CROA Class Action Lawsuits

When Congress approved the Credit Repair Organizations Act (CROA) in 1996, its goal was simple: to put an end to the misleading and frivolous practices of certain “credit repair” organizations. Known alternately as “credit clinics” or “credit doctors,” these unsavory businesses make money by leading consumers to believe they have the power to remove accurate negative information (i.e. collections, missed payments, liens) from their credit reports. They don't. There are specific expiration dates for these types of negative accounts set under Fair Credit Reporting Act, and no one, not even the major credit bureaus, can remove accurate information before those dates.

CROA set up a number of reforms intended to affect the way “credit repair” organizations advertise and go about their business. For starters, the law prohibits companies from accepting money before completing any work, and it requires them to explain, in writing, both the services they offer and the rights a consumer has to obtain and review their own personal credit history. Finally, CROA set up guidelines prohibiting companies from making deceptive claims in their advertising.

Regrettably, in the ten years since it became effective, CROA hasn't done much to curtail “credit repair” organizations' shady practices. With clever maneuvering, the worst offenders have found ways to skirt the law. “Credit doctors” are still in business, and they're still selling consumers the same worthless services. Simultaneously, some attorneys have taken advantage of CROA in ways Congress never intended. Under a stipulation that allows consumers to sue “credit repair” organizations directly, they've filed civil class-action suits against the three major credit reporting agencies —Equifax, TransUnion, and Experian—and Fair Isaac Corporation, the provider of the widely used FICO scores that measure our credit worthiness and credit risk.

These companies hardly fit the definition of “credit doctors,” so how did they get nabbed while the true CROA violators got off scot-free?

Unfortunately for the credit reporting agencies and Fair Isaac, some opportunistic attorneys recognized that the companies had been selling credit-monitoring services with names like “Score Power” or “Credit Watch.” They argued that these services were marketed under the guise of being able to improve a consumer's credit record, credit history or credit rating. This, they said, was a direct violation of CROA regulations. While well intentioned, CROA has led to a set of guidelines that are notoriously difficult to follow.

In two recent cases, Equifax and Fair Isaac admitted no wrongdoing, but decided to settle the case in Georgia federal court in order to avoid the cost and headache of protracted court proceedings. On June 4, the court OK'd an agreement that changes the way Equifax and Fair Isaac can market their services. According to an article published by the New York Times on May 7th: “Under a settlement that the plaintiffs reached with Fair Isaac and Equifax, none of the credit products can be advertised in various ways, such as pairing the words 'improving,' 'enhancing,' 'boosting' or 'raising' with words like 'tips,' 'suggestions' or 'advice.'”

Additionally, the agreement extends three months of free “Score Watch” services to several million consumers who purchased the credit monitoring services between November 19, 1999 and February 8, 2007. Given that Score Watch—a service that monitors a consumer's Equifax credit file, FICO score and provides credit analysis—typically sells for $8 or $9 per month, this is no small concession.

But is this really what Congress and credit activists had in mind when they lobbied so hard to reform the credit repair industry? In the case of “credit doctors,” their marketing was definitely part of the problem, but their practices were by far a bigger issue.

Here's how it works: To make good on their false promises, the “credit repair” organizations will (with a consumer's written permission) bombard credit reporting agencies with letters contesting every single negative item on a consumer's credit report—regardless of whether or not the dispute is actually warranted. Their hope is that the credit bureaus won't be able to confirm an item's legitimacy within 30 days and will have to remove it. In effect, they're trying to manipulate a bureaucratic loophole (designed to protect all of us from inaccurate information on our credit reports) to their advantage.

Here's the problem for the consumer—even if the strategy succeeds, its effects are often temporary. Once the credit bureaus verify the item is accurate, it goes back on the credit report, and the customer is in the same position as when he or she started, except that now he or she is out the hundreds of dollars paid to the “credit repair” organization—all for a service that anyone could do themselves for the price of an envelope, a stamp, and a piece of paper. Moreover, if caught using “credit repair” the customer can be “blacklisted” by the bureaus, making it difficult to file future disputes.

Then there's the effect on the credit bureaus. An estimated 50 percent of their customer service resources go to fielding claims submitted by “credit repair” organizations. While that may not muster much sympathy from many, we are all indirectly affected. Like any manipulated system, protections are put in place to try to weed out the wrongdoers, and in the process, it becomes increasingly difficult for those who are legitimately disputing inaccurate items on their credit reports—a surprisingly common occurrence.

Considering that the credit bureaus are the first in line to want to see “credit repair” companies disappear, that they find themselves as defendants in a lawsuit based on CROA is ironic, to say the least.

Equifax and Fair Isaac were engaged in none of the shenanigans used by “credit repair” organizations, yet somehow they've become the law's most prominent targets. TransUnion and Experian are also affected, as all three credit reporting agencies will have to abide by the same marketing regulations. Credit bureaus aren't perfect, but they don't deserve to be branded as lawbreakers by class action attorneys looking to cash in on a misconstrued interpretation of the law. In the end, consumers will gain very little from this frivolous class action settlement as the real bad guys still go about their business. Hopefully, it won't happen again.