
reported by the credit bureau is accurate, under the FCRA it may
be reported for at least seven years~. Bankruptcy_~ay be reported
for ten years. Although credit repair companies occasionally
succeed in improving consumers' credit bureau reports, they fail
to do so in most instances.
Credit repair companies typically charge from $50 to $1500
for their services. A fee of $400 to $500 per client appears to
~e typical. Commission staff believQ that more than fifty
3
bill. We express no opinion on the other provisions of the
2
percent of credit repair businesses move or go out ot business in the first year of operation without having delivered the services paid for by their clients. Since purchasers are usually told thQt credit ropair takes tima, they often do not realize they have boen defrauded until the company is gone. t The proliferation of fraudulent credit repair companies is a matter of serious concern to the FTC and to other law enforcement bodies across the country. To combat the problem, the FTC has adopted a two-pronged strategy of educating consumers and bringing enforcement actions against fraudulent operators. In the past two years, the FTC has filed complaints in federal district court against four credit repair companies. Taken together, these four companies alone operated a total of 55 offices in 20 states and thQ District of Columbia and caused an estimated consumer injury of $12 million. All indications are that this represents merely the tip of an iceberg. The credit repair industry is elusive and fragmented. For this reason it is diffiCUlt, if not impossible, to determine the a~tual sizQ of the industry or to estimate accurately the full~ extent of the economic harm done to consumers. Of course, the harm is not limited to the purchasers of credit repair services. Consumers and businesses alike who benefit from a properly functioning Credit reporting system crucial to the maintenance of a healthy economy are victimized by the abuses of fraudulent credit repair companies. 4 The methods used by credit repair companies can adversely affect the credit reporting system. The most common method employed by credit repair companies is to dispute all of the information on a consumer's report either at one time or in "disputo rounds. 1I Their aim is to overwhelm the system with such a large number of disputes that reverification is not possible within a reasonable period of time, causing the negative information to be rernoved. 5 Usually this practice does not work. 4 A recent development is the trend toward the sale of instruction manuals and training seminars that teach consumers how to open and operate a credit repa~~ company o~_their own. This type of marketing may add to the:. gr,owth of the credit repair industry despite efforts to establish controls. 5 Under Section 611 of the Fair Credit Reporting Act, when a consumer disputes a reported item of information, the credit bureau must reinvestigate that item unless it decides that the dispute is frivolous or irrelevant. Upon reinvestigation, information that is found to be inaccurate or incomplete must be corrected and information that cannot be verified must be deleted. Howover, if negative information is accurate and com~lete, the credit bureau is entitled to report it for seven J
The credit reporting agency reverifies the information with the
creditor and the accurate information stays in the consumer's
report. But sometimes accurate information is removed, which
injures creditors and creditworthy consumers who benefit from the
reliability ot the credit reporting system.
t
H.e, 1114 Would be strengthened by a
Modification of the Disclosure Requirement
The prevalence of fraud has prompted fifteen states to pass
credit legislation similar to the bill under consideration by the
Colorado legislature. The laws enacted by other states require
credit repair companies to inform their clients of their rights
under the FeRA, but, unlike the Colorado bill, do not specify the
oxact wording of the required disclosures. The disclosures that
woulQ bo required by H.B. 1114 contain technical language
similar to that contained in the FCRA and are quite lengthy.
The Commission's staff agrees that a disclosure requirement
could reduce a credit repair company's ability to misrepresent
what it is likely to achieve. In tho staff's experience, ,
consumers who seek the help of credit repair companies lack basic
knowledge about the FCRA and how the credit reporting system
works. Of particular importance is the fact that they do not
understand that accurate, adverse information will almost never
be romoved bya credit bureau until it becomes obsolete. These
consumers are easy prey to credit repair companies.
Enclosed, for your information and consideration, is a copy
of the Commission's comments on H.R. 458, the federal Credit
Repair Organization Act ("CROA"), proposed in the last session of
Congress. Parts of these comments, including the discussion of
the proposed federal bonding requirement,6 are not applicable to
the Colorado bill, but the comments on a disclosure requirement
are partiCUlarly relevant to H.B. 1114. In its comments on H.R.
458, the Commission favored language that would simply and
succinctly explain tho limitations on circumstances und~r which
consumers or a credit repair company may improve consumer
reports, advise consumers of their right to sue a credit repair
company under the CROA and suggest contacting the FTC for more
information. 7 The disclosure should also advise consumers of
their right to cancel a credit repair'c,9ntract within a certain
period of time. In addition, the Commission recommended that to
years, except for bankruptcy, which may be reported for ten years.
6 The proposed Colorado law appears to prOVide a structure
that will allow administration of the bonding requirement.
7 The Commission is the law enforcement agency charged with
administering tho Fair Credit Reporting Act.
4
be most effQctive, any required aisclosure be conveyed in simple, non-technical language on a separate sheet of paper before a consumer signs a contract or pays money to a credit repair company. Finally, the commission recommended that credit repair companio~ be required to follow model language proposed by Congrass. 8 f Tho Commission's staff believes that H.B. 1114 would be more effective if it called for disclosures similar to those rGcommcnded by the Commission in its comments on the CROA rather than those presently set forth in Section 12-14.5-108(1) (a). The adoption of a short, simple disclosure conveying information that consumers can easily comprehend will leave less room tor fraUdulent operators to prey on vulnerable consumers. Fraudulent operators often refer to the FCRA as a means to bolster their erodibility. A favorite ploy is to represent that their methods comply with the law and that they possess special expertise in interpreting and using the dispute procedures of the FCRA. If the disclosure language is perceived by consumers to be long and complex, it may have the unintended effect of aiding the fraUdulent operator rather than assisting the consumer. Care.~ should be Qxercised, therefore, to ensure that any adopted disclosure does not give fraudulent operators a tool to strengthen their sales pitch. Conclusion If thQ Colorado legislature believes that enactment ot H.B. 1114 would be in the public interest, we believe that the legislation would be strengthened by a simpler disclosure requirement similar to the one discussed in the Commission's comments on H.R. 459. Please let me know if you have any questions concerning this latter, or if we can be of assistance in any other way. sincerely, 4£ L.4~ ;'./4- C/~~4C7~V4~ Claude .~. Wild III Director, Denver Regional Office Enclosure 8 Please seo Appendix A and pp. 3-6 of the enclosed comments. 5
APPENDIX 1\. 1 Disclosura language from commission-approved statement on H.R. 458, the Credit Repair Organizations Act. 1. You have no legal right to have accurate information removed from your credit bureau report. Under the Fair Credit Reporting Act, the credit bureau must romove accurate negative information from your report only if it is over 7 years old. Bankruptcy can be reported for 10 years. Even when a debt has been completely repaid, your report can show that it was paid late if that is accurate. 2. You havo tho right to sue a credit repair or credit improvement company that violates the Credit Repair organizations Act. This law prohibits deceptive practices by credit repair- companies. 3. The Credit RQpair Organizations Act also. gives you the right to cancel your contract for any reason within 3 working days from the date you sign it. - 4. The Federal Trade Commission enforces these federal laws. For more information, call or write: - Division of Credit Practices Federal Trade Commi~~ion Washington, D. C. 20580 (202) 326':'3225
0 ~., ... -.- .. .... 0'1"0:.0" r .. c CI'l..'''' ..... H F'::Ce:~AL T~AOe: COMMISSION ...."SHINCTON. O. c. zosao May ll, 19S7 1 The Honorable Frank Annunzio 0.5. House of Representatives Washington, D.C. 20513 Oear Mr. Annun~iol Thank you for your :ecent latter forwarding a copy of 3.R. 458, the Credit Repair Organizations Act, to tne Federal Trade Commission. We appreciate the opportunity to comment on the proposed legislation. The cradit repair ~usiness appears to be a relatively recent phenomenon. I~ involves the marketing of credit repair Qervices to consumers whose credit bureau reports contain negative infor- mation that-interferes with their ability to obtain credit. The principal method such businesses rely upon to improva consumers' credit bureau reports is the dispute procedure available to --:.. consumers under Section 611 of the Fair Credit Reporting Act (FCRA). Section 611 is de9ignad ~o provide consumers with'a self-help mechanism t~ correct cr~dit reports that contain inaccurate or incomplete inform~tlon. Corxecting _and updating such information benefits credi~ors as well as consu~ers by helping to ensure chat credit-granting decisions are made on the basis of complete and accurate information reflecting the probable creditworthiness of the consumer. It does not appear, however, that most consumers who employ the services of a credit repair organization seek to correct inaccu~ate information. Sased on the monitoring experience of Commission staff, it: appears instead that many of those who turn to credit repair organizations have experienced significa~t credit probl'ems in the past, which they hope to minimize. ~lthou9h minor inaccuracies may appe~~ in their credit reports, by and large the adverse information that is repocted acout them fairly reflects what actually occurred. Utilization of FCRA dispute procedures is, therafore, unlikely to aid these consumers. ~~onetheless, through adver-isements and oral repre- sentations, credit repair organizations often lead consumers to 1 The Commission brought an enforcement action against six credit repair practitioners in 1986 (see Federal Trade Commission docket numbers C-3l85 through C-3l90) and presently is monitoring the activities of several oehers. ~.
The Honotabl~ Ftan~ ~nnun2io believe ehae adverse Lnf~rmation in their cred~t reports can ~~ deleted or modifi~d tegard1es s of i~~ accuracy. tn fact, howQver, if adv~rse information re~orted by the cr~dit bureau is accurate, under the FCRA i~ ~ay be ,~port~d for at least seven years. oankruptcy ~ay be reported for tan ¥ears. Although the FCRA does not requirs credit ~ureaus to ,~port adverse informa- tion for this period of time, it ~xplicitly authori~ea them to do 30. Credit bure~us, ~hich are in the business o~ selling credit hiseoty informacion to creditors, ordin~ri1y re~ort such infor- ~ation for ~s long as is legally permissible. .. It appears that credit re~air otganizations occasionally improve consumers' credit bureau reports, but fail to do so in most instancea -- ?rincipally because moat of the information they dispute is accurata and within the permissible reporting period. Their services ~re frequently sold on a ~oney-oack guarante~ basis, but conSu~er3 have reportQd difficu1ti~s i~ obtaining rQfunds. The company may be out of bu~iness, lack the ~unds to ~ay by the ti~e consu~ers ~~e~ refunds, or simply refuse to honor the guarantee. Credit repair organizations have ca~2ed economic injury to credit our93~S ~$ ~e11 as to con3u~ers by -. generating large num~ers of Jroundless dis9utes that credit bureaus must process. To th~ ~xtent tha~ ~ credi~ ~epair ~r9ani2ation does aucc~~d in dal~ting accur~te adverse inf~rmation from a con3umer's credit ~istOty, cr~di~0rs are de?rlved of information that ~i9ht otherwise have ~een a decisive Eactor in ~he credit- ~~anting decision. Creditors ~ave expressed concern to the Co~ission that deletio~ of accurate information may rasult in incr9ased landing risk. . The Commission's staff believes that do substantial segment. of the cr~dit repair industry ~:esently engageg in practices that injure both the general ?ub1ic and individual consum~rs. Whether 2 Cr~dit bureaus are required by Section 611 of che FCRA to reinvestigate disputed information within a reasonable ~eriod of time and to delete information that they cannot verify. A credit ~ur9au may delete accutate information from a consumer's credit bureau report because, for example, it is overwhelmed by disputes generated by credit r~pair orsanizations or because creditors fail to respond p~omptly to verific3tion requests.
•The- Honotabl~ Fran~ ~nnun:io :?age 3 the potential scope of this problem justifies enactment ~f federal 189islation is an issue fot CongteS3 t~ decide. As the pr1maty law enforcement agency, however, the Commission believes that it has a ~nique ?erspective to contribute if Congress chooses to enact such leqislation. In our view, the ~ropoged legislation would be strengthened by changing its tocus ~omewhat. H.R. 459 would impose a bonding requirement on cr~dit rQpair otganlzations. It also would provide consumers with the right to ~ue and to obtain 9ayment from a surety when a credit repair . or9ani~ation violates the terms of the statute. The Commission ~pposes ~his approach ~ecause ~e have serious c~servations about how well it would work in practice. The way that the bond is in~ended to function is far fro~ clear. In addition, administra- tion of a bonding requirement involves ov.rsight and enforcement t~sponsibilities ~hae are better undertaken by ~he states than' the federal government, in our view. From ~he ~ers?ectiv~ of public ~~w ~nfoccement, the Commis- sion believes that requiring disclosures about the ~CRAIS limL~ed ~asis for changing credit 'epocts \'lould protect coos·u:ners :nor e··' si~ply and effec~ively. Their :ight to sue. a credit re~air o,ganization that .nga~es in deception should also b~ di3closed. Moreover, although we believe that the pro?osed privata =igh~ of action for consumers may aid in enfotcing che law, ~e think that enforcement of the Credit Repair ~r~anizations ~ct ~ould be enhanCed considerably if Congress ~er~ to grant the Commission authority to seek civil penalties for violations of its prOVi- sions. The ensuing commentz discuss these issues in mor~ detail. They also suggest narrowing the definition of a cr~dit repair ~rganization anj eli~inating one of S~ction 404'5 prohibited ?ractices. ~isclosure Requir~ment5: Section 405 The Commission supports t~1e incl,usion of effective disclosure requirements in this legislation. ·Oespite educatiqnal efforts, 3 Although we ar~ aware of a few large credit repair organiza- ~ions, a gr~at many others ~ppear to be small and relatively unstable. We have no basiS for estimating the number of custom4rs they currently attract or predicting whether their clientele may diminiSh in the nea, future as a result of consumer edu~at1Qn and unfavorable publicity.
The Honor.~lQ F~an~ ~nnun~io many consumer. continua to ~e unawaCQ of ehe fCRAfg rulea govern- ing the reporting of information by cradit bur~aus. ~$ a reeult, these consumers are easily misled by credit repair organizations that oefer to repair ~r improve their credie histories. Requir- ing credit repair organi%ations to disclose information about the FCRA prior to execution of a sales contract should reduce their ability to misrepresent what the credit repair process is likoly to achieve. The Commissio~ believes that the focus of the dis- closures required under Section 40S(b) of the ?roposed leg1g1a- tian should ~e shift~d, however. Section 40S(b) (l) requires a •. credit repair organization, prior to the execution of a contract, to disclose to consumers their right to review their own cradit files and t~ dispute the completeness or accuracy of inlormation contained therein. The effact of this section is to bar a credit cepaie or~anization that only sells information about consumers' eights to correct Lnformation concerning their credit r~cord, credit history, or credit rating from ch~rging a fee for makinq this information available to con~umecs. 'There is no apparent reason for a prohibition of this sort. Other bus1nesse~ and pro- eesslons routin~ly char3e for the disclo$ure of information about rights and opportunities provided by la~1 inde~d, this is a ka~ compondnt in the pro~i3ion of ~any professionQl.ser~ices. . , t-tbreover, the disclosures required by Section 40S(o} (1) df) not address ~hat appears to be the principal cause cfinjury to consumers in their dealings ~ith cr9dit ~e~air organizations. Injury does not arise bec~use cradie repair :Jrganizations, for a fee, ~x~,cise :ights t~at consumers could execcise.themselvp.s at little or nd cost. tnstead, consumers ar9 injured when they ?ay money to an organization to do something that neither that organization nor they ehemselves can accomplish. We think that disclosures explaining instead the limited circumstances under ~hich credit history information must ba alt~rad by cr~dit bureaus would orovide consume%S with an informed basis Eor ~valu ating a credit-repair ~cganization'5 ~laims and that this is their cest ~rotection. !t may also be worthwhile to require disclosures that:: consu:ners m.ay sue a~r:edit rep~ir_organization if it engages in deception and that t:.he-y" may rescind any contract within three days of signing it. Finally, we think it would be helpful to identify the Faderal Trade Commission as the relevant law en.forcemernt authority, 50 that ':onsu:ners with que13eions will ~now whom to contact. 4 Of course, this concern is less significant to credit repair organizations :hat also sell services for the purpose of improv- ing a consumer's cr9dit record, credit history, or credit rating_ ~ 'I, Ir
•The Honor~ble Frank ~nnunzio Page 5 '. There ~re two ~dditional sets of ~isclosutes that Section 405 presently requir"!lI. S~ction 405(b) (2) requires a complete and detailed disclosure of the services to be performed and the total amount to be paid Eor these services, disclosures which are duplicated in Section 406 governing the content of contracts. We que~tion the utility of requiring a detailed description of ~.rvices to be performed. tven a minut~ly detaileddescri~tion could ~asily avoid conveying clear and definitive informatlon about what: will be done in t:.he case of an individual consumer. .., SGcti~n 40S(~) (3) rsqui:as disclosure of the consumer'a right to proceed a9ainst a Oond and identifies 'the su:ety. Information about t~e right to proceed against a bond clearly would be significant to consumers if Congress should decide to 'etain the bond raquirsment. qowever, Eor reasons discussed in ;he ensuing ~ect10n, we do not endor3e a bond requirement. We suggest that, t~ be ~ost effectiv~, any requit~d disclosur~s be conveyed on ~ separate sheet of pap~r, in simple, non-technical language, ~efore the consumer signs a cont:~ct or the credit repair organization receives ~ny payment. So as to :1void peas ible obfusca t it.:ln, ,.,re r:ecommend t.ha t credi. ~ r epai r -::'. organizations be required ~o follow language ~h~t i3 identical or substantially aimi13r to model language proposed byCongrass. ?or example, the r~quired di~closure might begin with ~ warnin9 not to sign a contr~ct ~, pay ~Qney for crp.dit r~pair services before readin~ the n0tic~. It might tben state: 1. 10u have no legal right to have accurate information removed ftom your credit bureau report. Under t~e Fair :redit ~eporting Act, the credit bureau must remove accurate negativ~ information from your re?ort only if it is over 7 1ears old. 3ankruptcy can be re?orted for 10 years. even when a debt has been completely repaid, your report can show that it wa.paid late if that is accurate. 2. You have th~ right to Sue a credit repair oe cr~it improve~ent company that violates the Crenit nepair Organizations Act. This law prohi~its dec~ptiv9 Eractices ~y credit repair companies. 3. The Credit Repair Organizations Act also gives 10u the right ~o cancel your contract for any reaSon within 3 working da¥s from the date ¥ou sinn it. ~_ ~ ;.. 1(0
. The ilonot'able E'rank .\nnun~io Page 6 .. 4. The Federal Trade Commission enforce~ these ~ederal laws. :or more information, call or wl:'1t:e: Division of Credle Practices Federal Trade Commission WaShington, D.C. 20580 (202) 326-3225 tor enforcement purposes, each disc10su:e 3tatement should be signed by the consumer as an acknowledgement of having read it before entering into the contract. The consumer's name, address, and telephone number should ~e included, as should the sales agent's signaeure and the com~any's name, address, and telephone number. The statement should be signed in duplicate, so that the consumer may retain one copy and the credit repai~ ~rgani%ation may retain the other for the swo-year period th3~, we assu~e, Section 405(c) would re~uire. - . We believe that thesa disclosures would affect~~ely warn consumers against contracting wit~ credit repair organizations. whose businesses are based on explicit or i,nplicit misrepresenta- tions oe what the law ~ermit3.· Howev~r, these disclosur~s should ~ot adversely affect t~e activiti~s of cr~dit improvement coun- selors who do not rely on consu~ersl ignorance ~f the credit reporting laws or otherwise attempt to miSlead them. ~onding rtequirements: Section 404(aL ~he proposed legislation requires a credit repair organiza- tion to Obtain a $50,000 surety bond if it wishes to obtain ?aymen~ for ~ervices in advance of performance. A 6ure~y is a th1r~-?arty guarantor who promises to pay 1~ the principal does not and require~ a percentage of the bond amount for providing this assurance. 'l'he percentage is often small be<;~use the 3 It would facilitate both compliance and enforcement if the evidence that~a credit repair organization should retain to demonstrate compliance under Section 405(c) were set forth in lJreate~ detail, 6 We Assume that indemnification of this sort is what the legislation 1s intended to produce. It is our understanding that surety agreements take ~any different forms, however, and are designed to achi~ve many different purposes. .~ ~"
• The Honorable Frank Annunzio 2age 7 f sur~t:y retains· ehe right: to cecol/er the amount· paid from the principal. In order to obtain a bond a company must persuade the sure~y that it is a good ,isk. In the case of a credit repair organization, we assume that a surety ~ould want some assurance that the organi%ation'g practices will conform to thG law and that, as a result, the organization is not likely to be held liable for I/iolating the law. Prior business experiences, busi- ness andpergonal credit hist.ory, income, asset.S, and otner indicia of reliability may be factors in determining whether an' 0.t'9anization is able .to obt.ain II bond. .r.. business that does not appear ~o be sufficiently risk·free ordinarily would oe required by ~he sur~ty to ~ut up collaceral corresponding to the amount of the bond. Under che ~roposed legislation, a com~any that: ~annot or does not wish to obtain a ~urety bond is not barred from the credit repair business. Although it would be prohibited from ~ r~cail/in9 faes prior to ~erforming the services it sold, it co~ld obligate consumers in advance to pay Eor aerl/ices upon completion of performance. The purpose of the proposed bond requirement, ~9 assume, is to ~ake funds al/ailable for the pay~ent of consumers' claima~ 1'IHI Commission is concerned that it may not serl/e t:his purpose in ~ractic"!, howel/er. SIJsiriesses that are engaged in deliberate c6nsurner fraud may well ignore the bonding ,equi,~ment. ~ore ol/er, the requirement ~ay ~e too a~orphous to achiel/e its intended purpose. The l~gislation does nat outline in any detail ho~ th"! bond is to func~ion or who is to adminis~er payments from it. !t do~s not 9xplain what ?rocedure~ are to be Eoll~wed in the ~vent of competing clai~6 that exceed the bond amount or ~hether the bond amount of $50,000 must be continuously main- tained. It is not clear fro~ the statutory language whether a~ organization that Joes ~cisiness in more than one state ~ust prol/ide for a $50,000 bond in each state Ot whether, altarna- tiv~ly, a single $50,000 bond issued by a suret~ licensed to do business in each of those st.at.e~ would ~uffice. It also is uncli!clr what~er l:'esidents of one st.at·e may make claims against ~ bond issued in another state when t~i b~nd funds in th~ir state of residence have been paid out. ~or is it clear ~hethec con- sumers are intended t.o·;ame the surety as a defendant in an .. ~ 7 Credit repair organi%at.ions va~y considerably in operational structure (franchises are becoming more common), size, and business I/olume. If Congress should decide to include a bond requirement in this le~islation, we suggest that it examine ways to link the value and numcec of bonds required to-variables. such as these. ~~
• The tignor:OIoJ.e Franl< ~nnl1l"\%io ~~tion 0: to seek payment ~rom the surety only if conv~ntional efforts to satisfy 3 judgment from the credit tepa!r ~rgani%ation h~ve been exhaust9d. Insurers .who issue ~uraty bonds, such as government per:orm- ance bonds 0: indemnity guarantees, may well be reluctant to issue any bond ~utsuant to this legislation, regardless ~f the character of the credit repair organi2ation ~t issue. Sureties ordinarily want to know ;hat their obligations and liabilittes ~re fixed and clear ~efore agre~ing to act in this capacity. .. Under the law as presently ~rafted, few if any insurers may be.· willing to act as sureties for credit repair Or9~ni%ations. Even it the bonding requirement a~d consumers' access to it ~ere spelled out in more detail, however, we are not ?ersuaded that it should be included in federal legislation. The equitable dis- tribution of bond funds may be difficult or impossible without the intervention of a disinterested third party, such as a state administrativQ agency. On balance, th~ Commission b4lieves that th~ bonding of credit r~pair organizations should be lGft to the states to legislate and administer. --.Enforcemen~: S~ctiong 409 and 411 Section 409 of the Act provides consumers ~ith the eight to sue for a viOlation of any of its ~tovisions. It proVides Eor actual damages, additional damages, costs of bringing the action, and attorney'.s fees. ay ~rovi.dil\g consumers \IIith a mechanism for recovering, at· a minimum, the fees paid to a violativ~ otganiza- ticn, thi3 right of private action should help to make the 3tatute ~elf-enforcing. None~heless, the Commission believes that enforcement of any credit repair organi~ation legislation Congress might enact would be strengthened considerably if Congress wera to grant the Commissionacivil penalty enforcement authority for violations of its terms. ~t present, Section 411 of the proposed legislation 8 Congress typically accords the Commission elvi: penalty authority by authoriZing enforcement of statutory violations as if they wete violaeions of a Commission trade regulaeion ~ule, i. '!., through Section 5 (m) (1) (A) of the Federal Trade Commission Ac~, which empowers the Commission to seek civil penaleies. ~ Section 704(c) of the Equal Credit Opportuniey Act, 15 U.S.C. i l6~lc1 Section 814(a) of eh~ Fair Oebt Collection practices Ac t: , 15 (]. S •C• 5 16 9 21 • ~ '1, \co
• The Honorable FranK Annun%io 2age 9 accords on11 administrative enforcement author~ty to thq Commis- sion. It provides that a viola~ion of i~s terms con$titutes an un~air or deceptive act or practice in violation of Section 5(a) oe the Federal Trade Commission Act and is enforceable through the Commission's administra~ive adjudication procedures under Section S(b). The Commission currently possesses Secti~n 5 enforcement authority over credit repair organizations. Thus, as proposed, the grant of authority to enforce the credit repair statute would not expand the Commission's powers, although the ae~irmat1v~ requirements of the law ~ould 3i~pllfy enfotcementto some extent. ay including civil penalty authority in the Act, Congre~s would accord the Co~mission greater flexibility in selecting , entorcement alt~rnativ~s and would also, ~e bellev4, ptomote more vigorous enforcement. ?articularly in Casas involving Qelice~~te fraud, the power to requir~ a company to disgorge its profits through imposition of a civil fin!o~ay be the only way to address adequately the viola~ive conduct. Because civil penalty actions are brought and eesolved in federal court, the 'final order -- whether it involves injunctive ralief, a elvil fin~,.or more -- is directlY enfoeceable by the court. The' contempt powers availabll!! to the court are a t'ot~nt. tool if cO'tlpliance pr obll!m's a( i sa. Precedent exi5ts in the feder~l consumer crQdi~ protection field for establishing a ~ange of enfo(c~ment mechanisms. Congress has accorded the Commission the authority to seek civil penalties for violations of the Equal Credit opportunity ~ct ~nd the Fair Debt Collection Practices ~ct under sections providing for administrative enforcement. Other Ge~tions of th~se statutes 9rovide for the imposition of civil liability by authori~ing consumers to bring ~rivate damage suits. The Commission's enforcement experience with these laws indic~tes ~hat ~ifferent enforcement approaches can secve different but often complemen- t~ry enforcement goals. As a result, we believe that allowing the Commission to seek civil penaltie's fot violattons of this >.ct would assist enforcement efforts. . " ".!' 9 The enforcement activity referred to in footnote 1 above was based on that Secti~n 5 authotity. 10 The credit repair business is often a transient one. When a company moves from state t.o state, the likelihood that individual consu~ers vr local law enforcement authorities will succeed in br:inging an action against it is substantially r~ced.
• • The nonorablo Frank ~nnunzio Page 10 ausinesses Subject to the Act: S~ction 403(d) 1 The definition of a cred1t rapair organization in Section 403(d), like most ~f the provisions of the oropo5ed legislation, toeuses on businesses selling credit repair or credit improvement services, i.~., services to remove adverse information from ~on sumers' credie bureau '~ports. The definition of a credit repair organizaeion appears to be needlessly broad, however. It includes entities that, for a fee, provide ~~rvices for the ~urpose of "obtaining an extansion of consumer credit for a consumer ••••" this definition would inclu3e, for example, automatad mortgage loan 3hopping services and ocher businesses that sell information about currently a~ailable terms and condi- tions of credit. ~uch businesses can ?rovide an important con- sumer service in a credit-oriented economy and should not be SUbjected to regu13tion in the absence of evidence that they J cause conSUluer injury. ~~e therefore recommend that the cl~fini tion of ~ credit re~air organization be revised to 91imin~te reference to thos~ who assist in obtaining credit extensions for consu~er$. Individual bu~ine~ses that make false claims about their ability to obtain credit for consumer~ are, we ~eliev~,~ qettar dealt ~ith on a case-by-case basi~ ~nder~Sect1on S of the Federal Trade' Commission Act or similar'~tate consumer protec~ion laws. We note that the ~,oposed lagislation pre~ent1y exempts a number of institutions and professions from the definition of a credit repair ~rgani2ation., Depositocy institutions, rgal ~$tat~ brokers, and bro~er-dealers appear to ba ~x~mpted becaus~, in the ordinary courSe of business, they ~ay assist conSumers in obtain- ing credit. If Congress adopts the foregoing recommendation to ,~define a credit repair ?rganiz3tion, these exemptions may be unnecessary. The Commission is not aware that such entities ordinarily sell services to consu:ners Eor the purpose of improv- ing their: cl:'edit bureau reports. :~e sug9~st that: the exemptions for consumer repor~ing agencies and d~bt collector~ be eliminat~d as well. ~either of these entitiesadvi~es 011assists consumers in improving credit ~ureau reports for a fee. . 11 When credit bureaus remov~ negative information that is inaccurate or obsolete they may imptove consumers' credit: reports. aecause this is not a ~ervice that: cr~dit bureaus may charge for but a right granted to consumers by the FeRA, credit burea~s would not fall within the definition of a credit repair or9 a nization. Services that credit b~reaus are permitted to charge for are described in Section 612 of the FCMlt, -''I'
ilage 11 Unde~ this approach only two exemptions remain -- nonprof1c organizations and attOtneys. ~onprofit or9aniz~t10ns, ~uch as ~he consumer credi~ counsaling services operated by the National Fo~nda~ion eor Con~umer Credit, sometimes charge a small fee for advising consumers about credit history problems. Attorneys may also advise or assist their clients concerning their credit histories and their rights under the Fair Credit Reporting Act. In the Commission's view it 1s preferable to avoid exemp- tions when @Qssible. ~xemptions can create enforcement gaps.12 __ They give a competitive ~dvantage to one group or profession ove~ another. Regulations necessarily impose some burdens on business and, if regula~ion is necessary, the underlying rationale ordi- na:l1y $hould be equally applicable to all industry members. We suggest therefore that Congre~s consider whether the definition of a cr~dit repair organi%acion should provide for any @xemptions. Particularly if the bonding requir~ment is eliminated, as the .~ Commission has proposed, complyinlJ with the affirmative require- ments of the Act should not be unduly oner~us. Prohibited ~racticas: Section 404(b) .. Section 404(0) of the ~ro~osed ~~~iglation prohibits charging fees 301ely for r~farring a consu~er to a recail seller who will 0= may make c~9dit availabl~ t~ the consumer on Substan- tially the same terms as those ~vailable to the general public. If Congress r~vises the definiti~n of ~ credit repair orsaniza- ~ion to excl~de those who ,efQr ~onsumer3 to creditors for ?ossibl~ credit extension, it may wish to delete this provision as well, as it ~ppear3 to ~e dir~ct~d ~t practices associated with credit ref~rral rather than with credit repair. In any event, the Commission questions whether the pr!~tice that this section addresses necessarily injures conSumers. If, th,ough the assi$tance of a credit repair ~rgani%ation, a consumer who cannot otherwise obtain credit is able to do so, the consumer 12 For example, the attorney-at-law exemption to the Fair Debt Collection Practices Ac~ was recently repealeJ because it had become a haven foe attorneys who practiced debt collectio~ rather than law. 13 Moreover, if ~his practice were injurious, the Commission is not certain why the injury would arise only in connection with credit extended by retail sellers as opposed to other categories of creditors.
• The Honorable Ftank Annun%io :?ag'l! 12 may well d.... this a ~er'" ice ...,or th pay in<] f-:Jr. f The cr it ica 1 1s~uQ, in ou~ view, is not ~hether the credit to be vro..,ided is ~y~11abl. to others on the same terms or ~~en on mota fa..,ocabl~ term~, b~t whether the con~umer understands what he or she is paying for. Whether the c:~dit is offered on terms that are desirable to the consumer ~ill depend on the financial circum- 't~nQ~S and options available to that consumer. Thank you again Eor ~oliciting the Comrniggion's ..,iewg on the Credit Repair Organizations Act. We hope that these comments will be u~Qful in your deli~~r~ticns. By dire~tion of th~ Commission, ~~:b~1v Oani~ 1 01 iv'er Chairman -.... '."
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