As credit scores fall, more consumers vulnerable to credit-repair scams
Recession-hammered homeowners' credit scores are on the decline across the country, say scoring industry experts, and that makes more consumers vulnerable to scams that purport to erase delinquencies, judgments, foreclosures and other problems from files at the three national credit bureaus -- Equifax, Experian and TransUnion.
What sort of scams? A Federal Trade Commission settlement in early September with a Florida "credit repair" company provides a fresh example. The FTC's complaint against Clean Credit Report Services Inc. of North Miami alleged that the firm promised clients it could boost their credit scores dramatically and quickly -- even if the derogatory information in their files was accurate and current.
In national radio advertisements, plus Internet and TV pitches, Clean Credit said it could make records of "late payments, collection accounts, charge-offs, repossessions and bankruptcies" simply disappear from credit files, according to the FTC's complaint.
The firm used testimonials from people identified as clients to help convince other potential customers that the claims were for real. The FTC cited a testimonial from one woman who said that she needed a minimum 600 credit score to obtain a loan but had only a 480 when she contacted Clean Credit.
"I got into the CCRS club," the woman recounted in the testimonial, "and did what they told me to do. Two months later I got responses from Equifax that said a bunch of stuff was deleted. When I pulled my [credit] report online I realized that I had a 621. I couldn't believe this really works."
The FTC complaint said that Clean Credit went beyond mere promises of short-term "repair," but in telephone sales talks with prospective clients the company held out the prospect of "permanently and legally" eliminating negative information in credit bureau files. The firm allegedly claimed that the target for clients was a 650 to 700 FICO score at the end of the file-scrubbing process.
Customers were charged upfront fees averaging $400, said the FTC, but once they paid the money, the company did "little, if anything, to fulfill the promises made" about boosting scores and purging negative files. Clean Credit's disgruntled customers filed complaints with state and local authorities, and the FTC -- which oversees the Credit Repair Organizations Act -- then took on the case.
Under that law, companies and individuals who claim to be able to fix consumers' credit files are prohibited from making "untrue statements" about what they can achieve and may not charge or collect money in advance of rendering their services.
Credit-repair services are frequently pitched to homeowners on the Internet, via direct mail or through mortgage loan officers. According to both Fair Isaac, whose FICO score is widely used in the mortgage industry, and VantageScore, a joint venture among the three national credit bureaus, scores have sagged in recent years because millions of consumers have fallen behind on credit cards, mortgages and other debts.
Lower scores, in turn, are preventing many homeowners from qualifying for new or refinanced mortgages under toughened underwriting standards imposed by lenders and investors such as Fannie Mae and Freddie Mac.
In the FTC settlement, Clean Credit and its officers agreed to forfeit substantial assets, including a $165,000 bank account balance, six commercial and three residential real estate properties in South Florida, another commercial property in Bogota, Colombia, along with a 1992 Mercedes S300. The proceeds from the sales of these and other assets are expected to be deposited by the FTC into a special restitution fund for Clean Credit clients. The agreement also requires the firm and its principals to pay $14.4 million for restitution should the financial statements they submitted for settlement purposes prove to be inaccurate.
Robin Rock, an FTC attorney in Atlanta, said the $14.4 million represents an estimate of what consumers were charged for credit-repair services they never received. An attorney representing Clean Credit, Andres Montejo of Miami, declined to comment on the allegations in the FTC complaint or the settlement terms.
The takeaway here for anyone with depressed credit scores who nonetheless is seeking a mortgage: Don't believe claims of credit-repair operators who say they can perform miracles on your credit files, boosting your scores overnight and keeping them that way permanently. They can't. If the delinquencies and other derogatory information in your files are accurate and current, the only way to boost your scores is to reverse your previous credit behavior and make responsible use of your credit accounts over time.
Finally, never pay money upfront. Not only are demands for advance fees for credit-repair red flags for scam operations, they're also blatant violations of federal law.