Credit Scores and Credit Reports, by Evan Hendricks

Chapter 11

Credit Repair & Credit Counselors

For every complex problem, there is a           
solution that is simple, neat, and wrong.           

- H. L. Mencken  

If you want to find an industry with a horrible reputation, you need not look much further than credit repair. And for good reason. In this chapter, we will recount major enforcement actions against credit repair clinics. We will also touch on problems in the credit counseling and debt consolidation fields. But we will also hear from two small companies that say they ethically help consumers correct errors or otherwise improve their credit reports.

Over the years a steady drumbeat of warnings about credit repair scams have come from the Federal Trade Commission, state Attorneys General, AARP, and Call For Action. Despite these warnings, tens of thousands of consumers over the years, probably desperate to improve their credit reports, have turned to credit repair clinics. Consequently:

• Credit repair clinics collectively are making millions of dollar annually, typically charging consumers about $300-$400 dollars per year.


• Investigations of and enforcement actions and lawsuits continue against credit repair operators for ripping off consumers.


• Credit repair clinics continue advertising that they can help remove negative information from your credit report (regardless of its accuracy).

Steve Baker, Director of the Federal Trade Commission in Chicago and a leading enforcer of the credit repair law, said a prevailing myth about credit repair is that there are loopholes in the federal law that allow poor credit to be erased. It doesn't exist.

The Credit Repair Organizations Act

Let's start with the law. Under the Credit Repair Organizations Act (CROA)¹⁷³, and similar state laws, credit repair organizations must give you a copy of the "Consumer Credit File Rights Under State and Federal Law" before you sign a contract. A credit repair company cannot:

• Make false claims about their services


• Charge you until they have completed the promised services


• Perform any services until they have your signature on a written contract and have completed a three-day waiting period. During this time, you can cancel the contract without paying any fees.¹⁷⁴


• How long it will take to achieve the results


• Any guarantees they offer, and


• The company's name and business address

Your contract must specify:

• The payment terms for services, including their total cost


• A detailed description of the services to be performed

¹⁷³ 15 U.S.C. Sect. 1679(h)(b)
¹⁷⁴ These restrictions do not apply to a (1) non-profit organization; (2) creditor restructuring a consumer's debt or (3) depository institution.

Bombardment & Technicalities

A typical technique used by credit repair outfits (CROs) is to flood consumer reporting agencies with letters disputing negative items in the credit report. CROs emphasize that when derogatory information is disputed, credit bureaus must remove it if they are unable to verify it within 30 days. They argue that with enough dispute letters, repeated over time, the credit bureaus will give up. However, the Big Three credit bureaus have ramped up their systems for countering this approach. Not only do their automated systems dispose of disputes with a few keystrokes, but also the bureaus often disregard repetitive disputes as "frivolous." Some CROs are known to try and mask their involvement by mailing in dispute letters from different locations around the country.

Some CROs proclaim that they exploit technicalities to remove negative data. For example, if the consumer owes $1,000.09 debt, and the credit bureau reports it as a $1,000.90 debt, some CROs argue that all references to the debt must be deleted when disputed. The FTC views such claims as false.

One case that illustrated the techniques and reach of credit repair was that of National Credit Repair. On August 11, 2003, the FTC announced that National Credit Repair, one of the country's largest credit-repair operations, agreed to pay more than $1.15 million in consumer redress to settle charges that it violated the federal credit repair law. The FTC charged that the six Michigan-based defendants falsely claimed that they could remove derogatory information from consumers' credit reports, even if that information was accurate and not obsolete.

¹⁷³ The defendants were ICR Services, Inc.; a Livonia, Michigan-based company; and its three officers and directors, Bernadino J. Pavone, Jr., his mother Gloria Tactac, and Abood Samaan. The remaining defendants were National Credit Education and Review (NCER), based in Canton, Michigan, and its president Todd Renzi.

The defendants purported to do this through the use of a "one-of-a-kind" computer disk that they claimed could search and identify errors in the process used by the credit reporting agencies to enter negative items onto consumers' credit reports.

Since 1996, the defendants have sold their credit-repair service to more than 183,000 consumers, taking in more than $53 million on those sales (about $290 per consumer).¹⁷⁶ The company sold its services through a network of 50,000 sales representatives, who were paid commissions for each sale, the FTC said.

'Get A New Number'

Another approach that has drawn enforcement action is known as "File Segregation," in which the credit repair outfit shows the consumer how to obtain a new taxpayer identification number (TIN) or employer identification number (EIN) from the U.S. Internal Revenue Service. The consumer is then taught to create a new identity under the number on the theory that it will create a whole new file at the credit bureau and separate the individual from the negative credit history under his true Social Security number. The first problem with this approach is that it is a felony to put false data on a credit application. Second, the credit bureaus' algorithms are designed to accommodate discrepancies in identifiers, so that if the individual was still applying under the same or similar name or address, the information could end up in the same file anyway.

¹⁷⁶ FTC v ICR Services, Inc., et al.: U.S. Dist. Ct. - Northern Dist. Of Illinois (Eastern Div.) - No 03C-5532; complaint at http://www.ftc.gov/os/2003/08/icrcmp.pdf

In October 1999, sixteen defendants agreed to settle FTC charges that their "file segregation" schemes violated the CROA. The settlements were the result of an FTC's sweep entitled, "New ID, Bad IDea."¹⁷⁷ Thirteen of the sixteen defendants had to refund money to consumers. Three of the defendants showed they lacked enough money to pay refunds.

On May 9, 2001, Clifton W. Cross was sentenced to 49 months in federal prison and ordered to pay nearly $171,000 in restitution as part of a guilty plea resolving criminal charges stemming from a "file segregation"¹⁷⁸ scam. Cross and his company, "Build-It-Fast," promised consumers "perfect credit... instantly." It showed consumers how to get new Employment Identification Numbers and then substitute them for SSNs when applying for credit. Under a settlement with the FTC, Cross agreed to get out of the file segregation business.¹⁷⁹

On February 17, 2004, a federal grand jury in Los Angeles returned a nine-count, criminal-contempt-of-court indictment against Richard Murkey Sr., 57, for returning to the credit repair business despite a previous court order that he stay out of it.<sup>180

177</sup> The settlements of the "Operation New ID - Bad IDea" sweep are with Mehmet Akca (FTC File No. X990018); Frank Muniz (FTC File No. X990020); LSQ International (FTC File No. X990024), Standard Business Services (FTC File No. X990021); Pro Se Publications (FTC File No. X990023); Ross Sanford Leiss (FTC File No. X990026); Michael Lyons (X990027); Edward Lane (FTC File No. X990032); All About Communications (FTC File No. X990030); Express Financial Planning (FTC File No. X990034); Financial Publishers of America (FTC File No X990033); New Start (FTC File No. X990028); Frederick P. Ray (FTC File No. X990066); Internet Publications (FTC File No. X990064); P.M.. Enterprises (FTC File No. X990047); Fresh Start (FTC File No. X990044).
¹⁷⁸ FTC v. Clifton W. Cross, et al.: U.S. Dist. Ct. - Western Dist. of Texas (Midland); No. M099-CA-018
¹⁷⁹ FTC News Release, June 21, 2001; ww.ftc.gov/opa/2001/06/cross.htm
¹⁸⁰ News Release (No. 04-020), Debra W. Yang, U.S. Attorney for Central Dist. of California, www.usdoj.gov/usao/cac/pr2004/020.html

The FTC brought a civil case against Murkey in 1998 for misleading consumers in connection with credit repair. In November 1999, a federal court in Los Angeles found that Murkey systematically violated the credit repair law and banned him from the business. The 2004 indictment charged that immediately following the court's order, Murkey continued to offer credit repair services through businesses such as "Credit Restoration Corporation of America, Inc." In 2001, the L.A. court held Murkey in civil contempt, but he again returned to credit repair, the indictment charged.

"There is only so much that civil enforcement can do against scams like credit repair," said Howard Beales, then Director of the FTC's Bureau of Consumer Protection. "We appreciate the Justice Department's willingness to pursue the criminal sanctions that con artists so richly deserve."

To Boldly Go...

An even more exciting scheme allegedly was operated by the husband-wife team that co-owned Second Chance Financial, a credit repair outfit based in Riverside, Calif¹⁸¹. According to an August 2004 federal grand jury indictment, Mickey Lynn Manning and her husband, Ross Smith "allegedly recruited employees from the major credit bureaus — Equifax, Experian and TransUnion — who would enter false and misleading information into their databases with the purpose of improving the credit scores" of Second Chance credit repair customers, stated a press release from Los Angeles U.S. Attorney Debra W. Yang.

Also indicted was Marcus Brandon Betts, of Ontario, Calif, a former "team leader" of Trans Union's Dispute Dept. in Fullerton, Calif., for falsifying credit report data on behalf of paying customers who wanted to improve their credit scores.

¹⁸¹ Remember, all those mentioned were only charged and had not been convicted of anything. People are presumed innocent until proven guilty. But the information is in the public domain and the story is quite compelling.

The 16-count indictment named Dolores Guerrero, a Customer Service Representative on Experian's Dispute Team in the Dallas facility, as an unindicted co-conspirator. Guerrero pleaded guilty to fraud in May 2004 and is serving a prison term of more than three years, officials said, adding that she was paid $300-$500 a week in bribes.

No Equifax employees were named in the press release or the indictment, but a source said the husband-wife team had recruited operatives at Equifax's dispute facility in Jamaica. It was the first known case of credit bureau employees being accused of illegally working on behalf of outsiders.

How They Did It

This investigation started in 2002 when, according to sources, Experian noticed a pattern of suspicious activity, specifically entries on credit histories that were made by one employee. That employee was terminated. A joint review by the credit bureaus prompted them to refer the matter to law enforcement authorities.

Second Chance Financial "helped" their credit repair customers in two ways. According to the indictment, in 2001, they would send to their accomplices at the credit bureaus fictitious "dispute letters" to justify deletion of negative data from their customers' credit histories. The credit bureau employees would then delete negative items from client credit reports and place the fictitious dispute letters in their credit bureau's files.

Second, they worked with at least three other conspirators who allegedly were employed at companies like "J&J Financial Services," of Fort Lee, N.J. (Jose L. Crespo); "Diamond Star Financial," of Teaneck, N.J. (Jamila Takiyah Davis); and "Superior Financial" of Valencia, Calif. These firms allegedly became subscribers of the major credit bureaus and then fraudulently reported positive loan histories on the credit repair clients. This, combined with the removal of negative data, had the effect of raising clients' credit scores. The indictment estimated $6 million in losses to more than 50 businesses. At the time, lawyers representing those who were indicted told reporters either that their clients would plead not guilty or that they had no comment.

¹⁸² Privacy Times, Vol. 24 No. 16, Aug. 31, 2004

Where To Draw The Line?

The Credit Repair Organization Act (CROA) is very broad in prohibiting for-profit companies from accepting advance payment for help in improving one's credit record, or providing advice or assistance to that effect¹⁸³. But several consumers have alleged in separate federal lawsuits that credit monitoring services are doing just that in violation of CROA. One suit charged that ConsumerInfo.com, a Web site where consumers paid a $79.95 annual subscription for unlimited access to their Experian credit reports¹⁸⁴. The suit said that the company acted like a credit repair outfit because it took money up front, provided consumers with a "Blueprint for Rebuilding Your Credit," and offered a service that helped generate dispute letters. Moreover, a Yahoo search using the term "'credit repair' consumerinfo" turned up the phrase, "How Can I Repair My Credit Rating" and a link to the www.consumerinfo.com. The company strongly denied it engaged in credit repair and defended itself in the lawsuit, which was pending when this book went to print.

Similar suits are pending against Trilegiant Corp.'s "PrivacyGuard."

¹⁸³ While some legal experts wonder whether such a broad prohibition on commercial speech could withstand Constitutional scrutiny, no successful challenge has yet been brought.
¹⁸⁴ Ronald W. Helms v. ConsumerInfo.com, Inc.: U.S. Dist. Ct. N. Dist of Alabama (Middle Div.) - No. CV-03-RRA-1439-M

The Modern Landscape

As of January 2005, it appeared that a handful of companies dominated the credit repair industry.

One market leader was Lexington Law Firm, based in Salt Lake City, Utah. According to its Web site, Lexington began operating in 1991 and has served over 100,000 consumers. It claimed to have "challenged and deleted" 350,174 negative items on credit reports in 2003. (Lexington cannot "delete" items; presumably, it meant that its disputes prompted the CRAs to delete the negative items.)

Lexington required a $79 payment covering what it called a "case setup." New clients were required to sign a retainer agreement.

"In accordance with federal regulation, Lexington charges retroactively for the service it performs," billing $39 for the dispute work performed in the previous month, the firm stated on its Web site. (Remember, the Credit Repair Act prohibits for-profit companies from collecting fees in advance for disputing credit report errors.)

Lexington's Web site said its system works in cycles. Clients begin by sending in their three credit reports. The firm enters the information in a database, and presents the client with a list of disputable items. The client chooses which items to dispute, and Lexington then sends dispute letters to the CRAs. (Lexington considers these dispute letters to be trade secrets and will not share them with anybody, including the client.)

"When you receive a response from a bureau, make a copy of the updated report for your records then send the original to Lexington to move your case forward. Thus the cycle begins anew, this time hopefully with fewer negative items on your credit report," the Lexington Web site states, describing the fourth step in the cycle.

¹⁸⁵ www.lexingtonlaw.com

The annual cost is $508 ($79.00 initial + 11 months $39.00/ea). After 12 months, clients are entitled to a refund if Lexington does not effectuate deletion of at least 11 negative items. It calculates that each deleted item has a $50 value. So, if only two items are deleted, the client is entitled to a $408 refund, according to the Web site.

The Lexington Web site sports both the Better Business Bureau seal (BBB) and separate seal for BBB's Online Reliability Program. Clicking on the first seal takes you to a BBB Web page stating:

Based on BBB files, this company has a satisfactory record with the Bureau. Any complaints processed by the Bureau in its three-year reporting period have been resolved. The number and type of complaints are not unusual for a company in this industry.

To have a "Satisfactory Record" with the Bureau, a company must be in business for at least 12 months, properly and promptly address matters referred to it by the Bureau, and be free from an unusual volume or pattern of complaints and law enforcement action involving its marketplace conduct. In addition, the Bureau must have a clear understanding of the company's business and no concerns about its industry.

Other credit repair companies that take approaches similar to Lexington at similar prices, and which feature a BBB seal, include "CreditAttorney,"¹⁸⁶ "Ovation Law," and "Legacy Legal Services."¹⁸⁷ A Google search, and the accompanying ads, turned up a host of credit repair clinics.

Not every consumer has been satisfied with Lexington Law's services. In 2000, the Tennessee Office of Attorney General investigated the firm for possible violations of the telemarketing sales law.

¹⁸⁶ www.creditattorney.com, Dana Facemyer, Provo, Utah
¹⁸⁷ www.legacylegalservices.com, Brian Rollins, Tempe, Arizona

The result was a consent agreement in which Lexington, while not admitting any wrongdoing, agreed not to "request payment... to remove derogatory information from, or improve, a person's credit history, credit record, or credit rating before the expiration of the time frame in which [Lexington] has represented all of the goods or services will be provided to that person."¹⁸⁸

A Different Approach

Stephen Gardner knows a lot about the credit reporting system, and about credit repair outfits. As the Texas Assistant Attorney General in the late 1980s and early 1990s, he led investigations that resulted in landmark settlement agreements with the "Big Three" consumer reporting agencies (CRAs). Under those agreements, the CRAs vowed to take steps to prevent mixed files, reinsertion of previously deleted data, and to conduct adequate investigations upon receiving consumer disputes (see Chapter 10). Those agreements served as the foundation for the 1996 FCRA amendments.

Gardner, now an attorney in Dallas, Texas, said the only organization he knows that ethically helps consumers is First Stone Credit Counseling (FSCC),¹⁸⁹ and its affiliate company, the People's Credit Bureau (PCB).¹⁹⁰ Based in Dallas, the two companies are run by Bruce J. Danielson, a former pilot and military veteran. Danielson said First Stone is the only Consumer Advocate Credit Counseling organization in the country because it helps the consumers organize their matters and clean up their credit reports.

¹⁸⁸ State of Tennessee v. Lexington Law Firm: U.S. Dist. Ct. - Middle Dist. Of Tennessee; Civil No. 3-96-0344; Agreed Final Order, 9/29/00.
¹⁸⁹ http://www.firststone.com/
¹⁹⁰ http://www.peoplescreditbureau.com/; The Peoples Credit Bureau sells annual memberships ($150 for singles, $200 for couples), offering "fast-track" credit restoration, a newsletter, and other consumer education material.

On behalf of an estimated 300 clients each year, Danielson engages in what he called "accountability combat," in which the "average client's credit report is cleaned up in four-to-seven months, and no one takes longer than two years." Danielson pointed out that the FCRA not only requires that credit reports be accurate, but that they are "relevant, confidential, and properly utilized" as well.

Danielson said he leverages the consumer's willingness to repay a loan so that the creditor reports information to the credit bureau in a manner most beneficial to the consumer. As an example, he cited the negative hit a credit report takes when a consumer pays an old charge-off or collection because it can "re-freshen" the "date-of-last-activity" (DLA), making the negative account "more recent," and consequently, cause greater damage to the credit score.

"FSCC believes people need to pay their bills and timely. Therefore, we 'fairly settle' many situations. However, we also get the proper paperwork in hand before payment is delivered which protects our consumer clients from further abuse and victimization," the company stated in a fact sheet.

Danielson, who hosts a weekly radio show called "The Consumer Fight Back Show," said that many of the people in the credit counseling industry are "collection agencies in disguise."

He said the most famous organizations, the non-profit National Foundation For Consumer Credit (NFCC) and Consumer Credit Counseling Services (CCCS), are actually a set of "non-profit franchises" that earn billions of dollars each year, primarily serving creditors' interests.

"The CCCS Web sites state that their average client takes five years to complete their program, and worse yet, there is no credit file clean-up. The bottom line is that you may end up having seven to fifteen more years of 'credit hell,'" he said. Danielson also warned of private companies that offer credit counseling, referring to them as "NFCC clones."

NFCC has a different view. On its Web site, it described how its member organizations help millions of debt-laden consumers at a low or reasonable price. It claimed to help some consumers by giving them a Debt Management Plan (DMP).

"Fair Isaac and Company (FICO), has publicly stated that since 1999 FICO has completely ignored any credit report mention of a Debt Management Plan arrangement with any counseling agencies. This is great news for consumers and credit counselors both. Therefore, credit counseling and DMP services do not negatively affect credit scores. As to consumers' ability to obtain credit, it is the discretion of individual creditors as to how they interpret a consumer's credit report history and their decision to extend credit," NFCC stated on its Web site.¹⁹¹

In 2003, the National Consumer Law Center (NCLC) and Consumer Federation of America (CFA) published a report, "Credit Counseling in Crisis," detailing the severe threat to consumers from a new generation of credit counseling agencies. The study found that, unlike the previous generation of mostly creditor-funded counseling services, these new agencies often harm debtors with improper advice, deceptive practices, excessive fees, and abuse of their non-profit status. An estimated nine million Americans have some contact with a consumer credit counseling agency each year, it found.¹⁹²

Susan Keating, who in 2004 became the chief executive at NFCC, acknowledged to Michelle Singletary of the Washington Post that the credit-counseling industry was "in transition."

"I believe there are agencies out there that are not doing the right thing morally and ethically on the part of consumers and are taking advantage of individuals when they are vulnerable," she said.

¹⁹¹ http://www.nfcc.org/AboutUs/nfccfactsbckgnd.pdf
¹⁹² http://www.nclc.org/initiatives/credit_counseling/content/press_cc.pdf

Keating said she planned to work with Congress to push for federal legislation to weed out bad credit-counseling agencies. "NFCC remains committed to ensuring that consumers have access to high-quality, affordable financial-management advice and debt-relief services," she said.

Keating said she wanted to get rid of the quick-fix debt operations that do little if any worthwhile credit counseling. She favored an industry that would not push "cookie-cutter" debt-repayment plans, but rather put more emphasis on financial education and counseling.

A central problem with the approach of many credit counselors is that they often focus on negotiating lower monthly payments with credit card companies. But the card companies respond by reporting to the credit bureaus delinquencies each month because they are not receiving the required monthly payments. This approach continues to damage the consumer's credit score and represents a recipe for keeping a financially-strapped consumer in "credit jail."

Beyond Credit Report Errors

Daryl Yurek and J. Madison Ayer don't like the term "credit repair." Instead, they prefer to describe their young and growing company, Veracity Credit Consultants, as representative of a new, pro-consumer approach in which helping customers remove errors from their credit reports is only one part of a suite of services.

¹⁹³ Singletary, Michelle, "Growing Consumer Debt Requires Reliable Credit Counseling," March 4, 2004; Page E03
¹⁹⁴ Id.
¹⁹⁵ Id.
¹⁹⁶ www.veracitycredit.com

"Traditional credit repair clinics focus strictly on the credit history, but that's only 35% of your credit score," Ayer said. "In addition to tackling the derogatory disputes, our service is heavily consultative, allowing us to educate and advise our clientele on the most effective way to ensure optimization of the remaining 65% of the credit score."

"Areas that are unclear to most consumers but can yield very meaningful improvements in credit scores include the use of revolving credit, ensuring the proper reporting of revolving credit limits, removal of any recent unauthorized inquiries, optimizing the mix of credit accounts for length and balance, etc. At this time we are not aware of any other fully consultative services."

The Denver-based firm doesn't advertise. Most of its customers come via referrals from mortgage lenders and brokers across the country.

Veracity conducts an initial consultation with prospective customers, but only ends up working with 75% of applicants, Ayer said.

"If someone is currently overextended and unable to make their monthly payments, then our program is not going to help them, as they'll just be piling up more delinquencies. We advise them to put the fee they would pay us towards existing bills until they are indeed stable. We want them as clients at some point, but only when we're really going to be able to help them," Ayer said.

Customers are charged $69 to set up a file and provide a detailed analysis and consultation. After that, they are billed $39 at the end of each 30-day period that service is provided. Customers can cancel at any time. As of 2004, some 80% of the customers renewed monthly, Ayer said.

'Rate Optimization'

Because most of its business comes from mortgage professionals, Veracity traditionally has focused on the "big-ticket" items: Mortgages and refinancing. But Ayer said that consumers need help with their credit card rates as well.

"As the credit industry moves more into risk-based pricing using credit scores, rates become more dynamic," he explained. "Each month, credit card companies check the credit scores of their cardholders for any drop in score from the previous month, and raise rates accordingly. However, interest rates do not automatically go down when the credit score goes up — this has to be specifically requested."

Veracity began testing services along these lines, he continued. One customer had several serious, inaccurate delinquencies, including a collection account, a credit card more than 150 days past due, three separate 30-day delinquencies on a bank line of credit, and a 30-day late on a Texaco gas card. Ayer said Veracity helped the customer get these errors removed. But the bad credit history had caused his credit card issuers to hike his rates to: 27.99% (MBNA); 20.99% (Chase); 20.49% (Advanta) and 12.74% (Citi).

"After correspondence with either the 'Customer Service,' 'Credit,' or 'Retention' departments at each of these four card companies, the rates were changed to the following: MBNA: 11.99% fixed; Advanta: 13.68%; Chase: 8.99% and CITI: 8.74% + 0% Balance Transfer for life of balance," he said.

Ayer and Yurek said they were encouraged by the test results and hoped to roll out a new "rate optimization" service in 2005.

Are we entering a new era in which companies can make a profit by ethically helping consumers not only fix credit report errors, but improve their overall credit standing?

Yurek said he already saw this happening, and considered it a rational market response.

One can only hope he's right. Only time will tell.
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© 2005 Evan Hendricks and Privacy Times, Inc. All rights reserved.