What is the Credit Repair Organization Act?

On November 9, 2024By Pranco

Key Takeaways

The Credit Repair Organizations Act regulates companies that sell credit repair services.
The law protects consumers by prohibiting unfair or misleading advertising and business practices.
Credit repair companies that violate the CROA may face significant fines.

Credit repair companies may offer to help you improve your credit score by disputing the inaccurate or outdated information on your credit report. Any company that offers credit repair services must follow the rules set forth in the Credit Repair Organizations Act (CROA).

The CROA arranges something credit repair companies can do if you help people improve their creditworthiness. Understanding how the CROA works can help you make informed decisions about credit repair services and avoid getting scammed.

The Credit Repair Organization Act

The CROA is a federal law that regulates credit repair companies and gives consumers certain rights. Congress enacted CROA in 1996 in response to concerns that dishonest credit repair companies were taking advantage of vulnerable consumers who had experienced credit problems.

The purpose of the CROA is to protect consumers from unlawful credit repair companies that rely on unfair or deceptive advertising and business practices. It ensures that consumers receive enough information about a credit repair company’s services to make an informed purchasing decision.

Consumer protection in the CROA

The CROA protects consumers against dishonest credit repair organizations. The law sets clear rules for companies that offer paid credit repair services. It prohibits certain unfair or misleading practices and obliges companies to protect the rights of consumers.

To comply with CROA, credit repair agencies must:

Accurately represents their services: Credit repair companies must be clear and honest in their marketing. False or misleading claims, such as promising a quick resolution or guaranteeing a certain credit score, are not allowed.
Enter into a written contract: By law, the contract must include a detailed description of the credit repair services. This includes how long the services will last, the total amount of payments and the payment terms.
Give new customers the option to cancel: According to the CROA, customers have three days’ reflection period after signing the contract. Customers can cancel the contract at any time free of charge within this period.
Have a written disclosure statement: Credit repair companies are required to provide customers with a standardized disclosure explaining their rights under state and federal law. That includes the right to contact credit bureaus directly.
Only bill customers for completed services: The CROA prohibits advance payments. Credit repair companies must fully complete a service before requesting payment.

Legal and illegal credit repair practices under the CROA

Companies advertising credit repair services use several tactics to improve customers’ credit scores. Understanding the difference between legal and illegal tactics can help protect yourself from scams when looking into credit repair services.

Legal Credit Repair Practices

Reputable credit repair companies have many ethical and legal methods for cleaning up customers’ credit reports. What these methods have in common is that they do not attempt to hide accurate negative information or mislead the credit bureaus.

Some examples of legal credit recovery practices under the CROA include:

Dispute errors on credit reports: The Fair Credit Reporting Act allows consumers to dispute inaccurate or incomplete information on their credit reports. It is legal for credit repair companies to provide assistance with this process, as long as they stay within CROA guidelines and are honest about their services.
Write debt validation letters: A debt validation letter asks for proof that a debt is legitimate. Credit bureaus must correct or remove unverifiable information, so credit repair companies can use this tactic to remove it zombie guilt from a customer report.
Writing goodwill letters to creditors: A letter of goodwill is a formal request to a creditor for forgiveness of a late payment or other negative item. This tactic is legal, but creditors are not obligated to honor the request.

Illegal credit repair practices

The CROA prohibits credit repair companies from using practices that involve fraud or deception. Companies should not use tactics that mislead the credit bureaus or lenders or that attempt to conceal accurate negative information on a customer’s credit report.

Some examples of credit repair practices that violate the CROA include:

Creating a new credit identity: Some illegitimate companies tell consumers they can start over by building credit with a credit privacy number or an alternative citizen service number. Using false information when applying for credit is considered fraud.
Dispute everything on your credit report: While it’s legal dispute incorrect informationit is illegal to deceive credit bureaus by disputing negative but true items on a credit report.
Filing false identity theft reports: Credit bureaus are required to remove fraudulent information resulting from identity theft. Filing false identity theft reports in an attempt to have accurate information removed is an illegal practice.

Consequences of violating the CROA

For credit repair companies, the penalties for failing to comply with the CROA can be significant. Companies that violate the law could face customer lawsuits, enforcement by the Federal Trade Commission (FTC), and even criminal charges.

Consumer lawsuits

By law, consumers have the right to sue a dishonest credit repair company that violates the CROA. They can recover their actual damages, which is the amount they paid to the credit repair company or the amount of their damages – whichever is higher. Courts can also award damages to punish the company and set an example.

Lawsuits can take the form of a class action. In these types of lawsuits, many customers who had been harmed by a credit repair company that violated the CROA bond came together to sue the company.

FTC Enforcement Actions

The FTC is a US government agency that monitors compliance with the rules consumer protection laws. It has the authority to take various legal and administrative actions.

The FTC can first send a letter warning the credit repair company that it is violating the CROA. According to the FTCWarning letters are very effective and most companies take quick steps to comply with the law.

The FTC can file suit in federal court for companies that don’t follow the rules. Previous legal proceedings have had significant consequences for businesses, from being required to pay millions of dollars in restitution to being permanently banned from offering credit repair services.

Possible criminal charges

Credit repair practices that violate the CROA may also be punishable by law. People who run illegal credit repair businesses can face criminal charges for crimes such as identity theft or bank fraud.

The possible penalties for committing crimes vary but can be significant. Once proven guilty, credit repair scammers can face fines or even jail time for their actions.

How to report violations

Reporting companies that violate the CROA help protect other consumers from predatory or unfair credit repair practices. You can report violations by contacting one of the following authorities:

Consumer Financial Protection Bureau (CFPB): Visit the CFPB website or call (855) 411-2372 to file a complaint. The CFPB shares complaint data with state and federal agencies and can file lawsuits against companies.
Federal Trade Commission: Visit the FTCs fraud reporting portal or call the Consumer Response Center at 1-877-FTC-HELP (382-4357) to report scams, fraud and other bad business practices. The FTC analyzes complaint data to identify companies that may be violating CROA so that appropriate action can be taken.
Your state’s attorney general (AG): Find your AG and their office contact information on the National Association of Attorneys General website. Attorneys general have the power to take action against predatory companies.

The bottom line

The Credit Repair Organizations Act outlines clear guidelines for how credit repair companies can operate. It aims to protect consumers by prohibiting misleading and deceptive business practices and guaranteeing certain rights and protections for consumers.

If you come across a credit repair company that appears to be violating CROA, file a report to protect other people and choose a more reputable credit repair company.