Credit Repair and Banks at ODDS

A little background on credit recovery companies

Millions of consumers are denied credit based on false information stored in their credit reports. The problem is widespread – as many as one in five Americans have false data in their reports. This essentially means that you or someone close to you has already been affected by this.

Getting the credit bureaus to remove false information is time consuming and requires a certain level of experience that most people don’t have. So many turn to credit repair companies to do the job for them. Unfortunately, this is not always a wise choice.

There are many reputable companies that provide good service at a reasonable price; however, many credit recovery organizations break the rules. Seems kinda ineffective when you consider that you hired them to make your life easier, right?

Credit repair is a highly regulated activity – companies are required to provide accurate information about what they can achieve and they are not allowed to charge customers upfront. They can only be paid after they have provided a service.

The crackdown

Organizations like the Consumer Financial Protection Bureau (CFPB) are very active in suing credit repair companies that break the rules. Rest assured, the FTC regularly prosecutes the worst offenders.

Recently, the number of cases against credit recovery organizations has increased dramatically – and most of these cases are the result of illegal prepayments. Why have so many organizations taken the risk since prepayments are illegal?

The freezing point

To understand the problem, we need to look at how these companies are paid.

Most of these businesses rely on electronic payments, either over the internet or over the phone. To process these payments, they need the services of a bank authorized to deal with the credit unions (Visa, MasterCard and/or American Express). The credit recovery company uses their approved “merchant accounts” to process the payments.

Recently, a number of banks and their agents have frozen “high risk” accounts, including credit recovery organizations.

These banks include:

* BMO Harris Bank

* Chesapeake Bank

* Merrick Bank

* Wells Fargo Bank

* Esquire Bank

* Elavon

* Deutsche Bank AG

Other banks are likely to follow in the coming months.

Credit repair companies are considered high risk for a number of reasons. First, there is the general ramifications of some companies’ misleading claims. While some companies are completely honest with their customers, the entire industry is damaged by the few who mislead them.

These false claims lead to customer complaints, chargebacks and refund requests. All things that are a bad reflection of the banks and their agents. As if to make things worse!

Another problem is the high write-off rate in the credit recovery industry. A charge-off occurs when a bank is unable to collect the fee from a customer. While credit repair companies tend to attract customers with a poor credit management history; then the industry has a much higher rate than usual.

The combination of these factors makes credit repair bureaus a bad risk for banks. As a result, several banks have closed their trading accounts without notice. This also affects accounts opened through Independent Sales Organizations (ISOs), which provide trading account services through the banks. ISOs essentially act as agents for the banks, selling their trading services to new customers.

The overall effect on the market

Each of these banks sponsors a large number of ISOs and MSPs (Member Service Providers – essentially the same as ISOs). Consequently, the impact on the credit recovery sector is catastrophic.

Freezing your account is a big deal – it means you can no longer accept electronic payments and your existing balance will be held in escrow pending investigation. The investigation could take up to 270 days, meaning the company’s cash flow is essentially dead or frozen.

Not to mention that it is virtually impossible for a company to open a new account after the old one has been frozen. All businesses depend on cash flow to keep their doors open and get their staff paid. Very few credit repair companies can survive 270 days without money. Out of desperation, some companies have started charging customers (illegally) in advance. Since they no longer have a merchant account, they rely on third-party payment gateways such as PayPal. This is, of course, an extremely risky move and will undoubtedly lead to more lawsuits and prosecutions.

Looking ahead, we can expect most credit repair agencies to close their doors as the costs of staying in business turn out to be too high. The few who can weather the storm will become the industry leaders.

On the one hand, this is a good thing for consumers – companies with poor customer service and misleading information will be among the first victims. At the same time, reputable credit recovery companies are also recovering from the blow, and some will no doubt falter and fail. Competition is healthy in any market. It keeps prices low and forces companies to provide better service.

On the other hand, it may be consumers who end up paying the highest price – a lack of competition is likely to lead to higher prices across the industry and less comprehensive services may become the norm.

Credit recovery services are valuable to customers who have been incorrectly labeled as credit risk. Today, the best way is to choose your credit recovery organization carefully. The safest choice is a reputable company with a proven track record, without excessive or illegal fees, and the resources needed to stay in business. At this point, consumers would be wise to avoid smaller businesses that may not survive in the current climate.

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