FTC says credit repair business doubled as a pyramid scheme

For the second time this month, the FTC has sued a credit repair operation that it says combined fake promises to swiftly and substantially boost people’s credit scores with the offer of a bogus money-making opportunity selling credit repair services. In this latest case, the FTC says the supposed money-making opportunity was a pyramid scheme.

The complaint alleges that Michigan-based Financial Education Services (FES), five related companies, and owners Parimal Naik, Michael Toloff, Christopher Toloff, and Gerald Thompson bilked consumers out of more than $213 million. At the FTC’s request, a federal court has frozen the defendants’ assets, appointed a receiver, and ordered a halt to the allegedly illegal operations pending further proceedings in the case.

The FTC says that FES, which also does business as United Wealth Services, uses social media, telemarketing, and a nationwide network of sales agents to promote its credit repair services in Spanish and English. It claims it can boost people’s credit scores by hundreds of points in a short time by permanently removing negative information—like collection accounts and late payments—from their credit reports and adding positive information.

But, the FTC says, FES does neither. For example, to purportedly remove negative information, FES emails clients uneditable form letters to print, sign, and send to credit bureaus. The letters challenge all or most negative items in the clients’ credit reports. But the challenges—without supporting documents—rarely result in removal of the items, the FTC says.

The complaint says FES charges people $99 up front for its services, and a recurring fee as high as $89 each month. It’s illegal for a credit repair company to charge people before fully performing the services it promises. In addition, the complaint says, FES doesn’t give people important information that the Credit Repair Organizations Act (CROA) requires, including signed contracts that disclose the services it will provide, the total cost of its services, and its refund and cancellation policies.

The complaint alleges that the credit repair scheme and pyramid scheme are intertwined. The FTC says FES pressures customers who inquire about its credit repair services to become “FES agents.” The company says agents can earn tens of thousands of dollars a month selling FES’s services to other consumers and recruiting those consumers to become FES agents themselves. And, it details a complex system in which it says FES agents become eligible for ever-bigger commissions and bonuses by building a “downline” of recruits who, in turn, sell FES services and recruit new agents to do the same.

But, the FTC says, FES’s purported business opportunity requires its agents to pay FES $299 up front to participate in the business, plus $89 per month thereafter for FES’s credit repairs services—even if they don’t need them. And, the FTC says, in classic pyramid scheme style, FES incentivizes recruiting new agents into the business over selling credit repair services. The complaint charges that few people, if any, make the income promised, and many lose money.

The complaint charges that the company’s practices violate the FTC Act, CROA, and the Telemarketing Sales Rule. It follows the FTC’s complaint earlier this month charging The Credit Game and its owners with operating a scam credit repair operation that also pitched a bogus business opportunity. There the FTC said the “opportunity” was essentially for people to turn over their COVID-19 government benefits to the defendants to learn how to start their own credit repair businesses.

If it seems like we’re taking a hard look at money-making schemes that target people who are in financial distress or trying to get ahead, we are. As for what’s next, it’s worth noting that the Commission launched a rulemaking in February to address deceptive or unfair marketing using earnings claims. If finalized, the rule would allow the FTC to recover redress for defrauded consumers and seek steep penalties against any multi-level marketers and other bad actors who prey on people’s hopes for economic advancement. Stay tuned.