Don’t eat CROA

Managing the risks of advising borrowers on how to improve credit scores

The long-standing practice of well-intentioned loan officers and mortgage brokers advising prospective or declined mortgage applicants on specific measures to improve credit scores poses some hidden risks to lenders.

Regulatory compliance in mortgage banking has always been a challenge for lenders and servicers. Yet, today’s volatile environment may prove to be the most demanding in modern times especially when examining activities touching a consumer.

And, like walking a tight rope in a hurricane, how does a company balance prudent and proactive regulatory compliance with the need for creative marketing and consumer outreach in originating residential mortgages?


In the recent Consumer Financial Protection Bureau Consent Order concerning Loan Interest Rate Lock Extension Practices (IRLE), the lynchpin was not the extension charge per se, but the fact that the processing delays justifying the extension fees were caused by the lender triggering the fee. Instead of absorbing those fees, the lender passed them on to the consumer. The magnitude of the immediate financial penalty coupled with additional legal and reputational entailments will, undoubtedly, spur compliance executives to dig deep into internal practices that affect consumers.

A lesson from this travesty is that merely satisfying regulatory requirements is only the price of admission. Compliance leaders must develop improved proactive techniques in examining any activities where employees, agents and third-party vendors interact with potential customers.

With the tight origination market, competition for borrowers is at an all-time high, causing originators to ramp up borrower outreach and taking extraordinary measures to retain and attract customers. One such area is the practice of loan officers attempting to assist applicants who were declined for a mortgage or in the pre-qualification stage by giving them specific advice on how to improve their credit scores.

This well-intentioned exercise may pose unnecessary regulatory, reputational and legal risk if not carefully considered, reviewed and audited.

The two specific activities that pose risk are:

ONE: Retail loan officers and mortgage brokers advising applicants on what specific corrective actions to take to improve their credit score in order to qualify for a loan and;

TWO: Retail loan officers and mortgage brokers referring declined or prospective applicants to unvetted credit repair companies who charge fees for the service.

A potential risk exists for lenders and loan officers for providing credit repair advice under the federal Credit Reporting Organizations Act (CROA). The essential purpose of the legislation is to protect consumers against misleading representations and unfair practices from “credit repair companies” that were taking advantage of consumers locked out of the credit market because of credit deficiencies.

When reviewing the various states’ laws in comparison to the federal CROA, there are inconsistencies between how the states define a credit repair organization and how CROA defines it.

The federal statute exempts nonprofits/section 501(c)(3) organizations; creditors; and depository institutions and credit unions from the definition of credit repair organization. Many of the state credit repair laws provide an exemption for “any person authorized to make loans or extensions of credit under the laws of this state or the U.S. who is actively engaged in the business of making loans or other extensions of credit to residents of this State.” (Maryland Code Title 14-1901).

However, CROA makes no mention of these exemptions and one may safely assume the federal law will preempt state laws. In fact, most of the state provisions became law prior to CROA’s enactment in 1996. Furthermore, as already noted in the LIRLE case mentioned above, the CFPB will not hesitate to leverage UDAAP if the credit advice harms the consumer.


Lenders should be careful that loan officers’ practices do not rise to becoming de facto credit repair actions, potentially placing lenders directly under CROA‘s purview. This potential of being deemed a credit repair organization for purposes of CROA will also extend to third-party service providers like mortgage brokers over whom there is much less operational control.

Recently, a case in Pennsylvania exposed the potential legal liability for unintentional missteps.

In that case, an in-house lender for a builder advised a mortgage applicant, whose credit score was too low, to just pay off $25,000 in credit cards and his scores would improve enough meet underwriting guidelines.

Despite this advice and after paying down the credit obligations and putting down $40K earnest-money deposit, his scores did not improve as promised. 

He successfully sued the builder and mortgage company. 

Charlie Scanlon, president and CEO of Phoenix Credit Consultants, who has written about these practices in the past, highlighted a particular egregious practice for which lenders’ compliance policy and internal audit procedures should account.

“The acceptance of referral fees paid to some loan officers by some of the ’shadier’ credit repair outfits could also create potential liability for lenders.”

This is especially so in instances where these fees are not disclosed to the borrower by either the lender or the credit restoration organization.

A referral fee payment could also be a CROA issue if the loan officer who received the referral fee later undertakes to assist in the credit restoration process. The referral fee could be looked at as “payment in advance” of performing those credit repair tasks, which is clearly prohibited under both state and federal law.


Despite these risks, potential liabilities and negative effects on consumers, assisting consumers to overcome eligibility barriers to homeownership is a legitimate and responsible pursuit that the mortgage banking industry should embrace.

First, the fundamental question for every lender to ask is whether loan officers should spend any time at all providing this advice notwithstanding the risk component.

Once that decision is made, it is critical to build a rational model that incorporates the proper mix of risk management, policy, operational procedures, metrics, reporting, compliance, and audit. A thoughtful, comprehensive approach will demonstrate prudent governance and care for the consumers who need help to become homeowners.

Compliance departments should perform an initial operational review to identify the extent to which these credit restoration practices are occurring, and then write policy and implementing procedures that manage risk and impose annual audits. The audit scope should not only address the CROA and UDAAP risks but also the CFPB third-party oversight guidelines.

Mark Cole, president and CEO of Hope LoanPort considers his company’s efforts to work with lenders, the GSEs, state housing finance agencies and consumers a mission that educates, and curates applicants seeking homeownership.

Through HLP’s cloud-based technology platform, HLP Guru, consumers can self-engage to improve creditworthiness while simultaneously getting on-demand assistance via chat and telephone counseling from HUD Certified non-profit housing counselors.

“One of the primary reasons we built HLP Guru was to offer lenders and their mortgage applicants a turnkey mortgage readiness option that is a 501 (c) (3) which is specifically exempted from CROA and state laws,” Cole said.

Brian Offner, president of Credit Mindset, works directly with many lenders to help consumers become credit worthy and to facilitate lenders’ compliance in what he characterized as the “wild, wild, west” when it comes to loan officers, brokers and even Realtors trying to give credit restoration advice independently or in conjunction with questionable credit repair companies.

“Credit education is key to behavior change,” Offner said. “We do not want companies out there inflating credit scores to help borrowers artificially qualify for a mortgage who do not have basic budgeting/money management skills.”  

Here are some guidelines for lenders who support the practice of providing credit restoration services to mortgage applicants and those declined for a mortgage:

  • Require the borrower to sign a hold-harmless agreement.
  • If the lender is outsourcing to a vetted, qualified credit restoration company, have loan officers obtain the consumer’s authorization to share his credit report with the company.
  • Make no promise to the consumer that completing the remediation will “guarantee” loan approval. In fact, the inverse should be disclosed.
  • Implement formal, documented training for loan officers with annual updates.
  • Establish annual audits to ensure compliance with applicable state and federal regulations and company policy.

Assisting mortgage applicants to become homeowners is an honorable and socially-responsible mission for the mortgage banking industry. It is no less true in the context of assisting consumers to improve creditworthiness to reach sustainable homeownership status. But as with any other consumer-facing initiatives, understanding the risk is as important as fulfilling the mission.

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