The ins and outs of credit repairTerry W. Clemanscredit repair, sub-prime market, Fair Credit Reporting Act, Credit Repair Organizations Act, Fair Isaac, National Credit Reporting Association Inc.
Brokers, be warned: Being closely involved with credit
repair may bring with it some major consequences.
The cover story of the last issue of Broker Magazine
caught my eye, as it discussed various methods of credit
restoration and improvement. The mortgage marketplace, specifically
the sub-prime market, has drastically shifted over the past year,
and so it is easy to understand the increased awareness in the
maximization of a consumers credit score. Now more than ever,
approval decisions seem to hang on the smallest of credit scoring
margins.
While the article discussed several methods of correcting,
improving or repairing credit, its author overlooked two very
important aspects of credit repairaspects that brokers must
carefully consider when working with their clients and credit
repair companies. Brokers, be warned: Being closely involved with
credit repair may bring with it some major consequences.
After reading the aforesaid article, a broker might consider
adding fee-based credit repair to their existing business model.
This would be a great way to generate revenue from clients not yet
ready for a mortgage loan, right? While this may seem like a very
normal method of business diversification and a conventional way to
expand your potential mortgage client base, is the potential
revenue from the credit repair service worth losing the ability to
offer mortgage loans?
Aspect number one involves legality, specifically with regard to
credit repair. In addition to the Fair Credit Reporting Act (FCRA),
there are very specific and strict laws about credit repair. One of
the most important laws, and one of the most frequently
unrecognized, is the Credit Repair Organizations Act (CROA). This
is the primary governing law for credit repair companies and it
strictly prohibits many practices that are, unfortunately, still in
use by many credit repair companies today. For a credit repair
company to be compliant with the most basic of CROA regulations,
they must start with a clear contract spelling out exactly what
they will do for the consumer, inform them of their rights and not
charge the consumer any fees until all terms of the contract have
been completed.
Many of these companies have program policies that barely meet
the requirements of the law, and would likely fail a CROA legal
challenge by a consumer or government enforcement agency. Even a
few of the national credit repositories and Fair Isaac and company
were surprised by CROA litigation challenges regarding the sale of
their credit reports, scores and credit correction/improvement
programs on the Web for violating the pre-payment portion of CROA.
If you are interested in further detail, log on to www.ftc.gov/ro/chro/credit.shtm
for a complete copy of the CROA.
Aspect number two, and the issue with the greatest potential
impact on your ability to continue your mortgage origination
business, is related to the three national credit repositories and
their policies prohibiting the sale of credit reports to companies
in the business of credit repair. Any accurate derogatory data on a
consumers credit report cannot be removed through legal methods
until the statute of limitations expires (seven years for
everything other than bankruptcy, which is 10 years). Companies
that make claims other than that should have their practices
carefully reviewed for both FCRA and CROA compliance.
Since any firm that is found to be in the business of credit
repair no longer qualifies to purchase credit reports, if you are
discovered and listed on a Do Not Sell list of the repositories for
being involved in credit repair, what is going to happen to your
mortgage originations? This also affects any company that shares
office space with a credit repair company. In other words, starting
a new company to shelter the connection with your Mortgage Broker
business will not work if you are sharing physical office space
with the other company. This is one of the items reviewed during
the mandatory site inspections prior to receiving clearance for the
purchase of credit reports.
In a down market, it is natural to seek new ways to expand your
consumer base and look for new revenue streams. When doing so,
careful evaluation should be given to the potential consequences
for both your consumer and your mortgage origination business if
credit repair is something you are considering. Make sure that any
company you are considering referring to your consumers meets all
of the federal guidelines for legally offering credit repair. The
FTC brochure, which can be found online at www.ftc.gov/bcp/conline/pubs/credit/repair.shtm,
will help you to determine if the company you are planning to refer
is worthy of consideration by your consumer. And of course, if you
are considering getting into this business, remember that being
involved in a credit repair company impacts your ability to access
credit report information. If this becomes known and you can no
longer access credit reports for your mortgage operations, will it
be worth it?
Terry W. Clemans is the executive director of the National
Credit Reporting Association Inc. (NCRA). He may be reached at
(630) 539-1525 or e-mail
[email protected].
