unable to respond in 30 days and therefore the disputed item is stricken from the credit record.

Mr. HILER. For the record if you are knowledgeable in this area, in terms of setting aside the claim of what this particular organization claimed it could do, the manner in which the credit would be repaired, that could be done by an individual. I mean there is nothing magic about a credit repair service.

Mr. WALTON. There is nothing magic about it at all. In fact, an individual could do it himself, and very likely should do it himself. Mr. HILER. Thank you.

Mr. Chairman, I have no further questions.

Chairman ANNUNZIO. I have no further questions either. Mr. Walton, again, many, many thanks for the cooperation you have extended to the subcommittee.

Mr. WALTON. Thank you, Mr. Chairman.

Chairman ANNUNZIO. We have two witnesses, Mr. Jeffrey Roberts, former co-owner of Credit-Rite, Inc. from Palmyra, NJ and Ms. Michelle Arnold, former employee of Credit-Rite,-Inc. Will you take your place at the table?

[Both sworn.]

Chairman ANNUNZIO. The staff director will introduce Mr. Rob

erts.

Mr. PRINS. Mr. Chairman, just for the record so that everybody is aware of the facts, Mr. Roberts is the former director of franchising of Credit-Rite. He has been tried, convicted of crimes involving that, has been sentenced to serve 15 months and, within the next 4 days will report to the Federal penitentiary in West Virginia to begin serving his sentence.

Miss Arnold was the former director of operations who was a witness for the Government. She has had no involvement in this case of a criminal nature of any kind.

The fact that she is testifying with Mr. Roberts should not be in any way construed as any criminal involvement on her part. I also want to say that I think you will find Mr. Roberts testimony very, very candid. He fully accepts the responsibility for what he has done and has come forward and offered his cooperation more or less voluntarily. I say more or less voluntarily not to try to use weasel words, but when we contacted him and asked him to appear he was more than happy to cooperate.

Let me say Miss Arnold was the same way. She offered her full cooperation.

Chairman ANNUNZIO. Thank you, very much. Mr. Roberts.

STATEMENT OF JEFFREY ROBERTS, FORMER CO-OWNER OF

CREDIT-RITE, INC., PALMYRA, NJ.

Mr. ROBERTS. Mr. Chairman, I have a statement to read. I first started in the credit repair industry in April 1985 working for a company called Correct Credit. I had answered an ad in the paper for "Credit Counselors", no experience necessary, we will train you. The training consisted of giving me a sales pitch, telling me to memorize it and their giving me prospective customers to call on. I sold about eight deals for Correct Credit and was never paid, so I quit after 22 weeks. I was supposed to get about $35 a deal.

Around the end of May 1985 I either answered an ad or a friend told me about a company called Credit-Rite that paid excellent money to sales people. I went for an interview, met Jim Gray, Sr. and was hired on the spot.

I was told that the price of the service was $650, and I should try to get a $200 deposit at least. I would be paid 1⁄2 the amount of the deposit that I brought in. We also discussed franchising at that time. I went on two appointments that night and sold both of them. The next day I asked him if he had a sales pitch, he said no, but he had made one up for a company called "Correct Credit" and when he left he wasn't able to take any of the materials. I gave him my Correct Credit sales pitch and that is how the Credit-Rite pitch was developed. Jim also told me that the reason he was in the business was because he had suffered a bankruptcy and couldn't get credit, so he went to the library and studied all the books on credit and then repaired his own credit, that is a fact I later found out was not true. He told me friends had asked him to repair their own credit, which he did. Another fact I was to learn wasn't true. After that, he told me he went into business at his kitchen table and then opened a 10 by 10 store front in Philadelphia without a bathroom.

His son, Donald, was the manager of the office and set appointments. There was another counselor by the name of Robin Robinson. Between Donald, Robin, and myself, we sold about 20 deals a week. I lasted about 6 weeks selling eight or nine deals a week before I burned out. A "counselor" was only good for about 6 weeks and then they burned out. Donald Gray then fired me.

By that time Jim Gray had taken a larger office in Palmyra, NJ and was ready to franchise. I went to work selling franchises. I sold about 20 franchises between August 1985 and March 1986. The average price was around $5000 a franchise, for that amount of money the franchise got the right to use the name Credit-Rite, a 2day training course at his office, help in finding an office, sample ads, help in hiring credit counselors. Initially this was done by Donald Gray, who then held the title of credit repair manager. I didn't think Donald was capable of doing the job, and I pushed Jim to hire a professional operations department. In December 1985, he hired the first two operations people, both totally unprepared and ill-equipped to do the job. Dennis Rhodes and Tom O'Connor both came from the K-Mart shoe department where they had been friendly with one of Jim's other sons, Jimmy, Jr. I complained that this was not going to work, but Jim Gray stood fast with his decision. He gave us all company cars equipped with telephones. My company car was his Cadillac, a roadster. I still wouldn't be quiet and continually complained that things weren't running smoothly, but I was always outvoted.

Around this time franchises were running out of operating capital. Jim had said in the brochure that only $8,000 to $9,000 was needed. Actually it turned out that $25,000 to $30,000 was needed. I continued to argue with him until in April 1986, he came to me and said he had a job that only I could do. Open another credit repair company in competition with Credit-Rite. It was either that or be forced out of the company entirely, so I opened USA Credit

centers with Jim Gray as my silent partner and supplying most of the money.

I put $10,000 to $15,000 of my own money in the business. It was doomed from the beginning. I tried to run the company as legitimately as could be, but it just didn't make it, and at this time I started to realize that credit repair might not be possible to do.

Meantime, Credit-Rite was prospering with around 36 franchises. Jim Gray had set seminars up around the country and set quotas for the counselors. If they met their quotas, they would win a trip to the Bahamas. I couldn't understand how he was going to pay for 200 counselors to go to the Bahamas, then it dawned on me. One of the stipulations was that a counselor must still be with the company when the trip took place. Since the majority of counselors lasted only 6 weeks, very few would qualify for the trip in the end.

During the summer of 1986 I started to receive calls from credit franchises at my USA office. They were still friendly with me and complained that they couldn't get through to talk to Jim. He wouldn't take their calls.

Customers were calling them and complaining that the work couldn't be done. I was told there was an 8-week backlog. About that time Barry Flickstein, a franchise from Florida and a franchise salesman for Credit-Rite who had sold franchises for up to $150,000, called me and asked me if I would close down USA and return to Credit-Rite. As president, Barry was angry with Gray. Gray hadn't paid him his commission. He was supposed to get $15 a deal from all the franchises he had sold, plus $15 a deal from the main office. See attached letter. Plus any franchises that he sold in Florida, he got to keep the entire franchise fee.

He also told me that Gray had shown the franchises how to get credit for people who never had credit. Flickstein said he didn't think it was legal. Gray told them to send out their applications, wait about 30 days and even if they hadn't come back approved or disapproved, send out three more and say the original three had been approved, since they would just show up on the credit report as an inquiry.

Also Gray had told him to send the applications back in a plain envelope with no return address and not to run the envelopes through a postage machine, but to use a regular stamp.

In September 1986 I returned to Credit-Rite as president, the franchises were screaming that no work was being done by Gray, he wouldn't talk to them and he was never in the office. They were right on all counts.

By this time Gray owned 26 horses, had three Mercedes, one for his wife, one for him, and one for his son, Jimmy, Jr. He had thrown lavish parties at the Red Lion Inn, some costing as much as $25,000. He was flying first class all over the country and staying in suites at the finest hotels. His days were spent in the casinos in Atlantic City. He was smoking $5 cigars and nobody could talk to him.

He owned several businesses including Gray Automotive, which $60,000 of Credit-Rite was invested in. He told me that himself. I tried to run Credit-Rite but couldn't since Gray never relinquished control. Things went from bad to worse. People were clamoring for

their money back on their 18 month money-back guarantees. Gray said not one guarantee was to be paid.

I had a private conversation with him in late September or early October 1986 at which time he told me that he never had intended to honor the guarantees or do the work. I then had a choice, walk away from a $1500 a week job, expense account and company luxury car with phone or just go along with the program.

I decided to go along with the program. Today, as I reflect on all the events that took place, I realize that I might as well have changed my name to Gray. I was just as responsible for ripping off 9,000 low income Americans as he was. I have been sentenced to 15 months in prison starting Monday.

The credit repair industry is big business, big business that can't be done. It is legally impossible to change a credit rating unless a mistake has been made. Yet hundreds of credit repair companies thrive on other peoples' misfortune. A $50,000 bond is not the answer. Credit-Rite alone brought in over $2 million in less than 18 months.

The franchises continued to bill clients and collect moneys even after Credit-Rite had no employees. It seems as if greed abounds. In my opinion, there is no such thing as credit repair, so instead of being regulated, the industry should be outlawed. If not, the regulation should be so tough and the bond so high that people are discouraged from going into the business.

Chairman ANNUNZIO. Thank you, very much.

Our next witness is Miss Michelle Arnold. You can proceed in your own way with your testimony. You have about 10 or 15 minutes.

STATEMENT OF MICHELLE ARNOLD, FORMER EMPLOYEE, CREDIT-RITE, INC., PALMYRA, NJ.

Ms. ARNOLD. I guess the best way to continue after Mr. Roberts' statement is to perhaps reflect on some things from my point of view as an employee in the company.

I was personally involved with the individuals who signed up as clients. That is where my concern lies. These people are desperate people. When they come to us, they were telling the sales people that their credit was very bad. Their homes were at stake, their cars, livelihood.

The people were at the very ends of their ropes and thought they had no alternatives and no place else to turn. When they came to us, we promised them everything and obviously that is not what could be done for these people.

We took money from people who did not have the money to give. Contracts and paperwork that came into the office at Credit-Rite obviously showed with the T-sheets and what have you that these people did not have the funds to pay their own monthly expenses, let alone the $650 or $850 fee to Credit-Rite.

Credit-Rite did not take into consideration these peoples' misfortunes. All they were concerned about was collecting the money. I can remember many times taking contracts and paperwork to the president of the company at that time, who was James Gray, and showing him things on the profile for the individuals and asking

him how is it possible, how can we accept something like this and take money from these people when it is obvious to me that it just can't happen, these people cannot continue with us.

He would take the contracts from me and say he would handle them. Later I was told it was not my business to look at the contracts or review them, and I was forbidden to do so from that point on. It is my understanding that someone else was reviewing them and these contracts were not supposed to be accepted.

There was a clause in the contract itself that says the contract is not binding unless it is authorized by the main office, which implies that someone at the main office was reviewing the paperwork and making sure that it was up to the standards that we were told to present to these people.

Obviously, it was not. It is very unfortunate that all these individuals were misled the way they were and that their money was taken, and if they had gone to perhaps a credit counseling service that is free of charge or if they had been maybe re-educated in their spending or helped with budgeting instead of offering rainbow and pie in the sky, perhaps we would not be sitting here today. Chairman ANNUNZIO. Thank you, very much.

When these people came into the office and they were desperate, did any of these people look like they were suicidal?

Ms. ARNOLD. I don't recall anyone looking like they were suiciwere dal.

Chairman ANNUNZIO. The reason I asked that is there are so many suicides today by people who are over their head in credit. They owe everybody. They become desperate. They wind up shooting themselves and shooting their wives. This appears in the paper every day. I am wondering if any of that happened.

Ms. ARNOLD. I don't believe so.

Chairman ANNUNZIO. Thank you.

Mr. Roberts, Credit-Rite promised to repair consumer credit within 18 months. Is this something that it or any other credit repair clinic could actually do?

Mr. ROBERTS. No, sir. If a person does not qualify for credit, there is no way that they are going to receive an unsecured credit card within 18 months. There is no way they can be guaranteed they will not be turned down for a loan.

Chairman ANNUNZIO. Credit-Rite used a technique that it called negotiations that to attempt to get creditors to remove bad credit information in exchange for payment of the account. How often was that technique successful?

Mr. ROBERTS. I would say very rarely, but I am not an expert on that particular field. I would say very rarely. Credit-Rite, as far as I can understand through conversations with Donald Gray, tried to tie up the system through disputation.

Chairman ANNUNZIO. Mr. Hiler.

Mr. HILER. Mr. Roberts could you expand on that last couple of sentences you said about what type of effort Credit-Rite was engaged in?

Mr. ROBERTS. It is my understanding that most of the work done by Credit-Rite, and I say most of the work, was strictly disputation in order to tie up the computers at TRW and the other credit reporting agencies with the hopes that if they could tie up the com