On Monday, October 20, 2008, the Federal Trade Commission (the "FTC"), in cooperation with 25 state agencies in 23 states, announced "a crackdown on operations that deceptively claim they can remove negative information from consumers' credit reports - even if that information is accurate and timely." The FTC's press release says it will hold a press conference on Thursday, October 23 at 10:30 am ET to provide more details.
In the credit repair industry, the FTC's two principal enforcement tools in its arsenal include Section 5 of the FTC Act, which generally prohibits false and deceptive marketing practices, and the federal Credit Repair Organizations Act ("CROA"), which prohibits false or misleading representations and requires certain affirmative disclosures in the offering or sale of "credit repair" services. CROA bars "credit repair" organizations from demanding advance payment; requires that "credit repair" contracts be in writing; and gives consumers certain contract cancellation rights, among other requirements. The definition of credit repair has been interpreted broadly. Section 501(c)(3) organizations are excluded from regulation under CROA, however, the scope and application of the 501(c)(3) exemption from CROA has been an area of intense litigation.
In addition, a number of states have enacted similar statutes, often called "Credit Services Organization Acts," that are enforced by state Attorneys General and, sometimes, private plaintiffs. The state laws usually have all of the features of CROA, but also often encompass additional services (and products), require registration and bonding, and include advanced fee prohibitions that may only apply in certain circumstances, among other requirements. Not all state credit repair statutes exempt tax-exempt 501(c)(3) nonprofit organizations from regulation.
CROA enforcement is an active area for the FTC, state Attorneys General, and for many plaintiffs' and class action lawyers. Most similar to this enforcement sweep, in 1998, the FTC's "Operation Eraser" targeted 31 allegedly fraudulent credit repair companies, including a number under the then-new CROA. In addition, CROA and state CSOAs have been used by plaintiffs' attorneys against credit counseling agencies and debt settlement companies with some success.