TSR and credit repair services.

  • Robert Sigman
  • 22nd, June 2021

The Telemarketing Sales Rule (or the “TSR”) imposes severe restrictions on credit repair companies. For example, it is illegal to accept fees unless the credit repair service is proven by a credit report issued 6 months after the service is performed. Compliance with this TSR provision is practically (if not actually) impossible. The fork in the road is simple: Stay in the industry and remain non-compliant or get out of the industry. Alternatively, Credzu offers a unique, never-been-tried-before approach using internet-only, escrow services. This solution was the subject of a presentation at the 2021 Credit Convention in Clearwater, FL. The following is an outline, with targeted excerpts, of the speech.

This is not legal advice.

But, you should consult your attorney about it.

This is heavy-hitting stuff. It is very legal in nature. Our goal is not to give financial, tax, or legal advice. It’s to bring to your attention things that you should know so that you can consult your trusted expert and protect yourself.

Pay attention to the details and seek guidance concerning them.

Presenter and Presentation background.

The “why” of this presentation is just as important as the “what.”

The founder of Credzu became interested in credit after coming home from a tour in Iraq as a Special Agent with Army Counterintelligence.

Having trouble of his own with the credit system, he began to seek solutions. Ultimately, those solutions were formalized into a business model so as to help others with them.

With a “counterintelligence” mindset, compliance with relevant credit-related laws was paramount. However, actual compliance seemed to be elusive, if not impossible.

After discovering the TSR’s application to credit repair services, the original company was sold and Credzu was formed under the belief that compliance is not possible and a third-party escrow company must exist in order to save the entire industry from being regulated out of existence.

The only issue?

CROA and TSR prepayment restriction.

The CROA and TSR regulate quite a lot, but we’re clearly only talking about credit repair services.

Even if limited to credit repair services, the CROA and TSR apply a lot of rules.

We’re only going to cover one thing under each:

  • The up-front fee provision in the CROA
  • The 6-month delay in payment in the TSR

Why? Because compliance with everything else is simple. How easy is it to not lie? How easy is it to refrain from telling your consumers to lie? How easy is it to provide the required disclosures? How easy is it to provide a compliant contract? For the most part, compliance with these consumer protection laws is very simple.

On the other hand, prepayment prohibitions reach into your business model and disrupt it.

And, in the case of the TSR, obliterate it.

The CROA says:

Do work. Then charge.

Everyone in the credit repair industry should know what the CROA says about payments.

“No credit repair organization may charge or receive any money or other valuable consideration for the performance of any service which the credit repair organization has agreed to perform for any consumer before such service is fully performed.” – 15 USC § 1679b(b)

There’s still some question on whether you can take fractional payments, such as monthly, or whether you must perform all work which the CROA makes you describe in the contract, such as “a full and detailed description of the services to be performed” including “the total amount of all payments to be made.”

The TSR says:

Do work. Wait 6 months. Prove it. Then charge.

Unfortunately, this catches a lot of people off guard. More unfortunate is the fact that the TSR means exactly what it says.

“(a) Abusive conduct generally. It is an abusive telemarketing act or practice and a violation of this Rule for any seller or telemarketer to engage in the following conduct:

(2) Requesting or receiving payment of any fee or consideration for goods or services represented to remove derogatory information from, or improve, a person’s credit history, credit record, or credit rating until:

(i) The time frame in which the seller has represented all of the goods or services will be provided to that person has expired; and

(ii) The seller has provided the person with documentation in the form of a consumer report from a consumer reporting agency demonstrating that the promised results have been achieved, such report having been issued more than six months after the results were achieved. Nothing in this Rule should be construed to affect the requirement in the Fair Credit Reporting Act, 15 U.S.C. 1681, that a consumer report may only be obtained for a specified permissible purpose;”

– 16 C.F.R. § 310.4(a)(2)(ii).

It actually says that. As an aside, you should consider that last sentence about obtaining a credit repair post service.

Outbound and inbound calls.

Yes, if you perform credit repair.

The TSR has an interesting exception mechanism. This is how it works. Inbound (when people call you) and outbound (when you call people) calls are covered by the TSR, with a few exceptions such as inbound calls made in response to general media advertising.

What does this mean? It means it covers all calls, whether you call someone or someone calls you, except if someone calls you in response to, say, an ad online or a brochure, etc.


This exception does not apply if you operate a credit repair business.

As such, if you operate a credit repair company, the TSR applies whether you call a customer or whether a customer calls you. No exceptions.

Others may be liable for your violations.

It’s called “substantial assistance.”

The consequences for violating the TSR can apply to more than the violators.

“It is a deceptive telemarketing act or practice and a violation of this Rule for a person to provide substantial assistance or support to any seller or telemarketer when that person knows or consciously avoids knowing that the seller or telemarketer is engaged in any act or practice that violates §§ 310.3(a), (c) or (d), or § 310.4 of this Rule.”

So, we know taking money before 6-months is a violation for the credit repair company, right? It is likely that all credit repair companies in the Country are in violation of this provision. Therefore, anyone that substantially assists a credit repair company is likely in violation of the TSR as well, since they are necessarily substantially assisting a violation.

  • Credit repair software providers?
  • Phone and email services?
  • Marketing and advertising?
  • Payment processors?

All of those have been wrapped up in enforcement actions for the reason listed above.

Seems crazy?

The CROA and TSR were a reaction to crazy.

credit repair in the 1980s was abusive

In the 1980s, the proliferation of credit repair companies was matched by the proliferation of complaints on credit repair companies.

There were headlines left and right describing the horrors of the credit repair industry.

Credit repair was synonymous with consumer harm.

This gave the political capital to regulate the industry.

The CROA took nearly 10 years.

State laws and the TSR were on the move.

CROA took 9 years to pass

States across the Country rushed to pass credit repair laws and regulations. Some States, California, passed laws regulating credit repair as early as 1984. Florida passed its credit repair laws in 1987.

However, the federal government attempted to pass the federal law many times. It wasn’t until 1996 that the CROA was finally signed into law.

TSR created in 1995.

But, one-and-down enforcement until 22 years later?

One of the strangest things about the TSR is that it was promulgated by the Federal Trade Commission in 1995. Literally, the first industry included in the TSR’s framework was credit repair.

Right off the bat, the FTC immediately used its new tool (the TSR), with “Operation Payback,” a joint enforcement operation between the FTC and many States Attorneys General.

The cases were:

  • Giving You Credit — 952 3136 / U.S. District Court for the Northern District of Illinois, Eastern Division, Civil Action No. 96C 2088)
  • Credit Doctor — 962 3114 / U.S. District Court for the District of Columbia, Civil Action No. 96 0687)
  • The Law Center — 962 3037 / U.S. District Court for the Central District of California, Civil Action No. not available at press time.)
First TSR enforcement Action Against Credit Repair Companies (Pages 1 and 2)
(Pages 3 and 4)

From the cases that we could find, it appears they didn’t enforce it again until 2016, nearly 21 years later.

This could be due to many reasons, such as:

  • The CROA came out in 1996 and the FTC began enforcing that instead.
  • The Consumer Financial Protection Bureau, who also has authority to enfoce the TSR, wasn’t established until 2010.
  • The FTC/CFPB use unpublicised methods to bring compliance, such as CIDs, and settlements.

It appears the TSR was somewhat of a sleeping giant.

Unfortunately, it’s awake, now.

The TSR is not hypothetical.

It is being enforced, right now.

  • Prime Marketing (2016)
  • Lexington Law (2017)
  • Lexington Law (2019)
  • Top Tradelines (2019)
  • BoostMyScore (2019)
  • Commonwealth Equity Group (2020)
  • Many civil investigative demands (CIDs)
  • Robby Birnbaum: “The Biden administration has re-energized the CFPB. …They are looking for cases.”

Industry reaction to CROA in the 90s.

May indicate how we will react to TSR today.

CROA began in 1996.

Although the TSR began in 1995, enforcement didn’t start until two decades later, i.e., now.

So, it may be helpful to see how people reacted to the CROA to give us an idea how people will react to the TSR.

When the CROA passed, there were primarily two groups frustrated by the CROA’s passage: good guys and bad guys. The bad guys were frustrated because the government had targeted tools to address their fraud. The good guys were frustrated because they were doing the right thing and became subject to harsh restrictions.

Everyone, at the time, sought to resist and “get around” the CROA with creative, but ultimately insufficient, arguments.

Failed CROA loophole number 1:

“The CROA doesn’t apply to me.”

  • Argued that the CROA does not apply.
  • Lost almost every case.
  • Litigation seemed to expand the definition.
CROA applies to many industries

CROA applies to anyone who merely represents that they perform (even if they do not actually perform) services covered by CROA, such as credit score providers, car dealerships, credit counseling, lawyers, debt settlement, financial services, or even lenders. See Stout v. Freescore, LLC, 743 F.3d 680 (9th Cir. 2014), Wojcik v. Courtesy Auto Sales, 2002 WL 31663298 (D.Neb. Nov. 25, 2002), Polacsek v. Dedicated Consumer Counseling, Inc., 413 F. Supp. 2d 539 (D. Md. 2005), FTC v. Gill, 265 F.3d 944, 950 (9th Cir. 2001), Picard v. Credit Solutions, Inc., 564 F.3d 1249 (11th Cir. 2009), PARKER v. 1-800 BAR NONE, Case No. 01 C 4488, (N.D. Ill. Feb. 11, 2002), In re National Credit Mgmt. Group, L.L.C., 21 F. Supp. 2d 424, 457-58 (D.N.J. 1998), respectively. 

Failed CROA loophole number 2:

“Lawyers are exempt from CROA”

  • Argued that lawyers are exempt from the CROA.
  • Lost every case.
  • Solidified lawyers are not exempt from CROA.
lawyers are not exempt from CROA (or TSR)

There is no exemption for lawyers under the CROA. If the lawyers fall under the definition of a credit repair organization, the CROA applies. See Iosello v. Lexington Law Firm, 2003 U.S. Dist. LEXIS 14591 at *17-19 (N.D. Ill. Aug. 7, 2003); Rannis v. Fair Credit Lawyers, Inc., 489 F. Supp. 2d 1110, 1116 (C.D. Cal. 2007); FTC v. Gill, 71 F. Supp. 2d, 1030, 1038 (C.D. Cal. 1999)

Failed CROA loophole number 3:

“It’s not up front fees, it’s escrow.”

  • Escrow must be real.
  • Escrow must be third party.
  • Exercising control, even through a third party, can be possession of the funds.

The escrow process must be real. You can’t just call your payment processing escrow to avoid the upfront fee provision of the CROA. See Estrella v. Freedom Financial Network Llc, 778 F. Supp. 2d 1041, 1046 (N.D. Cal. 2011); Jhass Grp. L.L.C. v. Ariz. Dep’t of Fin. Institutions, 238 Ariz. 377 (Ariz. Ct. App. 2015)

And, you cannot do escrow for your own transactions, as this defeats the disinterested third party spirit of an escrow relationship.

Failed CROA loophole number 4:

“I’m selling a product. The credit repair is free.”

  • Arguing free services, but selling a product is not covered by the CROA.
  • If they are bundled, it’s covered.

You cannot call your credit repair “free” to avoid the provision in the CROA that says the CROA only applies to “services” in exchange for money (or other valuable consideration). If you’re bundling “free services” with a paid product, the Courts will look to the entire transaction and consider the credit repair a compensated service. See F.T.C. v. RCA Credit Servs., LLC, 727 F.Supp.2d 1320, 1333 (M.D. Fla. 2010).

Failed CROA loophole number 5:

“I accept voluntary contributions, not fees.”

  • Arguing fees were actually “voluntary contributions.” 
  • They weren’t.
  • They were associated with services and not tax deductible.

The FTC (and CFPB) lawyers and Judges are very smart. Trickery nonsense isn’t going to fly. They will apply reasonableness and sufficiency tests to unearth the sophistry of meritless loopholes. In the case of “voluntary contributions,” they will simply ask if they are tax-deductible. If not, they’re not voluntary contributions. If not, they’re fees subject to the CROA. See Polacsek v. Debticated Consumer Counseling, Inc., 413 F. Supp. 2d 539, 549 (D. Md. 2005)

Failed CROA loophole number 6:

“I’m a nonprofit. CROA doesn’t apply.”

  • Arguing exemption to CROA as a non-profit.
  • Actually operate a nonprofit organization and tax exempt under 501(c)(3)
  • Can’t fake it.

Just like the voluntary contributions silliness, Courts will see through non-non-profits. This has been settled for many years. See Zimmerman v. Cambridge Credit Counseling Corp., 409 F.3d 473, 478 (1st Cir.2005); Walker v. Clearpoint Fin. Solutions, Inc. (In re Walker), 414 B.R. 787, 792 (Bankr. M.D. Fla. 2009); Baker v. Family Credit Counseling Corp., 440 F.Supp.2d 392, 404 (E.D.Pa.2006).

Questionable loophole number 7:

“I don’t repair the past, I help establish good credit going forward.”

  • CROA applies to “retrospective” repair.
  • CROA may not apply to “prospective” counseling.
  • It all depends on the representations made.

This “loophole” might not be a loophole at all. However, if you make representations that your service will improve credit, that will subject you to the CROA. So, as the cases literally point out, it all depends on the representations made. See Hillis v. Equifax Consumer Servs., Inc., 237 F.R.D. 491 (N.D.Ga.2006); Plattner v. Edge Solutions, Inc., 422 F.Supp.2d 969 (N.D.Ill.2006); Wojcik v. Courtesy Auto Sales, Inc., No. 01-506, 2002 WL 31663298, 2002 U.S. Dist. LEXIS 22731 (D.Neb. Nov. 25, 2002).

Questional loophole number 8:

“I charge for the previous month’s work.”

  • Monthly doesn’t make it legal; post service makes it legal.
  • Questions remain: Complete “any” service or “full” service?
  • RMCN settlement?

The basis of this argument is strong, but it is not a settlement matter (despite the fact that nearly the entire industry charges on a monthly basis). See Stout v. FreeScore, LLC, 743 F.3d 680, 684 (9th Cir. 2014); U.S. v. Cornerstone Wealth Corporation, Inc., Civil Action No. 3:05-CV-2147-D, 19 (N.D. Tex. Aug. 16, 2007); United States of America, Plaintiff, v. RMCN Credit Services, Inc. et al  (Settlement).

There are two ways to look at the issue.

  • First, in one section of the CROA, it says “No credit repair organization may charge or receive any money or other valuable consideration for the performance of any service which the credit repair organization has agreed to perform for any consumer before such service is fully performed.” So, does this mean perform “any” service (even a portion of an overall service” before you get paid? Could you charge daily? Or, by the minute? By the word?
  • Second, in another section of the CROA, it says the contract must include “the terms and conditions of payment, including the total amount of all payments to be made by the consumer to the credit repair organization or to any other person” and “a full and detailed description of the services to be performed by the credit repair organization for the consumer…” So, does this mean that the payment provision (above) requires you to complete everything outlined in the contract before you get paid?

You should know that the FTC and the CFPB have taken the position that you cannot charge until you achieve credit improvement (an interpretation that is not found in the text of the CROA or any case).

In addition, the DOJ has taken an even more extreme interpretation, suggesting that post-dated checks and collecting credit card information (even if you do not deposit the checks or process the credit card payment) is the acceptance of “valuable consideration” and, therefore, a violation of the CROA’s up-front fee prohibition. See the Cornerstone case above, but you will have to search pacer for Case 3:05-cv-02147-D, Document 22, pages 22 and 23.

Escrow is needed, as you will see below.

TSR enforcement now.

How will the industry react?

The (failed) loopholes above represent the credit repair industry’s reaction to the CROA’s passage in 1996. Even though the TSR was promulgated in 1995, it wasn’t enforced until recently. So, the question is: How will the industry react now?

The choice is:

  • Seek loopholes.
  • Seek compliance.

It’s a lot easier said than done with the TSR (work followed by a 6 month delay in payment), especially compared to the CROA (work then payment).

Unfortunately, the search for loopholes has already begun. Fortunately, loopholes are failing and compliance option exists, both of which are discussed in detail below.

Failed TSR loophole number 1:

“The CFPB is not constitutional.”

Background on this: The Consumer Financial Protection Bureau does not have enforcement authority over the CROA but they can enforce the TSR. Most TSR enforcement actions against credit repair companies have come from the CFPB.

Lexington Law moved to dismiss a complaint against it on the basis that the CFPB is unconstitutional (among other things). This argument ultimately failed. Many other cases revolved around the same argument and the Supreme Court took up the issue, deciding that the CFPB is constitutional.

The TSR survived.

Failed TSR loophole number 2 (and 3):

“The CROA superceded the TSR (or they conflict)”

As you know, the CROA is a law and says “do work, then get paid” while the TSR is a regulation and says “do work, wait 6-months, then get paid.”

Many cases have argued that the CROA supersedes the TSR, because a regulation is invalid if it conflicts with the law.

There was a ruling in the Prime Marketing case that addressed this issue, thoroughly. Citing to Tennessee v. Lexington Law Firms, No. 3:96-0344, 1997 WL 367409, at *6 (M.D. Tenn. May 14, 1997), the Court in Prime agreed that “there is no language in the statute indicating that Defendant’s telemarketing activities may not be simultaneously regulated by the [TSR and the CROA]”.

The Court directly concluded that “the CROA and TSR do not conflict.”

The reasoning is just as damaging to loophole enthusiasts.

“[If a company is] both a credit repair agency and a telemarketer, it is required to comply with both the CROA and the TSR. On the other hand, if a credit repair agency does not qualify as a telemarketer, then it need not comply with the TSR – only the CROA is applicable.”

CROA and TSR do not conflict

TSR Loopholes likely to fail:

I’m a not-for-profit.

It is true the TSR does not apply to bonafide nonprofit organizations. Bonafide being the operative word. The fake nonprofit loophole that failed to avoid the CROA will obviously fail to avoid the TSR.

Face-to-face exceptions (mobile closers).

Face-to-face exemptions are real. However, you cannot send a stranger to sign a document to “avoid” the TSR. It must be a person legitimately in your company that can actually build a relationship with the consumer and intelligently speak about your product or service.

The case of Federal Trade Commission v. United Debt Counselors, LLC, et al.Civil Action No. 4:17-cv-143 in the United States District Court for the Eastern District of Texas is a good example. They were sending notaries to close deals to meet the face-to-face exceptions to the TSR.

In that case, the FTC argued that “[those] in-person meetings between notaries public and consumers do not qualify for the face-to-face sales presentation exemption.”

Intrastate sales.

The TSR clearly only applies to interstate telemarketing sales (sales using the phone which crosses state lines).

You cannot control whether your phone call crosses state lines, so this loophole is too risky to be taken seriously.

I’m an attorney.

Attorneys are not exempt from the TSR.

“The TSR, in turn, contains no applicable exception for the practice of law or attorneys.”

I sell a product, not a service.

The TSR applies to both products and services of credit repair.

“Requesting or receiving payment of any fee or consideration for goods or services represented to remove derogatory information from, or improve, a person’s credit history, credit record, or credit rating”

Therefore what?

The TSR is here to stay.

  • Credit repair is in danger: How could you possibly wait 6 months to get paid?
  • Loophole history not encouraging.
  • We need a solution (not a loophole).

A solution.

Internet only + escrow.

The TSR does not cover internet transactions, even if the internet goes over telephone lines. See 800-JR Cigar, Inc. v. GoTo.com, Inc., 437 F.Supp.2d 273, 294 (D.N.J.2006). In fact, the TSR does not include the word “internet.”

The TSR does regulate Voice over Internet Protocal (VoIP), but not the internet. See 68 FR 4580–01, at 4632–33 (January 29, 2003); United States v. Dish Network, L.L.C., 75 F. Supp. 3d 942, 956 (C.D. Ill. 2014).

The FTC has addressed this issue:

“This amendment proceeding is limited in scope to the direct regulation of those telemarketers and sellers covered by the TSR…The Commission, therefore, cannot extend the prohibition to Internet based transactions, as suggested by some advocates.” – 80 FR 77520 (Dec. 14, 2015)

Does a solution exist?

Yes, it’s Credzu.com

Consumers, credit repair companies, and escrow agents meet within the online platform at credzu.com. Consumers and credit repair companies connect and coordinate services and sign CROA compliant agreements. Escrow agents hold consumer funds until services are complete.

Credzu offers internet only online escrow for credit repair and TSR and CROA compliance

Start your TSR compliance journey with Credzu

Help us help you.

We provide the value of TSR avoidance and CROA compliance, in an only escrow system that carries out the intent of consumer protection laws and regulations.

You provide a valuable service to consumers.

When we work together, the entire credit repair industry is elevated.