What is this page about? There is a serious case pending in federal court which will have a massive impact on credit service organizations and consumers who hire them. There’s an update to the case, discussed below. Before that, however, is some background and context. More importantly, we’re trying to explain it all in an easy-to-understand way.
How laws, rules, and agencies work.
Everything below pertains to federal laws, rules, agencies, and Courts. The following is a very basic, reduced explanation for the purpose of understanding this article.
Congress makes “laws.” Those laws can create agencies, such as in the case of the two agencies relevant here:
- The Consumer Financial Protection Bureau.
- The Federal Trade Commission.
Agencies, provided congress gave them the power to do so, can make “rules” and enforce them by filing lawsuits, etc.
From the 80s to the 90s (in a paragraph or so).
In the 1980s, credit repair, as an industry, exploded in growth like the Big Bang. Complaints inevitably followed. Governments came to the rescue (from their perspective).
Starting around 1986, the United States Congress debated creating credit repair laws to regulate the industry. They failed to do so for many legislative sessions.
While the federal government proposed and ultimately failed to pass the “Credit Repair Organizations Act” (or the “CROA”), State governments took the CROA’s proposed language, at the time, and passed state laws with it.
Because of the federal government’s failure to pass the CROA, the FTC said “Fine! We’ll just regulate the industry with a ‘rule’.” No, that wasn’t their words; that’s my characterization of the lengthy event and their attitude toward the issue at the time.
The FTC amended the TSR with what many consider to be draconian restrictions. For example, the now-infamous 6-month-with-no-payment prohibition.
However, since the State governments were passing laws and going after violators of those laws, the FTC did not have a reason, at the time, to enforce the TSR.
Fast forward a decade…
From the 90s to the 2000s (in a paragraph or so).
In 1996, the federal government finally passed the CROA. It was a pretty rough rule, but there are good arguments for and against it. Compliance concerns took hold of the industry.
Eventually, the industry figured out how to “play by the rules” to some extent, making the teeth of the CROA not so bad (provided you’re not a total and complete scammer).
Fast forward 25 years…
Today; right now.
Just shy of 2020, the FTC and CFPB decided to start enforcing the credit repair payment prohibitions in the TSR (together with the CROA). Ask me for my opinion on this strange event in the comment section below, if you’re interested.
The agencies publicly went after two companies:
Lexington Law (credit repair):cfpb-complaint-against-pgx-holdings-and-lexington-law
Boost My Score (tradelines)FTC-complaint-against-BoostMyScore
In both cases, they used the TSR and CROA.
The agencies privately pursued “civil investigation demands” which is like a private investigation that may lead to enforcement actions, using the TSR and CROA.
The agencies have made clear their intention to enforce the TSR and the CROA.
The credit repair industry clearly dislikes the TSR
NACSO is trying to fix the problem.
The National Association of Credit Service Organizations (NACSO) is an industry advocate. Some of their members were sued by the FTC/CFPB for violations of the TSR.NACSO-amended-complaint-against-FTC-and-CFPB
After the industry awakened from its shock from the TSR’s impact, NACSO decided to sue for a declaratory judgment, i.e., asking a court to “declare” that the TSR is somehow legally or constitutionally infirm.
The basis (i.e., the “merits”) of their position is not relevant, right now. The basis of the FTC’s and CFPB’s motion to dismiss is relevant, right now.
The FTC/CFPB argues that NACSO does not have a right to bring their case, at all, because NACSO’s challenge to the TSR should have taken place within 6 years of its passage/amendment (i.e., 19 years ago). This is correct, but it’s a bit more complicated.
NACSO contends that the FTC’s and CFPB’s delayed use of the TSR’s provision is effectively a “final agency action” breathing life into the legal challenge (i.e., a “substantive as-applied challenge”). In other words, the initial use of the TSR’s provision through an enforcement action (i.e., lawsuit) in 2018 was the date when the 6-year window began. Therefore, according to that theory, NACSO’s case can proceed.
FTC/CFPB wants the case dismissed.
NACSO wants the motion to dismiss denied.
Now, what might happen?
- If the case is dismissed, it’s over (with some legal maneuvering which I doubt will happen because of the expenses involved).
- If the dismissal is denied, it just means that it goes forward with a trial on the merits.
What do I think will happen?
- The case will be dismissed, with prejudice (i.e., cannot refile, dead in the water, over), because NACSO doesn’t have the standing to bring the case and because the court lacks subject matter jurisdiction which expired 19 years ago.
- The case may also be dismissed, without prejudice (i.e., can refile to perfect its complaint). Unlikely, at this point.
I prefer NACSO survives dismissal so that we can get an adjudication on the merits. Either way, this case will have massive ripple effects throughout the industry.
Implicit in NACSO’s argument is that “we don’t need this rule.” And, that’s factually accurate. After all, the FTC went 30 years without enforcing the TSR’s provision, while relying on the law, the CROA. As such, the appropriate method of attack (if NACSO fails) is to ask the FTC to amend the TSR on the basis that it solves a 1988 problem that no longer applies today.CFPBs-Reply-to-MTD