California
CREDIT REPAIR SERVICES
February 2008
The importance of obtaining and maintaining good credit has
increased in recent years. More and more consumers are faced with the challenge
of taking steps to maintain or improve their credit rating. Though consumers are
free to undertake credit repair on their own, several organizations now offer
services in this area. This guide provides general information on state and
federal laws governing credit repair services. In addition to financial
advisors, other types of credit service companies have surfaced offering credit
repair services, credit-counseling services, and debt management or debt
repayment plans. Regardless of the services offered, both state and federal law
provide certain protections for consumers using those services.
CALIFORNIA LAW
A. The Credit Services Act of 1984
(Civ. Code §§ 1789.10 et seq.)
Credit services organizations
(also known as "CSOs" or "credit repair services") do not provide credit.
Rather, CSOs offer to obtain loans or extensions of credit for consumers who
have experienced credit problems, or to correct or improve such consumers'
credit records. As defined by the Credit Services Act of 1984 ("Act"), CSOs
sell, provide, or perform (or promise) any of the following services for a fee:
- To improve a buyer's credit record, history,
or rating.
- To obtain a loan or other extension of credit
for a buyer.
- To provide advice or assistance to a buyer
with regard to either of the above. (Civ. Code §1789.12(a).)
The buyer of a CSO's services can
cancel the contract, without penalty or obligation, within five days after
signing it. (See discussion below.) (Civ. Code §1789.16(a),(b).)
B. Statutory Exemptions
(Civ. Code §§1789.12(a), (b), 1789.19(b).)
The following individuals and
institutions are excluded from the requirements set out in the Act:
- Lenders or creditors who are (a) licensed to
make loans or extensions of credit under California or federal law, (b)
regulated and supervised by a state or federal official or agency as to
those loans or extensions of credit, and (c) whose business is the making of
those loans or extensions of credit.
- Banks and savings institutions whose deposits
or accounts are insurable by the FDIC.
- Non-profit organizations under § 501(c)(3) of
the Internal Revenue Code that have received a final ruling or determination
from the Internal Revenue Service that they are not private foundations and
are exempt from taxation under § 501(a) of the Code. (Section 501(a)
contains a laundry list of corporations that are exempt from tax, such as
charitable corporations and religious organizations.)
- Licensed proraters, acting within the course
and scope of their licenses.
- Licensed real estate brokers performing an act
for which a license is required under the Real Estate Law (Bus. & Prof. Code
§§1000 et seq.)
and who are acting within the course and scope of that license.
- Attorneys licensed in California rendering
services within the course and scope of the practice of law. (The exemption
does not apply to an attorney who is an employee of, or who is otherwise
directly affiliated with, a credit repair agency.)
- Broker-dealers who are registered with the
Securities Exchange Commission or the Commodities Futures Trading
Commission, acting within the course and scope of applicable regulations.
(Civ. Code §§ 1789.12(a)(1), (b).)
C. Statutory Purpose and Construction
(Civ. Code §1789.11(b),(c).)
While some CSOs provide consumers
legitimate services, others have been known to accept payment and not provide
any service; to provide inaccurate or misleading advice (e.g., referring
consumers to potential creditors who would have granted them credit in any
event); and/or to engage in questionable credit repair practices (e.g.,
disputing every entry on a consumer's credit report).
It is important to remember that
most of the services performed by CSOs can be performed by consumers acting on
their own behalf, exercising rights under the credit reporting laws and other
laws.
The purpose of the Act is to
provide prospective buyers of credit repair services with the information
necessary to make an intelligent decision regarding the purchase of those
services, and to protect the public from unfair or deceptive advertising and
business practices. (Civ. Code § 1789.11(b).) A court will interpret the
provisions of the Act liberally to achieve these purposes. (Civ. Code §
1789.11(c).)
D. What must every CSO do?
- File a registration application with, and
receive a certificate of registration from, the Department of Justice
(Attorney General's Office) before doing business in California. (Civ. Code
§ 1789.25.)
- Obtain a $100,000 surety bond from an admitted
surety in favor of the State of California for the benefit of any person
damaged by any violation of the Act. (Civ. Code § 1789.18.) (The bond must
be maintained for two years after the CSO stops doing business in
California.)
- Give the buyer, before the contract for
services is signed, an information statement that complies with Civil Code
Section 1789.15 (described below). The CSO must also maintain for 2 years a
copy of the statement signed by the buyer and the acknowledgment of receipt
of that statement. (Civ. Code §§ 1789.14, 1789.15.)
- Not provide any service to a buyer except
pursuant to a written contract that complies with Civil Code Section 1789.16
(described below). (Civ. Code § 1789.16.)
- Complete the agreed services within six months
after the date the buyer signs the contract for services. (Civ. Code §
1789.13(b); see Civ. Code § 1789.16 (a)(3).)
- Maintain an agent for service of process in
this state. (Civ. Code § 1789.13(j).)
E. What are CSOs not allowed to do?
(Civ. Code §§1789.13, 1789.17, 1789.19(a).)
A CSO (or a salesperson,
representative, or independent contractor) cannot:
- Charge or receive any money or other
consideration until it has fully performed the agreed services. (Civ. Code
§ 1789.13(a).)
- Charge or receive any money or other
consideration solely for referring a buyer to a retail seller or other
credit grantor for an extension of credit, if the credit is, or will be,
based on substantially the same terms as those available to the general
public, or on substantially the same terms as the buyer could have obtained
without the CSO's assistance. (Civ. Code § 1789.13(c).)
- Make, or advise the buyer to make, any untrue
or misleading statement to a consumer credit reporting agency, or to any
present or potential creditor, such as untrue statements about the buyer's
identification, home address, credit worthiness, credit standing, or credit
capacity. (Civ. Code § 1789.13(d).)
- Remove, or assist or advise the buyer to
remove, accurate and non-obsolete adverse information from the buyer's
credit record. (Civ. Code § 1789.13(e).)
- Create, or assist or advise the buyer to
create, a new credit record by using a new name, address, social security
number, or employee identification number. (Civ. Code § 1789.13(f).)
- Make any untrue or misleading representation,
or engage in any fraudulent or deceptive act or practice, in the offer or
sale of its services. (Civ. Code §§ 1789.13(g), (h).)
- Advertise its services without being
registered with the Department of Justice (Attorney General's Office).
(Civ. Code § 1789.13(I).)
- Transfer or assign its certificate of
registration. (Civ. Code § 1789.13(k).)
- Submit a buyer's dispute to a credit reporting
agency without the buyer's knowledge. (Civ. Code § 1789.13(l).)
- Call a credit reporting agency or use its toll
free number and represent the CSO as the buyer without the buyer's prior
authorization. (Civ. Code § 1789.13(m).)
- Attempt to have a buyer waive any rights under
the Act. (Any such attempt is a violation of the Act, and any such waiver
is void and unenforceable.) (Civ. Code § 1789.19(a).)
- Breach the contract or any contractual
obligation the CSO has with the buyer. (Any such breach constitutes a
violation of the Act.) (Civ. Code § 1789.17.)
F. Requirements Relating to the Information Statement and the
Contract (Civ. Code §§1789.14,
1789.15,1789.16.)
1. Information Statement Requirements:
A CSO must give the buyer an
information statement which contains all of the following before the buyer signs
a contract for the CSO's service. (Civ. Code § 1789.14.)
- A complete and detailed description of the
services to be provided by the CSO, and the total cost or obligation to the
buyer. (Civ. Code § 1789.15(a).)
- Notice of the buyer's right to proceed against
the CSO's bond as set forth in Civil Code section 1789.18, and the name and
address of the surety which issued the bond. (Civ. Code §§ 1789.15(b),
(c).)
- A complete and accurate statement of the
availability of nonprofit credit counseling services. (Civ. Code §
1789.14(d).)
- A statutorily prescribed statement of
consumers' rights under the state and federal credit reporting laws to
obtain their credit reports and to dispute inaccurate information in them.
(Civ. Code § 1789.15.)
2. Contract Requirements:
The contract for services between
a buyer and a CSO must be in writing, must be signed and dated by the buyer, and
must contain all the following. (Civ. Code § 1789.16.)
- The terms and conditions of payment, including
the total of all payments to be made by the buyer. (Civ. Code §
1789.16(a)(2).)
- A complete and detailed description of the
services to be performed by the CSO, and the estimated date, or length of
time, for completion of the services. The estimated length of time for
performing services cannot exceed six months (or a shorter period if so
prescribed by the Department of Justice). Any guarantees or promises of any
refund also must be completely described. (Civ. Code § 1789.16(a)(3).)
- The CSO's principal business address and the
name and address of its agent authorized to receive service of process
(other than the Secretary of State). (Civ. Code § 1789.16(a)(4).)
- A conspicuous, statutorily prescribed
statement of the buyer's right to cancel the contract by midnight of the
fifth day after the contract is signed. The notice must be in at least
10-point bold type, and be near the buyer's signature line. (Civ. Code §
1789.16(a)(1).)
The CSO must give the buyer a
fully completed contract, and all other documents that it has required the buyer
to sign, at the time they are signed. Duplicate, completed "Notice of
Cancellation" forms, in the same language as the contract, must be attached to
the contract, and must be easily detachable from it. (Civ. Code § 1789.16(b).)
Section 1789.16(b) prescribes the type size of this notice and its content,
including the date on which the cancellation period expires, and requires that
the seller return any payment within 15 days after receipt of notice of
cancellation (which may be any written notice of
cancellation).
G. Sanctions and Remedies
(Civ. Code §§1789.18,1789.20,1789.21,1789.22,1789.24.)
The Act's provisions are not
exclusive, and its remedies are in addition to other remedies or procedures
prescribed by law. (Civ. Code § 1789.22.)
1. Criminal Sanctions
Any violation of any provision of
the Act is a misdemeanor. The Attorney General, district attorneys, and city
attorneys may prosecute such violations, and may also seek injunctive relief.
(Civ. Code § 1789.20.)
2. Civil Remedies
- A buyer who is injured by a CSO's violation of
the Act or breach of contract may recover actual damages at least equal to
the amount paid to the CSO, plus costs and reasonable attorneys fees. The
buyer also may obtain injunctive relief. The court, in its discretion, may
award punitive damages. (Civ. Code § 1789.21(a).)
- A person who claims against a CSO's bond for a
violation of the Act may bring an action at law against the CSO and the
surety. The surety is liable for actual, but not punitive, damages, and its
aggregate liability to all claimants cannot exceed the amount of the bond.
(Civ. Code § 1789.18(b).)
- Credit reporting agencies, users of credit
reports, and suppliers of credit information may bring an action for
damages, injunction, or both, for violation of the Act. A prevailing
plaintiff is entitled to reasonable attorney's fees and costs. (Civ. Code §
1789.21(b).)
FEDERAL LAW
A. The Credit Repair Organizations Act
("federal law") (15 U.S.C.A. §1679 et seq.)
- The purpose of this law is to ensure that
prospective buyers of a credit repair organization's ("CSO")1
services are provided with the information necessary to make an informed
decision regarding the purchase of such services; and
- To protect the public from unfair or deceptive
advertising and business practices by CSOs.
B. Definition
Under section 1697a of the federal
law, a CSO means any person who uses interstate commerce or the mails to sell,
provide, or perform (or represent that he or she can or will sell, provide or
perform) any service, in return for the payment of money or other valuable
consideration, for the express or implied purpose of:
- improving any consumer's credit record, credit
history, or credit rating; or
- providing advice or assistance to any consumer
with regard to any activity or service described in (1) above.
C. Excluded Organizations and Individuals
The following are excluded
from the definition in B above:
- any nonprofit organization exempt from
taxation under section 501 (c)(3) of the Internal Revenue code;
- any creditor (defined in 15 U.S.C.A. section
1602), with respect to any consumer, to the extent the creditor is assisting
the consumer in restructuring any debt owed by the consumer to the creditor;
or
- any depository institution (defined in 12
U.S.C.A. section 1813), federal or state credit union (defined in 12
U.S.C.A. section 1752), or any affiliate or subsidiary of one of those
institutions.
D. CSOs may not:
- make any statement, or counsel or advise any
consumer to make any statement, which is untrue or misleading with respect
to any consumer's credit worthiness, credit standing, or credit capacity to
any CSO or any person who is extending credit to the consumer; or to whom
the consumer has applied or is applying for an extension of credit. (15
U.S.C.A. sec 1679b.)
- make a statement or counsel or advise any
consumer to make any statement, intended to alter the consumer's
identification to prevent the display of the consumer's credit record,
history, or rating for the purpose of concealing adverse information that is
accurate and not obsolete to any consumer reporting agency, any person who
is extending credit to the consumer, or to whom the consumer has applied for
credit.
- make or use any untrue or misleading
representation of the services it provides; or
- engage, directly or indirectly, in any act,
practice, or course of business that would constitute fraud or deception on
any person in connection with the offering or sale of services of the CSO.
- charge or receive any money or other
consideration before fully performing the services the CSO has agreed to
perform.
E. Pre-Contract Disclosure Requirements
(15 U.S.C.A. §1679c.)
Prior to entering into any
contract or agreement with a consumer, the CSO must provide the consumer with
the written statement prescribed by 15 U.S.C.A. section 1679c outlining the
consumer's credit file rights under state and federal law. The written statement
must be separate from any written contract or other agreement between the CSO
and the consumer, and the consumer must sign an acknowledgment of receipt of the
statement, which the CSO must maintain for two years.
F. Contract Requirements
(15 U.S.C.A. §1679d.)
The contract must be in writing, dated and signed
by the consumer. Services may not begin, and the contract cannot be effective
until three (3) business days after signing. The written contract must include
the following:
- the terms and conditions of payment, including
the total amount of all payments to the CSO or to any other person;
- a full and detailed description of the
services the CSO is to perform for the consumer, including all guarantees or
performance, and an estimate of the date by which the services will be
completed; or the length of the period necessary to perform those services.
- the CSO's name and principle business address;
and
- a conspicuous statement in bold face type,
right next to the buyer';s signature line on the contract, which reads as
follows: "You may cancel this contract without penalty or obligation at any
time before midnight of the 3rd business day after the date on which you
signed the contract. See the attached notice of cancellation form for an
explanation of this right."
G. No Waiver of Rights (15
U.S.C.A. §1679f.)
A consumer cannot waive the
protections provided under the federal law. Further, any attempt by the CSO to
obtain a waiver voids the contract. Finally, any contract not in compliance with
the federal law is void and rendered unenforceable in both federal and state
court.
H. Civil Liability (15
U.S.C.A. §1679g.)
Any person who violates any
provision of the federal law is liable for actual damages, punitive damages, and
attorneys' fees.
I. Enforcement (15 U.S.C.A.
§1679h.)
The Federal Trade Commission
enforces the federal law. The laws additionally permits state action for
violations.
J. Statute of limitation
(15 U.S.C.A. section 1679i.)
Where a CSO violated the federal
law, the consumer has 5 years to file suit. The 5 years begin to run either from
the date of the violation or if the CSO misrepresents information, then 5 years
from the date the consumer discovers the misrepresentation.
NOTICE: We attempt to make our legal guides accurate as of
the date of publication, but they are only guidelines and not definitive
statement of the law. Questions about the law's application to particular cases
should be directed to a specialist. Customers who believe they have been
victimized by a credit repair service company can file a complaint with the
California Attorney General's Public Inquiry Unit at
www.ag.ca.gov/consumers/general.php. For more information on Federal
enforcement, visit the Federal Trade Commission Web site at
www.ftc.gov/.