The credit counseling industry has received a great deal of attention in recent years. Common complaints include excessive or hidden fees, failure to disclose material facts, and false promises about eliminating inaccurate information from consumer credit reports. The industry is partly funded by the banking industry, and the presence of creditors on debt counseling agencies' boards of directors has also drawn fire from consumer advocates.
The Regulatory Environment
Credit counseling and credit repair services must comply with multiple layers of regulation and control. At the federal level, these organizations are chiefly regulated by the Federal Trade Commission and subject to a number of federal laws, including the Consumer Credit Protection Act. Additionally, credit repair and debt counseling organizations have come under close scrutiny by the Internal Revenue Service, particularly when they are claiming tax-exempt status as charity organizations. Finally, state legislatures and state commerce departments provide another layer of regulation and licensing.
Prohibited Acts
As part of the Consumer Credit Protection Act, Congress cracked down on misleading claims made by credit repair organizations. Under Section 1679b, credit repair organizations are prohibited from advising consumers to make false representations to creditors or courts, nor may they seek to remove accurate negative history from consumer credit reports. Finally, no credit repair organization can receive money from a consumer before it has performed the services required of it.
Contractual Requirements
As part of the same law, Congress requires every credit repair organization to furnish customers with a written contract, and provides a three-day cooling period before the contract becomes binding on the consumer. The contract must contain a full description of services to be performed and the time period estimated to be necessary to complete them. Finally, the contract must disclose all fees, terms and conditions of payment, including all amounts to be paid to the organization providing the services and to any other entity.
Tax-Exempt Credit Counseling and Repair Organizations
Many credit repair organizations have applied for tax-exempt treatment as charity organizations. The IRS scrutinizes these organizations carefully. If the scope of an organization's services is limited to working out a payment plan for a customer at a profit, the IRS will decline the application. To qualify for tax-exempt status, the organization must also provide significant counseling and education services to the public.
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