FTC Staff Comment to the Hon. R. Michael Young Concerning Indiana H.B. 1146 to Declare that Specific Acts by Credit Service Organizations are Deceptive

UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
CHICAGO REGIONAL OFFICE
Suite 1437
55 East Monroe SIrMl
ChiCago. Inl...,.. 60603
(312) 353-8156
February 9. 1990
The Honorable R. Michael Young
State of Indiana House of Representatives
Third Floor State House
Indianapolis, IN 46204
Dear Mr. Young:
V900019
COMMISSION AUTHORIZED
The staff of the Federal Trade Commission is pleased to submit this letter in
response to your request for comments on H. B. 1146. 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 	believe 	that 	effective
disclosures are likely to benefit consumers. 	It is our view, however, that H.B. 1146
would be strengthened by providing specific disclosure language that credit service
organizations must follow. 	Moreover, we believe that the meaning of the disclosure can
be more effectively conveyed if it is short and written in simple, non-technical language.
I. 	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. The Commission staff has filed comments with the Colorado
State 	Senate 	on 	legislation 	that 	was 	substantially 	similar 	to 	H.B. 	1146.2 	The
Commission staff testified before the U.S. Congress on H.R. 458, the Federal Credit
Repair Organization Act, which was introduced to combat fraudulent practices in the
1 	These comments are the views of the staff of the Chicago Regional Office and
the Bureau of Consumer Protection of the Federal Trade Commission and are not
necessarily the views of the Commission or of any individual Commissioner.
2 	See Letter from Claude C. Wild III, Director, Denver Regional Office of the Federal
Trade Commission, to the Honorable Tom Norton, Colorado State Senate (February 21,
1989).

The Honorable R. Michael Young
Page -2-
credit repair industry.3 	In addition, the Commission staff has investigated and brought
a number of enforcement actions against the kind of companies that would be covered
by H.B. 1146, if enacted. 4 	For these reasons, we believe that we can provide some
additional perspective on the magnitude of the problem addressed by H.B. 1146, as
well as on some aspects of the proposed legislation.
It. 	Description of H.B. 1146
H.B. 1146 (the "Bill"), if enacted, would declare that certain specific acts by credit
service organizations are deceptive. 	It also would require, among other things, that
when credit repair organizations provide services to (1) improve a consumer's credit
history, credit record or credit rating, or (2) attempt to obtain an extension of credit for
a consumer, 	they provide the consumer with 	certain 	written 	disclosures 	prior to
execution of the contract for services. 	Our comments focus on the specific acts
declared deceptive by Section 5(2) and the disclosure requirements contained 	in
Section 6 of the Bill.5
III. 	Background of the Credit Repair Industry
The Bill applies to organizations that are popularly referred to as "credit repair
organizations.II 	The 	credit repair business 	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 ("FCRA") , 15 U.S.C. § 1681. 	Section 611 is designed to provide
3 	See Testimony of Jean Noonan, Associate Director for Credit Practices, Federal
Trade Commission, before the Subcommittee on Consumer Affair and Coinage of the
House Committee on Banking, Finance, and Urban Affairs (September 15, 1988). 	See
also, Letter from Daniel Oliver, Chairman, Federal Trade Commission, to the Honorable
Frank Annunzio, U.S. House of Representatives (May 11, 1987).
4 	See, e.g., Federal Trade Commission v. Credit Clinic Corporation No. CA3-89-
2046-H (N.D. Texas filed September 1, 1989); Federal Trade Commission v. American
Credit Services, Inc. No. 89-3651-KN (C.D. Cal. filed June 20, 1989); Federal Trade
Commission v. Credit Repair, Inc. No. 89-C-Q344 (N.D. lit. filed January 17, 1989); and
Federal Trade Commission v. Nationwide Credit No. 88-4071 (E.D. La. filed September
15, 1988).
5 	We express no opinion as to the other provisions of the Bill.

The Honorable R. Michael Young
Page -3-
consumers with a self-help mechanism to correct credit reports that contain inaccurate
or 	incomplete 	information. 	Correcting 	and 	updating 	such 	information 	benefits
consumers as well as creditors by helping to insure that credit-granting decisions are
based on complete and accurate information.
The principal goal of most consumers who purchase the services of a credit
repair company is not to have inaccurate information corrected. 	It appears instead that
many of those who turn to credit repair organizations do so in hopes of minimizing
significant credit problems that they have experienced in the past. 	Although minor
inaccuracies may appear in their credit reports, by and large the negative information
in the reports is accurate. 	Therefore, use of the dispute procedures of the FCRA is
unlikely to significantly improve the reports' accuracy.
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 may 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 be typical. 	Commission staff believe that
more than fifty percent of credit repair businesses move or go out of business in the
first year of operation without having delivered the services paid for by their clients.
Since purchasers are usually told that credit repair takes time, they often do not realize
they have been defrauded until the company has disappeared. 	Consumers that are
victims of fraudulent operations are not only deprived of the money they pay for fees,
but may also forgo other steps that they might take to put their credit back on firm
ground.
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 six credit repair
companies; four of these companies have signed consent decrees to settle the charges
brought by the FTC.6
6 	The Commission files a complaint when it has "reason to believe" that the law
has been or is being violated, and it appears to the Commission that a proceeding is
in the public interest. 	The complaint is not a finding or ruling that the defendant has
actually violated the law. 	A consent decree is for settlement purposes only and does
not constitute an admission of a law violation. 	Consent decrees have the force of law,
which means that the FTC can seek civil penalties against companies that violate their
consent orders.

The Honorable R. Michael Young
Page -4-
The credit repair industry is elusive and fragmented. 	For this reason it is difficult,
if not impossible, to determine the actual size 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
benefit from a properly functioning credit reporting system. 	Such a system is crucial
to the maintenance of a healthy economy, and both consumers and legitimate business
are victimized by the abuses of fraudulent credit repair companies?
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 "dispute
rounds. M 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 removal
of negative information.8 	Usually this practice does not work. 	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 of the credit
reporting system.
IV. 	H.B. 1146's Disclosure RequirerT)ents
The Commission staff agrees that a disclosure requir~ment could reduce a credit
repair company's ability to misrepresent what it is likely to achieve. 	In the 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
7 	A recent development is the sale of instruction manuals and training seminars
that teach consumers how to open and operate a credit repair company of their own.
This type of marketing may add to the growth of the credit repair industry despite
efforts by law enforcement authorities to establish controls.
8 	Under § 611 of the FCRA, when a consumer disputes an item, 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. 	However, as
explained above, a credit bureau can report accurate information for seven years,
except for bankruptcy, which may be reported for ten years.

The Honorable R. Michael Young
Page -5-
will almost never be removed by a credit bureau until it becomes obsolete. 	These
consumers easily fall prey to exaggerated or false claims by fraudulent 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 Organizations Act (the "CROA"), which
was introduced in Congress to combat fraudulent practices in the credit repair industry.9
Parts of these comments are not applicable to the Bill, but the discussion of disclosure
requirements is particularly relevant. 	In its comments on H.R. 458, the Commission
favored 	language 	that 	would 	simply 	and 	succinctly 	explain 	the 	limitations 	on
circumstances under which a consumer 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. 1o The disclosure
should also advise consumers of their right to cancel a credit repair contract within a
certain period of time. 11 	In addition, the comment recommended that to be most
effective, any required disclosure 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 companies
be required to follow model language proposed by Congress.12
9 	The CROA legislation has not yet been adopted. 	It has been reintroduced in
this session, but no action has been taken, and, to our knowledge, none is scheduled.
10 The Commission is the law enforcement agency charged with administering the
Fair Credit Reporting Act. 	A state disclosure scheme might well include the name and
number of the State Attorney General's office or other local law enforcement officials as
well.
11 Section 7(a)(1) of the Bill requires this disclosure. 	It provides that any contract
for the provision of services by a credit service organization must contain, in immediate
proximity to the space reserved for the signature of the consumer, the following
statement: "You, the buyer, may cancel this contract at any time before midnight of the
third business day after the date of the transaction. 	See the attached notice of
cancellation form for an explanation of this right." 	Section 7(b) provides the specific
language for the Notice of Cancellation form.
12 In 	its 	comments 	on 	H.R. 	458, 	the 	Credit 	Repair 	Organizations 	Act, 	the
Commission proposed the following disclosure language.
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 remove 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.

The Honorable R. Michael Young
Page -6-
The Commission staff believes that the Bill would be more effective if it called
for disclosures similar to those recommended by the Commission in its comments on
the CROA rather than those presently set forth in Section 6 of the BiII. 13 The adoption
of 	a 	short, 	simple 	disclosure 	conveying 	information 	that 	consumers 	can 	easily
comprehend will leave 	less room 	for fraudulent operators to prey 	on 	vulnerable
consumers. 	Fraudulent operators have often referred to the FCRA as a means of
bolstering their credibility. 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 specific disclosure language is left to the discretion of
the individual operator rather than prescribed by the legislature, the resulting disclosure
may be accurate and complete, but written in language that is perceived by consumers
to be long and complex. 	As a result, it may have the unintended effect of aiding the
fraudulent operator rather than assisting the consumer. 	Care should also be exercised
by the legislature to ensure that any disclosure language that it may adopt does not
similarly give fraudulent operators a tool to strengthen their sales pitches.
V. 	Prohibited Practices
Section 5(2) of the Bill, if enacted, would make it a deceptive act to charge a
consumer a fee solely for referring the consumer to a retail seller who will or may make
credit available to the consumer on substantially the same terms as those available to
2. 	You have the 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 Repair 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 Commission
Washington, D.C. 20580
(202) 326-3225
See also pp. 3-6 of the enclosed comments.
13 In general, 	affirmative disclosure requirements 	such as those 	contained in
Sections 6 and 7 of the proposed Bill raise firms' costs and might impede them from
adopting efficient business practices. 	However, given the recent history of the credit
repair industry, we believe that these costs are likely to be outweighed by the benefits
provided to consumers through disclosures written in simple, non-technical language.

The Honorable R. Michael Young
Page -7-
the general public. 	Commission staff questions whether the practice that this section
addresses is necessarily deceptive or injurious to consumers. 14 If the purpose of this
provision 	is 	to 	protect 	consumers 	from 	misrepresentations 	by 	credit 	service
organizations regarding credit extended by others, the scope of the provision appears
to be broader than is necessary to accomplish this end. 	As a result, consumers may
be deprived of a valuable source concerning the availability of credit.
To establish a good credit record, a consumer may first have to obtain a line
of credit from which a credit history can be built. 	A credit service organization can
function as a clearinghouse of information about those businesses that are likely to
extend credit to a particular class of consumers. 	A consumer may not have access to
this 	information without the assistance of a third party such 	as a credit service
organization. If through the assistance of a credit service organization, a consumer who
cannot otherwise obtain credit is able to do so, the consumer may consider this a
worthwhile service and be willing to pay for it. 	Whether the credit is offered on terms
that are desirable to the consumer will depend on the financial circumstances and
options available to the consumer. 	The critical issue, in our view, is not whether the
credit to be provided is available to others on the same terms or even on more
favorable terms, but whether consumers understand what they are purchasing (Le.,
referral services). 	Declaring it deceptive for a credit service organization to charge a
fee 	for 	providing 	this 	assistance 	takes 	away 	a company's 	incentive 	to 	provide
information that consumers may otherwise be willing to purchase.
VI. 	Conclusion'
We believe that H.B. 1146, if enacted, would be strengthened by a disclosure
requirement written in simple, non-technical language similar to the one discussed in
the Commission's comments on H.R. 458.
Please let me know if you have any questions concerning this letter, or if we can
be of further assistance.
Sincerely,
L,~8k/r~I'?-
C. Steven Baker
Director
CHICAGO REGIONAL OFFICE
Enclosure
14 Moreover, if this practice were injurious, staff is not certain why this injury would
arise only in connection with credit extended by retail sellers as opposed to other
categories of creditors.