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Consumer Action is pleased to be able to publish a summary of a Melbourne Law School report into credit repair, which involved a review of Consumer Action’s casework and interviews with Consumer Action Staff. The summary has been provided in advance of the full article which will be published at a later date. We’d like to thank the article’s authors for allowing us to publish a summary of their findings:

Associate Professor Paul Ali, Lucinda O’Brien and Professor Ian Ramsay
Centre for Corporate Law & Securities Regulation
Melbourne Law School

June 2015 update: This full paper has now been released. It’s available to view in full here.

1.  What is credit repair?

The rise of an Australian credit repair industry reflects both the growing importance of consumer credit and the increasing prevalence of financial hardship in Australian society.  A poor credit history can prevent an individual from obtaining loans, credit cards, and even access to basic utilities such as electricity and telephone connections.  At the same time, rising rates of financial hardship make it more likely that even relatively affluent Australians will have difficulty paying their bills and making their loan repayments.  In this context, it is unsurprising that more and more Australians are seeking help from credit repair companies (CRCs).

While CRCs promise to help their clients, consumer advocates are concerned that they only serve to entrench financial hardship.  CRCs charge very high up-front fees, sometimes thousands of dollars, for services that could otherwise be provided free of charge by an industry ombudsman, financial counselling service or community legal centre.  People who contact CRCs are often experiencing acute financial stress, meaning that they are vulnerable to high-pressure sales techniques and unrealistic promises.  Many Australians have little understanding of credit reporting law and believe, wrongly, that CRCs can remove legitimate listings from their credit files.  Many CRCs fail to tell their clients that in some cases, they can amend their own credit reports simply by contacting their creditors.  They often make exaggerated claims about the results they can achieve and the money their clients will save as a result of ‘repairing’ their credit files.  CRCs are also reluctant to publicise their fees and often impose large additional charges for late payment, cancellation or other ‘administrative’ services.

2.  What do credit repair companies do?

At present, there is very little data available regarding the Australian credit repair industry.  In 2012, the Energy & Water Ombudsman of New South Wales (EWON) produced a report on the activities of CRCs in Australia, based on a customer survey and mystery shopper research.[1]  It found that many people signed contracts with CRCs, and paid considerable amounts of money, without realising that they could use industry ombudsman services themselves, free of charge, to dispute adverse information placed on their credit reports by utilities providers.  These people often told EWON that they would not have paid a CRC to act on their behalf, if they had known that such services were available for free.   88 per cent only realised that they had a bad credit rating when they applied for new credit, suggesting that they were under financial pressure at the time they sought help from a CRC.  In the vast majority of cases, the listings on their credit reports were for debts of less than $500, with several being less than $120.  They often paid far more than this for the services of a CRC, with fees averaging at around $1,000 per listing.  Most of these fees were up-front and non-refundable.

Researchers at the Melbourne Law School recently conducted a survey of credit repair files at the Consumer Action Law Centre.  The following cases illustrate the typical problems encountered by clients of CRCs:

• A school teacher applied for a loan but her application was rejected.  She discovered that her credit file listed a few unpaid bills for small amounts.  She had not updated her address with these creditors when she moved house.  She paid approximately $1,000 to a CRC, which contacted her creditors on her behalf, explained the situation and had the listings removed.  When the client contacted Consumer Action, she discovered that she could have done this herself and saved herself $1,000.
• A uni student ran up a bill of $800 on his mobile phone.  He went overseas and while he was away the debt was listed on his credit report.  He contacted a CRC and signed up with them over the phone.  He never received a written contract, but he agreed to pay the CRC nearly $2,000 to provide him with a ‘clean credit file’.  He thought this figure was all-inclusive, but later found out that he had to pay $800 to the phone company as well.  He paid the $800, and his credit file was amended to show that the debt had been paid.  Still, he was unhappy about this unexpected cost and tried to terminate his contract with the CRC.  The CRC began charging him dishonour fees and commenced legal action against him, claiming he owed $1,500 for outstanding payments, dishonour fees and other administrative charges.

3.  Should credit repair be regulated?

Australian consumer advocates are concerned about the activities of CRCs.  They argue that because of the high fees they charge, these businesses often compound their clients’ financial problems rather than solving them.[2]  Some critics believe that CRCs undermine the integrity of industry ombudsman schemes and the credit reporting system, by flooding the system with requests for review.  Industry ombudsman schemes are funded by the business community, and companies incur a charge every time a customer makes a complaint.  In some cases, a creditor will remove a legitimate listing to avoid this charge, even if it is based on a genuine default.

Since the introduction of new credit reporting laws in March 2014, the need to examine the activities of CRCs has become more urgent.  Australian credit bureaus are now entitled to collect and disseminate much more detailed information about individuals, following amendments to the Privacy Act 1988 (Cth).  While these reforms may have some merit, they may increase the number of errors and adverse listings on individuals’ credit reports.  This in turn may create greater demand for the services of CRCs.  In this context, it is important to consider how CRCs should be regulated.

4.  How might credit repair be regulated?

The most effective option for regulating CRCs would be a rule-based statutory regime combined with a licensing system.  This would bring CRCs into line with consumer credit providers, which currently need to obtain a license from the Australian Securities & Investments Commission (ASIC).

A system of legal rules would promote transparency and consistency, providing the public with a clear framework for dealing with CRCs.  Rules would include a strict prohibition on up-front fees and a mandatory cooling-off period, allowing clients to cancel their contracts free of charge within the first two weeks.  CRCs would be required to publish detailed information about their fees, terms and conditions on their websites.  Under these rules, clients of CRCs would be entitled to a refund or compensation if a CRC didn’t do what it promised to do, behaved unfairly or dishonestly, or breached any other rule (for example, by refusing to let a client cancel a contract within the cooling off period, or charging unexpected administrative fees).

In conjunction with these rules, a licensing and reporting regime would eliminate rogue operators from the industry and provide the Government with valuable information about CRCs.  CRCs would be required to provide ASIC with regular reports about their services, finances, staff (including staff training), customer profile and details of any complaints made against them.  A licensing regime would impose clear duties on CRCs, such as a duty to act in the client’s best interests.  It would also require CRCs to belong to an ombudsman scheme, allowing clients to lodge complaints without having to go to a court.  The licensing regime could be funded by CRCs’ licensing fees, and CRCs would be required to join an existing industry-funded ombudsman scheme.  Such a regime would represent no cost to Government.

While this model would not entirely eliminate the risks posed by CRCs, it would do much to protect vulnerable Australians from their most harmful effects.

5.  Summary of recommendations

• a strict prohibition on up-front fees
• mandatory two week cooling-off periods for all credit repair contracts
• a requirement that CRCs publish detailed information about their fees, terms and conditions on their websites
• enforceable rights for CRC clients, including the right to a refund or compensation if CRCs breach their legal obligations
• a licensing and reporting regime administered by ASIC
• clear legal duties for CRCs, including a duty to act in the client’s best interest
• a requirement that CRCs join an industry ombudsman scheme, giving clients the power to lodge complaints against them, free of charge