CREDIT REPAIR ORGANIZATIONS ACT (H.R. 458)

Thursday, September 15, 1988

HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON CONSUMER AFFAIRS AND COINAGE, COMMITTEE ON BANKING, FINANCE, AND URBAN AFFAIRS, Washington, DC. The subcommittee met, pursuant to call, at 10 a.m., in _room 2128, Rayburn House Office Building, Hon. Frank Annunzio [chairman of the subcommittee] presiding.

Present: Chairman Annunzio and Representative Hiler.

Chairman ANNUNZIO. The meeting of the subcommittee will come to order. This morning the subcommittee meets to hear testimony on credit repair clinics. These clinics hold themselves out as companies that can help consumers clean up bad credit histories or obtain a clean credit report.

Most often their product is not a "Mr. Clean" which leaves a consumer's credit history sparkling bright, but a "Drano” that cleans out a consumer's pocket.

Under the Fair Credit Reporting Act, consumers are entitled to have the contents of their credit file at credit bureaus disclosed to them, and they have the right to challenge inaccurate information. Consumers who are denied credit based on a credit report are entitled to have the contents of their credit file disclosed to them free of charge. In other instances, the credit bureau may charge a small fee. These fees generally average about $10. The consumer may dispute inaccurate information and the credit bureaus must reinvestigate that information at no charge to the consumer.

Credit repair clinics claim that they can help consumers remove adverse information from their files even if it is true. If you turn your attention to the television monitors, you will see an example of an advertisement from a credit repair clinic.

Nationwide Credit Services, the firm whose ad we just saw, promised to stop doing business in Texas and to repay $3,800 to damaged consumers. Nevertheless, the company is still in business in Louisiana.

All too often, promises of credit repair are fraudulent. They are fraudulent for a simple reason—you cannot remove accurate information from your credit file. If the information is adverse but accurate, nothing can get if off your credit history. Under the Fair Credit Reporting Act, it will become obsolete and be removed from your credit report after 7 years. Until then, it remains in the file. Credit repair clinics pose a threat to consumers who can least afford it. These organizations hold out the promise of a quick credit fix at a high cash price. They prey on consumers whose often dire

(1)

straits and dreams of a better life make them susceptible to the false promises of unscrupulous credit clinic operators.

H.R. 458 forces credit repair clinics to tell consumers the truth about their services up front.

This morning we will hear the story of Credit-Rite, Inc., a company which defrauded at least 9,000 consumers of $2.3 million in a credit repair scheme. We will first hear from Mr. Kenneth P. Walton, Deputy Assistant Director of the Criminal Investigative Division of the Federal Bureau of Investigation. It was the FBI's investigation of Credit-Rite which resulted in the conviction of James Gray, Donald Gray and Jeffrey Roberts, for mail fraud and conspiracy in connection with Credit-Rite.

James Gray was sentenced in July to 7 years in prison and ordered to make restitution. Donald Gray received 3 years probation and was also ordered to make restitution. Jeffrey Roberts received a 15-month prison term and was ordered to make $600,000 in restitution.

Following the testimony of Mr. Walton, who will provide a comprehensive overview of the Credit-Rite operation, we will hear testimony from Jeffrey Roberts, a convicted credit repair clinic criminal, and from Michelle Arnold, a former employee of Credit-Rite. I want to emphasize that Michelle Arnold was in no way implicated, investigated or accused of any wrongdoing in the Credit-Rite case. Ms. Arnold testified at the trial of the Grays and Mr. Roberts as a witness for the prosecution. Her testimony was so damning that the defendants decided to plead guilty while she was still on the witness stand.

Now I would like to have the ranking minority Member give his statement.

Mr. HILER. Thank you, Mr. Chairman.

I will make brief opening remarks. First I would like to applaud you for holding these hearings today in the lateness of the session. Sometimes some committees don't engage in a lot of work at the end of the session. I think this hearing record will help establish a good record for us to move early in the next Congress.

I know that you introduced this bill awhile back. All the Republican Members on the subcommittee have endorsed it and signed on to this bill as well. Hopefully, at the start of the next session with this record in place, we will be able to move on it. If there are problems with the drafting of it or any corrections needed, this record will help bring that out.

Should we perchance be moving in the wrong direction, maybe the hearing will bring that out, but I doubt that we are. I think we are moving in the right direction and look forward to the testimony today.

Chairman ANNUNZIO. I appreciate your statement, Mr. Hiler. I am hopeful for all the Republicans agreeing and the Democrats agreeing when we conclude the hearings. I know it might be overstepping my bounds, but I will really try to see if we can get the bill to the floor and passed before we adjourn. I know it can be done with your cooperation. One thing you will all learn from this subcommittee is that Mr. Hiler and I cooperate with each other for the benefit of good legislation, and this is good legislation.

I now ask that the statement of Mr. Chalmers Wylie, the ranking Republican of the full committee be made part of the record. Is there objection? Without objection, it is so ordered.

[The prepared statement of Hon. Chalmers Wylie can be found in the appendix.]

Chairman ANNUNZIO. Our first witness today is Mr. Kenneth P. Walton, inspector, deputy assistant director of the Criminal Investigative Division of the Federal Bureau of Investigation.

Mr. Walton will you please take your place at the table? We are delighted to have you this morning. I want to add my own personal commendations to the bureau for a job well done.

STATEMENT OF KENNETH P. WALTON, INSPECTOR, DEPUTY ASSISTANT DIRECTOR, CRIMINAL INVESTIGATIVE DIVISION, FEDERAL BUREAU OF INVESTIGATION

Mr. WALTON. Thank you Mr. Chairman.

I do have a short statement, Mr. Chairman, that I would like to read into the record if you or Members of the subcommittee have no objections.

Chairman ANNUNZIO. We have no objections.

Mr. WALTON. Mr. Chairman and Members of the subcommittee I am pleased to appear before you today and provide testimony on the FBI's investigation involving consumer fraud by Credit-Rite, Inc. My appearance before this subcommittee is not in support of any pending legislation, but is at your invitation to outline the facts of the case.

As the subcommittee is aware, the FBI has jurisdiction to investigate certain fraudulent activity in violation of Federal law such as bank fraud and embezzlement and fraud by wire. We also have concurrent jurisdiction with the United States Postal Inspection Service in the area of mail fraud. These Federal laws are frequently used to prosecute crimes which victimize our citizens.

In this case, information was received by our Newark division in late 1986, that Credit-Rite, Inc., doing business in Palmyra, NJ, was defrauding consumers through a scheme wherein they promised to repair the credit of people with poor credit profiles.

Credit-Rite, Inc. was operated principally by president, James T. Gray, its acting president, franchise director, Jeffrey Roberts, and its credit repair manager, Donald Gray. It was in operation from approximately mid-1985 to February 1987.

Credit-Rite, Inc. sold franchises to investors throughout the United States for a fee of between $5000 to $30,000. The franchisers solicited consumers with poor credit profiles and signed them to contracts_which guaranteed 100 percent credit repair within 18 months. The contract was usually sold to the consumer for $650 with initial deposits of between $50 and $250. Once a franchiser sold a contract, the contract would be forwarded to the main office of Credit-Rite in Palmyra, NJ, where an account would be established under the client's name. Credit-Rite, Inc. would then send billings to the consumers on the remaining balance due on the contract. When Credit-Rite, Inc. received the monthly payment from the client, a percentage of that fee was to be sent to the originating franchise.

The FBI received numerous inquiries from consumer affairs offices of several States each claiming to have received complaints from consumers advising they had paid Credit-Rite, Inc. for credit repair when, in fact, no credit repair had taken place.

Credit-Rite, Inc. guaranteed, for a fee, to repair the negative credit histories of clients to the point where the clients could apply for any credit that they desired and would not be denied credit based solely on their credit history. Investigation determined that "credit repair", as marketed by Credit-Rite, Inc., could not be performed since credit reporting is governed by the Fair Credit Reporting Act. As you are aware, this act provides that certain accurately reported negative credit entries, including late payments, collection accounts, and charge-offs may remain on the credit reports for up to 7 years, while bankruptcy may remain for 10 years. Other entries, such as liens and judgments, remain on a credit report until paid. Therefore, one cannot guarantee a claim to be able to "repair" an accurate credit report. The Fair Credit Reporting Act provides that only inaccurate information on a credit report may be removed.

The principal method used by Credit-Rite, Inc. in attempting to remove negative credit entries from an accurate credit report was by disputing the accuracy of the entry. Credit reporting agencies are required, under the Fair Credit Reporting Act to investigate and respond to consumer disputes within a reasonable time, which has been interpreted by the Federal Trade Commission as 30 days from receipt of the dispute. Credit-Rite, Inc. operated under the premise that by inundating the credit bureaus with disputes, the credit bureaus would become mired and unable to respond to the disputes within the period of time proscribed by law. This would result in the disputed item being removed from the credit history report.

Credit-Rite, Inc. also attempted to remove or upgrade existing negative items on a credit report by "negotiating" with a creditor to delete or upgrade the entry in return for the client making partial or full payments to the creditor. By and large, creditors realize that by succumbing to this type of negotiation; they undermine the integrity of the credit reporting system they depend upon for granting credit. Therefore, negotiations were generally not successful.

Credit-Rite, Inc. attempted to utilize a combination of disputes and negotiations, whereby, they arranged with clients to repay a portion of existing bad debt. Once a partial payment was made, a dispute was sent to the credit bureau stating the account was paid and should be so reflected on the current credit report.

The FBI investigation revealed Credit-Rite, Inc. sold over 9,000 "repair" contracts through 33 franchise locations throughout the United States. Credit-Rite, Inc. totaled over $6 million in business volume and available records reveal approximately $2.3 million in revenues were actually received.

The three principals of Credit-Rite, Inc. were indicted in November 1987, for devising a scheme to defraud the public through the guaranteed "repaired credit" contracts sold through Credit-Rite, Inc. franchises.

One of the defendants was sentenced in United States District Court to serve a 7-year term in jail, a second defendant was sentenced to serve 15 months in jail, and the third defendant was sentenced to 5 years on probation. All the defendants were ordered to make restitution of $2.3 million.

We believe this investigation serves as an excellent example of the FBI's enforcement efforts to address consumer fraud in the credit industry. There are many other pending criminal investigations affecting the economic well-being of the public currently under investigation. We attempt to address investigations in the most efficient, effective, and economical manner possible, given our limited resources.

Thank you, Mr. Chairman, I would be happy to answer any questions you may have.

Chairman ANNUNZIO. I have two questions, but I want to thank you very much for being here and to thank you for your very excellent, excellent testimony.

Mr. Walton what amount of manpower was consumed in this investigation by the FBI?

Mr. WALTON. In this particular case, one agent was assigned fulltime for roughly 13 months. Two other special agents worked on a part-time basis and four accounting technicians. Reports were sent to other field offices which were covered by agents in those field offices. So the manpower expended was really quite small.

Chairman Annunzio. What factors led the FBI and the United States Attorney to pursue this matter in the Federal courts as opposed to the State or local courts?

Mr. WALTON. I think it was the size of the case, the amount of the fraud totaled over $2.3 million and the number of victims were 9,000. The broad jurisdiction covered 33 locations in 15 States.

The FBI is the only law enforcement agency equipped to handle white collar crime of that scope.

Chairman ANNUNZIO. Thank you. I wanted to clear that for the record that the reason the FBI was involved is because of crossing State lines.

Mr. WALTON. Yes, sir, and the overall scope of the investigation. Chairman ANNUNZIO. Thank you. Mr. Hiler.

Mr. HILER. Thank you. Sir, do you have other investigations going on at this time on similar activities?

Mr. WALTON. We have a number of investigations in the white collar crime area dealing with essentially boiler room operations. We do not have a lot of cases involving credit repair which is essentially a boiler room crime.

Mr. HILER. You were talking about one of the techniques used in your testimony where the so-called credit repair service tries to inundate the creditors with requests for information, questioning the accuracy of the billing information with the hope that by these inundations that information does not come back or something happens and the information ends up being removed from the credit bureau's rating systems. Is that what happens?

Mr. WALTON. That is essentially correct. Under the existing laws the credit agency that receives a disputed claim has 30 days to respond. The logic of Credit-Rite and many other credit repairs is to inundate the credit bureaus with such a large volume that they are