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Let me ask two quick questions. You had a guarantee, or it was a payment plan, rather, that went 3, 6 or 18 months. Did Mr. Gray tell you which plan he wanted the people to use?

Mr. Roberts. He wanted to use a 6-month payment plan, the reason being that he felt that after 5 to 6 months, clients would stop paying.

Mr. Prins. Didn't he also plan to not have the company in operation much longer than that?

Mr. Roberts. As I found out, in October and November, the whole thing was a scam. He did not plan on having the company more than 18 months when the majority of the guarantees would come to an end.

Mr. Prins. Let me ask a question about the phone lines. Did there come a time when the 9,000 folks complaining and the franchise people started complaining and they were flooding the Palmyra office with complaints, and what action did you all take to make certain that people could get their complaints heard by your office?

Mr. Roberts. Orders from Jim Gray were to take all phones off the hook, except for one, and he had a private number that if you wanted to call in and you were out on the street, you could call in. When I say, "you," I mean one of the employees. Other than that, his orders were all the phones were to go off the hook except one, which means that possibly one person could call in. That would be it.

Mr. Prins. Ms. Arnold, it is my understanding that they were told they could only call in on Friday during a certain period. Is that correct?

Ms. Arnold. At one point in time that was one of the ways they tried to handle the phone calls. They assigned different days to different areas and they also assigned bogus names, fictitious names for people so that when clients would call in and ask for Mr. Jones they would note it was a client calling in with a question or a complaint.

Mr. Prins. What happened to them?

Ms. Arnold. Basically nothing. The telephone lines got so busy that they then changed to the new policy which was only on Fridays, and that was when all the lines were busied out and just one or two lines, whatever, were free for calls.

Mr. Prins. Were you personally told that the two lines were to be taken off the hook on Friday?

Ms. Arnold. I was not there at that time. I was at USA Credit Centers, but Mr. Roberts told me that if you need to call the office, and you have to use the private number, that is the only way we can reach Jim because it is Friday and the phones are off the hook.

Mr. Prins. This is my final question, Mr. Chairman.

Mr. Roberts, was this a busy operation that started out with good intentions and somehow for a lot of reasons went sour, or was this a direct intention to run a nationwide scam from the beginning?

Mr. Roberts. To the best of my knowledge, this was an out and out scam from the very, very beginning. I did not find out about it until I had suspicions, though, and I did nothing about my suspicions and I did not find out in actuality, actually being told by Mr. Gray that that is what it was, until October 1986.

As I said in my statement, I stayed with him.

Mr. Prins. Looking back, now, on your time with the company, did you see anything even before you crossed over to the criminal side or after to indicate to you that this was ever anything, but a gigantic scam.

Mr. Roberts. Mr. Gray was extremely cleaver at covering up, and it was extremely hard for anybody to see that it was actually a scam from the very beginning.

He hired a good number of people, more than 20, he had maybe 30, 35 employees at the height of his business. He put on a night crew, even. He brought in six to eight people at night, supposedly to work on the credit repair.

I later found out they weren't really working on credit repair. What they were doing actually is posting or they were doing other things, meaning that he put these employees on to show the franchises that I even have a night crew on. So he was very clever in his cover-up.

Unfortunately for him, fortunately for the public and everybody else, it just got to the point where there were too many complaints.

Mr. Prins. There were other credit repair companies operating around the country at the same time. Do you have knowledge of any of those other companies?

Mr. Roberts. I have knowledge of a few of those companies. They were offshoots of Credit-Rite, a few of our Credit-Rite franchises when Credit-Rite closed down formed their own companies.

Mr. Alice Belonte and Mr. Joe Kline, I believe their operation was centered right in this Washington area and they claimed that everything was done through computers. To the best of my knowledge, it is hearsay, but to the best of my knowledge that company is now defunct, out of business because they couldn't do credit repair.

Mr. Prins. Do you know any credit repair company in the United States that is operated other than on a scam basis?

Mr. Roberts. That would probably be unfair for me to answer. The few that I know of or that I have read of have all been operated on a scam basis.

Mr. Prins. Thank you very much. Thank you, Mr. Chairman.

Chairman Annunzio. I want to express the appreciation of the subcommittee to both of the witnesses for your very illuminating testimony. You have been a tremendous help to the subcommittee. I know how difficult it has been for you to come here, and under the circumstances, but I commend you both.

As far as I am concerned, you are both very, very good citizens and we should have more people like yourselves come forward so that we can expose so many, many rackets that are going on in this country that affect consumers.

Ms. Pelosi?

Ms. Pelosi. Thank you, Mr. Chairman. I, too, want to thank our witnesses for coming forward with their testimony, and I would like to commend you for your leadership on consumer issues. Your introduction of H.R. 458, the Credit Repair Organization Act, is another pro consumer initiative in a long line of actions you have taken to assist American consumers.

Just briefly, Mr. Chairman, I would like to say I am proud to be a cosponsor of H.R. 458 which would end abuses by credit repair organizations. While there may be credit repair organizations which legitimately assist individuals, as your line of questioning and Mr. Prins' line of questioning indicate, there are unfortunately far more of these businesses which serve only to promise that they can deliver to people with bad credit ratings.

Many credit repair organizations profit by promising they can fix bad credit ratings; something they cannot do, if the bad credit rating is a result of an individual not paying his or her bills. Many credit repair organizations also charge high fees for obtaining information that a consumer could already receive for free or for a nominal fee thanks to the Fair Credit Reporting Act of 1970.

I am very pleased among other things, that H.R. 458 would require that all credit repair clinics advise consumers of their rights under the Fair Credit Reporting Act before a consumer signs a contract.

I thank you, Mr. Chairman, for holding today's hearings on this important legislation. Because of another committee work I will be back and forth, but I look forward to reading, if not hearing the testimony of our witnesses, and again I thank you for all of your work on behalf of the consumer.

Chairman Annunzio. We appreciate your statement, Ms. Pelosi. I would like the record to show that is the plight of Members serving in the Congress. We have to be in three places at one time. Sometimes it is very difficult. The only person that can't get out of it is the chairman, and sometimes he has to sit alone.

You mentioned the Fair Credit Reporting Act. You know that is a product of this committee. We sponsored that legislation. Many thanks, Mr. Roberts and Ms. Arnold.

Chairman Annunzio. The next panel will be L. Jean Noonan, associate director for Credit Practices, Bureau of Consumer Protection, Federal Trade Commission; George L. Rayburn, assistant commissioner of Consumer Credit, State of Maryland, Baltimore, MD, accompanied by George Jones, director, Anti-Fraud Program; Walter R. Kurth, president, Associated Credit Bureaus, Inc., Houston, TX, accompanied by D. Barry Connelly, senior vice president, Associated Credit Bureaus, Inc.; and Elena Halford, president, Design Systems, Glendale, CA.

The first witness we will hear from, Ms. Noonan, the associate director for Credit Practices. If you have a prepared statement Ms. Noonan, you can submit that statement for the record.

Without objection, the entire statement will be made part of the record. So you can proceed in your own way for 5 or 10 minutes.

STATEMENT OF L. JEAN NOONAN, ASSOCIATE DIRECTOR FOR CREDIT PRACTICES, BUREAU OF CONSUMER PROTECTION, FEDERAL TRADE COMMISSION

Ms. Noonan. Thank you, Mr. Chairman. Mr. Chairman and Members of the subcommittee, my name is Jean Noonan. I am the associate director for Credit Practices at the Federal Trade Commission. With me today is Kathleen Buffon, the assistant director in the Division of Credit Practices. We appreciate the opportunity to appear to discuss the credit repair industry and comment on H.R. 458, the Credit Repair Organizations Act.

In our view, Federal legislation to regulate the credit repair industry could provide useful information to consumers and help deter deceptive and dishonest practices. The Commission would support legislation requiring different disclosures, however, ones that would better reduce consumers' vulnerability to false credit repair claims.

The Commission questions whether the proposed legislation will achieve this goal. In a letter to Chairman Annunzio dated May 11, 1987, the Commission commented at some length on the proposed legislation. The Commission requests that that letter also be made part of the record of this hearing.

Today, I will summarize those views and discuss the Commission's efforts to protect consumers from credit repair fraud. I would like to focus on companies that sell credit repair services, that is, on those claiming to be able to improve consumers' credit records.

As presently drafted, H.R. 458 would also encompass those who offer to help consumers obtain an extension of credit. Many businesses provide such services non-deceptively. The Commission believes that the proposed legislation should focus solely on credit repair services, as this is the area in which false claims and consumer inquiry have been a recurrent theme.

In our experience, credit repair companies typically promise the impossible. Television and newspaper ads assert "Credit problems? No problem." " Come to the credit experts." " We erase bad credit history." Such claims are misleading. As you know, under the Fair Credit Reporting Act, if adverse information is accurate and complete, a credit bureau is entitled to report it for 7 years. Bankruptcy may be reported for 10 years.

Most consumers who turn to credit repair clinics for help have experienced genuine credit problems in the recent past. It is accurate information that they seek to remove, not inaccurate information. No matter how many times a consumer or credit repair clinic disputes accurate information, it almost surely will remain on the consumer's report for the 7 or 10 years permitted by law. Although credit repair companies often guarantee success, consumers rarely can obtain refunds when their reports are not improved.

Since 1984, 19 states have enacted laws to combat deception by credit repair companies. The State of California was a leader in credit repair legislation. It enacted a law in 1984 that is similar to H.R. 458 in many respects, including the disclosure, bonding and other requirements. Despite this, according to a recent survey, over 100 credit repair companies currently operate in California and there is evidence that a number of them engage in deceptive practices.

For example, the Commission recently obtained a preliminary injunction against a credit repair company in Los Angeles based on evidence of false credit repair claims. Several other companies that the Commission staff is investigating are located in States that have recently enacted laws similar to H.R. 458.

We recommend a close look at how effectively these laws have functioned at the State level. We believe that a different approach may be advisable if Federal legislation is to achieve its intended purpose.

The Commission has thusfar relied on its powers under the Federal Trade Commission Act in combatting deception in credit repair. We have pursued a strong consumer education program and we have brought and will continue to bring enforcement actions against companies that rely on deception to sell their services. In a 1986 action, for example, we brought six individuals who had run a credit repair company in Detroit under order. The companies' founders were ordered to make paid radio and newspaper announcements warning consumers against false credit repair claims.

The other action I mentioned was brought against a credit repair company that has been operating over a dozen offices in California and Nevada. Having obtained preliminary relief, we are now seeking permanent injunctions and money back for consumers.

We are also in the process of resolving civil complaint charges against Credit-Rite, which formerly operated 31 franchises in 15 States. As you have heard, the U.S. Attorney's Office brought criminal charges against this company's principals, and the company's founder was sentenced in July to 7 years in prison. He was ordered, along with his co-defendants, to make restitution to consumers.

Yesterday the Commission filed suit against a credit repair company that we believe to be the largest one that has operated to date. Our complaint charges that this company made false credit repair promises, reneged on its refund guarantee and used false threats to collect on its contracts when consumers refused to continue making payments.

The staff currently is at work on a number of other investigations which at this point are not public. The Commission also has been working intensively to educate consumers about what can and can't be done to improve their credit bureau reports and, thus, how to determine when credit repair claims are false.

During the past year, in cooperation with consumer and industry groups, we published our most complete consumer guide to date on

about the problems inherent in dealing with credit repair companies. Over 63,000 copies have been distributed thusfar.

Turning again to H.R. 458, I will note several points that are discussed in more detail in the Commission's May 1987 letter. A principal feature of this legislation is the disclosure requirement. Disclosures can perform an important cautionary function, but we believe that these disclosures miss the boat.

The proposed law presently would require credit repair companies to disclose to consumers how to exercise their rights under the Fair Credit Reporting Act. We believe that it is far more important to disclose, instead, that consumers' rights under the Fair Credit Reporting Act are limited. That is, consumers can require credit bureaus to remove accurate negative information from their reports only if the information is over 7 years old; bankruptcies may be reported for 10 years.

In other words, the problem is not that consumers can do this for themselves, but rather that no one can do what credit repair companies typically promise. We want to arm consumers with informa

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