Credit Repair Scams and How to Avoid Them

Buyers with good credit scores – above the standards traditionally acceptable to Fannie Mae and Freddie Mac – find that lending institutions are imposing considerably higher requirements.  720 is the new 620.

Given this tightening of standards it is not surprising that many consumers are attracted to the ads and promises of credit repair agencies.

Both Federal and State laws apply.  At the Federal level there is the Credit Repair Organization Act (CROA) found at 15 USCA, Section 1679 ff.   California has the Credit Services Act (Civil Code section 1789.10 et seq.). A comprehensive guide to both of these laws can be found on the California Department of Consumer Affairs web site at www.dca.ca.gov/publications/legal_guides/cr-9.shtml.

Both laws prohibit charging or receiving any money or other consideration before fully performing the credit repair services that the credit repair agency has agreed to perform (called “advance fees”).

California law provides an exemption for attorneys in cases where the credit repair service is rendered “within the course and scope of the practice of law.”  An exemption is given to real estate brokers if their credit repair service occurs while “performing an act for which a real estate license is required…and who is acting within the course and scope of that license.” California law exempts these entities provided that they are acting within their normal scope of business and they are not operating “stand alone” credit repair agencies.

In two cases (FTC v. Gill and Rannis v. Fair Credit Lawyers) the U.S. Court of Appeals for the Ninth Circuit has rejected the exemption argument by California lawyers.  In both cases the court noted that what the lawyers were doing fell within the scope of the Federal Credit Repair Organizations Act.  Even if they might have been exempt under California law, they would not be exempt from Federal regulations.

Currently there appears to be no precedence regarding broker exemptions but, in a recent California Department of Real Estate (DRE) publication (DRE Summer Bulletin, 2012), Chief Counsel, Wayne Bell, has pointed out that even if a broker were exempt under both the CROA and the Credit Services Act, it is unlikely that it would be legal for them to charge any kind of upfront fee for credit repair services.

California’s DRE regulations contain a general prohibition against advance fees.  Any broker who wants to charge such fees must make a special application to the Department.  In the case of credit repair services, it is unlikely that permission would be granted.

As a consumer, be advised. If upfront fees are being charged you should be concerned.