When we created the first-ever escrow platform to protect buyers and sellers of credit-related services, we had to do a lot of research.
That was an understatement, by the way.
In speaking with experts, we left no stone unturned. Well, at least for the ones we looked at, anyway.
Along the way, we found a few areas in which we disagreed with the prevailing wisdom.
One issue in particular? Whether credit repair companies must be bonded in every State.
This is not legal advice; you should consult a legal expert to see if we’re as crazy as it seems.
Spoiler alert! Based on the circumstances outlined below, we do not believe credit repair companies need to be bonded in every State.
And, we’ll go one step crazier: you could make the case that companies that get bonded in every State intend to violate the CROA.
We have had the pleasure of meeting so many credit repair companies on our journey. One of the things we’ve enjoyed the most is being challenged by them with very important questions.
We have had many companies ask us if they need to be bonded in all 50 States. Some of them are so serious about this that they refuse leads from us unless the leads are from their State. This is totally reasonable, especially for TSR reasons. However, maybe not so much for bonding reasons.
Well, we thought this was a great question and decided to look into it.
Here’s what we found…
Let’s get some basics out of the way.
The National Association of Surety Bond Producers defines a surety bond as follows:
A surety bond is a promise to be liable for the debt, default, or failure of another. It is a three-party contract by which one party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee).NASBP
So, what does this mean… especially for credit repair?
In “high risk” industries, like credit repair, government entities are concerned with potential consumer harm.
To get in front of that potential risk, a government entity may require credit repair companies to set aside a large chunk of money.
This is required to pay for damages the credit repair company might cause (i.e., fraud, ripping off a consumer, etc.) in the form of a bond.
Bonds for credit repair companies range from State to State between $10,000.00 to $50,000.00. You typically put up a small amount to secure the bond issued by the surety.
For example, the State of Florida’s bonding “requirement” says that it is a prohibited activity to:
Charge or receive any money or other valuable consideration prior to full and complete performance of the services the credit service organization has agreed to perform for the buyer, unless the credit service organization has obtained a surety bond of $10,000 issued by a surety company admitted to do business in this state…817.7005(1), Florida Statutes
You might see where this is going, unless (hint, hint) you weren’t paying attention.
If you ask experienced credit repair companies, attorneys, or experts whether bonds are required in all 50 States, you will get a mixed bag of answers.
Most will say “yes,” and few (if any) will say “no.”
When we looked at it from our perspective, an escrow-for-credit-repair-companies perspective, we saw a clearer view.
So, in those cases, a bonding requirement is irrelevant. Or, you could say “not required.”
But, what about the other States?
This is where it gets really interesting (if you’re nerdy like us).
Hear us out!
Look at what the bonding “requirements” actually say.
They effectively say: If you take upfront fees, you need to be bonded.
That’s not a mistake or typo.
All bonding “requirements” in State credit repair laws presuppose that you are taking upfront fees.
At the time those laws were passed, there was no Federal outright prohibition on upfront fees.
Those laws basically said: You cannot charge upfront fees unless you have a bond.
How did this happen?
The Federal Government and State Governments began passing credit repair laws in the late 1980s and early to mid-1990s.
It seemed like there was an organized effort to unify the law because early drafts of both the Federal law and the State laws had very similar language. Copy and paste, in most cases.
This is especially true with the bonding “requirements.”
But – in my best Monk impression – here’s what happened:
The States went on to pass laws with one set of language which included a bonding requirement. However, the Federal government, at the last second, cut out the bonding requirement from Federal law.
As a result?
You had State laws that permitted upfront fees so long as the company was bonded. Then, you had a Federal law that prohibited upfront fees, regardless of bonding status.
As the CROA points out:
This subchapter shall not annul, alter, affect, or exempt any person subject to the provisions of this subchapter from complying with any law of any State except to the extent that such law is inconsistent with any provision of this subchapter, and then only to the extent of the inconsistency.15 USC 1679j
This basically means the CROA controls when there is a conflict of language concerning credit repair company laws. In other words, you cannot take upfront fees. Period.
Therefore, bonding requirements are irrelevant.
Here’s a chase-one’s-tail way to understand it:
States wanted you to be bonded because they accepted the upfront fee nature of credit repair. Congress ended the need for bonds by outlawing upfront fees, entirely.
When you couple this with the Telemarketing Sales Rule’s 6-month delay in credit repair payments, credit repair companies are at a significant economic disadvantage.
A solution to these issues, which protects the interests of credit repair companies and consumers, is to use an escrow service for credit repair transactions.
We’re hopeful that was helpful!