The Federal Trade Commission (FTC) recently announced that it has filed proposed orders against the owners and operators of Financial Education Services (FES), a credit repair operation accused of running a pyramid scheme and violating the Credit Repair Organizations Act (CROA). The proposed orders call for permanent bans and substantial monetary penalties for the defendants.

The FTC brought its complaint under §§ 13(b) and 19 of the FTC Act, § 410(b) of CROA, and § 6(b) of the Telemarketing and Consumer Fraud and Abuse Prevention Act alleging that FES preyed on consumers with low credit scores by promising easy credit fixes and then recruiting them into a pyramid scheme selling credit repair services to others.

The FTC’s complaint described several allegedly deceptive practices by FES and its associated companies, including:

  • False Credit Repair Claims: Defendants falsely claimed they could permanently remove negative items from consumer reports and improve credit scores significantly. For example, defendants and their agents claimed, “If you have 400-500 credit score and want a 700-800 score, I have a connection that legally erases negative things..repos, foreclosures, late payments, medical, student loans evictions, and more.”
  • Upfront Fees: Defendants charged consumers upfront fees for credit repair services, which is prohibited under CROA. For example, before providing the promised credit repair services, defendants’ representatives typically tell consumers that the services cost $89 per month with a one-time payment of $99, variously referred to as a registration or activation fee.
  • Pyramid Scheme: Defendants also marketed a purported investment opportunity, soliciting consumers to become FES agents to recruit additional consumers to purchase credit repair services and become FES agents themselves.
  • Deceptive Marketing: FES used deceptive marketing materials, including social media-ready advertising and scripts, to lure consumers into their scheme. For example, defendants claimed, “If I could show you how to earn a [sic] extra 500-1000 a week in a home based business that you can run in all 50 states would you be willing to hear more information?”
  • COVID-19 Exploitation: The company preyed on consumers’ fears related to the COVID-19 pandemic to sell their services. For example, defendants encouraged FES agents to market their credit repair services by claiming that because of the pandemic, the consumer reporting agencies and creditors would be less likely to respond timely to dispute letters, resulting in the automatic removal of the disputed items.

The proposed court orders include significant monetary penalties and permanent bans for the defendant entities and their owners:

  • FES, United Wealth Services, Inc., VR-Tech, LLC, Youth Financial Literacy Foundation, and LK Commercial Lending LLC: Prohibited from engaging in unlawful activities related to credit repair services and pyramid schemes. Required to implement a compliance monitoring system to ensure its employees and contractors do not violate the terms of the settlement and turn over $5.5 million in cash.
  • VR-Tech Mgt, LLC, and Statewide Commercial Lending LLC: Permanently banned from providing credit repair services and any involvement in multi-level marketing. Required to turn over cash, cars, a boat, and multiple real estate properties totaling millions of dollars.
  • CM Rent Inc.: Permanently banned from providing credit repair services and any involvement in multi-level marketing. Required to turn over $1.7 million.

The FTC’s action will result in more than $12 million being turned over to the FTC for use in providing refunds to affected consumers.