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Credit Sweep – Credit Sweeps in Finance vs Credit Repair

Credit Sweep – What Are Credit Sweeps in Corporate Finance?

Credit SweepA credit sweep in corporate finance is an arrangement with a bank to utilize idle funds to automatically pay down a line of credit or loan.  Credit sweeps are typically contracts between a bank and a client, usually a corporation. The arrangement calls for all idle cash or extra money in a deposit account to be utilized to pay off short-term debt under a line of credit. Typically, the customer establishes a target balance that determines how much of its money will be utilized. A credit sweep arrangement can significantly reduce a client’s expenditures incurred as a result of interest on existing debt.

A credit sweep is a cash management technique.  It is particularly useful for big organizations with several accounts and high day-to-day payment unpredictability. If the balance in a deposit account exceeds a preset limit, a credit sweep account may be set up to automatically transfer the extra cash to pay down a loan obligation. Most credit sweeps also offer the inverse arrangement, in which if the funds in the account are less than the goal amount, the line of credit will be drawn down to meet the target. The term sweep refers to financial jargon.  It simply means the bank can collectively sweep excess funds from one account to another.

Example of a Corporate Credit Sweep

CashFlow Inc. has a line of credit with EzMover Bank in the amount of $1 million. Currently, Cashflow is borrowing $400,000 of the $ 1 million, which needs to be repaid. However, CashFlow also has a cash deposit account with EzMover Bank that is used to make and receive regular business payments among other business purposes. CashFlow sets up a target balance and stipulates that any amount in the deposit account that is over $255,000 on any given day, can be used to pay down the outstanding $400,00 credit line. On a Thursday, the amount in the deposit account jumps to $290,000, so EzMover Bank sweeps the additional $35,000 above the target balance to pay down $35,000 of the $400,000 borrowed amount.  The outstanding balance is reduced to $365,000 and CashFlow has $635,000 available in its line of credit.

Bank Credit Sweep Accounts 

Banks employ sweep accounts on a more sophisticated level to circumvent the limitation on paying interest on business checking accounts. Idle cash may be more successful in earning slightly higher returns by “sweeping” assets overnight to some kind of investment vehicle. Sweep investment vehicles are often linked to the money market, notably “Eurodollar Sweeps” and “Repo Sweeps.” Sweep arrangements come in a variety of shapes and sizes. Commercial banks typically have larger funds available and can afford more intricate arrangements.  As a result, they can pursue more aggressive methods that often provide a greater rate of return.

What Are Credit Sweeps in Consumer Credit Repair?

A credit sweep is also a term used in consumer credit repair.  A credit sweep’s purpose is to get the credit bureaus to delete bad information from your credit reports more swiftly than they are normally compelled to do so. The Federal Credit Reporting Act (FCRA) requires that unfavorable material on a credit report be erased after seven years.  However, there are exceptions.  For example, a Chapter 7 bankruptcy can stay on your credit report for up to 10 years. A reputable credit repair business will work to get the bad marks removed from your credit report as soon as possible.  Sometimes, these agencies are successful in removing credit stains more quickly.  This is opposed to waiting seven years when it will be automatically removed.  However, in the case of identity theft, the negative information must be removed within four (4) business days.

Consumer Credit Sweep Fraud

Unfortunately, there are variations of credit sweeps that unethical credit restoration organizations sometimes use.  A particular scam that disreputable credit repair companies often engage in is also called the credit sweep. Credit sweep providers use a range of strategies.  However, there are certain common themes. Credit sweeps primarily refer to the process of contesting all entries on one’s credit reports and alleging that the accounts were the product of identity theft. That is why it is referred to as a credit sweep — credit sweeps are attempts to sweep credit reports of any bad information.

Example

The credit repair firm requests that you appear to be a victim of identity theft.  This is in order for the credit bureaus to erase information from your credit record – even if it is accurate. The credit restoration firm instructs you to go to a law enforcement agency, such as the police, and submit a police complaint alleging that your identity has been stolen. The credit repair agency can then provide the identity theft report to the credit bureaus as “proof” that the bad information on your credit record is the product of identity theft. If the credit sweep is successful, the CRAs must delete all implicated unfavorable material from your credit report within four business days.  Further, it prohibits it from ever reappearing on your record.  In this way, it sweeps any negative items from your credit report.

Criminal Credit Sweep Consequences

The problem with this approach is that it is illegal.  Claiming that an account was created as a consequence of identity theft when it wasn’t may lead to criminal charges. This is true for unethical companies that engage in this behavior and people that fake their own identity theft reports. Submitting fake police reports is unlawful in general, and alleging identity theft generally entails filing a police complaint.

Federal Credit Reporting Act – Section 605B 

Section 605B of the FCRA is a section that refers to the blocking of information resulting from identity theft. This portion of the FCRA is intended to protect legitimate victims of identity theft.  It involves cases where someone else has created accounts in your name falsely.  As a result, you have the right to have the bogus information removed from your credit reports. Furthermore, in the instance of identity theft, Section 605B requires CRAs to do two additional tasks.  These are beyond the ordinary and necessary part of removing negative information:

  1. They must erase any erroneous information from your credit report within four business days.  This is after receiving all relevant documents proving identity theft. This is a fairly short length of time in relation to 30-45 days.  That is the typical time credit bureaus are permitted to finish their investigations and erase incorrect information.
  2. Further, they have to block the information from ever appearing on your credit reports again.

Scammers take advantage of this portion of the FCRA by marketing a service that exploits these regulations.  Even when identity theft is not the source of the bad information appearing on someone’s credit report.

Up Next: What Is the Options Price Reporting Authority (OPRA)?

Options Price Reporting AuthorityThe Options Price Reporting Authority (OPRA) is a group of members from participating securities exchanges tasked with delivering last-sale option quotes and information from the exchanges. OPRA controls the process through which market participants share, aggregate, and distribute market data as a national market system plan. Trades and quotations are the principal data feed provided by OPRA. Trade data is comprised of the latest sale reports for completed securities transactions.  Quotations are comprised of the latest bids and offers for options.

In the United States, OPRA is the key securities information processor for market information created by the trading of securities options. The cornerstone of the information disseminated by OPRA is the latest sales data and quotations. However, OPRA also disseminates certain additional sorts of information.  For example, the number of options contracts traded, open interest, end-of-day summaries, and certain types of administrative communications.

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