[Senate Hearing 111-1017]
[From the U.S. Government Publishing Office]
S. Hrg. 111-1017
THE DEBT SETTLEMENT INDUSTRY:
THE CONSUMER'S EXPERIENCE
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HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
APRIL 22, 2010
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
JOHN D. ROCKEFELLER IV, West Virginia, Chairman
DANIEL K. INOUYE, Hawaii KAY BAILEY HUTCHISON, Texas,
JOHN F. KERRY, Massachusetts Ranking
BYRON L. DORGAN, North Dakota OLYMPIA J. SNOWE, Maine
BARBARA BOXER, California JOHN ENSIGN, Nevada
BILL NELSON, Florida JIM DeMINT, South Carolina
MARIA CANTWELL, Washington JOHN THUNE, South Dakota
FRANK R. LAUTENBERG, New Jersey ROGER F. WICKER, Mississippi
MARK PRYOR, Arkansas GEORGE S. LeMIEUX, Florida
CLAIRE McCASKILL, Missouri JOHNNY ISAKSON, Georgia
AMY KLOBUCHAR, Minnesota DAVID VITTER, Louisiana
TOM UDALL, New Mexico SAM BROWNBACK, Kansas
MARK WARNER, Virginia MIKE JOHANNS, Nebraska
MARK BEGICH, Alaska
Ellen L. Doneski, Staff Director
James Reid, Deputy Staff Director
Bruce H. Andrews, General Counsel
Ann Begeman, Republican Staff Director
Brian M. Hendricks, Republican General Counsel
Nick Rossi, Republican Chief Counsel
C O N T E N T S
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Page
Hearing held on April 22, 2010................................... 1
Statement of Senator Rockefeller................................. 1
Statement of Senator McCaskill................................... 78
Witnesses
Gregory D. Kutz, Managing Director, Forensic Audits and Special
Investigations, U.S. Government Accountability Office.......... 3
Prepared statement........................................... 6
Holly A. Haas, Consumer.......................................... 28
Prepared statement........................................... 30
Philip A. Lehman, Assistant Attorney General, North Carolina
Department of Justice.......................................... 51
Prepared statement........................................... 54
John Ansbach, Legislative Director, United States Organizations
of Bankruptcy Alternatives..................................... 62
Prepared statement........................................... 66
Hon. Julie Brill, Commissioner, Federal Trade Commission......... 68
Prepared statement........................................... 70
Appendix
Hon. Kay Bailey Hutchison, U.S. Senator from Texas, prepared
statement...................................................... 91
Hon. Mark Pryor, U.S. Senator from Arkansas, prepared statement.. 92
John Mark Spaulding, prepared statement.......................... 92
Letter, dated April 20, 2010, to Hon. John D. Rockefeller IV and
Hon. Kay Bailey Hutchison from Jean Noonan, Counsel, American
Coalition of Companies Organized to Reduce Debt (ACCORD)....... 93
Letter, dated October 9, 2009, to the Federal Trade Commission,
Office of the Secretary, from Gail Hillebrand, Financial
Services Campaign Manager, Consumers Union..................... 95
Response to written questions submitted by Hon. Mark Pryor to:
Gregory D. Kutz.............................................. 99
William and Holly Haas....................................... 100
Philip A. Lehman............................................. 101
John Ansbach................................................. 102
Response to written question submitted by Hon. Kay Bailey
Hutchison to John Ansbach...................................... 104
Response to written questions submitted by Hon. Mark Pryor to
Hon. Julie Brill............................................... 105
Letter, dated October 16, 2009, to Donald S. Clark, Secretary,
Federal Trade Commission from Susan Grant, Director of Consumer
Protection, Consumer Federation of America on Behalf of
Consumer Federation of America, Consumers Union, Consumer
Action, the National Consumer Law Center on behalf of its low-
income clients, the Center for Responsible Lending, the
National Association of Consumer Advocates, the National
Consumers League, U.S. PIRG, the Privacy Rights Clearinghouse,
the Arizona Consumers Council, the Chicago Consumer Coalition,
the Consumer Assistance Council, the Community Reinvestment
Association of North Carolina, the Consumer Federation of the
Southeast, Grass Roots Organizing, Jacksonville Area Legal Aid,
Inc., the Maryland Consumer Rights Coalition, Mid-Minnesota
Legal Assistance, and the Virginia Citizens Consumer Council... 108
Article, dated August 6, 2009 entitled ``Economic Factors and the
Debt Management Industry'' submitted by Richard A. Briesch,
Ph.D., Associate Professor, Cox School of Business, Southern
Methodist University........................................... 121
THE DEBT SETTLEMENT INDUSTRY:
THE CONSUMER'S EXPERIENCE
----------
THURSDAY, APRIL 22, 2010
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 2:37 p.m. in room
SR-253, Russell Senate Office Building, Hon. John D.
Rockefeller IV, Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. JOHN D. ROCKEFELLER IV,
U.S. SENATOR FROM WEST VIRGINIA
The Chairman. We will begin this hearing.
And others are coming. I've been there, you know. I was
late a lot.
All right. This is important. This is very important.
Millions of American families have suffered serious financial
setbacks during the economic turndown, which promises to go on
for a while. Sometimes it's because somebody in the family has
lost a job. Sometimes it's because a family member has gotten
sick and medical bills are piling up. As we all know, even
people who think they have good health insurance end up owing
thousands of dollars out of their own pockets, and that's
another hearing and another subject.
For thousands of Americans and West Virginia families, our
economic downturn has meant falling farther and farther behind.
It also means struggling every month to pay bills. And it means
thinking seriously about what happens if they can't make even
their minimum monthly payments to their creditors.
One person who found himself in this situation was Mark
Spaulding, who lives in South Charleston, West Virginia. And
between the credit card bills and the hospital bills, he and
his wife owed more than $23,000. That is not unique. He wasn't
behind on these bills, yet he was worried. He had a job, and he
believed in paying what he owed. But, he wasn't sure how he was
going to pay it all off. So, he looked for help. And he found a
California company called U.S. Debt Settlement that looked
reputable. That's--it's hard to see from South Charleston to
California, so he was doing this off the Internet, and had to
make that judgment.
He called a toll-free number. He talked to a sales
representative named Holly Slater. She told him that U.S. Debt
Settlement could act as his financial representative and could
negotiate with his creditors to cut his debt by as much as 50
percent.
William and Holly Haas, of Concord, New Hampshire, had a
similar experience with a debt settlement company called
Consumer Credit Counseling of America. Notice the--sort of the
integrity of these names. And I'm very pleased that they're
here with us. And they're going to have something to say.
What Mr. Spaulding and the Haas family has--and thousands
of other Americans have learned the hard way, is that these
debt settlement companies are not what they claim to be. And
that is what we are talking about today. They promise to reduce
debts by 40, 50, or even 60 percent, and then collect thousands
of dollars in fees up front. They promise to settle the debts,
but collect up front. When you go into a candy store, you buy a
Baby Ruth candy bar, you get the candy bar, and then you pay
the fee. But, it's sort of reversed here.
Today, we will learn that these companies keep the fees,
but don't keep their promises. In reality, signing up to work
with these families and these companies usually makes
struggling consumers financially worse. And that's where that
is. They fall farther behind on their debts, they see their
credit scores plunge. And they get sued by their creditors.
In written testimony, Mr. Spaulding says he followed U.S.
Debt Settlement's advice for 14 months and paid them more than
$2,400 in fees--up front. Today he owes, in fact, 40 percent
more than he did when he began on his debts, and his credit
score is ruined. He has two court judgments against him, and he
has been advised he should think about declaring bankruptcy.
This is outrageous. It is appalling beyond words.
So, these debt settlement companies are kicking people when
they are down. That's the way I look at it. I come from West
Virginia. We see that a lot. And even though they take
patriotic names, like U.S. Debt Settlement or Consumer Credit
Counseling of America, and have all kinds of emblems, which I
will show you in a bit, their actions are, in fact, profoundly
un-American. This is serious, and it is a growing problem, and
I'm pleased to report that our States' attorneys general and
the Federal Trade Commission are fighting these fraudulent
companies.
We're going to hear testimony about these companies from
newly sworn-in FTC Commissioner Julie Brill and from Phil
Lehman--Have I got that right?--who is Assistant Attorney
General from North Carolina. And we thank you for coming.
Much of this committee's work, and my attention as chairman
over this last year, has focused on consumer protection. It's
what everybody else gets angry about, but doesn't do anything
about. So, I've decided that we're going to do something about
it in this committee, and we are. And the terrible part is that
it's not really very hard to ferret out and that it's so
rampant. And that's so wrong.
We have the authority to conduct independent investigations
in this committee. And last October, I used this authority to
ask the GAO Special Investigations Office to conduct, in fact,
a covert investigation on this problem and the matter of debt
settlement as an industry. I told them I wanted to know what
really happens to a consumer who calls one of these 800-
numbers. We will hear the results of that investigation right
here, today. And I think members of the Committee, should they
show up, and the American public will find them pretty
disturbing, alarming, and depressing.
So, I want to thank today's witnesses. I look forward to
your testimony as much as I look forward to some of our members
showing up.
And we will start with you, sir.
STATEMENT OF GREGORY D. KUTZ, MANAGING DIRECTOR,
FORENSIC AUDITS AND SPECIAL INVESTIGATIONS,
U.S. GOVERNMENT ACCOUNTABILITY OFFICE
Mr. Kutz. Mr. Chairman, thank you for the opportunity to
discuss the debt settlement industry.
Today's testimony highlights the results of our
investigation into fraudulent and deceptive marketing and
business practices.
My testimony has two parts. First, I will discuss the
results of our investigation, and then I will discuss the
results of other investigations.
First, as you mentioned, posing as fictitious consumers
with significant credit card debt, we contacted 20 debt
settlement companies. We attempted to pick companies that, on
the surface, ranged from credible to egregious in their
marketing. We did not enter into any agreements with these
companies. The vast majority of companies that we've contacted
provided fraudulent, deceptive, and otherwise questionable
information to our fictitious consumers.
The monitor shows key themes that we found, including
advance fees, exaggerated claims of success, telling consumers
to stop paying their bills, and linking debt settlement to
Federal programs.
The basic program setup was for consumers to make a monthly
payment into a bank account. Once that account had accumulated
enough funds, the companies promised to settle debt with
creditors for pennies on the dollar. For 17 companies, advance
fees were collected from consumers before any debt was actually
settled. Companies told us that their service fees ranged from
10 to 18 percent of the outstanding debt. These fees were
usually taken directly from the bank account during the first
12 months of what were typically multiyear programs. In the
most egregious cases, 100 percent of the consumer's first 3 or
4 monthly payments were used for fees.
Other fees charged by these companies included monthly
maintenance, trust, and bank fees. Exaggerated claims----
The Chairman. If I could interrupt, for a moment.
Mr. Kutz. Yes, sir.
The Chairman. I failed to identify you.
Mr. Kutz. That's fine.
The Chairman. No, it isn't.
[Laughter.]
Mr. Kutz. I'm undercover at this hearing, so--just kidding.
[Laughter.]
The Chairman. I know. I know. But, the folks listening in,
et cetera, or the folks behind you, don't know. And that's my
fault, and I apologize.
You are, in fact, the Managing Director, Forensic Audits
and Special Investigations, U.S. Government Accountability
Office, GAO.
Please proceed.
Mr. Kutz. Thank you. Now everyone knows who I am.
The Chairman. I've blown your cover, yes.
[Laughter.]
Mr. Kutz. You've blown my cover. All right, I can't use
that one again.
Exaggerated claims of success provided our fictitious
consumers with false hope of program completion. Examples
included claims that 85 percent, 93 percent, and even 100
percent of clients successfully completed these programs. The
reality, according to Federal and State investigations is a
success rate of less than 10 percent.
One industry association represented that their members
have a 34 percent success rate. Whether single digits or 34
percent, this low success rate shows the negative impact of
advance fees on financially distressed consumers.
We also found that 17 of these 20 companies advised our
fictitious consumers to stop paying their creditors. Although
industry associations say their members don't do this, 9 of the
17 were, in fact, their members. I have no doubt that for these
programs to work, consumers must stop paying their bills.
However, our fictitious consumers were told to stop paying
their bills even when they were current, which would have a
significant negative impact on their credit scores.
Several companies advertised that their debt settlement
programs were part of a Federal Government program. My favorite
is the company that advertised that its program was, and I
quote, ``a national debt-relief stimulus plan,'' end of quote.
These companies made it appear as if government agencies and
stimulus dollars were linked to their programs. Although I find
this to be ridiculous, and I'm sure you do, too, many consumers
likely fall prey to these fraudulent marketing tactics. At the
end of my presentation, I will play excerpts from several of
these undercover calls.
Although the vast majority of companies provided fraudulent
and deceptive information, several did provide sound advice.
For example, one company told us to take care of our late
mortgage payments before worrying about our delinquent credit
cards. In another case, our fictitious consumer was told that
if we could make our monthly payments, then perhaps debt
settlement was not a good solution.
Moving on to my second point, the experience of our fake
consumers is similar to many real consumers, like the ones
sitting to my left. Cases from 12 Federal and State agencies
reveal allegations of fraudulent and deceptive practices
involving over 200,000 consumers across the country. This
information is taken from Federal and State, open and closed,
civil and criminal cases.
In addition--and you'll hear from FTC--they are taking
actions to enhance consumer protection, including a proposed
ban on the type of advanced fees that I just described.
The Better Business Bureau recently designated debt
settlement as an inherently problematic type of business. Other
businesses with this designation include payday loan centers
and wealth-building seminars. I'm sure you understand, that's
not good company.
In conclusion, I can't tell you that all companies in this
industry are bad actors. However, it wasn't very hard for us to
find the rotten apples of this basket. My advice to consumers,
Senator, is, buyer beware.
As I mentioned, I'm now going to play for you some of the
undercover calls we made to debt settlement companies. You will
see the transcription of the conversations on the monitors as
you listen.
[Video presentation.]
Transcript of Undercover GAO Calls to Debt Settlement Companies
Telling consumers to stop paving their creditors. (Industry trade
groups say their members do not do this.):
Clip 1: Call from GAO to A New Beginning Financial (TASC Member)
Debt Settlement Company: You don't actually have to be delinquent
to be in our, into our program, but once you do enter the program you
don't make credit, you don't make your payments to the creditors.
Clip 2: Call from GAO to Freedomdebt.com (USOBA)
Debt Settlement Company: Once you enroll in the program, you will
no longer make any of your credit card payments.
Fictitious Consumer: OK, so . . .
Debt Settlement Company: That's correct.
Fictitious Consumer: So then, what's, what's gonna happen with my,
uh, creditors? I mean . . .
Debt Settlement Company: They're, they, they're, uh, they're . . .
you're not gonna pay `em!
Fictitious Consumer: I shouldn't, I shouldn't pay a few of these
cards at all?
Debt Settlement Company: You're not. . .when you are in our program
you will not pay any of your creditors anymore . . .
Fictitious Consumer: [cross-chatter]
Debt Settlement Company: . . . throughout the whole program.
Clip 3: Call from GAO to Credit Solutions of America
Debt Settlement Company: I'm, I'm saying I don't, don't tell
anybody not to pay their bills. I say 100 percent of the clients who
have been successful have stopped paying their bills.
Fictitious Consumer: OK. Alright . . . right . . . so now, so . . .
so now I'm caught between a rock and a hard place. Do I put money away
in my savings account or do I use that money to pay my bills, if I'm in
your program?
Debt Settlement Company: If you're in our program, umm, put that
money into your savings account.
Fictitious Consumer: OK.
Claims of high success rates: (Federal and state investigators have
generally found single-digit success rates.)
Clip 4: Call from GAO to Web Credit Advisors via Free Debt
Settlement Now (USOBA Member)
Debt Settlement Company: OK, great. So, it's important for you to
know we have thousands of clients. We're also an accredited business
with the Better Business Bureau with an A rating. Umm, and, uh, we have
zero unresolved customer complaints. And that's because we do exactly
what we say. And we help 100 percent of the people who enter this
program eliminate their debt, uh, in less than 3 years.
Clip 5: Call from GAO to ProCorp Debt Solutions (TASC Member) via
Free Debt Settlement Now
Debt Settlement Company: Now, our fallout ratio in the program is
probably the lowest in the country. Fallout ratio meaning people that
sign up and then don't complete the program.
(cross-chatter)
Fictitious Consumer: Do you know what it is, roughly? Debt
Settlement Company: Yes, it's less than 7 percent. Fictitious Consumer:
Wow, that's tremendous.
Debt Settlement Company: It's my job to know those numbers. It's my
job to know those numbers.
Fraudulent claims of links to government programs:
Clip 6: Call from GAO to Freedom Fidelity Management (CA) via The
Bailout Group
Fictitious Consumer: With the government the way it is, does this
government approved thing, does that have anything to do with the
stimulus package?
Debt Settlement Company: No, no. It's just, it's just government
approved. They allow for us to do this.
Fictitious Consumer: OK.
Debt Settlement Company: Um, you know the banks received, you know,
bailout money last year--I'm sure you saw it on the news. There has to
be some type of assistance for people on a consumer level also.
Other Fraudulent, Deceptive or Questionable Representations:
Clip 7: Call from GAO to ProCorp Debt Solutions (TASC Member) via
Free Debt Settlement Now
Debt Settlement Company: And there are actually 12,000 companies in
the U.S. that do what we do. Only 200 of them are licensed and
regulated. Uh, they're regulated by TASC, which is The Association of
Settlement Companies. . . . They are the regulating body for this
industry.
Fictitious Consumer: So TASC . . .
Debt Settlement Company: They're like the SEC for stock traders. T-
A-S-C.
Fictitious Consumer: So, for you all, that would be kind of like,
in your industry, the Good Housekeeping Seal of Approval?
Debt Settlement Company: Correct. That's exactly what the story is.
Clip 8: Call from GAO to ProCorp Debt Solutions (TASC Member) via
Free Debt Settlement Now
Debt Settlement Company: The companies that operate like ours are
the ones that are safe, stay around forever. We've never been inquired
on by the Attorney General, ever. You find me a debt settlement company
that can say that, and I'll move over there and work for them. Every
debt settlement company that I've ever come across has had
investigations or inquiries by an attorney, the Attorney General for
their state. The Attorney General doesn't even, doesn't even look our
way.
Mr. Kutz. Mr. Chairman, I applaud your efforts today to
protect consumers from the kinds of fraud and abuse we're
talking about here.
That ends my statement, and I look forward to your
questions.
[The prepared statement of Mr. Kutz follows:]
Prepared Statement of Gregory D. Kutz, Managing Director, Forensic
Audits and Special Investigations, U.S. Government Accountability
Office
Mr. Chairman and members of the Committee:
Thank you for the opportunity to discuss our investigation into
fraudulent, abusive, and deceptive practices in the debt settlement
industry. As historic levels of consumer debt have dramatically
increased the demand for debt relief services, a growing number of for-
profit companies have appeared, offering to settle consumers' credit
card and other unsecured debt for a fee as an alternative to
bankruptcy.\1\ The companies say they will negotiate with creditors to
accept a lump sum settlement less than the amount owed--purported to be
as low as pennies on the dollar in many cases. In addition, these
companies often say their programs can result in lower monthly payments
for consumers than what they had been paying their creditors, and that
their programs will help consumers get out of debt sooner than going
through bankruptcy or making only minimum payments on their credit
cards. They commonly use radio, television, and Internet advertising to
solicit consumers. The marketing claims appeal to consumers who may be
vulnerable, given the stress of their financial situations.
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\1\ Unsecured debts are those debts for which there is no
collateral, such as most consumer credit card debt.
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Some consumers who have hired these companies have complained that
they did not obtain relief from their debts and ended up in worse
financial circumstances. For example, according to a sworn statement
given to state attorneys, a 75-year-old New York woman ended up paying
more than $5,100 to a company to settle only $3,900 of debt on one
account. The company failed to settle a second one, which she
ultimately paid off for about $1,000 more than what she originally
owed. At the time she signed up for the debt settlement program, she
had been a widow for several years and was working as a pharmacy clerk
to help pay her bills and mortgage. She stated that she often neglected
her own needs and accrued more debt trying to help her adult daughter
care for two children and a sick spouse. She also stated that she was
desperate for help and was easily sold on entering a debt settlement
program through an unsolicited telephone call and an offer to reduce
her debts by 24 to 40 percent. Even though the debt settlement company
cost her more than she originally owed, it still counted her as a
success story.
Federal and state agencies have made allegations that some debt
settlement companies engage in fraudulent, abusive, and deceptive
practices. You asked us to conduct an investigation of these issues. As
a result, we attempted to: (1) determine through covert testing whether
these allegations are accurate; and, if so, (2) determine whether these
allegations are widespread, citing specific closed cases. To achieve
these objectives, we conducted covert testing by calling 20 companies
while posing as fictitious consumers with large amounts of debt; made
overt, unannounced site visits to several companies called; conducted
interviews with industry stakeholders, such as industry trade
associations and the Better Business Bureau (BBB); and reviewed
information on Federal and state legal actions against debt settlement
companies and consumer complaints. We did not actually use the services
of any of the companies we called.
For our first objective, we identified debt settlement companies by
searching online using search terms likely to be used by actual
consumers, and by observing television, radio, and newspaper
advertisements. We selected companies from across the Nation to call as
part of our covert testing by using several criteria, such as: (1)
types of marketing claims or pitches, such as refund offers, service
guarantees, or targeting of specific groups of consumers; (2) presence,
if any, of consumer complaints through BBB and other resources; (3)
represented size of businesses, to include both small and large
companies; (4) availability of consumer-friendly information on
companies' websites, such as financial education resources, comparisons
to other types of debt relief, or advice on handling credit card debt;
(5) membership in various industry trade organizations, which requires
adherence to specified standards of conduct; and (6) claims of
advertising presence on television or radio. In one case, we identified
a company through a spam e-mail message received by one of our staff
members, which provided a link to the company's website.\2\ The 20
cases that we selected incorporated a range of debt settlement
companies, including some that appeared to make egregious claims and
others that appeared more reputable. We found that some of the 20
companies we called are marketing companies that refer potential
clients to other--sometimes multiple--affiliated companies. In most
cases, we were unable to determine the exact business relationship
between these entities. For the purposes of this testimony, our 20
cases represent the original company we called, plus any related
marketers and any other affiliated companies with which we spoke. In
addition, we called some companies more than once, depending on the
circumstances. The findings for these 20 cases cannot be projected to
all debt settlement companies. For our second objective, we identified
allegations against debt settlement companies from review of closed and
open civil and criminal investigations pursued by Federal and state
enforcement agencies over the last decade. We did not attempt to verify
the facts regarding all of the allegations and complaints we reviewed.
We also identified five closed civil and criminal cases where courts
found the debt settlement companies liable for their actions and
interviewed affected consumers.
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\2\ Spam is unsolicited ``junk'' e-mail that usually includes
advertising for some product.
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We briefed Federal Trade Commission (FTC) officials on the results
of our investigation. In addition, we referred cases of fraudulent,
deceptive, abusive or questionable information provided by the 20 debt
settlement companies we called to FTC as appropriate. We conducted our
investigation from November 2009 through April 2010 in accordance with
standards prescribed by the Council of the Inspectors General on
Integrity and Efficiency.
Background
For-profit debt settlement emerged as a business model as other,
decades-old forms of consumer debt relief came under increased
regulation. Traditionally, consumers with large amounts of debt turned
to nonprofit credit counseling agencies (CCA) for debt relief. CCAs
work with consumers and creditors to negotiate debt management plans
(DMP), which enable consumers to pay back unsecured debts to their
creditors in full, but under terms that make it easier for them to pay
off the debts--such as reduced interest rates or elimination of late
payment fees. In addition, CCAs often provide consumers with financial
education and assist them in developing budgets. In order to qualify
for a DMP, consumers must prove they have sufficient income to pay back
the full balances owed to creditors under the terms of the potential
DMP. As part of a DMP, CCAs contact each of a consumer's creditors to
obtain information about what repayment options the creditors may be
willing to offer to the consumer. The CCA then creates the final DMP
and a repayment schedule, with payments typically spread over 3 to 5
years. Throughout the length of the DMP, the CCA distributes funds to
each of a consumer's creditors after the consumer makes each monthly
payment to the CCA. Nonprofit CCAs typically receive funding from
consumers and from creditors.
Many for-profit CCAs emerged as the level of consumer debt rose
over the last decade, leading to new consumer protection concerns. FTC
and state attorneys general took legal action against unscrupulous CCAs
that engaged in deceptive, abusive, and unfair practices. For example,
some CCAs charged excessive fees, abused their nonprofit status,
misrepresented the benefits and likelihood of success of their
programs, and committed other deceptive and unfair acts. The Internal
Revenue Service (IRS) also undertook a broad examination effort of CCAs
for compliance with the Internal Revenue Code and revoked or terminated
the Federal tax-exempt status of some agencies. As Federal and state
actions cracked down on these consumer protection abuses, a growing
number of consumers became unable to afford traditional DMPs. As a
result, many companies began offering for-profit debt settlement
services for consumers.
Debt settlement companies offer to negotiate with consumers'
creditors to accept lump sum settlements for less than the full balance
on the consumers' accounts. The process typically requires consumers to
make monthly payments to a bank account from which a debt settlement
company will withdraw funds to cover its fees. Some companies require
consumers to set up accounts at specific banks, while others allow
consumers to use their existing bank accounts. These monthly payments
must accumulate until the consumer has saved enough money for the debt
settlement company to attempt to negotiate with the consumer's
creditors for a reduced balance settlement.\3\
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\3\ Some creditors may sell a consumer's debt to a collection
agency after the consumer misses payments for a given period of time--
typically 6 to 12 months. The collection agency will then attempt to
collect payments from the consumer. In such cases, debt settlement
companies will generally negotiate with the collection agency seeking
the consumer's money.
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Debt settlement companies typically charge a fee for their services
and require payments either at the beginning of the program as an
advance fee or after settlement as a contingent fee. Some companies
structure the payment of advance fees so that they collect a large
portion of them--as high as 40 percent--within the first few months
regardless of whether any settlements have been obtained or any contact
has been made with the consumer's creditors. Others collect fees
throughout the first half of the enrollment period in advance of a
settlement. Companies that charge a contingent, or ``back-end,'' fee
generally base it on a certain percentage of any settlement they obtain
for consumers. They sometimes charge a small, additional fee every
month while consumers are attempting to save funds for settlements. In
addition, some debt settlement companies handle only one part of the
overall settlement process, such as the front-end marketing or the
negotiation with creditors, while other debt settlement companies
conduct every part of the process themselves.
Currently, there has been only limited Federal action taken against
debt settlement companies. Since 2001, FTC has brought at least seven
lawsuits against debt settlement companies for engaging in unfair or
deceptive marketing.\4\ In August 2009, FTC issued a Notice of Proposed
Rulemaking to amend the Telemarketing Sales Rule (TSR) to enhance
consumer protections related to the sale of debt relief services,\5\
including debt settlement services.\6\ In its notice, FTC offers
multiple criticisms of the debt settlement industry and states that its
``concerns begin with the marketing and advertising of the services,
but also extend to whether such plans are fundamentally sound for
consumers.'' The proposed rule would amend the TSR to do the following,
among other things:
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\4\ FTC's regulatory authority related to false advertising is
contained in section 5(a) of the Federal Trade Commission Act (15
U.S.C. 45(a)), which makes unlawful both ``unfair'' and ``deceptive''
acts or practices that affect interstate commerce.
\5\ The notice primarily discusses three categories of debt relief
services--credit counseling, debt settlement, and debt negotiation.
While some consider debt negotiation to be another term for debt
settlement, FTC refers to debt negotiation as a separate type of debt
relief service. In this context, debt negotiation companies are those
that offer to obtain interest rate reductions and other concessions
from creditors on behalf of consumers, but do not claim to obtain full
balance payment plans or lump sum settlements for less than the full
balance. See 74 Fed. Reg. 41988, 41997 (Aug. 19, 2009).
\6\ 74 Fed. Reg. 41988 (Aug. 19, 2009).
prohibit companies from charging fees until they have
provided debt relief services to consumers;\7\
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\7\ Under the TSR, advance fees are currently banned for several
other industries, including credit repair services and advance fee
loans.
require companies to disclose certain information about the
debt relief services they offer, including how long it will
take for consumers to obtain debt relief and how much the
---------------------------------------------------------------------------
services will cost; and,
prohibit specific misrepresentations about material aspects
of debt relief services, including success rates and whether a
debt relief company is a nonprofit.
In its notice, FTC demonstrates that the requesting or receiving
payment of advance fees before debts are settled meets its criteria for
unfairness, and therefore designates advance fees for debt settlement
services as an abusive practice. FTC considers advance fees an abusive
practice due to the following:
the substantial injury to consumers caused by advance fees,
based on the low likelihood of success for debt settlement
programs and the significant burden on consumers paying advance
fees--especially fees charged at the front end of a debt
settlement program, which FTC states ultimately impede the goal
of relieving consumers' debts;
the injury to consumers caused by advance fees outweighing
any countervailing benefits; and,
the business practices prevalent among debt settlement
companies making the injury to consumers reasonably
unavoidable, such as representations in advertisements
obscuring the generally low success rates of debt settlement.
FTC also states in its notice that many consumers entering debt
settlement programs are counseled to stop making payments to
their creditors in order to facilitate settlements, which has a
harmful effect on these consumers' credit scores.
Given the absence of specific Federal law, some states have taken
the initiative and enacted their own legislation regulating the debt
settlement industry. The regulations vary widely from state to state,
however. For example, Virginia's detailed legal framework requires debt
settlement companies to apply and pay for an operating license, to
enter into written agreements with potential customers that describe
all services to be performed and provide the customer a right to cancel
at any time, and to charge only a maximum $75 set-up fee and $60
monthly fee, among other restrictions.\8\ Other states, such as
Arkansas \9\ and Wyoming,\10\ have chosen to simply ban most types of
for-profit debt settlement companies from operating in their states at
all. Individuals who violate those states' bans are guilty of a
misdemeanor and could face up to 1 year imprisonment in Arkansas and up
to 6 months imprisonment in Wyoming. On the other hand, New York and
Oklahoma, among others, have not yet enacted any laws specifically
targeting this industry, thus leaving the public to rely on generally
applicable consumer protection laws.
---------------------------------------------------------------------------
\8\ Va. Code Ann. 6.1-363.2-.26.
\9\ Ark. Code Ann. 5-63-301 to -305.
\10\ Wyo. Stat. Ann. 33-14-101 to -103.
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Covert Testing Shows That Some Debt Settlement Companies Engage in
Fraudulent, Abusive, and Deceptive Practices
Our investigation found that some debt settlement companies engage
in fraudulent, deceptive, and abusive practices that pose a risk to
consumers already in difficult financial situations. The debt
settlement companies and affiliates we called while posing as
fictitious consumers with large amounts of debt generally follow a
business model that calls for advance fees and stopping payments to
creditors--practices that have been identified as abusive and harmful.
While we determined that some companies gave consumers sound advice,
most of those we contacted provided information that was deceptive,
abusive, or, in some cases, fraudulent. Representatives of several
companies claimed that their programs had unusually high success rates,
made guarantees about the extent to which they could reduce our debts,
or offered other information that we found to be fraudulent, deceptive,
or otherwise questionable. We did not actually use the services of any
of the companies we called. A link to selected audio clips from these
calls is available at: http://www.gao.gov/products/GAO-10-593T.
Advance Fees
The debt settlement companies we called generally represented that
they would collect fees before settling our debts--a practice FTC has
proposed banning due to the harm caused to consumers. We were able to
obtain information about fee structures from 18 of the 20 companies we
called while posing as fictitious consumers with large amounts of
debt,\11\ and found that their fee structures generally recall the
concerns expressed by FTC. Specifically, we found that 17 of the 20
companies represented that they collected advance fees before debts
were settled. Company representatives told us that the advance fees are
calculated based on a percentage of the consumer's debts to be settled,
citing figures that ranged from 10 to 18 percent. Moreover,
representatives from several companies told us that our monthly
payments would go entirely to fees for up to 4 months before any money
would be reserved for settlements with our creditors. Only 1 of the 20
companies we called represented that it followed a contingent fee model
based on a percentage of the reduction of debt it says it obtains for
consumers. Representatives from this company said a fee equal to 35
percent of each client's reduced debt was charged. Some companies also
represented that they assessed monthly maintenance and other additional
fees. One of the 17 advance-fee companies also revealed that it charged
a contingent fee after each debt is settled based on a percentage of
the debt reduction.
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\11\ Of the two companies for which we were unable to obtain fee
information, one company presented an audio recording of general
information about its program, and one company's representative told us
we did not have enough debt to qualify for its program.
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FTC has banned advance fees in several industries, such as credit
repair, based on analyses that determined these practices to be unfair
because sellers often do not provide the services for which they
charge. The agency has proposed a similar ban for debt settlement,
stating that the advance fees cause substantial injury to consumers.
FTC justified this stance toward debt settlement, in part, based on the
following findings: advance fees induce financially strapped consumers
to stop making payments to their creditors; and consumers are unlikely
to succeed in debt settlement programs, given evidence from Federal and
state agencies that generally shows single-digit success rates.\12\
Moreover, FTC stated concerns in its notice that advance fees for debt
settlement may actually impede the process of saving money to settle
debts, especially substantial fees collected at the beginning of a
program. This business model may be especially risky for consumers who
are already in financially stressed conditions, given that interest,
late fees, and penalties often continue to accrue on the consumers'
accounts as they work to save money toward settlements. In addition,
consumers with already limited financial resources may be unable to
direct adequate funds toward saving for settlements if their resources
are being devoted to paying fees.
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\12\ Federal and state agencies have defined success as consumers
being able to obtain the results that the debt settlement companies
promised them.
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We asked representatives of some companies what services we would
receive as we paid advance fees while saving money for settlements.
These representatives generally stated that our advance fees would pay
for financial education, updates from attorneys, and communications
with our creditors--such as cease and desist letters, to attempt to
prevent harassing telephone calls. One representative, however, was
unable to provide an explanation of what services we would receive for
our advance fees beyond the fact that her company's attorneys would
``look at'' our accounts every month. Several companies we called had
basic financial education resources on their websites or provided links
to such resources by e-mail. Industry representatives have stated that
advance fees are needed to cover essential operating costs, such as
overhead and providing the types of services mentioned above for their
existing clients. However, FTC found that marketing and acquiring new
customers make up a large portion of the operating costs for debt
settlement companies. We were unable to verify whether any companies we
called provide ongoing services for clients they enroll in their
programs, given that we did not enter into business relationships with
them.
Directing Consumers to Stop Paying Creditors
We also found that the companies we called generally follow a
business model that poses a risk to consumers by encouraging them to
stop making payments to their creditors, a practice that harms
consumers because of the damage it typically causes to their credit
scores. Representatives of nearly all the companies we called--17 out
of 20--advised us to stop paying our creditors, by either telling us
that we would have to stop making payments upon entering their programs
or by informing us that stopping payments was necessary for their
programs to work, even for accounts on which we said we were still
current. The following quotes demonstrate some of the statements made
by representatives of the companies we called regarding our payments to
creditors:
``You stop paying, uh, those payments out to those
creditors. The only thing you're going to have to worry about
is this payment here [to company].''
``One-hundred percent of our clients stop making their
monthly payments as soon as they enroll into the program.''
``I won't tell anybody not to pay their bills; I said one-
hundred percent of the clients who have been successful have
stopped paying their bills.''
``Say you enrolled in the program. At that point you would
no longer make any of your credit card payments. All of them
would go late.''
Among the 17 companies encouraging us to stop paying our creditors
or representing that stopping payments is a condition of their
program,\13\ 5 were members of an industry trade group called The
Association of Settlement Companies (TASC) at the time we made our
calls. TASC's written standards, adherence to which is required of all
member companies, explicitly state ``No Member shall direct a potential
or current client to stop making monthly payments to their creditors.''
A representative of 1 of these 5 TASC member companies told us that she
could not direct us to stop paying our creditors, but later stated that
if we could afford to make our payments then her program was not ``the
best solution'' for us. In addition, a representative of 1 of these 5
TASC member companies appropriately screened us out by telling us that
we had too low of income to afford that company's program under the
scenario we presented; he later described his company's program as
requiring clients to stop making their payments. In addition to these 5
TASC member companies, we spoke to a representative from another TASC
member company who told us that we did not have enough debt to qualify
for that company's program. In addition, 4 of the companies that told
us to stop paying our creditors or represented that stopping payments
was a condition of their program were members of a different industry
trade group called the United States Organizations for Bankruptcy
Alternatives (USOBA) at the time of our calls. According to USOBA
representatives whom we interviewed, its member companies do not tell
potential clients to stop paying their creditors. We received
particularly good advice from a representative of 1 additional USOBA
member company--not among the 4 listed above--whose representative told
us that we should worry about taking care of our late mortgage payments
before we worried about settling our credit card debts.
---------------------------------------------------------------------------
\13\ As stated above, some companies we called referred us to one
or more affiliates. We were unable to determine the relationship
between these companies and their affiliates.
---------------------------------------------------------------------------
Stopping payments to creditors results in damage to consumers'
credit scores. According to FICO (formerly the Fair Isaac Corporation),
the developer of the statistically based scoring system used to
generate most consumer credit scores, payment history makes up about 35
percent of a consumer's credit score. Moreover, the damage to credit
scores resulting from stopping payments is generally worse for
consumers who have better credit histories--such as consumers who
maintained good payment histories prior to entering a debt settlement
program that required them to stop making payments. In its notice, FTC
also discussed the harmful effect that stopping payments has on
consumers' credit scores.
Success Rates
In several cases, representatives of companies we called claimed
success rates for their programs that we found to be suspiciously
high--85 percent, 93 percent, even 100 percent. In its notice, FTC
cites claims of high likelihood of success as a frequent representation
in the debt settlement industry. The success rates we heard are
significantly higher than is suggested by evidence obtained by Federal
and state agencies. When these agencies have obtained documentation on
debt settlement success rates, the figures have often been in the
single digits. For example, as part of an annual registration process
in Colorado, the state's Attorney General compiled data on success
rates for all debt settlement companies statewide. The data show that,
from 2006 to 2008, less than 10 percent of Colorado consumers
successfully completed their debt settlement programs. Our case studies
discussed below provide additional evidence of similarly low success
rates.
Industry-reported data have claimed a higher success rate for debt
settlement programs. According to TASC, data gathered from a survey of
some of its largest member companies in 2009 shows that 34.4 percent of
consumers participating in a debt settlement program offered by a TASC
member company completed their debt settlement programs by settling at
least 75 percent of their enrolled debts.\14\ A previous study released
by TASC in 2008 claimed overall completion rates between 35 and 60
percent. However, Federal and state agencies have raised concerns with
the methodology behind TASC's data. For example, these agencies have
argued that: (1) TASC's data were self-reported by its member
companies, and may not reflect all member companies; (2) not every TASC
member company that submitted data defined completion in the same way;
and (3) the fact that consumers complete a debt settlement program does
not necessarily imply that these consumers successfully obtained the
debt relief services for which they paid. We did not attempt to
validate success or completion data from TASC or Federal or state
agencies.
---------------------------------------------------------------------------
\14\ While TASC requires its member companies to make a series of
disclosures in its discussions with potential clients, the individual
completion rate for each company's program or the 34.4 percent overall
completion rate mentioned in TASC's study are not among the required
disclosures.
---------------------------------------------------------------------------
TASC and USOBA have cited several factors that might contribute to
consumers' success rates in debt settlement programs, such as that most
consumers entering debt settlement programs are in extreme financial
hardship and may choose to quit their program after settling some debts
and improving their financial situations. However, FTC stated in its
notice that the prevalent fee structure in the debt settlement
industry--substantial up-front fees--may be a major factor in the
generally low consumer success rates as well. TASC and USOBA have both
offered suggestions for ways to boost consumer success rates, such as
improved processes for determining consumers' suitability for debt
settlement programs.
Debt settlement success rates also play a key role in the BBB
rating system for companies in the industry. Due to the volume and
nature of consumer complaints,\15\ among other factors, BBB recently
designated debt settlement as an ``inherently problematic'' type of
business and, in September 2009, implemented new rating criteria for
debt settlement companies to reflect this designation. Under this
designation, no debt settlement company may earn a BBB rating higher
than a C-.\16\ While BBB has designated other types of businesses as
inherently problematic--such as pay-day loan centers, businesses that
charge fees for publicly available information on government jobs,
scientifically unproven medical devices and products, advance fee
modeling agencies, and wealth-building or real estate seminars--debt
settlement companies are the only type of business currently allowed by
BBB to escape the inherently problematic designation if they provide
evidence to BBB that they meet a series of criteria. These criteria
require a debt settlement company to prove, among other things, that:
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\15\ According to data it provided to us, BBB has received
thousands of complaints about debt settlement companies in recent
years, with the number of complaints rising from 8 in 2004 to nearly
1,800 in 2009. This figure may underestimate the total number of
complaints related to debt settlement, as not all companies providing
debt settlement services are classified as debt settlement companies by
BBB. According to BBB, these complaints are related primarily to debt
settlement companies: (1) charging advance fees without providing
services as promised to consumers and sometimes without providing any
services at all; (2) failing to disclose important information to
consumers, such as unannounced fees; and (3) failing or refusing to
provide refunds to consumers.
\16\ According to BBB, its rating system uses grades based on a
proprietary formula that incorporates information known to BBB and its
experience with the business under assessment. The ratings are intended
to represent BBB's degree of confidence the business is operating in a
trustworthy manner and will make a good faith effort to resolve any
customer concerns. The rating system uses grades from A to F, with
plusses and minuses, so that A+ is the highest grade and F is the
lowest. Some debt settlement companies may currently have a BBB rating
higher than a C- because they were misclassified (e.g., characterized
by BBB as something other than a debt settlement company) or because
debt settlement does not represent a substantial portion of its
services.
It has substantiated all advertising claims, including
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claims relating to the benefits or efficacy of debt settlement;
It makes certain disclosures to consumers, including clear
and conspicuous disclosure of program fees and the risks of
debt settlement;
It has adequate procedures for screening out consumers who
are not appropriate candidates for debt settlement; and
A majority (at least 50 percent) of its clients successfully
complete its program and obtain a reduction in debt that is
significant and exceeds the fees charged by the company.
According to a BBB official, he was unaware of any debt settlement
company that had yet successfully demonstrated that it met these
criteria, as of March 2010. Officials from TASC and USOBA told us they
strongly disagree with BBB's new rating system for debt settlement
companies. According to these officials, the new rating system
minimizes the importance of resolved consumer complaints, requires an
unrealistic measure of programs' success rate--50 percent--and inhibits
consumers' ability to differentiate between reputable and disreputable
debt settlement companies.
Guaranteed Reductions in Debt
Representatives from some companies also guaranteed or promised
that they could obtain minimum reductions in our debts if we signed up
for their services. For example, some representatives stated that they
would save us 40 to 50 cents on the dollar once they negotiated
settlements with our creditors. In its notice, FTC cites claims of
specific reductions in debt as an example of a consumer protection
abuse in the debt settlement industry.
Fraudulent or Other Deceptive Representations
We found examples of companies offering fraudulent or other
deceptive information, such as using names and imagery for their
services that indicates that their program is linked to the government.
Table 1 below shows examples of fraudulent or deceptive information
from companies we called.
------------------------------------------------------------------------
Table 1: Examples of Fraudulent or Deceptive Information Provided by
Debt Settlement Companies We Called
------------------------------------------------------------------------
No. Representation Comments
------------------------------------------------------------------------
1 Debt settlement companies TASC is a nonprofit trade
are ``licensed and association that lobbies
regulated'' by TASC, which lawmakers on behalf of the
is ``like the SEC [United debt settlement industry.
States Securities and It is not a licensing or
Exchange Commission] for regulatory authority.
stock traders.''
------------------------------------------------------------------------
2 Stopping payments will According to FICO, stopping
``knock [credit score] down payments to creditors as
a couple of points . . . part of a debt settlement
However, unlike bankruptcy can drop credit scores
or any other credit anywhere between 65 to 125
counseling program, this points. In addition, missed
only affects your credit payments leading up to a
while you're in the debt settlement can remain
program.'' on a consumer's credit
report for 7 years even
after a debt is settled.
------------------------------------------------------------------------
3 Debt settlements will be According to FICO,
noted on consumers' credit settlements are typically
reports as ``paid in full'' listed on consumers' credit
or ``paid as agreed.'' reports as ``settlement
accepted on the account''
or ``settled for less than
full balance.''
------------------------------------------------------------------------
4 Company advertises a The company's services are
``National Debt Relief not affiliated with a
Stimulus Plan.'' government program or part
of the American Recovery
and Reinvestment Act of
2009 (the ``stimulus'').
------------------------------------------------------------------------
5 Company promised that calls Debt settlement companies
from creditors seeking cannot prevent creditors
money will ``slow down and from contacting consumers.
eventually stop'' if we Companies often advise
just told our creditors we consumers to terminate all
had hired the company. communication with their
creditors, ask consumers to
assign power of attorney to
them, and send cease and
desist letters to creditors
in an attempt to cutoff
further communications.
------------------------------------------------------------------------
Source: GAO.
Five of our cases are highlighted below. The companies in these
cases made multiple fraudulent or deceptive representations either to
our fictitious consumers by telephone, on their websites and through
company documents or to our staff during unannounced, overt site
visits. Table 2 below shows basic information represented by these
companies, including the location, fees, and industry trade association
membership of each of these companies and their affiliates, if any.
(Table 4 in appendix I provides summary information on all 20 companies
we called.)
------------------------------------------------------------------------
Table 2: Representations Made by Select Debt Settlement Companies We
Called
------------------------------------------------------------------------
Location of
No. company and Fees a Association
affiliates membership b
------------------------------------------------------------------------
1 Florida; Advance fees TASC; c affiliates
affiliates in based on 15 percent in TASC and USOBA
Florida, of enrolled debt,
Massachusetts, with monthly
California, and payments required
New Jersey b throughout program.
------------------------------------------------------------------------
2 Unknown; Advance fees Affiliate in USOBA
affiliates in based on 12 percent
Arizona, Texas, of enrolled debt.
and First 3
California b monthly payments go
to fees.
$25 monthly
maintenance fee.
Additional
contingent fee based
on 4 percent of
reduction in debt
company obtains for
clients.
------------------------------------------------------------------------
3 California Advance fees TASC (at the time
based on 16 percent of our call)
of enrolled debt,
with monthly
payments required
throughout program.
First 3
monthly payments go
to fees.
$100 fee for
out-of-state
clients.
------------------------------------------------------------------------
4 California Advance fees TASC
based on 17 percent
of enrolled debt,
with monthly
payments required
throughout program.
First 3
monthly payments go
to fees.
$840
maintenance fee
(total throughout
program).
$623.50
trust account fee
(total throughout
program).
------------------------------------------------------------------------
5 California Advance fees TASC (at the time
based on 15 percent of our call)
of enrolled debt.
------------------------------------------------------------------------
Source: GAO analysis of information obtained from debt settlement
companies.
a Fee information reflects fees disclosed to us; some companies may
charge additional fees that were not disclosed. Debt settlement
companies typically charge fees requiring payments either at the
beginning of the program as an advance fee or after each settlement as
a contingent fee. Some companies structure the payment of advance fees
so that they collect a large portion of them--as high as 40 percent--
within the first few months regardless of whether any settlements have
been obtained or any contact has been made with the consumer's
creditors. Others collect fees throughout the first half of the
enrollment period in advance of a settlement. Companies that charge a
contingent fee generally base it on a certain percentage of any
settlement they actually obtain for consumers. They sometimes charge a
small, additional fee every month while consumers are attempting to
save funds for settlements.
b Some companies we called referred us to one or more affiliates. It was
not always clear to us exactly with which company or affiliate we were
speaking, where the companies or affiliates were located, or what the
relationships were between the companies and affiliates. In some
cases, separate affiliates of the same company claimed to be members
of different industry trade associations.
c While Company 1 claimed to be a member of TASC, it appears this was a
false representation.
Company 1
Company 1 made several fraudulent and deceptive representations. We
identified Company 1 when one of our investigators received an
unsolicited spam message through his private e-mail account advertising
debt settlement services, with a mailing address in the country of
Lebanon listed at the bottom. A link in the message brought us to a
website advertising ``New Government Programs! New free and easy
programs are available for those who are in debt right now! Take
advantage while they're still available
[sic].'' (See figure 1 below.) The website also featured logos for
TASC and BBB, along with other insignias declaring ``Satisfaction
Guaranteed'' and ``Privacy 100 percent Guaranteed.'' When we called the
number listed on the website, a representative answered using the name
of an affiliate different than the company name listed on the website.
He explained that the website was a ``generic advertisement'' to spread
information about his company. Throughout our conversation, he made
multiple statements that we found to be deceptive or questionable.
According to the representative, the ``worst case scenario'' for
settlement of our debts would be ``40 cents on the dollar.'' He stated
that his company has helped 100 percent of its clients get out of debt
in 3 years or less, and that ``every single creditor settles. There's
not one creditor we haven't been able to reach a settlement with.''
When asked about the government programs advertised on the website, he
replied ``What we're offering is not part of any government program
whatsoever. . . . It's just that the government is allowing this to
take place at this time. . . . The government is putting pressure on
banks to allow things like this so that, you know, there are no more
bankruptcies or things along those lines.'' Even though the website
displayed a TASC logo, we were unable to find either Company 1 or this
affiliate on TASC's member directory. The Executive Director of TASC
confirmed to us later that neither Company 1--as it listed itself on
its website--nor this affiliate is a member of the organization. The
affiliate's website displays a logo for USOBA, and we confirmed its
membership with that organization.
Shortly after we called Company 1 the first time, we noticed that
the website contained some changes--when we attempted to leave the
website on later visits, a pop-up message appeared declaring ``If we
can't get you out of debt in 24 hours we'll pay you $100!'' (See figure
1 above.) We called Company 1 again and a representative said that he
was with Company 1. He later stated that he was actually with an
affiliate of Company 1--a different affiliate than the first
representative with whom we spoke. He described the website for Company
1 as a ``landing page'' used to attract business to his company. This
second representative also offered deceptive or questionable
information, such as a 93 percent success rate for his program. When
asked about the government programs advertised on Company 1's website,
he replied that the government program was related to creditors'
ability to obtain tax credits from the IRS for the debts they sell to
collection agencies. Regarding the offer to get consumers out of debt
within 24 hours, he said that this was for clients who have the
financial resources to make a large lump sum payment at the very
beginning of the program. However, he added that ``ninety-nine point 9
percent of the people that come to us do not have the ability to do
that.'' When we asked about the risk of being sued by our creditors, he
told us that ``a judgment is nothing more than a fancy I.O.U.'' We were
able to find this second affiliate on TASC's member directory, and the
Executive Director of TASC later confirmed that this affiliate is a
member of TASC.\17\
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\17\ We also identified an additional website at a different
address that was nearly identical to the one that referred us to the
two representatives discussed above, with the same phone number and
logos for TASC and BBB, but listing what appeared to be a different
company name entirely.
---------------------------------------------------------------------------
We made a site visit to Company 1 in Florida. The owner of Company
1 admitted that the company does not really exist and is really just a
marketing website, and told us he actually owns a different company
that offers both debt settlement and mortgage modification services. He
claimed that he did not know that Company 1's website contained
information about an alleged government program, and logos for TASC and
BBB. However, he acknowledged that neither Company 1 nor his real
company is a member of TASC despite the logo featured on the
website.\18\ When asked about the offer to get consumers out of debt
within 24 hours, he replied that this was a ``typo'' and that the offer
should say 24 months rather than 24 hours.\19\ Our investigators
observed employees at the location listed for Company 1 representing on
the telephone that they were employees of the second affiliate
mentioned above. Moreover, when the owner of Company 1 gave our
investigators a copy of the script his employees use when speaking with
potential clients, the text of the script implied that they were
representatives of the second affiliate. We were unable to determine
the actual relationship, if any, between Company 1, its affiliates, or
the other company the owner claimed he runs.
---------------------------------------------------------------------------
\18\ TASC's executive director confirmed that Company 1 is not a
member.
\19\ Prior to our site visit, we found a testimonial from an
alleged client on Company 1's website claiming that Company 1 helped
her to cut her monthly bills in half in 24 hours.
---------------------------------------------------------------------------
Company 2
Company 2's online and radio advertisements feature multiple
fraudulent or deceptive claims. The company's website advertises that
its services will ``Reduce balances to 40 percent--60 percent,''
``Eliminate excessive Credit Card Debt interest immediately,'' and
``End late payment fee's [sic].'' When we called Company 2, it referred
us to at least 3 different affiliates. It was not always clear exactly
with which company's representatives we were speaking.\20\
Representatives from these affiliates described Company 2 as a
marketing group that referred potential clients to them. We also
identified radio advertisements placed in several major cities
purporting to be from Company 2, in which it claimed to offer a
``government authorized'' and ``government approved'' debt settlement
program. When we called the telephone number listed in one of the radio
advertisements, a representative answered from one of the affiliates of
Company 2 that we had spoken to earlier. When asked about the
government-approved debt settlement program, the representative
acknowledged the radio advertisement and replied ``it is government
approved. . . . They allow for us to do this. You know, the banks
received, you know, bailout money last year. I'm sure you saw it on the
news. There has to be some type of assistance for people on a consumer
level also.'' According to this representative, Company 2 runs similar
advertisements on television and radio stations nationwide.
---------------------------------------------------------------------------
\20\ A recent report by the Maryland Consumer Rights Coalition
stated that debt settlement companies ``often seem a many-headed
Hydra'' with parent companies split from other divisions that handle
the marketing and solicitation. The report further states that this
division of services causes confusion for consumers trying to track the
progress of their debt settlement, and for agencies attempting to
enforce compliance.
---------------------------------------------------------------------------
We were unable to visit Company 2 because we could not determine
its physical location. However, we visited the affiliate whose
representative discussed the radio advertisement with us, which is
located in California. Officials from this affiliate told us that their
company is ``the most legitimate debt settlement company,'' and that
their employees receive commission based on the number of clients they
enroll in the company's program. They also claimed that their company
was not associated with Company 2, and refused to disclose to us the
number of clients in their program or the total amount of consumer debt
their company is currently handling. On two separate covert telephone
calls we made to Company 2, representatives of this affiliate stated
they were with Company 2 at the beginning of each call but later
informed us that they actually were with the affiliate and that Company
2 handled their marketing. When asked during our site visit if we could
see their call center, officials refused.
Company 3
Company 3 targets Christians for its debt settlement services by
employing a Biblical marketing theme, both on its website and over the
phone. Representatives of Company 3 told our fictitious consumers that
they run a nonprofit ministry affiliated with their for-profit debt
settlement company, with funds from debt settlement feeding into the
ministry and missionary trips overseas. In addition, representatives
told us that their program has an 85 percent success rate and that they
would negotiate our debt down to 40 or 60 percent of what we currently
owed. About the risk of being sued by our creditors, a representative
remarked to us that ``It's just a computer thing. I mean, sometimes
there's a handful of them that they'll have reserved to go after and
it's just random. But even if they were to do that in your case, it's
just a small percentage; we'd be able to advise you at that time, too.
You don't need an attorney in the matter or anything like that. It's
just a civil thing.''
We visited Company 3 in California, where we found it located in a
strip mall near a grocery store. The owner of Company 3 told us that he
owned a mortgage company and sold cars prior to entering the debt
settlement industry. Company 3 handles the front end of the debt
settlement process by signing up clients, and uses a third-party
company and law firm for the rest of the process. Most of the employees
of Company 3 are contractors who earn $200 commission for each client
enrolled, with bonuses for employees who enroll a high number of
clients. According to Company 3 officials, they enrolled approximately
1,200 to 1,300 new clients in the first 2\1/2\ months of 2010. When
asked if we could see a copy of their IRS Form 990 for the nonprofit
side of their operation, the owner replied, ``The Bible says you should
never let the left hand know what the right hand is doing.'' \21\
Company officials provided us with a sample of its contract, which
states that ``In the event Client comes into a lump sum of money and
wishes to settle an account before original designated completion date,
Client must first pay [Company 3] Fee. The remainder of the lump sum
will be utilized in settling Client's unresolved program debt.'' The
contract also states that Company 3 does not provide legal
representation or any legal advice to its clients.
---------------------------------------------------------------------------
\21\ IRS Form 990 is a Federal information return filed annually by
tax-exempt public charities. Information reported on this return
includes assets held, contributions received, and grants paid.
---------------------------------------------------------------------------
Company 4
We became interested in calling Company 4 when we noticed on its
website that it advertised a ``U.S. National Debt Relief Plan,'' with a
logo depicting a shield filled with a U.S. flag. When asked about this
plan, a representative stated that it was ``a consumer advocacy program
entitled [sic] to help consumers get out of debt'' but that ``it's not
a government agency. We just take advantage of the fact that the
government are [sic] giving money to the banks to get out of debt and
we just show you and go through the route of settling out your
accounts.'' The representative also told us that our first 3 monthly
payments would go entirely to paying fees with no money set aside for
savings. He said that Company 4 uses this advance fee structure
because, during the first few months of the program, the company would
be setting up our account and mailing cease and desist letters to our
creditors, and ``to show that you have the commitment to be in the
program.''
When we visited Company 4 in California, officials told us that the
company only handles the front-end marketing of the debt settlement
process, and that it had enrolled approximately 1,000 clients in the
first 2\1/2\ months of 2010. In early March 2010, TASC issued a
statement on its website noting a recent increase in companies
practicing deceptive marketing, including companies sending letters to
potential clients resembling government documents and using terms like
``U.S. National Debt Relief Plan.'' Company 4 marketed the ``U.S.
National Debt Relief Plan,'' and is a member of TASC.
Company 5
A representative of Company 5 advised us that we could not afford
its debt settlement program because our fictitious consumer's income
was too low and his expenses were too high. He suggested that we
consider credit counseling or bankruptcy as options if we were unable
to make substantial improvements in our budget. However, when we
indicated that we may obtain a new job soon that would boost our
income, he provided details on how Company 5's debt settlement program
works. He told us that it generally takes about 7 to 8 months to save
up enough money to begin negotiating settlements. When we asked what
services we would be paying for during those first 7 to 8 months, he
replied that our fees would pay for the ability to get out of debt
within 36 months, and monthly education and updates from the company's
attorneys. Company 5's website advertised that it can help consumers
who are experiencing stress, anxiety, and depression associated with
being in debt. When we asked about these services, the representative
laughed and said these services are arranged through debt negotiators
who will hold monthly strategy calls with us.
We attempted to visit Company 5 in California, but found that it
was no longer at the location listed on its website. Employees of
several other companies in neighboring office suites told us that
Company 5 had moved to another office down the hall, which was listed
under a different company name. An official from this company denied
knowing anything about Company 5, and claimed that his company did not
provide debt settlement services. However, records we obtained indicate
that the name of Company 5's owner is the same as the name on this
official's driver's license. In addition, the website for this other
company indicates that it does, in fact, provide debt settlement
services. After we returned from our site visit, the website for
Company 5 was down for maintenance.
Allegations of Fraud, Abuse, and Deception in the Debt Settlement
Industry Are Widespread
We found the experience of our fictitious consumers to be
consistent with the widespread complaints and charges made by Federal
and state investigators on behalf of real consumers against debt
settlement companies. We identified allegations of fraud, deception and
other questionable activities that involve hundreds of thousands of
consumers.\22\ We drew this figure from closed and open civil and
criminal cases governments have pursued against these companies over
the last decade. Our calculation likely underestimates the total number
of consumers affected, since we obtained information from only 12
Federal and state agencies about the clients within their jurisdiction
that they identified in some of the cases they pursued.\23\ Federal and
state agencies have reported taking a growing number of legal actions
against companies that offer these services in recent years. As
mentioned above, since 2001, FTC has brought at least seven lawsuits
against debt settlement companies for engaging in unfair or deceptive
marketing. The National Association of Attorneys General (NAAG) said in
an October 2009 letter to FTC that 21 states brought at least 128
enforcement actions against 84 debt relief companies, including debt
settlement companies, over the previous 5 years.\24\ The group stated
that the number of complaints received by the states about debt relief
companies--especially debt settlement companies--had more than doubled
since 2007. Last, the group noted that any business model requiring
``cash-strapped consumers to pay substantial up-front fees'' raised
significant consumer protection concerns and agreed with a consumer
group that called it ``inherently harmful.''
---------------------------------------------------------------------------
\22\ We did not attempt to verify the facts regarding all of the
allegations pursued by Federal and state agencies that we identified.
\23\ We obtained information from the following agencies: Federal
Trade Commission, U.S. Department of Justice, and state law enforcement
agencies in Alabama, Colorado, Delaware, Florida, Illinois, North
Carolina, New York, Texas, Vermont, and West Virginia. They identified
clients through company records, individual complaints, and restitution
paid. We focused on select states with enforcement actions listed in a
National Association of Attorneys General letter. We did not attempt to
query all 50 states.
\24\ According to the letter, the 128 enforcement actions listed in
its attachment do not represent a comprehensive list of all cases filed
or regulatory actions taken against debt relief companies. We did not
attempt to verify the facts regarding all of the actions listed in the
letter. Details regarding 3 of these enforcement actions are provided
below, as case studies 1, 3, and 4.
---------------------------------------------------------------------------
Attorneys general from 40 states and 1 territory submitted the
letter, saying they supported FTC's proposed rule changes to combat
unfair and deceptive practices in the industry. They cited similar debt
settlement activities that prompted their own enforcement actions,
including the following:
collecting advance fees in many instances without providing
services;
misleading consumers about the likelihood of a settlement;
misleading consumers about the settlement process and its
adverse effect on their credit ratings;
making unsubstantiated claims of consumer savings;
deceptively representing the length of time necessary to
complete the program;
misleading or failing to adequately inform consumers that
they will be subject to continued collection efforts, including
lawsuits;
misleading or failing to adequately inform consumers that
their account balances will increase due to extended nonpayment
under the program; and
deceptive disparagement of bankruptcy as an alternative for
debtors.
The state attorneys general expressed concern the industry would
grow exponentially given the current economic climate and a regulatory
environment that allows substantial advance fees to be collected. They
criticized the advance fees as providing minimal incentive for
companies to perform services because they get paid whether or not they
take any action on behalf of the consumer. They also noted that low
set-up costs help in the promotion of debt settlement as a cheap
business opportunity. They stated that they would continue to take
enforcement actions against unscrupulous operators in the industry, but
that they also believed the proposed FTC rule changes would
substantially aid law enforcement agencies in addressing harms caused
to consumers.
We developed case studies from five closed civil or criminal
actions in which state or Federal courts found debt settlement
companies liable for fraudulent, unfair or deceptive actions that left
clients in worse financial condition--bankrupt, owing more debt, and
with lower credit scores and more judgments against them. We also
examined the experiences of a consumer from each of these cases. Table
3 below shows key information from each of these five cases. Further
details are discussed below.
------------------------------------------------------------------------
Table 3: Select Cases of Debt Settlement Companies Engaged in
Fraudulent, Abusive, or Deceptive Practices
------------------------------------------------------------------------
Company location Federal/state
No. agency Case details
------------------------------------------------------------------------
1 Arizona; New York More than 500
affiliates in Attorney New Yorkers withdrew
Arizona and General from the debt
Florida settlement program
after paying over $1
million in fees only
to receive more debt,
tarnished credit
ratings, and
increased collection
calls and creditor
lawsuits.
Nearly half
of the New York
clients that
completed the program
during the Attorney
General's
investigation, or 27
out of 64, ultimately
paid more than they
originally owed.
Only 0.3
percent of the New
York clients realized
the promised savings.
A New York
court found the
company and its
affiliates liable for
statutory fraud and
ordered restitution
for clients who paid
more than they owed.
------------------------------------------------------------------------
2 New York and U.S. Attorney An attorney
Vermont General and his law firm
associates
misappropriated and
embezzled millions of
dollars from 15,000
clients seeking debt
reduction help over a
6-year period,
forcing some
customers into
bankruptcy.
The group
lured consumers
through television
and radio
advertisements by
falsely claiming a 50
to 70 percent savings
off unsecured debt,
an improvement in
credit scores and
bankruptcy avoidance.
Only 8
percent of the
group's clients
completed the
program.
Clients paid
advance fees for
these services and
funded escrow
accounts from which
their creditors were
supposed to be paid.
The fees were not
considered ``earned''
until consumer debts
were settled.
The fees
collected were used
in part to fund huge
payments to the
attorney and two of
his associates before
they provided any
services to clients.
The client
escrow accounts were
drawn upon, in part,
to cover overdrafts
from the law firm's
operating account and
to make payments to
the attorney's wife,
among other things.
The law firm
filed for bankruptcy
in 2003.
A Federal
jury found the
attorney guilty in
2005 on multiple
felony counts,
including fraud. His
six associates pled
guilty to Federal
charges.
------------------------------------------------------------------------
3 Florida North Carolina Two companies
Attorney General and their owners ran
an illegal debt
settlement business
using unfair and
deceptive practices,
collecting over
$500,000 from about
220 North Carolinians
who rarely obtained
the services they
purchased.
North
Carolina law
prohibits anyone from
acting as a for-
profit intermediary
between residents and
their creditors for
the purpose of
reducing, settling,
or altering debt
payments, except in
limited
circumstances. It
specifically bans
advance fees for
these services.
The companies
and their owners, one
of whom was an
attorney, marketed
their services in
part using third-
party ``referral
agents'' who received
compensation for
directing consumers
to the group.
Many clients
dropped out of the
program dissatisfied.
Few received refunds
or obtained
settlements with
their creditors. Many
filed for bankruptcy.
A North
Carolina court found
that the group's
actions violated
state law and banned
the parties from
doing any debt-
related business with
state residents. In a
separate action in
January 2009, the
attorney was
disbarred for a
period of 5 years.
------------------------------------------------------------------------
4 Maryland Maryland A Maryland
Attorney attorney, his law
General firm and their
marketers used unfair
and deceptive trade
practices to collect
$3.4 million from
about 6,200 clients
over a 2 year period
to settle debt but
provided little or no
services in return,
causing harm to
consumer credit
histories and credit
scores.
The group
told clients that its
employees were
qualified credit
counselors capable of
recommending the most
appropriate action,
but instead it
provided virtually
the same advice to
everyone--enter debt
settlement plans
profitable for the
group.
The group
reached an agreement
in 2007 with the
Attorney General,
agreeing to
immediately cease and
desist selling
unlicensed debt
settlement services,
pay restitution to
customers, and pay
investigatory costs
and a fine to the
state consumer
protection office.
The Attorney
General filed a
lawsuit in 2008
against the group for
violating the terms
of their agreement
and the state's
consumer protection
act. The court
ordered the group to
fulfill the terms of
its previous
agreement, pay a fine
and costs of
$180,000, and pay
restitution of almost
$2.6 million.
------------------------------------------------------------------------
5 California Federal Trade Four related
Commission California companies
lured more than 1,000
consumers into a debt
settlement program
through false
promises of reducing
debt, halting
collection calls,
removing negative
credit report
information, and
holding payments in
trust to settle
accounts--from which,
the FTC alleged, more
than $2 million later
went ``missing.''
FTC filed a
complaint against the
companies in August
2002, alleging that
numerous consumers
who enrolled in the
program saw their
indebtedness increase
after incurring late
fees, finance
charges, and
overdraft charges.
Many ultimately filed
for bankruptcy.
The Federal
court entered default
judgments against all
four companies,
banning them from
engaging in any debt
settlement services
and ordering them to
collectively pay $1.7
million in
restitution to
consumers, among
other actions.
------------------------------------------------------------------------
Source: GAO analysis of case studies discussed below.
Case Study 1
An Arizona company and its affiliates used false advertising and
deceptive marketing to fraudulently induce more than 500 New Yorkers
into paying over $1 million in fees for a debt settlement program that
left them with more debt, tarnished credit ratings, and increased
collection calls and creditor lawsuits. The group told clients that
consumers typically saved between 25 percent and 40 percent, including
all fees and charges. It also promised to substantially reduce credit
card debt in as little as 24 months. However, according to the New York
Attorney General, only 0.3 percent of the company's clients realized
these savings and few ever completed the program. Only 64 of the
group's New York clients finished the program during the time period of
the Attorney General's investigation (between January 2005 and
September 2008); another 537 withdrew from the program after paying
fees. Those who finished the program complained of being deceived and
harmed by the group. Nearly half of them actually paid more than they
owed. For example, one said, ``I actually paid 87 percent more than
what was originally due.'' Another said that the company ``did not
settle any of my accounts until I was actually sued by my creditors.''
A state court found the group liable for statutory fraud, ordered it to
pay restitution to clients who completed the program but paid more than
they owed, and prohibited it from doing business with consumers in New
York unless it posted a $500,000 performance bond.
The group required clients to authorize electronic debits from
their personal bank accounts in an amount that typically ranged between
$300 and $1,000 each month, depending on the consumers' cash-flow and
expected settlements. The group told clients that once the funds
accrued to a sufficient amount, it would negotiate with creditors for a
settlement. Clients were instructed to stop making credit card payments
during this time and to cease all communication with their creditors.
The group did not include most of the program fees it charged in its
calculation of the ``savings'' clients would achieve. The fees included
the following: $399 for ``set up''; an amount equal to three times the
clients monthly payment for ``enrollment''; $49 per month for
administrative and bank fees; and an amount equal to 29 percent of the
difference between the amount originally due and the settlement amount
for a ``final fee.'' The set-up and enrollment fees had to be paid in
full before the group would allow money to accrue for a settlement.
The experience of one New York family exemplifies the harm suffered
by the group's clients. According to a sworn statement the wife gave to
state attorneys, the couple owed about $21,700 in credit card debt
accumulated after the husband was laid off. In 2006, the wife received
a call from a telemarketer saying that the Arizona company had looked
into her family's credit history and found that it could cut their
credit card debt in half. She and her husband joined the program and
began making $325 in monthly payments to settle five accounts, even
though they were current on their bills. ``Who wouldn't want to save 50
percent on her credit cards?'' the wife told state attorneys. The
couple was advised to stop paying their creditors, which they did after
being told by the company that no penalties and interest would accrue
as a result. The couple was soon being harassed by their creditors, who
called at all times of day, including evenings and weekends. Four of
the couple's small accounts were settled during this time. However, the
creditor with the largest balance, which totaled about $19,000, took
the couple to court. The pair withdrew from the program and settled the
lawsuit for $28,000, including $9,000 in penalties and interest. They
subsequently had to pay this creditor $300 per month. The wife called
this outcome ``disastrous for us.'' Nevertheless, the couple received a
``congratulations'' letter from the company, saying the pair had paid
only 79.3 percent of what was originally owed on the four settled
accounts.
Documents that the couple gave state attorneys, however, show
otherwise: after adding the $2,506 in fees they were charged, the pair
actually paid more than 140 percent of what was originally owed on the
four accounts. The wife told state attorneys that the Arizona company
``failed our family in every respect, and we are counted as one of its
success stories!''
Case Study 2
An attorney and his law firm associates defrauded about 15,000
clients seeking debt reduction help, causing them to lose millions of
dollars and forcing legions of them to file for bankruptcy. The group
lured consumers through television and radio advertisements, falsely
claiming a 50 to 70 percent savings off unsecured debt, an improvement
in credit scores and bankruptcy avoidance. The group, with offices
initially in New York and later in Vermont, further promised that if
clients did not receive a settlement, they would be entitled to a full
refund. Clients paid fees for these services and funded escrow accounts
from which their creditors were supposed to be paid. Under the terms of
the contract that clients signed, the fees were not considered
``earned'' until consumer debts were settled. The group, however, did
not reduce debt for most of its clients (only 8 percent completed the
program, according to a witness cited by the U.S. Department of
Justice) and failed to pay refunds to many of those who withdrew from
the program or were forced into bankruptcy. Instead, the fees collected
were used in part to fund huge payments to the attorney and two of his
associates before they provided any services to clients. The client
escrow accounts, meanwhile, were drawn upon to cover overdrafts from
the law firm's operating account and make payments to the attorney's
wife, among other things. The law firm filed for bankruptcy in 2003. A
Federal jury found the attorney guilty in 2005 on multiple felony
counts, including fraud. His six associates pled guilty to Federal
charges.
To enter the law firm's debt settlement program, clients signed an
agreement that authorized monthly automatic deductions from their bank
accounts. The first four payments often went into a retainer account to
collect advance fees owed to the firm, despite the fact that the
clients had pressing debt problems. The advance fees equaled about 25
to 28 percent of the total projected savings from the client's debt
settlement plan. Thereafter, about half of payments also were deposited
into an escrow account to settle client debts held by creditors until
the retainer account was fully funded. Subsequent monthly deductions
went into escrow account until enough money accrued to make a
settlement offer on behalf of the client. Although not formalized in
written contract, many clients were instructed to stop making their
minimum monthly payments to creditors. They were told that continuing
to pay creditors would inhibit the firm's ability to reach a
settlement.
One of the firm's New York clients who Federal authorities
interviewed enrolled in the debt settlement program after hearing an
advertisement on the radio. The woman, who owed $60,000, was
experiencing marital problems and feared becoming a single mother with
small children and a large amount of debt. She called the toll-free
number and arranged for a meeting at a New York office. One of the
firm's associates, who later pleaded guilty to interstate transmittal
of stolen money and preparing a false tax return, told her that the
advance fees she paid would be held in trust until all of her debt was
settled. She paid about $7,000 to $8,000 to the firm to settle her
debts until one of her creditors obtained a judgment against her,
causing her bank account to be frozen. When she contacted the firm to
withdraw and ask for a refund, her calls were not returned. She
ultimately filed for bankruptcy. The firm never secured a settlement on
her behalf. She filed a civil lawsuit and won a default judgment
against the firm for $10,000 including attorney fees, but told us she
never recovered any money from the court decision. In relating her
experiences with the debt settlement company, she described the
attorney as ``a ghoul and a vulture . . . preying on vulnerable
consumers.''
Case Study 3
Two Florida companies and their owners ran an illegal debt
settlement business using unfair and deceptive practices, collecting
over $500,000 from about 220 North Carolinians who rarely obtained the
services they purchased and found themselves in far worse financial
positions. North Carolina law prohibits anyone from acting as a for-
profit intermediary between residents and their creditors for the
purpose of reducing, settling or altering debt payments, except in
limited circumstances. The state ban specifically includes situations
where an individual is receiving advance fees to provide these
services. To enforce these laws, the North Carolina Attorney General
filed a complaint in February 2008 accusing the group of operating a
``classic advance-fee scam, designed to extract up-front fees from
financially strapped consumers whether or not any useful services are
performed.'' The companies and their owners, one of whom was an
attorney, marketed their services in part using numerous third-party
``referral agents'' who received compensation for directing consumers
to the group. One such referral agent listed a local telephone number
which, when dialed, actually rang a telemarketing ``boiler room'' in
Massachusetts or Florida. The group and its agents told consumers that
their unsecured debts could be reduced by up to 60 percent in as little
as 1 to 3 years and thus avoid bankruptcy. The group typically charged
clients an advance fee of 15 to 25 percent of their total debt, paid
through monthly debits from their bank accounts. It also advised them
to cease all communication and payments to creditors, stating that it
could stop any harassment and provide ``legal protection.'' When
consumers were sued, however, the group gave them no legal assistance.
They also experienced difficulty in contacting the group and were often
put on hold, disconnected, or ``given the runaround,'' state
prosecutors said. Many clients dropped out of the program dissatisfied.
Few received refunds or obtained settlements with their creditors. Many
filed for bankruptcy. A North Carolina court found that the group's
actions violated state law and banned the parties from doing any debt-
related business with state residents. State prosecutors ultimately
secured refunds for some of the group's clients. In a separate action
in January 2009, the attorney also was disbarred for a period of 5
years.
An example of the service the group's clients received can be found
in the experience of a rural North Carolina couple. According to the
wife's sworn statement, the pair found it increasingly difficult to
meet their monthly financial obligations after the husband became ill
and temporarily lost his income. They searched for ways to reduce their
unsecured debt on the Internet and found what turned out to be one of
the group's referral agents. They were told that the initial monthly
payment of about $1,700 would be deducted from their bank account for
the first 3 months of the program to cover attorney fees. Subsequent
monthly payments of about $1,200 were to go toward settlements with
creditors. The couple joined the program in hopes of avoiding
bankruptcy and made their first installment in February 2007. Seven
months later, the wife called the group for a status on her account and
was told the couple had only accrued about $3,000 in savings, despite
paying the group over $11,000 to date. She also learned that none of
their credit accounts had been settled and they had been charged
additional attorney fees of $499 each month. They withdrew from the
program and demanded a full refund, since the group had done nothing
``other than take our money with no accountability.'' The couple
started receiving collection notices and threats of lawsuits. Their
debts had now increased since they were no longer making payments to
creditors. In an attempt to save their home from foreclosure, the
couple filed for Chapter 13 bankruptcy. They also took second jobs as
janitors to help pay off their debts. The wife told us that during the
day she works as a bank teller and her husband is employed as an
electrical engineer. One of their creditors suggested they call their
state Attorney General. ``My husband and I are worse off than before we
entered into an agreement with (the group) for debt settlement
services,'' the wife said in her sworn statement. The state Attorney
General ultimately secured a full refund for the couple.
Case Study 4
A Maryland attorney, his law firm, and their marketers used unfair
and deceptive trade practices to collect $3.4 million from about 6,200
clients over a 2-year period to settle debt but provided little or no
services in return, causing harm to consumer credit histories and
credit scores. The group told its clients that they could settle debts
with creditors for half of the total amount owed, but either did not do
so or negotiated agreements that saved significantly less than
promised. Only $811,136--less than a quarter of the money the group
collected--was either paid to creditors or refunded to clients.
Moreover, about $240,000 was taken from client trust accounts to pay
for the law firm's debt and expenses. The group told clients that its
employees were qualified credit counselors capable of recommending the
most appropriate action, but instead it provided virtually the same
advice to everyone--enter debt settlement plans profitable for the
group. The Maryland Office of the Attorney General began an
investigation of the group because it was not licensed to provide debt
settlement services in the state. The group reached an agreement in
2007 with the Attorney General, agreeing to immediately cease and
desist selling unlicensed debt settlement services, pay restitution to
customers, and pay investigatory costs and a fine to the state consumer
protection office. However, the Attorney General filed a lawsuit in
2008 against the attorney, his law firm, and their marketers accusing
them of continuing to provide debt settlement services, thus violating
the terms of their agreement and the state's consumer protection act.
The court ruled in favor of the Attorney General and ordered the group
to fulfill the terms of its previous agreement, pay a fine and costs of
$180,000, and pay restitution of almost $2.6 million. As of March 2010,
the attorney had only paid $20,000.
Clients made numerous complaints to the Maryland Office of the
Attorney General, detailing the financial harm they suffered from the
group. A New Hampshire couple struggling to pay their bills joined the
debt settlement program in August 2007 and authorized the firm to
automatically deduct about $650 from their checking account each month,
according to a letter they sent to the Attorney General. Although the
couple had approximately $41,000 in credit card debt when they joined
the program, the wife told us that they had a good credit history and
had never missed a payment. However, she said that they were told they
had to stop making payments to their creditors when they entered the
program. The collection letters and phone calls from creditors started
``arriving constantly'' by the end of September, the couple told the
Attorney General. Threats of lawsuits followed 2 months later. The
couple withdrew from the program in February 2008, after paying the
firm $3,895 and receiving no relief from their debts. They told the
Attorney General they were so far in default on their credit cards,
with interest and fees added on top, that they considered bankruptcy to
be the best option available to them. According to the wife, their
credit score dropped from 720 down to 605 as a result of their
experience with this debt settlement program. She added that they
ultimately entered into a consumer credit counseling program after they
learned that state law requires such counseling prior to bankruptcy.
When asked to compare the two different debt relief programs, she said
that credit counseling is ``legit'' and helps consumers to get out of
debt, but that ``debt settlement is a crock.''
Case Study 5
Four related California companies lured more than 1,000 consumers
into a debt settlement program through false promises of reducing debt,
halting collection calls, removing negative credit-report information,
and holding payments in trust to settle accounts--from which, FTC
alleged, more than $2 million later went ``missing.'' The companies'
telemarketers told consumers that the group could cut their debt by as
much as 60 percent in exchange for a nonrefundable fee, thus improving
their financial status. The companies did not disclose that the fees
typically amounted to hundreds or thousands of dollars. They said that
the monthly payments withdrawn from consumers' bank accounts would be
held in trust to settle their debt at a reduced amount. Consumers were
instructed to immediately stop paying their unsecured creditors so that
they would be considered a ``hardship,'' putting them in a better
position to negotiate settlement terms. The companies stated that they
would contact the creditors and tell them to cease all contact with
their customers, thus preventing collection calls. They also told
consumers that any negative information that appeared on their credit
report would be removed at the conclusion of the program.
FTC filed a complaint against the companies in August 2002,
alleging that numerous consumers who enrolled in the program saw their
debt increase after incurring late fees, finance charges and overdraft
charges. Negative information often appeared on the consumers' credit
reports--such as charge-offs, collections and wage garnishments--and
will stay on their record for a period of up to 7 years. FTC determined
that in numerous instances, the companies did not contact consumers'
creditors or collectors, nor did they return calls. FTC later
determined that more than $2 million the companies collected to be held
in trust for making settlements was missing. Given their worsened
financial condition, many consumers ultimately filed for bankruptcy.
The Federal court entered default judgments against all four companies,
banning them from engaging in any debt settlement services and ordering
them to collectively pay $1.7 million in restitution to consumers,
among other actions. FTC brought suit against four executives of the
companies, but these cases ended in settlement agreements without any
liability or fault established. As part of the settlements, however,
the executives agreed to be permanently banned from participating in
debt settlement services and to pay between approximately $220,000 and
$2.6 million, depending on the amount of consumer injury that stemmed
from their activities. The monetary judgments were largely suspended,
except in two instances where the executives surrendered property and
other assets to help satisfy what they owed, because of their inability
to repay consumers.
The experience of a secretary from Riverside, Calif., illustrates
the harm that FTC determined the companies to have caused consumers.
She joined the program after receiving an e-mail in August 2000 and
being told by a representative from one of the companies that she could
be completely out of debt in 16 months, according to a written
statement she gave to FTC under penalty of perjury. At the time, she
made about $27,000 a year, owed a total of $7,000 in credit card debt
and was making little progress toward reducing her balances given that
her salary barely covered rent, food, car payments, and insurance. The
company also offered a debt management class, which she stated had
appealed to her because she wanted to learn how to better manage her
money. She never received the promised training, though, despite asking
for it several times. Three months after she joined the program,
letters from creditors started arriving threatening legal action if she
did not pay. Counselors with her debt settlement company told her to
ignore them, calling the move a ``scare'' tactic. She started to panic
after she received a court summons in late 2000 stating that a lawsuit
had been filed against her. A counselor again told her not to worry,
that everything would be OK. After a court summons arrived from a
second credit card company, a counselor told her to fax the documents
to the company and that staff would deal with it. The state courts,
however, entered two judgments against her in March 2001. She later
received notice that her wages would be garnished by 25 percent. ``I
was frantic,'' she stated. ``I was barely making ends meet on my
salary.'' By July 2001--less than a year after the secretary entered
the debt settlement program--her credit card debt had more than doubled
to about $15,000, because of late charges, interest, and other fees.
She filed for bankruptcy that same month. She later sued the company
that enrolled her in the program and settled for what she had paid in
program fees, about $1,700, plus court costs.
Mr. Chairman, this concludes our statement. We would be pleased to
answer any questions that you or other members of the Committee may
have at this time.
Appendix I: Debt Settlement Companies
Table 4 below summarizes examples of fraudulent, deceptive, abusive
or questionable information provided by the 20 debt settlement
companies we called. We have referred these cases, as appropriate, to
the Federal Trade Commission (FTC).
----------------------------------------------------------------------------------------------------------------
Table 4: Representations Made by Debt Settlement Companies We Called
------------------------------------------------------------------------
Location of
No. company and Fees a Association Case details
affiliates membership b
------------------------------------------------------------------------
1 Florida; Advance The Marketi
affiliates fees based on 15 Association ng website that
in Florida, percent of of referred us to
Massachuset enrolled debt, Settlement two affiliates
ts, with monthly Companies Represe
California, payments (TASC);c ntative from
and New required affiliates one affiliate
Jersey b throughout in TASC and (a member of
program. United USOBA) stated
States ``everyone who
Organization enters the
s for program makes
Bankruptcy the independent
Alternatives decision to
(USOBA) stop paying
their
creditors''
Identif
ied through
spam e-mail
message
received by one
of our
investigators
website
advertised
``New
Government
Programs!'' and
``If we can't
get you out of
debt in 24
hours we'll pay
you $100''
Represe
ntatives
claimed high
success rates--
93 percent and
100 percent
Represe
ntative from
USOBA-member
affiliate
claimed that
``worst case
scenario'' for
our settlements
would be ``40
cents on the
dollar,'' and
that ``every
single creditor
settles.'' He
also promised
that hiring his
company would
ensure that
calls from
creditors would
``slow down and
eventually
stop''
Represe
ntative from
TASC-member
affiliate
claimed that
TASC was ``like
the SEC for
stock traders''
and serves as
the regulating
body for the
industry
Owner
of company
acknowledged
TASC logo
featured on
website despite
company not
being a member
of TASC
For
further
details, see
section on
``Company 1''
in this
testimony
------------------------------------------------------------------------
2 Unknown; Advance Affiliate in Marketi
affiliates fees based on 12 USOBA ng website that
in Arizona, percent of referred us to
Texas, and enrolled debt. at least three
Californiab First 3 affiliates
monthly payments Represe
go to fees. ntatives from
$25 two affiliates
monthly told us we
maintenance fee. would not make
Addition our monthly
al contingent payments to
fee based on 4 creditors while
percent of in the program
reduction in Represe
debt company ntative from
obtains for one affiliate
clients. told us we
could not
afford debt
settlement and
suggested that
we consider
bankruptcy as
an alternative
website
advertised
``Reduce
balances to 40
percent--60
percent,''
``Eliminate
excessive
Credit Card
Debt interest
immediately,''
and ``End late
payment fee's
[sic]''
Company
's radio
advertisements
claimed
``government
approved'' and
``government
authorized''
debt settlement
Represe
ntative from
one affiliate
stated
creditors would
send letters to
us indicating
that our
settled
accounts are
considered
``paid in
full''
For
further
details, see
section on
``Company 2''
in this
testimony
------------------------------------------------------------------------
3 California Advance TASC (at the website
fees based on 16 time of our targeted at
percent of call) Christian
enrolled debt, consumers
with monthly Multipl
payments e
required representatives
throughout told us we
program. would not make
First 3 payments to our
monthly payments creditors once
go to fees. we entered
$100 fee company's
for out-of-state program
clients. Represe
ntative told us
that stopping
payments to our
creditors would
``knock [our
credit score]
down a couple
of points,''
and that our
credit would
only be
affected while
we were in the
program
Represe
ntatives
claimed that
program has 85
percent success
rate, that
lawsuits from
creditors were
``just random''
and did not
require an
attorney, and
that they would
negotiate our
debt down to 40
to 60 percent
of what we owed
Represe
ntative told us
that creditors
would report
our accounts
settled for
less than the
full balance as
``paid in
full'' or
``paid as
agreed''
Owner
told us during
our site visit
that the
company
recently
dropped its
TASC membership
due to rising
costs
For
further
details, see
section on
``Company 3''
in this
testimony
------------------------------------------------------------------------
4 California Advance TASC Company
fees based on 17 advertised
percent of ``U.S. National
enrolled debt, Debt Relief
with monthly Plan,'' with a
payments logo depicting
required a shield filled
throughout with a U.S.
program. flag
First 3 Represe
monthly payments ntative stated
go to fees. that, upon
$840 entering the
maintenance fee program, we
(total would ``no
throughout longer be
program). making payments
$623.50 to your
trust account creditors on a
fee (total monthly basis''
throughout Represe
program). ntative
justified first
3 monthly
payments going
only to fees as
necessary
because it
covered initial
set-up costs
and ``to show
that you have
the commitment
to be in the
program''
For
further
details, see
section on
``Company 4''
in this
testimony
------------------------------------------------------------------------
5 California Advance TASC (at the Represe
fees based on 15 time of our ntative told us
percent of call) we were too
enrolled debt. poor for debt
settlement and
advised us to
consider
bankruptcy as
an alternative;
later described
company's debt
settlement
program
Represe
ntative stated
that we could
not continue
paying our
creditors while
in company's
program
After
our undercover
call but prior
to release of
this testimony,
company appears
to have gone
out of business
For
further
details, see
section on
``Company 5''
in this
testimony
------------------------------------------------------------------------
6 Texas Advance Unknown Represe
fees based on 15 ntative stated
percent of that ``One-
enrolled debt, hundred percent
with monthly of our clients
payments stop making
required during those [credit
first 24 months card]
(program length payments'' in
unknown). order for
program to
work; later
directed us to
divert money
from paying
creditors to
account from
which company
withdraws fees
Represe
ntative advised
us to give
company's
telephone
number to
creditors as
our telephone
number, to
avoid calls
from creditors
Represe
ntative stated
``basically
what we do is .
. . we
negotiate with
your creditors
to basically
cut your bills
in half. So
when we go to
negotiate, we
go to negotiate
at 50 cents on
the dollar.
That's what we
guarantee. Now,
we can also get
less,'' and
added as an
example one
major bank that
he claimed
``normally
settles'' for
only 30 cents
on the dollar.
Represe
nted their
program could
prevent
creditors from
suing us or
garnishing our
wages
------------------------------------------------------------------------
7 California Advance Unknown Adverti
fees based on 10 ses ``National
percent of Debt Relief
enrolled debt, Stimulus Plan''
with monthly Represe
payments ntative told us
required during we would stop
first 12 months paying our
(of estimated 38- creditors, and
month program). that ``the only
thing you're
going to have
to worry about
is this payment
here [company's
fees]''
Represe
ntative stated
that lawsuits
were a ``scare
tactic''
website
states it can
``Prevent
Creditor
Harassment''
Represe
ntative claimed
company could
reduce our
balances so
that we would
pay ``anywhere
from 30 to 60
percent on what
you owe''
------------------------------------------------------------------------
8 Texas Advance TASC Regardi
fees based on 12 ng payments to
percent of our creditors,
enrolled debt, representative
with monthly stated ``you're
payments gonna have to
required during cut them off so
first 15 months that they
(of estimated 48- haven't
month program). received
First 4 anything''
monthly payments Represe
go to fees. ntative claimed
``every account
that we work on
will be at
least 40 cents
on the dollar''
------------------------------------------------------------------------
9 Texas Advance Unknown Represe
fees based on 15 ntative stated
percent of that ``one-
enrolled debt, hundred percent
with monthly of our clients
payments stop making
required during their monthly
first 12 months payments as
(of estimated 24- soon as they
month program). enroll into the
program''
Represe
ntative
encouraged us
to explore
other debt
relief options
as well as debt
settlement
Name of
company changed
during our
investigation
------------------------------------------------------------------------
10 Texas Advance USOBA Represe
fees based on 17 ntative stated
percent of debt, that upon
with monthly enrolling in
payments company's
required during program ``you
first 19 months would no longer
(of estimated 48- make any of
month maximum your credit
program). card payments.
All of them
would go late''
Represe
ntative claimed
to ``negotiate
your debt down
to 50 percent
or less of what
you owe''
Represe
ntative said
advance fees
paid for
attorneys who
would ``look
at'' our
account monthly
Represe
ntative was
unable to
explain refund
policy by
telephone
Represe
ntative
suggested we
change our
address on
billing
statements to
address for
company's
attorneys
------------------------------------------------------------------------
11 Florida Unknown- Unknown Telepho
-only received ne number
recorded listed on
information. website went to
a 7-minute
recording
Recordi
ng stated that
we would stop
paying our
creditors upon
entering
program
Recordi
ng claimed to
send letters to
credit bureaus
that would
``remove any
late marks that
you may have
received on the
account''
------------------------------------------------------------------------
12 California Advance Unknown Front-
fees based on 15 end marketing
percent of company, with
enrolled debt. 28 different
websites used
to solicit
customers for
referral to one
debt settlement
company
Represe
ntative stated
that affiliate
handling actual
settlement
process would
call us back;
we did not
receive a
return call
------------------------------------------------------------------------
13 Texas Advance USOBA Represe
fees based on 10 ntative stated
percent of that program
enrolled debt, does not work
with monthly for everyone,
payments but does work
required for everyone
throughout who has a
program. hardship
Represe
ntative stated
company's
services are
helpful to
consumers
``because we
allow
[consumers']
accounts to go
delinquent and
past due and
into
collections''
An e-
mail sent after
our call stated
that upon
enrolling in
the program,
``we will
inform your
creditors that
you will no
longer be
making payments
on the
accounts''
------------------------------------------------------------------------
14 Arizona Advance Unknown Represe
fees based on ntative stated
12.9 percent of that ``9 out of
enrolled debt, 10 of our
with monthly clients are
payments current,'' but
required during stop making
first 10 to 12 payments when
months (of entering
estimated 30- program
month program). When
asked whether
to stop paying
accounts that
are current,
representative
replied
``Absolutely''
------------------------------------------------------------------------
15 California Advance TASC Represe
fees based on 15 ntative stated
percent of that she could
enrolled debt. not interfere
First 3 with our
monthly payments obligation to
go to fees. pay our
$30 creditors, and
monthly encouraged us
maintenance fee. to continue
$14.50 making payments
monthly trust if we could
account fee. afford to do so
at the same
time as saving
for settling
debts
Represe
ntative later
stated that if
we could
continue making
our minimum
payments
``maybe this
[debt
settlement]
isn't the best
solution for
you''
------------------------------------------------------------------------
16 Florida Continge USOBA website
nt fees based on targeted at
35 percent of Christian
reduction in consumers
debt company Represe
obtains for ntative stated
clients. that ``you stop
First paying
monthly payment everybody.
goes to That's what
enrollment fee. makes you
$53 qualify. You
monthly fall behind.''
maintenance fee. Company
's contract
states there is
a $1,000
termination fee
for dropping
out of the
program
Represe
ntative
suggested that
we could pay
our initial fee
with a credit
card
Represe
ntative offered
to also provide
us information
on debt
consolidation
loans, to
determine which
option would be
best
------------------------------------------------------------------------
17 California Advance USOBA Represe
fees based on 18 ntative
percent of encouraged us
enrolled debt, to take care of
with monthly our late
payments mortgage
required during payments before
first 18 to 24 worrying about
months (of paying off or
estimated 36- settling our
month program). credit card
debts
------------------------------------------------------------------------
18 Unknown Advance Unknown website
fees based on 15 targeted at
percent of Christian
enrolled debt, consumers
with monthly website
payments describes one
required of the
throughout ``blessings''
program. of its program
First 3 as ``Immediate
monthly payments increase of
go to fees. spendable cash-
flow [sic]''
Represe
ntative told us
the program is
based on our
stopping
payments to
creditors
------------------------------------------------------------------------
19 Maryland Advance Unknown Represe
fees based on 15 ntative stated
percent of that it
enrolled debt. ``wouldn't make
$9.85 sense'' to
monthly bank fee. continue making
payments while
in a debt
settlement
program
Represe
ntative said
that program
``works for
some'' but is
``not great for
others,'' and
that company
discourages
consumers from
debt settlement
if they plan to
buy a house
soon, due to
credit score
damage
------------------------------------------------------------------------
20 California Unknown- TASC Represe
-representative ntative stated
said we did not that we did not
have enough debt have enough
to qualify for debt to qualify
program. for the
company's debt
settlement
program
------------------------------------------------------------------------
Source: GAO analysis of information obtained from debt settlement
companies.
a Fee information reflects fees disclosed to us; some companies may
charge additional fees that were not disclosed. Debt settlement
companies typically charge fees requiring payments either at the
beginning of the program as an advance fee or after each settlement as
a contingent fee. Some companies structure the payment of advance fees
so that they collect a large portion of them--as high as 40 percent--
within the first few months regardless of whether any settlements have
been obtained or any contact has been made with the consumer's
creditors. Others collect fees throughout the first half of the
enrollment period in advance of a settlement. Companies that charge a
contingent fee generally base it on a certain percentage of any
settlement they actually obtain for consumers. They sometimes charge a
small, additional fee every month while consumers are busy attempting
to save funds for settlements. FTC has criticized advance fees,
stating that consumers often suffer irreparable injury as a result of
paying them in advance of receiving services. The agency maintains
that the practice of taking fees before a settlement is obtained
results in a number of adverse consequences for consumers: late fees
or other penalty charges, interest charges, delinquencies reported to
credit bureaus that decrease the consumer's credit score, and
sometimes legal action to collect the debt.
b Some companies we called referred us to one or more affiliates. It was
not always clear to us exactly with which company or affiliate we were
speaking, where the companies or affiliates were located, or what the
relationships were between the companies and affiliates. In some
cases, separate affiliates of the same company claimed to be members
of different industry trade associations.
c While Company 1 claimed to be a member of TASC, it appears this was a
false representation.
The Chairman. Do you have, incidentally--there are several
of those comments which I couldn't understand. Do you have text
which is available?
Mr. Kutz. Yes, we do.
The Chairman. We have text.
Mr. Kutz. Yes.
The Chairman. OK. I just--I want to have that.
Mr. Kutz. OK.
The Chairman. I thank you very much.
And now, we will turn to The Honorable Julie Brill.
Well, I--I'm just doing it in order of what I see here. I'm
not going to be stage-managed, OK?
[Laughter.]
The Chairman. I will be stage-managed.
[Laughter.]
The Chairman. Mrs. Haas--Mr. and Mrs. Haas. You're of
Concord, New Hampshire.
Mrs. Haas. Yes, I am.
The Chairman. And please proceed.
STATEMENT OF HOLLY A. HAAS, CONSUMER
Mrs. Haas. Thank you, Chairman Rockefeller and Ranking
Member Hutchison, for inviting me to speak with you today about
my experience with debt settlement.
I live in New Hampshire with my husband of 17 years. I have
three sons and one grandson. My son served proudly with the
U.S. Navy until 2009.
In June 2007, our credit card interest rates were
increased. The credit card company told us our debt-to-income
ratio was too high, and that justified an increase, even though
we were current. These increases made it difficult to meet our
monthly budget, due to dramatic increases of our monthly
payments. We were never late on our payments, but we needed
help to reduce them.
In July 2007, after watching TV commercials on credit
counseling, we started researching credit counseling companies
on the Internet. We found one, in particular, that was close to
home in Massachusetts: Consumer Credit Counseling of America;
and because it had ``America'' in it, we thought we couldn't go
wrong.
We called CCCA and spoke with a man named Tom Roy, who
talked to us about credit counseling, but, because of our
credit card balances, he persuaded us to do a debt settlement.
For a fee, they could get us an attorney, that they selected,
who would work to settle our debts. In the end, we would pay 46
percent of our debt and a retainer of $7,500. This would cut
our credit card payments in half. Forty-eight payments would go
into an account and would be used to pay the attorney and the
settlements. After trying to work with our creditors, to no
avail, this sounded like a better option for us.
On August 4, 2007, we received the contract and sent it
back, signed, along with the checking info for the
installments. We were instructed by the CCCA not to pay our
credit card bills, because the credit card companies would not
negotiate settlements with current accounts. By September, the
collection letters and calls started. Money was going into our
holding account, and the attorney that Consumer Credit
Counseling of America put us in touch with started taking his
fees.
The attorney's name was Richard A. Brennan. We heard
nothing from him, so we researched our attorney on the
Internet. To our dismay, we found numerous serious complaints
about him.
Afraid that we were being scammed, we called Brennan's
client services number, as instructed on the contract, for
questions, which we thought was Brennan's office staff. But, it
turned out to be a totally separate entity in Boca Raton,
Florida. The person assured us that our case was being handled
properly, so we continued with Brennan to help us with our
debt.
In November 2007, we called client services, due to
collection threats. They no longer handled Brennan's cases, and
referred us to a number in Maryland that no one answered; the
voice-mails were always full. We called client services again,
who said the creditors agreed to settle our credit card debt at
80 percent. In reality, nothing was being done on our case and
the attorney was still taking our money from our account.
In February 2008, we got a call from Howard Lee Schiff, a
law office hired by Sears credit. They were going to sue us. We
told them that we had a lawyer and that they needed to contact
him. We again called client services, and the woman told us
they no longer instructed clients of Richard A. Brennan, again
giving us the contact number that gets you nowhere.
We decided to Google his name. The complaints were worse.
The Better Business Bureau rated him an ``F,'' and the AG of
Maryland had reached a settlement with him to discontinue debt
settlement practices, but the attorney was still practicing
debt settlements. After learning this, we realized we had to
stop working with him immediately. We then faxed a letter to
the bank that had the holding account, and told them to stop
all payments to Brennan, and to stop all transfers. We
immediately closed our checking account, for fear that they
would still take the money out anyway. The next day, we sent a
letter to the attorney's office, terminating his services.
On February 25, 2008, we consulted with an attorney in New
Hampshire, to see if we could undo the damage that Brennan
caused. We were now so far in default that we thought our only
option was bankruptcy. At our consultation, we found that
neither Consumer Credit Counseling of America nor Brennan was
licensed for debt adjustment in New Hampshire, making our
contracts with them illegal. He said we should formally
complain to the AGs' offices in New Hampshire and in Maryland,
and the New Hampshire Banking Commission, which we did.
There is now an order to cease and desist in New Hampshire,
and the AG's office in Maryland had Brennan disbarred from
their State.
Our New Hampshire attorney told us about Consumer Credit
Counseling Service of New Hampshire and Vermont, a licensed,
nonprofit company that is affiliated with the credit card
companies to help manage debt. We joined the program on March
10, 2008. In 6 months' time, we were about $13,000 behind from
where we started. Our credit scores had gone from excellent to
poor. All credit extended to us now is at a higher rate, if at
all, and banks who once gladly financed our cars won't look at
us. Insurance companies have given us a higher quote, due to
their--our credit history.
Debt settlement companies are very misleading. They have no
regard for State or local laws. Debt settlement is much
different than debt management. As we now know, a debt
settlement plan does extreme damage to your credit. And in our
opinion, they don't work and shouldn't exist.
In 2 years, we have paid about $32,000 toward our credit
cards, and we now owe approximately $34,000. If we started with
a legitimate company first, our current debt would be about
$13,000. We would have paid off our credit cards in April 2011.
With our current payment plan, we will be debt-free October
2012.
Now, we don't spend beyond our means. If we want to buy
something, we save up first and we do not use credit cards at
all.
Thank you.
[The prepared statement of Mrs. Haas follows:]
Prepared Statement of Holly A. Haas, Consumer
After numerous years of unrequested credit limit increases from our
credit card companies and them sending us checks with our monthly
statements to use for credit, in June 2007, we noticed an increase in
our interest rates on our monthly statements. After calling the credit
card company, we were told that our ``debt to income ratio was too
high'' and that justified an increase in rates. This was in spite of
the fact that we were making payments on time. Increased rates made our
payments higher and this is what made it difficult to pay these cards
off.
My husband and I, realizing our ever increasing financial debt with
credit cards, were paying more than what we could afford in credit card
payments and needed some advice in how to reduce them in some way to
make it easier to pay our necessary bills without struggling each
month. We were never late on any of our credit card payments at this
time.
In late July 2007, after researching debt management companies on
the Internet, we called Consumer Credit Counseling of America, (CCCofA)
1060 Osgood Street, North Andover, MA to get more information on debt
reduction. We chose this company because it was the closest we could
find from our home in Concord, NH and we thought they were credit
councilors to help manage our debt. The representative, Tom Roy, asked
us about our credit card balances and assured us that there were
options for us, either reduction or settlement. First he talked about
``credit counseling'' where they would set up a payment plan with the
creditors and help reduce the interest rates. However, he thought that
it would be better for us to do a debt settlement plan. For a small
referral fee to fill out the paperwork they could get us an Attorney
who would work for us to settle our debts with the credit card
companies. For our total debt of $48,648 we would be paying forty-six
percent (46 percent) or $23,821 and an attorney fee of $7,500 for a
total sum of $31,321. This would reduce our monthly payments from
$1,327 a month to $653 (estimate) for a period of 4 years. The monthly
payments would go into a bank account which they would set up for us.
The money in that account would collect over time and be used to pay
the attorney and the settlements for each of the creditors we had. They
told us that their attorney (unknown at the time) would pay them off as
he got word that the credit card companies agreed to settlement with
the money accrued in the account. After trying to work with all of our
creditors beforehand about reducing the interest rate and being denied,
this sounded like a better option for us at the time.
Once we agreed to go with the debt settlement and Consumer Credit
Counseling of America sent out our contract in the mail, this was the
last time we ever could get a hold of Tom Roy. They gladly took $400
electronically from our checking account for their referral fee. It
took about 2 weeks to get the contract.
Finally, on August 4, 2007, we received the contract in the mail,
read and signed it and sent it by fax back to Consumer Credit
Counseling of America, along with our checking account information for
the monthly installments and a hardship letter to our creditors, as
instructed. During that time, we were verbally instructed not to pay
our credit card bills--which were not overdue at that time, because the
credit card companies would not negotiate settlements with current
accounts. If the credit card companies or collection companies called,
we were told to say ``We are not neglecting our debts, we have hired an
attorney. Please call (the number) for more information.'' We were
instructed to fax all collection letters to our attorney, which we did.
(Exhibit A)
Exhibit A
By the end of September 2007, the collection letters and phone
calls started arriving, money was going into our ``Global Client
Solution Banking Services at Rocky Mountain Bank and Trust'' (Exhibit
B) account thru electronic transfer and the Attorney's office was
surprisingly now taking our money out of our holding account
automatically for his fees ($649.13 each month for August and
September). We still had not spoken to or heard from our Attorney.
After calling the ``client'' phone number provided to us in the
beginning to no avail and finding out who he was from our contract's
business heading, we decided to research about him on the Internet to
get more information about him. To our dismay, we found numerous
serious complaints about our attorney.
Exhibit B
Shocked to think that we were being scammed and afraid that we'd
lose everything we owned, we called the ``client number'' at the Client
Services Department. The person on the other end in Boca Raton, FL,
assured us that our case was being handled properly. We had requested
at that time, that we get a copy of all correspondence to and from the
creditors and the attorney from the date of the agreement until now.
They agreed and said they would. About a week after that, the only
copies we got were the ``Cease and Desist Communications'' and the POA
for the companies we carried credit cards with. They were dated 9-25-
07. Wanting to believe in the good of people, we continued with this
Attorney to help us with our ever growing financial mess.
In November 2007, we again called our Attorney's Client Services
Department due to threatening collection letters, calls and threats of
lawsuits. The Client Services representative told us that they no
longer handle Richard A. Brennan' s cases and referred us to a number
in Maryland that when called it just rang and rang. No one ever
answered the call. When we tried to leave a message for the paralegal,
the voice mailbox always said it was full. We were just like the 1000
or so other people who wrote complaints about the attorney on the
websites. We again called the Client Services representative in Boca
Raton, FL and told them that no one was answering the phone and that we
were really concerned and he asked what our questions were. We told him
that we didn't think anyone was working on our debt settlement case and
he said that they got information from all creditors reducing our debt
to 80 percent. (We feel that he just told us that to appease us.)
Relieved, we asked him to send copies of those letters as we had
already requested all copies of correspondence. He said he would. To
this date, we never got those letters. At this time, nothing was done
on our case and they were still withdrawing money from our account each
month and the attorney was still taking money from our holding account.
(Exhibit C)
Exhibit C
In January 2008, we continued to get collection letters from
creditors and we were still faxing them to the number they provided us
in the contractual agreement. We continued to try to call the Frederick
Law Group, LLC, now in Maryland, to get some information on our file to
no avail, but continued to not pay any credit card bills as instructed.
By now, our credit cards were over limit (with fees), overdue (with
fees) and interest charges sky-rocketed and the Attorney was still
taking our money.
On February 19, 2008, we got a call from a Law Firm representing a
creditor. They were going to sue us. We told them that we had a lawyer
representing us and that they needed to contact them. The lady
commented that the file doesn't show that we have an attorney and took
the information and hung up. Immediately, we called the number our
contractual statement first provided us. The woman told us the same
thing. They no longer instruct clients of Richard A. Brennan, again
giving us the contact information that gets you nowhere.
Upon trying to call this Attorney, we once again decided to Google
his name. The complaints were worse, the Better Business Bureau's
rating of this business is an F, and we found where the Attorney
General of Maryland had reached a settlement with him but the Attorney
is still fraudulently scamming hundreds of debt-stricken people.
(Exhibit D) This settlement occurred unbeknownst to us, a month or so
after we signed our contract with him. According to an on-line report
the attorney's company we were working with in Boca Raton, was ``out of
business'' as of October 2007. We never received any notice of this and
he still took our money each month.
Exhibit D
On February 19, 2008, my husband faxed a letter to the company that
is in charge of taking out our money and told them to terminate our
account and stop all direct payments to the account. We immediately
closed our checking account for fear he would still take the money out
anyway. (Exhibit E)
Exhibit E
On February 20, 2008, we faxed a letter to the Attorney's new
office in Frederick, MD, terminating his POA over our creditors and
terminating his (lack of) services due to breach of contract. (Exhibit
F) To this date, Attorney Brennan' s office has sent us two more blank
contracts to fill out to continue the debt settlement with him that we
started back in August 2007, even after he was fired. We still can't
believe how bold this rip off artist is.
Exhibit F
On February 25, 2008, we had consulted with an Attorney here in
Concord, NH to see if we could undo the damage that this scamming
Attorney caused us. We were now so far in default that we thought our
only option was bankruptcy. (Exhibit G) It was at this time that we
found out that any company doing debt adjustments must be licensed with
the State of NH. Neither Consumer Credit Counseling of America nor
Richard A. Brennan was licensed in NH. Thereby making our contract with
either of them illegal and making the fee Consumer Credit Counseling of
America retained also illegal. He told us that we should write letters
to the Attorney Generals Offices in NH and MD and the NH Banking
Commission, which we did 2 days later. (Exhibit H) There is now an
order to ``Cease and Desist'' here in NH along with paying back
Consumer A, which is us. (Exhibit I) The Attorney General's Office in
MD has managed to Disbar Richard A. Brennan from ever practicing law in
the State of Maryland. (Exhibit J)
This Concord, NH Attorney also told us about a program in town that
is a licensed, legitimate non-profit company and is affiliated with the
credit card companies. Anyone who filed for bankruptcy in NH must use
this program for 6 months before filing anyway so we joined the program
in hopes that we didn't have to file bankruptcy. On March 10, we signed
an agreement with Consumer Credit Counseling Service of NH and VT to
have them help manage our credit card debt. (Exhibit K) At that time,
our credit card debt had increased from $48,648 to $57,236 a difference
of $8,588. This was not including the $3,895.08 we paid Attorney
Brennan, so now we were $12,483 behind from where we started. Our
credit card companies refused to take off the interest charges and fees
due to our issue with Richard Brennan and to date we are still working
with Consumer Credit Counseling Service of NH and VT to pay off our
credit cards balances.
The far reaching affects from what this debt settlement lawyer did
to us; is our credit scores have gone from excellent to poor; All
credit extended to us now is in the higher interest rate bracket--if at
all. Banks who financed our cars and we had in good standing with,
won't look at us to finance another if we ever needed too. We can't
refinance anything at lower rates, including our mortgage. Auto
insurance companies have given us higher quotes due to our credit
history.
What we have learned from our experience is; Debt Settlement
companies have business names very similar to the ``real'' ones, so
it's hard to tell who is legitimate and who isn't. Debt ``management''
is much different then debt settlements; these debt settlement
companies will tell you the key words that you want to hear, like
``reduce debt/payments in half'', ``first step toward building
wealth'', ``build a bank account with liquid assets you never thought
possible'', ``pay off your debt in 4 years''. They are in business to
make money, they are not in business to help consumers with financial
debt problems, they have no regard for State or local Laws and in our
opinion they don't work.
We have read the book by Dave Ramsey, ``Total Money Make Over'' and
have followed his debt free living to the letter. We've learned that in
order to get our heads above water and stay above water, we don't spend
beyond our means; if we want to buy something, we must save a little
each pay period and pay with cash when we have saved enough. We try to
put more toward our credit card debt to get them paid off faster but
that doesn't always happen each month. Since we started with CCCS of
NH, we have not used credit cards even for Christmas or birthdays. When
we first started with CCCS of NH we had $57,236 in debt. In 2 years we
have paid $31,895 toward our credit cards and now owe approximately
$34,037.
If we had started with a legitimate debt management company first,
put what we paid Atty. Richard A. Brennan toward our debt, our current
debt would be approximately $12,858. This means we would be completely
credit card debt free in April 2011. With our current payment plan we
will be debt free October 2012.
The Chairman. Thank you very much. That's a stunning,
stunning experience.
Mr. Phil Lehman, Assistant Attorney General in the Office
of North Carolina's Attorney General, Consumer Protection
Division, Raleigh, North Carolina.
We welcome you.
STATEMENT OF PHILIP A. LEHMAN, ASSISTANT ATTORNEY GENERAL,
NORTH CAROLINA DEPARTMENT OF JUSTICE
Mr. Lehman. Thank you, Mr. Chairman. I appreciate the
opportunity to appear before the Committee.
And, as you said, Mr. Chairman, this is a very important
and timely consumer protection issue, and one that is a very
high priority for the attorneys general around the country,
particularly in these very difficult economic times, when
consumers are overwhelmed with debt and looking for ways out
that are legitimate and that work.
Before I continue with my remarks, I'd like to follow up on
what Mr. Kutz and what Mrs. Haas testified to. And I can tell
you, as someone working in an attorney general's office, that
the stories they told are not isolated examples. I, along with
my colleagues around the country, hear these kind of stories
every day. It's a very serious problem, and what they talked
about, again, is not uncommon.
Unfair and deceptive practices in the marketing and
delivery of debt settlement services continue to be a major
problem for consumers and for law enforcement. Financially
distressed consumers are looking for help in managing their
debt burdens. Unfortunately, too many of them have fallen prey
to unscrupulous debt settlement companies. These companies
advertise heavily on television and on the Internet. They make
grandiose promises that they can cut consumers' debt burdens in
half and leave the consumer completely debt-free in 12 to 36
months.
The reality is far different from the rosy view that's
painted in these commercials. In the view of the attorneys
general, deceptive conduct in the sale of debt settlement
services is widespread. In our view, this is not a case of a
reputable and beneficial industry that is marred by a few bad
apples.
Last October, 41 State attorneys general joined in comments
in support of the Federal Trade Commission's proposed rule on
the sale of debt relief services. The comments noted that
complaints to AGs' offices had more than doubled since 2007 and
that the States had brought more than 128 enforcement actions
against debt relief companies. The attorneys general reported
that too many consumers have paid substantial fees for debt
settlement services that were often not provided.
We identified a number of very specific, serious problem
areas that regularly occur in the debt settlement industry.
These are, first, as we have just heard, there are widespread
deceptive representations in the sale of debt settlement
services. In our experience, consumers are regularly misled
about the likelihood of getting all their debts settled, the
length of time it takes to get any debt settled, and the amount
of money it will cost them as fees.
Second, another major problem is the failure of debt
settlement companies to inform consumers about the negative
consequences of the debt settlement process. Based on what
consumers have told us, there are many pitfalls with debt
settlement programs. Consumers are directed not to communicate
with or make payments to their creditors. When that happens,
collection efforts intensify. Debt balances balloon due to
default interest rates and late fees. The consumer's credit
standing will continue to deteriorate. Collection lawsuits and
wage garnishment actions may follow.
And we have heard from the banking industry that they do
have, and would like to offer, options to consumers who are
overwhelmed with debt, but they can't, because consumers are
told not to talk to their creditors and not to make payments.
The third problem, and a very significant one, is the
charging of significant advance fees before any real services
are delivered and before any results are obtained. By the
industry's own admission, the majority of consumers drop out
before debt settlements are completed. Since these fees are
front-loaded, the debt settler gets paid whether or not it
completes any settlements. There is little incentive to perform
with this advance-fee model. If the debt settler does not
perform and the consumer drops out after 6 months, the debt
settler keeps the fees that it has collected, even though the
consumer has obtained no benefit.
This is why the attorneys general that supported the FTC
comments support a prohibition on the collection of advance
fees for debt settlement services. We believe that the
elimination of advance fees is the key to cleaning up this
industry.
My State, North Carolina, has already taken that step. In
2005, our General Assembly enacted an advance-fee ban for debt
settlement services. It has worked well, both for enforcement
purposes and to limit debt settlement abuses.
Debt settlement companies can, and do, operate without
charging very large advance fees. We've been informed by two
major national companies that they can do business in North
Carolina and that they can continue to do business by
collecting fees only after successful settlement of debts. I
know the debt settlement industry strongly opposes any
prohibition or serious limitation on advance fees, but it is
not, as they claim, a death sentence for the industry.
One other thing I would like to mention is that, despite
our North--very strict North Carolina law--a problem that was
highlighted by Mrs. Haas is that attorneys are now getting into
this field, and we have seen a number of examples where
attorneys are used as fronts by debt settlement companies to
get around State regulatory laws. In many States, including
ours, licensed attorneys are exempt from both the debt
settlement laws and, generally, from our unfair and deceptive
practices laws.
The Chairman. Can you further explain that, sir?
Mr. Lehman. Yes, I'd be happy to. The debt settlement
industry--the services are--I would describe them as very
segmented. As Mrs. Haas testified to--she responded to an ad by
Consumer Credit Counseling of America. That is not a debt
settlement company, it is a lead-generator. And the lead-
generators then refer the consumer to somebody. In our case, in
North Carolina, since debt settlement with advance fees is
illegal, lead-generators may refer the consumer to a law firm,
an out-of-state law firm. The law firm is there in name only.
When the consumer signs the agreement, it's in the name of a
law firm. It's a law firm retainer. So, the consumer thinks
they're getting a law firm to represent them, which also would
mean representation in the event of a lawsuit. And so, it gives
the consumer an added comfort zone that they wouldn't get from
a commercial debt settlement company.
The fact of the matter is, the law firm does none of the
work. All of the customer service, negotiation, accounting, and
management, is handled by an outsourced debt settlement
provider. So, the law firm is there in name only, and they then
contend they're not subject to State laws. They do not want to
respond to subpoenas, because of attorney-client privilege, and
so on. But, that is a fairly new problem, and I think it's done
as a way to get around State laws.
In our State, we've had two litigated cases against law
firms and a settlement in another case where a law firm was
involved. So, yes, it is a problem.
Those are my remarks, Mr. Chairman. I'd be happy to answer
any questions. And I can speak on behalf of other attorneys
general offices, that we greatly appreciate the attention that
you and your committee are giving to this very important issue.
Thank you.
[The prepared statement of Mr. Lehman follows:]
Prepared Statement of Philip A. Lehman, Assistant Attorney General,
North Carolina Department of Justice
Chairman Rockefeller, Senator Hutchison, and members of the
Committee, my name is Phil Lehman. I am an Assistant Attorney General
in the Consumer Protection Division of the North Carolina Department of
Justice. I have served in that capacity for 22 years and have
specialized in litigation and legislation relating to consumer credit
and credit fraud. I appreciate the opportunity to appear before the
Committee and to share my experience about consumer protection issues
relating to the business of debt settlement.
I. Unfair and Deceptive Practices in the Offering and Performance of
Debt Settlement Services are Widespread and are a Major
Consumer
Protection Problem for State Attorneys General
Consumer abuses in the marketing and delivery of debt settlement
services have been a major consumer protection problem for state
attorneys general. The problem is particularly acute in the current
economic downturn when many consumers are overwhelmed with debt, are
delinquent in credit card payments, and are looking for legitimate ways
to cope with their debt burden. Unfortunately, too many of these
consumers fall prey to unscrupulous debt settlement businesses that
make grandiose offers of debt reduction but deliver little relief. In
our experience, most consumers are worse off after enrolling in debt
settlement programs. Typically, consumers' debt balances increase with
added interest, their payments are diverted to the debt settlement
company instead of the creditor, and collection efforts, including
legal action, are stepped up against the consumer.
Last October, the National Association of Attorneys General (NAAG)
submitted comments on behalf of 41 attorneys general to the Federal
Trade Commission in support of the FTC's proposed Rule on Debt Relief
Services.\1\ The attorneys general noted that unfair and deceptive
activity in the debt settlement industry was widespread. Citing the
fact that consumer complaints had substantially increased and that
attorneys general had filed over 128 enforcement actions against debt
relief companies, the comments welcomed the comprehensive regulatory
initiative proposed by the FTC:
---------------------------------------------------------------------------
\1\ FTC Notice of Proposed Rulemaking to amend the Telemarketing
Sales Rule to address the sale of debt relief services, 74 Fed. Reg.
41988 (Aug. 19, 2009). The comments submitted by NAAG are available at
http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00192.pdf.
The States view the eradication of unfair and deceptive
practices in the debt relief industry--and the harm caused to
consumers and the marketplace by these practices--as a consumer
protection priority . . . [The States] submit that the
comprehensive bright line approach reflected in the proposed
rules would substantially aid law enforcement agencies in
addressing the harms that have been caused to consumers by
---------------------------------------------------------------------------
unscrupulous practices in the debt relief industry.
In the comments, the attorneys general described some of the
prevailing problematic debt settlement practices based on information
obtained from cases and numerous consumer complaints:
1. Deceptive solicitations, including unsubstantiated claims of
consumer savings and the length of time required to complete
the program. (See sample solicitations attached as Exhibit 1.)
2. Failing to adequately inform consumers that collection
efforts, including lawsuits, will continue against them due to
the extended nonpayment of consumers' accounts while in the
debt settlement program and that the consumer's credit standing
will deteriorate. (Sample solicitation: ``You'll avoid
bankruptcy, put an end to harassing phone calls from creditors,
and allow your credit score to dramatically improve.'')
3. Failing to adequately inform consumers that before debts are
settled, the balances on their credit accounts will increase
significantly due to accumulating interest and late charges.
(Default rates on credit card accounts can be as high as 30
percent, so a consumer's $10,000 debt could rise to $13,000
after 1 year of nonpayment.)
4. Lack of adequate screening and individual budget analysis to
determine whether a debt settlement program is suited for the
consumer.
5. Deceptive disparagement of consumer credit counseling
services and bankruptcy, which are often more effective
alternatives for the consumer.
6. The collection of substantial advance fees before any
meaningful services are rendered, so that the debt settlement
company profits even if the consumer receives no benefits.
(Fees typically range from 15 percent to 18 percent of the
consumer's debt, and are collected in the earlier months of the
program before settlements are concluded.)
7. Advising consumers to cease payments on their credit
accounts and to cease communications with their creditors.
8. Failing to provide regular information to consumers about
collection of fees, status of debt settlement accounts, and
communications with creditors.
The consumer protection problems in the area of debt relief
services are not limited to a few bad actors; they are pervasive
throughout the industry. The whole premise of debt settlement is based
on consumers not paying their debts and not communicating with
creditors, i.e., essentially encouraging breach of contract. The theory
is that the older and more delinquent the debt, the easier it will be
to negotiate. Only after sufficient funds are accumulated in the
consumer's settlement account (after deduction of fees), which can take
a year or more, the debt settler may initiate some settlement
negotiation activity. Consumers are taking a big risk, while interest
charges mount and the debt settler's fees are being collected, that
they will eventually get relief from all their debts.
During the extended period of time while consumers are making
payments to their debt settlement accounts, problems are likely to
arise. Creditors have not agreed to any debt relief plan, they are not
receiving any payments, and they are blocked from offering debt
resolution options directly to their customers. These months of
nonpayment and non-communication lead not only to increased debt, but
also to increased collection efforts and legal action.
Further, a significant portion of the consumer's initial payments
is diverted to the settlement company's fees.\2\ If the consumer drops
out before the settlement process is concluded, as is usually the case,
he or she will lose the fee payments, while facing increased debt
account balances.\3\ The debt settler therefore profits whether or not
it accomplishes anything for its client.
---------------------------------------------------------------------------
\2\ Attached is a copy of a payment schedule offered to a North
Carolina consumer by Heritage Debt Relief in December 2009. It calls
for the payment by the consumer of $6,906 in fees to Heritage. The
consumer has to make monthly payments of $575 for an unspecified period
of time. The consumer's first 5 monthly payments of $575 are allocated
entirely for Heritage's fees, followed by half ($287.74) of the next 14
months payments.
\3\ A study published by the Colorado Attorney General's Office
based on annual reports submitted by debt settlement companies from
2006 through 2008 revealed that only 7.8 percent of consumers who began
debt settlement programs in 2006 had completed them by the end of 2008.
53.3 percent of consumers had dropped out of the programs. The Colorado
information came from licensed debt settlement providers, not outlaws
or ``bad apples.'' See Comments of the Colorado Attorney General on the
FTC's proposed debt relief amendments to the Telemarketing Sales Rule,
http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00189.pdf. In a
lawsuit brought against debt settler National Asset Services (NAS), the
Florida Attorney General alleged that over a six-year period, only 13.5
percent of Florida residents had completed NAS' debt settlement
program. In a similar case brought against NAS, the New York Attorney
General alleged that out of 1,981 New Yorkers enrolled in the NAS
program, only about 3 percent completed it.
---------------------------------------------------------------------------
Because of these rampant consumer abuses in the debt relief
industry, 41 attorneys general specifically support the FTC's proposal
to prohibit debt settlement companies from collecting advance fees. The
advance fee ban, while opposed by much (but not all) of the debt relief
industry, is the key to preventing fraud and ensuring that debt
settlement services will be performed. There is precedent for such an
advance fee prohibition, particularly for suspect services that purport
to help distressed debtors. The Federal Credit Repair Organizations
Act, 15 U.S.C. 1679b(b), and many similar state laws prohibit credit
repair businesses from charging fees until all promised services are
fully performed. Similarly, the Telemarketing Sales Rule, 16 C.F.R.
310.4 (a)(4), prohibits advance fees for loan brokering services,
another business activity characterized by deceptive promises and
minimal performance. Many states prohibit advance fees for foreclosure
relief and mortgage loan modification services because of widespread
consumer fraud in the offering and delivery of those services. The FTC
is also recommending an advance fee prohibition in its proposed Rule on
Mortgage Assistance Relief Services (75 Fed. Reg. 10707, March 9,
2010).
II. North Carolina Law Prohibits Debt Settlement Services If Advance
Fees Are Charged
Debt relief services are not a new phenomenon, nor are the consumer
abuses associated with such services. Over 40 years ago, at least 13
states, including North Carolina, enacted ``debt adjusting'' or ``debt
pooling'' statutes not just to regulate, but to prohibit, the then-
prevailing model of debt settlement. In fact, North Carolina and the
other similar state statutes made debt adjusting a criminal offense.
The 1963 preamble to the North Carolina statute, N.C. Gen. Stat. 14-
423, et seq., explained the reasons for banning debt adjusting
services, reasons which are still very pertinent today:
. . . these [debt adjusting] practices have grown to such
proportions that for the most part they have become a national
menace by preying upon unfortunate people and harassed debtors,
and those engaged in such practices, except for a few, have
engaged in false advertising, have falsely held themselves out
as competent and able to solve debt problems regardless of any
and all circumstances, have lured ignorant and unsuspecting
people into executing contracts heavily loaded in their favor
and have charged large fees for alleged services which results
in piling debt upon debt.\4\
---------------------------------------------------------------------------
\4\ 1963 N.C. Session Laws, Chap. 394.
In 1963, the U.S. Supreme Court upheld the constitutionality of a
similar Kansas debt adjusting statute in a case brought by the Kansas
Attorney General against a company known as ``Credit Advisors.'' The
Court held that the prohibitory statute did not violate due process
rights and noted the State's evidence that the business of debt
adjusting ``lends itself to grave abuses against distressed debtors.''
Ferguson v. Skrupa, 372 U.S. 726.
The original definition of debt adjusting in the North Carolina and
similar statutes covered debt settlement activities but applied only
where the debt adjuster received funds from the consumer to distribute
to the consumer's creditors. To get around the statutes, debt settlers
in recent years arranged for third party bank accounts to receive the
consumer's funds. By this method, the debt settlement company did not
hold consumers' money but could still direct the disbursement of funds
to pay its fees and to pay creditors if and when settlements were
reached.
In 2005, the North Carolina General Assembly, recognizing the
abuses perpetrated by the new breed of debt settlers, amended the debt
adjusting statute to simply prohibit advance fees for any debt
settlement or foreclosure assistance services, whether or not the debt
settler directly managed and disbursed consumer funds. The amendments
have created a bright line test for compliance and have been effective
enforcement tools. The 2005 amendments do not prevent debt settlement
companies from operating in North Carolina as long as no fees are
charged prior to completion of settlements. The Attorney General's
Office is aware of at least two national debt settlement companies
currently doing business in North Carolina without charging advance
fees.
Licensed North Carolina attorneys are generally exempt from the
debt adjusting statute but unfortunately, some attorneys have run their
law firms as debt settlement businesses with some of the worst
deceptive practices in the industry. Two of the North Carolina Attorney
General's litigated enforcement cases have been against out-of-state
law firms who defrauded consumers by diverting funds out of client
settlement accounts. One continuing area of concern is the practice by
some debt settlement companies to use attorneys as fronts to offer
their services in states that have restrictive debt settlement laws. A
debt settlement company will arrange for an out-of-state law firm to
contract with a North Carolina resident. The law firm then assigns all
of the accounting and debt negotiation work back to the debt settlement
firm. To claim an exemption from the debt adjusting law, the law firm
may associate a local North Carolina attorney to represent the client
in name only.
III. Consumers Need Effective Debt Management Assistance
There is clearly a need for legitimate, effective debt relief for
consumers who cannot pay off their credit card accounts and do not want
to file for bankruptcy. However, the current model of debt settlement
is not the answer. Most debt-strapped consumers can benefit from
financial counseling, budgeting, and debt management services offered
by nonprofit consumer credit counseling agencies. These agencies offer
debt management plans that allow for the orderly reduction of debt
under a payment plan agreed to by both the consumer and the creditor.
Fees are nominal and monthly payments are paid promptly to creditors,
not held back for 12 months or more as with debt settlement. While in
the plan, the consumer gets protection from collection contacts.
One of the problems with current debt management programs is that
they do not offer significant principal reduction. The logical next
step, which would benefit both consumers and the banking industry,
would be a combination of a multi-year payment plan followed by
forgiveness of principal after successful completion of the payment
plan. Principal reduction is now being incorporated into mortgage loan
modification programs. Unfortunately, accounting rules relating to debt
charge-offs have prevented principal reduction programs from being
implemented. A coalition of bankers, consumer groups and credit
counseling services have approached the Office of the Comptroller of
Currency (OCC) to authorize these programs but the OCC has not been
receptive to date.
IV. Conclusion
The debt settlement industry has been characterized by deceptive
solicitations, overpromising of results, underperformance of services,
and excessive fees. Too often, debt settlement companies have profited
off of economically distressed consumers while delivering little relief
in return. My colleagues in other attorneys general offices and I
appreciate the attention the Committee is giving this important
consumer protection problem.
Exhibit 1--Sample Debt Settlement Solicitations
Exhibit 2--Sample Debt Settlement Fee Schedule
The Chairman. Am I not correct in saying there are some 86
to 96 of the States' attorneys general that are active in this?
Mr. Lehman. Just from my experience, yes, most--the large
majority of attorneys general are. And, as I said, 41 attorneys
general signed very detailed comments in support of the FTC
rule. And in those comments, which I would commend to the
Committee, there are many examples of the kind that we've heard
from today, and also examples of enforcement actions taken by
attorneys general. But, that's--41 out of 50, that's 82
percent, yes.
The Chairman. Yes, that's what I meant to say.
Thank you very, very much.
Mr. John Ansbach, who is Legislative Director of the United
States Organization for Bankruptcy Alternatives, USOBA, and
General Counsel and Chief Compliance Officer for EFA
Processing, from Houston, Texas.
STATEMENT OF JOHN ANSBACH,
LEGISLATIVE DIRECTOR, UNITED STATES
ORGANIZATIONS OF BANKRUPTCY ALTERNATIVES
Mr. Ansbach. Thank you, Mr. Chairman.
Quick correction. I'm not the Chief Compliance Officer, I
am the Chief Operating Officer of that company. I'm happy to
correct that in the record.
Mr. Chairman, distinguished members, thank you so much for
the opportunity to contribute to this very important meeting
and this very important discussion.
My name is John Ansbach. I am the Legislative Director for
USOBA. We are a trade group based in Houston, Texas. We
represent approximately 200 companies that operate in the debt
settlement industry. In addition to supporting those companies
with best practices, we also serve as a resource to consumers
who are looking for information about the debt relief process,
generally, and how to select an honest and ethical provider in
this industry.
I am also employed, as you pointed out, Mr. Chairman, by a
company that actually performs debt settlement work. In my
role, I directly oversee approximately 100 employees, Texans,
who talk to consumers every day and who work to help these
folks to find a way out of debt without ending up in personal
bankruptcy.
There has been a lot of discussion today about personal
experiences. The Chairman--sir, you've had some stories, and
obviously, we've heard Mrs. Haas' story. If I may, I'd like to
begin my remarks with a consumer story, as well.
A wonderful woman, by the name of Ms. Faith Zabriske,
suffered an injury a few years ago. After utilizing her credit
cards to pay her medical and her living expenses, she fell
behind on those payments. At that point, she did exactly what
the Better Business Bureau and others tell her and so many to
do, which is to simply call your bank; they'll work with you.
What she found instead, and what she was told candidly--the
woman from the bank said, ``I'm not supposed to tell you this,
but until you fall behind on your payments for 6 months, we
can't help you,'' essentially telling her to stop paying her
debts or there would be nothing that the bank could do for her.
She tried credit counseling. They were similarly unhelpful.
And she found her way to a debt settlement company in Dallas,
Texas. After working her debt settlement program and saving the
money and working with the counselor, I am very pleased to
report that Ms. Zabriske is today debt-free. She is on her very
last payments with her last creditor, and is well on her way to
financial stability.
Mr. Chairman, Ms. Zabriske, as well as another gentleman
named Mr. Gary Ross, another consumer that had a very
successful debt settlement experience, are both here today.
They are, in fact--that's Mr. Ross and Ms. Zabriske, who have
held up their hands--they've come today from Texas and
Illinois. I understand it is not possible for them to tell
their story to the Committee, or here in testimony, but I want
the Chairman to know, and the members, that if there is any
interest in visiting with folks who have, in fact, had a good
experience, if there is something instructive in that, then
they would be, both, very happy to appear and talk about what
their experience was.
The Chairman. You must have come up with them at the last
moment, because we asked you--the Committee asked you if you
wanted to have anybody testify, and you declined to have
anybody testify except yourself.
Mr. Ansbach. I understand, Mr. Chairman. I don't think
that's actually accurate. I do understand that the Committee
staff visited with staff from both USOBA and our sister trade
group. I understand that Mr. Ross, in particular--his name and
contact information were provided. Of course, we only found out
about this hearing 7 days ago. But, in any event, I assume that
their ability to talk and, certainly, to share perhaps what
makes a good debt settlement versus a bad experience, such as
Mrs. Haas had--perhaps there is some instruction in that. And
again, they're here, if anybody would like to visit with them.
It is certainly the case, Mr. Chairman, that--and I want to
be very clear about this--despite the fact that Ms. Zabriske or
Mr. Ross had a good experience--and, certainly, we are aware of
hundreds and thousands of others who have had a good experience
in debt settlement, both----
The Chairman. Would you say that again? You're aware of
hundreds of thousands of people that have had----
Mr. Ansbach. Hundreds and thousands. Yes, sir.
The Chairman. What is hundreds and thousands?
Mr. Ansbach. Well, in particular, the Federal Trade
Commission, when it held its hearing--a public forum and open
public comment, there were 200 comments that were submitted by
consumers directly who had, unlike me, been through a debt
settlement program. And they ran 40-to-1 in support of, and in
favor of, at least preserving the options of debt settlement.
In addition to those, my company alone, and many of those that
are represented here today, also have literally piles and piles
of written testimonials that we would be very happy to share.
We don't think, by any means, that that means there is no
problem in the industry. In fact, I would very much agree with
what's been said by Mr. Lehman and Mr. Kutz, and having heard
Mrs. Haas' experience, it's very clear to us that we have
significant challenges in our industry. And, candidly, it's the
reason that folks, like myself, my counterpart at TASC, and a
number of us, spend so much of our time going to different
states, working on debt settlement-specific legislation.
Along these lines, I wanted to share a couple of examples
of what we think is a very important and needed regulatory
approach. I know Senator Boxer is not with us today, but in
California specifically, we have been working now for 3 years
on Assembly Bill 350, which not only has fee regulation in it,
which I think we all agree is critical, but it is a
comprehensive piece of legislation that has insurance and
surety and licensing and bonding requirements, as well as some
of the things that the Federal Trade Commission have proposed,
which we fully support. AB 350 has passed the House. It is
pending in the Senate. We are hopeful, although, obviously,
they have budget difficulties in the State, and I'm not sure
where that will go, but we're hopeful it will move.
I think an even better model is the Tennessee model.
Tennessee passed a piece of legislation that is very specific
on fees. And I want to be very clear on----
The Chairman. Mr. Ansbach, this is fascinating testimony,
and you're speaking to your own advantage by not speaking to
the nature of the hearing. You're talking about what states are
doing to try and get rid of the kinds of problems that your
association causes. You're leading us to believe that what you
do is absolutely wonderful and that all of these other
experiences are just anomalies.
It is our impression that it is quite exactly the opposite
of that and that you're fundamentally making happy talk in
front of a very serious problem. And I don't appreciate that.
Now, if you have testimony which reflects upon, not what
States are doing, but how you see this problem, which is being
represented here and which will be further represented by the
person next to you--the lady next to you--that's what I want to
hear. That's what you're here for. You're not here to talk
about what various States are doing.
Mr. Ansbach. Mr. Chairman, I do apologize if in any way
I've insulted this body. Because we were discussing fee
regulation, I thought it would be instructive to know what has
been worked on for the last 5 years. It was only in that
respect that I wanted to offer what Tennessee has done.
The Chairman. OK, well, you've done that now, so let's get
back to the subject.
Mr. Ansbach. What I want to be very clear about, Mr.
Chairman, is--and I, again, apologize--this is not a rosy
picture. I have 160 people that I employ, that do this work
every single day. We work very hard to help folks. Now, that
does not mean that we are 100-percent successful and that, in
any way, Mrs. Haas or any of the other stories have been
anomalies. I don't think that's true at all. I think there are
some significant issues in the industry, and we need to address
them.
With that said, the Federal Trade Commission has proposed a
number of things in the Notice of Proposed Rulemaking. Eighty
percent of it is incredibly important. We need more disclosure
requirements. We need more prohibited misrepresentation rules.
We need fair advertising rules. The one portion of the rule
that we are unable to support, as Mr. Lehman has pointed out,
is the advance-fee ban.
The Chairman. Yes, which is--of course, is the only thing
that makes you money.
Mr. Ansbach. Respectfully, I would----
The Chairman. I apologize, Senator McCaskill; I seem to be
asking questions, and I shouldn't be doing that. But, I can't
quite help myself.
Senator McCaskill. You'll get a chance, Mr. Chairman.
The Chairman. Oh, I know that. I'm just taking any chance I
can get.
[Laughter.]
Senator McCaskill. I just thought maybe you, you know,
hadn't been around here long enough, and I could----
The Chairman. Yes, right. Right.
[Laughter.]
The Chairman. Please proceed.
Mr. Ansbach. Yes, sir.
The Chairman. But, you don't disagree with my statement,
that the one thing that you don't agree with is the one thing
which puts money in your pocket.
Mr. Ansbach. I do, respectfully, disagree. Yes, sir.
The Chairman. And how would you disagree with--no, I'll ask
that question later. Proceed with your testimony.
Mr. Ansbach. Yes, sir.
The advance-fee ban that's proposed essentially says that a
small business owner that does this work must operate without
revenue for up to a year. That is the absolute--I mean, that's
what it does. And because it--the reason it's a year is because
consumers must have time to create a savings. In that year, up
to that time period, folks that I employ, and others, must be
able to stay on the phones, to talk with them, to empower them
with information about this process. The reality is, I cannot
afford to pay my employees for a year without any revenue at
all. That is the reason that we characterize this as the death
of the industry. That is the reason, I suspect, that 85 percent
of our members have indicated, in response to surveys, that
they will go out of business if an advance-fee ban, in
particular, is passed.
All--to be very clear, all of the rest of the rule is
incredibly necessary and needed. There are, absolutely, issues
in this industry that must be addressed, but an advance-fee
ban, actually, as Mr. Lehman has already pointed out, has a
very obvious consequence. Most, if not all, of our members
don't do business in North Carolina anymore, because they can't
afford to. I don't see that as a successful outcome, because
what has then happened, consumers no longer have any other
option. They have bankruptcy, they have credit counseling, and
nothing in the middle.
I do not believe, with all due respect, that that is the
consumer-protective outcome that we are trying to get to with
this regulation.
Mr. Chairman, I--you've been very gracious with your time.
If I may just share a few very last things. And I will promise
to answer any questions that you may have.
Under the very fee structure that is being proposed to be
outlawed, our members, as well as our sister trade group's
members, have resolved almost $3 billion in unsecured debt for
consumers. Clearly, there are positive results that are
happening in this industry. We would simply ask that we be
given the opportunity to stay at the table. And again, we're
incredibly grateful that we were invited today. We simply want
to continue to participate in this process. We want to help
find appropriate and strong consumer protection regulation,
whether it is here in Washington, D.C., or in the states.
And in that regard, I'm happy to answer any questions that
you might have.
[The prepared statement of Mr. Ansbach follows:]
Prepared Statement of John Ansbach, Legislative Director,
United States Organizations of Bankruptcy Alternatives
Chairman Rockefeller, Ranking Member Hutchison, distinguished
members of the Committee, thank you so much for the opportunity to be
here today and to contribute to what I hope is a helpful and
informative hearing for you on the topic of debt settlement.
My name is John Ansbach, and I volunteer in service as the
Legislative Director of the Unites States Organizations for Bankruptcy
Alternatives or ``USOBA.'' USOBA is a trade association in Houston
Texas whose members are 200 companies that offer debt relief services
to financially strapped consumers who are trying to avoid bankruptcy.
In addition to supporting these member companies, USOBA also serves as
a resource to consumers who are trying to find out information about
the debt resolution process and what to look for in an honest, ethical
provider. It is in my capacity as the Legislative Director of USOBA
that I appear before you today.
I want you to know, as well, so that I can shed light on other
areas of interest to the Committee, that I am also the Chief Operating
Officer and Genera Counsel of what we in the industry refer to as a
``back-end'' company. As such, our company works for other companies
servicing their clients. In this role, I directly oversee more than 100
Texas employees in the City of Frisco just north of Dallas who talk to
debt settlement consumers every day, supporting them, negotiating for
them, giving them information about the unsecured debt process and
otherwise helping them to meet their savings goals and succeed in their
programs.
The title of today's hearing is ``The Debt Settlement Industry--The
Consumer's Experience.'' In this regard, I want to offer as much
information as I can to help this committee better understand debt
settlement and what it can and has done to help consumers.
In this regard, please let me begin today with a real life example
of debt settlement. It is the story of Faith Zabriske, a wonderful
woman in my home state of Texas who has lived the nightmare of being
overwhelmed by debt, and who utilized the services of a debt settlement
company to not only survive that nightmare, but to emerge from it
stronger and financially stable.
Ms. Zabriske suffered an injury a few years ago and like many
Americans was forced to turn to her credit cards to pay medical bills
and other living expenses to survive.
Although she recovered from her injuries, she was soon overwhelmed
by the debt created by her ordeal. At that point she did exactly what
the Better Business Bureau and consumer advocates tell consumers to do
who are in such situations: she called her credit card company to find
out if they would work with her on repayment of the debt. At the time,
Ms. Zabriske had a credit score in the high 700s and had always paid
her debts timely.
Unfortunately, what Ms. Zabriske found from her creditor was not
help, but rather a refusal to work with her. She was told that until
she was 6 months delinquent, the bank wouldn't work with her. She tried
credit counseling, as well, but they were similarly unhelpful.
It wasn't until she enrolled in a debt settlement program that she
found true support. After working her program, saving money as needed,
her provider was able to help Ms. Zabriske settle all of her debts and
today she is debt free, on the path to financial stability.
Ms. Zabriske is here today, having traveled all the way from Texas
to tell her story. USOBA offered to have her appear today to tell this
story herself, but she was not extended an invitation.
Mr. Gary Ross from Illinois, another consumer who had a successful
experience with debt settlement is also here and prepared to tell his
story. HE was also offered, but like Ms. Zabriske was not extended an
opportunity to tell his story.
If any member of this committee or anyone else would like to visit
with either of these good folks to hear their story and their
experience, they welcome the opportunity to visit after this hearing.
Ladies and gentlemen of this committee, Ms. Zabriske and Mr. Ross
represent just two of hundreds of stories of consumers who have had
successful outcomes in debt settlement programs. In fact, in the
Federal Trade Commission's own public comment period, of the 200
consumer testimonials the Commission received, we understand those
testimonials ran 40:1 in favor and in support of preserving debt
settlement as an important option for consumers in need.
And in fact, that is truly what we are here to talk about:
preserving options. The truth is that USOBA, as well as our sister
trade group the Association of Settlement Companies (``TASC''),
supports strong consumer protection regulation in the debt settlement
industry, including the overwhelming majority of what has been proposed
by the FTC in its August Notice of Public Rulemaking. Stronger consumer
disclosure requirements are needed and should be adopted. Rules
proscribing certain misrepresentations in advertising are needed and
should be adopted. In fact, USOBA and TASC have been arguing and
working in support of these actions as well as others for more than 5
years now in roughly 20 states, including but not limited to licensing
and registration requirements; bonding and insurance requirements;
strong advertising rules; reasonable fee regulation including limits on
amount and timing of fee collection; contract requirements that set out
specific language that must be included for the benefit of consumers;
requiring education for consumers; even requiring multiple language
efforts where debtors in need don't speak English as a first language
to ensure an understanding of the program. These efforts are ongoing
even as we sit here today in California, Texas, Florida, Pennsylvania,
New York, Illinois, Connecticut and Maryland. Nevada, Tennessee,
Minnesota, Oregon, Utah, Montana, Delaware, Rhode Island and Colorado
have already adopted debt settlement statutes with input from both
consumer groups and industry trade organizations.
In short, the industry has supported and continues to work for
strong consumer protection regulation of this industry; regulation that
manages to enact such protection while preserving the ability of
honest, ethical companies to provide consumers with the services and
options they need.
What we cannot support, however, and what we understand the FTC is
attempting to implement via the Telemarketing Sales Rule, is fee
regulation that would kill the industry. The FTC's proposed ``advance
fee ban'' would put 85 percent of our members--most of whom are small
business owners--out of business. They would accomplish this by
essentially starving these businesses of revenue, disallowing the
collection of any fees for services rendered unless and until there was
a settlement of a debt, a process that often takes up to a year or
more. In short, the FTC proposes to require American businesses owners
to work for free for up to a year--paying their own employees to talk
to and help consumers; paying their rent; addressing expenses related
to information technology and required infrastructures--all the while
being unable to collect fees from the very consumers they are trying to
help.
The truly troubling part of this effort is that there exists
another more reasonable alternative, which the states themselves have
adopted and which would be preempted by this effort. More specifically,
the states of Colorado, Utah, Montana, Nevada, Delaware and Tennessee
have adopted a capped and limited pay as you go fee structure that both
limits the amount of money a consumer may be charged and when the fees
may be collected.
Tennessee in particular has a very workable system that balances
good consumer protection and the rights of honest ethical providers to
be compensated for their services. Under the Tennessee law, a provider
may charge in one of two ways: a savings model that allows for fee
recovery based on what the provider saves the consumer; and, a ``pay as
you go'' fee system, under which no more than 17 percent of a
consumer's enrolled debt may be charged. Further, fees cannot be
collected any sooner than in equal payments spread out over half the
life of a consumer's program. In a typical case where $10,000 in debt
is enrolled then, a consumer may not be charged more than $1,700. This
fee must then be collected over half the life of a program. Where
programs typically last thirty-six months, half the life would be
eighteen months, thus fees of $1,700 over eighteen months or $94 per
month. The result is a good, middle of the road approach than ensures a
consumer does not face high up front fees, while preserving a modicum
of revenue for his or her provider, allowing the business to pay its
employees and rent.
Distinguished members, the allegations that are often made by the
consumer groups in particular, and which you may hear today, resonate
around one critical point: that debt settlement services are ``rarely
if ever provided to consumers'' as promised. Well ladies and gentlemen,
please allow me to report the following facts that we believe refute
such assertions:
USOBA members alone have settled more than $1.4 billion in
unsecured debt over the last few years.
This debt was settled for consumers who experienced an
average reduction of 53 percent; that is, they settled their
debt for 47 cents on the dollar.
Our members alone are right now servicing more than 277,000
consumers, consumers who will be stranded and left to
bankruptcy if the FTC's rule is passed as drafted and these
providers go out of business.
When you add TASC's members into this mix, you find that
roughly $3 billion of unsecured debt has been settled for
America consumers.
If I may, let me also add for you the very most recent numbers from
my company, just one USOBA member company that services other providers
working for consumers:
Last month alone, in March 2010, we:
Settled 1,491 individual accounts with a value at enrollment
of $9.14 million.
Those accounts were settled for $3.9 million, or $0.36 on
the dollar, a savings of 64 percent to the consumers.
Over the last 3 months (Jan-March), we:
Settled 3800 accounts (3,793) with a total value at
enrollment of $22.9 million.
Those accounts were settled at an average of $0.36 on the
dollar, again saving those consumers 64 percent on their
outstanding debts.
To date, my company has settled more than 39,000 accounts with a
value of $214.5 million at approximately $0.40 on the dollar--a 60
percent savings to American consumers. We are currently working on
settling $1.17 billion in debt for our consumers, again most if not all
of whom will be stranded and abandoned to bankruptcy if we are forced
out of business by the FTC's proposed fee ban.
On this last note, I do want you to know the impact of the FTC's
proposed fee regulation on employees. In my home state of Texas, alone,
we estimate more than 1,100 Texans will lose their jobs if this rule is
adopted. These are hard working folks employed by USOBA member
companies, only. If we add the TASC companies, we estimate this number
is closer to 2,500-3,000 jobs lost just in Texas. While we do not have
numbers in every state, we do know that hundreds if not thousands of
more jobs will be lost from this rule, specifically in California and
Florida, where debt settlement is a much needed service due to economic
conditions and the still lingering effects of the housing bubble. In
short, it is likely if not certain that as many as 10,000 Americans
will lose their jobs if the FTC rejects the approach adopted by the
states and proceeds instead with the radical fee ban they propose.
Senators, we know you--like USOBA and TASC--want to protect
consumers. And we know you--like USOBA and TASC--want to ensure that
honest, ethical debt settlement companies can continue to help those
consumers, keeping employed the thousands of hard working folks who
dedicate their days to helping people get out of debt responsibly and
ethically. In that, please allow us to work with you and the Commission
on a reasonable approach that includes reasonable fee regulation, as
well as the many other consumer protections we and so many others
support.
On behalf of the 160 people in my company in Frisco, Texas, the
thousands of others employed by our members companies, the more than a
quarter million consumers they serve right now across the country, as
well as the folks employed by TASC and the consumers they serve, I
thank you so much for the opportunity to contribute to this discussion
and I look forward to trying to answer any questions you may have.
The Chairman. Thank you.
And finally, the Honorable Julie Brill, Commissioner of the
Federal Trade Commission.
STATEMENT OF HON. JULIE BRILL, COMMISSIONER,
FEDERAL TRADE COMMISSION
Ms. Brill. Thank you very much.
The Chairman. We're trying to save your life, incidentally.
Ms. Brill. Oh, really?
The Chairman. Of the FTC. There are those who are----
Ms. Brill. Oh, yes.
The Chairman.--who are malevolently proceeding to try and
remove your powers. That will not happen.
Ms. Brill. And we certainly appreciate all your efforts in
that regard, Mr. Chairman. Thank you very much.
Chairman Rockefeller, members of the Committee, I am Julie
Brill, a Commissioner of the Federal Trade Commission.
Thank you for inviting me to testify about a critical issue
for consumers during these difficult economic times:
problematic practices in the debt relief industry.
I'm honored to be here today in my brand new role as an FTC
Commissioner. As you know, I've spent almost my entire career
working to protect consumers from unscrupulous business
practices. I'd like to thank the Committee for giving me the
opportunity to bring my consumer protection skills and
experience to the FTC.
American consumers are overwhelmed with mortgage and credit
card debt. At least 13 million Americans owe $10,000 or more in
credit card debt. Of those households that are carrying credit
card debt, the average amount of the debt load is approximately
$16,000. And over 14 million American households are 30 or more
days delinquent in their credit card bills. Many of these
consumers have lost their jobs or have seen their working hours
cut back, making their debt load all the more worrisome.
Such financially distressed consumers are vulnerable to
schemes that promise miraculous solutions to their debt
problems. As I stated in my confirmation hearing, these
consumers have a target on their back.
You've heard compelling testimony this afternoon from the
GAO regarding the deceptive and unfair marketing of debt
settlement services. While there are some consumers, like Ms.
Zabriske and Mr. Ross, who have benefited from the services
offered by debt settlement companies, the GAO's disturbing
findings are consistent with what the FTC has encountered in
many of our own investigations. Debt settlement firms
frequently convince consumers to pay large fees by falsely
promising to obtain deep reductions in the consumers' debt.
You've probably heard the advertisements on the radio or
late-night TV: ``In debt? Can't pay your bills? Debt collectors
calling you at all hours? Call us now. We will negotiate with
your creditors so that you can become debt-free.'' Through
advertisements like these and follow-up aggressive
telemarketing pitches, debt settlement companies often make
dramatic savings promises that they cannot keep.
They also sometimes make misleading statements about the
fees that the consumers must pay for their services. Consumers
may end up shelling out large sums of money up front, hundreds
or even thousands of dollars, with nothing in return but empty
promises.
Now, keep in mind, the financially strapped consumers who
respond to these sales pitches are having trouble paying
creditors before piling on the fees of a debt settlement
company. Many consumers, like Mr. Spaulding in West Virginia
and Mr. and Mrs. Haas, who are here today, simply can't keep up
with paying the new fees and covering their existing debt, and
are forced to drop out of these programs, often forfeiting all
the money they've paid in fees, leaving them worse off than
when they started.
The Commission has been actively pursuing those debt relief
service providers and other fraudsters who prey on Americans
hardest hit by the financial crisis. In an effort to improve
law enforcement and set clear standards for the debt relief
industry, the Commission published a proposed rule last August.
The proposal would amend the telemarketing sales rule to cover
debt relief providers that promote and sell their services over
the telephone.
It would be premature to speculate about whether the
Commission will issue a final rule, and, if so, what the rule
might contain. But, I can assure you that the proceeding has
been thorough, thoughtful, transparent, and fair. The
Commission received written comments from over 300 individuals,
corporations, and organizations. The Commission also hosted a
public forum to discuss the proposed amendments, with
stakeholders representing a wide variety of viewpoints. And the
Commission staff has had extensive discussions with industry
representatives, consumer advocates, and other interested
parties.
Thank you, again, for the opportunity to describe how the
FTC is protecting financially strapped consumers from those
debt relief services that engage in deceptive and abusive
practices.
I'd be happy to answer any questions.
[The prepared statement of Ms. Brill follows:]
Prepared Statement of Hon. Julie Brill, Commissioner,
Federal Trade Commission
I. Introduction
Chairman Rockefeller, Ranking Member Hutchison, and members of the
Committee, I am Julie Brill, a Commissioner of the Federal Trade
Commission (``FTC'' or ``Commission'').\1\ I appreciate the opportunity
to appear before you today, and the Commission thanks this Committee
for its interest in the work of the FTC to protect consumers from
deception and abuse in the sale of debt relief services.
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\1\ The views expressed in this statement represent the views of
the Commission. My oral presentation and responses to any questions you
may have are my own, however, and do not necessarily reflect the views
of the Commission or any other Commissioner.
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The Commission has long been active in protecting consumers of
financial products and services offered by entities within the agency's
jurisdiction. With Americans continuing to feel the effects of the
recent economic downturn, the Commission has stepped up its efforts to
stop fraudulent financial schemes that exploit consumers who are
particularly vulnerable as a result of financial distress. Stopping
deceptive debt relief practices is one of our highest consumer
protection priorities. Providers of debt relief services purport to
help people who cannot pay their debts by negotiating on their behalf
with creditors. Debt settlement companies, for example, market their
ability to dramatically reduce consumers' debts, often by making claims
to reduce debt by specific and substantial amounts, such as ``save 40
to 60 percent off your credit card debt.'' To be sure, some debt relief
services do help consumers reduce their debt loads. In too many
instances, however, consumers pay hundreds or thousands of dollars for
these services but get nothing in return.
The FTC utilizes its four principal tools to protect consumers of
debt relief services: law enforcement, rulemaking, consumer education
efforts, and research and policy development. To halt deceptive and
abusive practices and return money to victimized consumers, the
Commission has brought 20 lawsuits in the last 7 years against sham
nonprofit credit counseling firms, debt settlement services, and debt
negotiators, including 6 in the past year alone.\2\ These cases have
helped over 475,000 consumers who have been harmed by deceptive and
abusive practices.\3\ The Commission continues to actively investigate
debt relief companies and will continue aggressive enforcement in this
arena. As the Commission's law enforcement experience has shown,
victims of these schemes often end up more in debt than when they
began. Especially in these difficult economic times, when so many
consumers are struggling to keep their heads above water, this is
unacceptable.
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\2\ A list of the Commission's law enforcement actions against debt
relief companies is attached as Appendix A.
\3\ In addition to consumers who lost money from fraudulent debt
relief companies, hundreds of thousands, if not millions, of consumers
have been harassed by automated robocalls pitching services in
violation of the Do Not Call provisions of the Telemarketing Sales
Rule. The Commission has charged companies engaging in these robocalls
with violations of the rule. See, e.g., FTC v. Economic Relief Techs.,
LLC, No. 09-CV-3347 (N.D. Ga., preliminary injunction issued Dec. 17,
2009); FTC v. 2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill.,
preliminary injunction issued Dec. 17, 2009); FTC v. JPM Accelerated
Servs. Inc., No. 09-CV-2021 (M.D. Fla., preliminary injunction issued
Dec. 31, 2009).
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Below, this testimony provides an overview of the three common
types of debt relief services, as well as the Commission's law
enforcement efforts with respect to each. The testimony then describes
the Commission's proposal to amend its Telemarketing Sales Rule
(``TSR'') \4\ to strengthen the agency's ability to stop deception and
abuse in the provision of debt relief services. Finally, the testimony
addresses the FTC's ongoing efforts to educate consumers about debt
relief options and how to avoid scams.\5\
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\4\ 16 C.F.R. 310.1 et seq.
\5\ With respect to its research and policy development in this
area, in September 2008, the Commission held a public workshop entitled
``Consumer Protection and the Debt Settlement Industry,'' which brought
together stakeholders to discuss consumer protection concerns
associated with debt settlement services. Workshop participants also
debated the merits of possible solutions to those concerns. An agenda
and transcript of the Workshop are available at www.ftc.gov/bcp/
workshops/debtsettlement/index.shtm. Public comments associated with
the Workshop are available at www.ftc.gov/os/comments/
debtsettlementworkshop/index.shtm.
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II. The Commission's Authority
The Commission enforces Section 5 of the FTC Act, which prohibits
unfair or deceptive acts or practices in or affecting commerce,\6\ as
well as the Telemarketing and Consumer Fraud and Abuse Prevention Act
(``Telemarketing Act''),\7\ and the associated TSR that prohibit
certain deceptive and abusive telemarketing practices.\8\ The
Commission has used this authority to challenge debt relief providers
within its jurisdiction \9\ who have engaged in deceptive or abusive
practices. In addition, the Commission works to protect consumers from
a wide range of other unfair, deceptive, and abusive practices in the
marketplace, such as credit-related and government grant scams,
mortgage loan modification scams, deceptive marketing of health care
products, deceptive negative option marketing, and business opportunity
and work-at-home schemes.\10\ The FTC works closely with many state
attorneys general and state banking departments to leverage resources
in consumer protection.
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\6\ 15 U.S.C. 45.
\7\ 15 U.S.C. 6101-6108. Pursuant to the Telemarketing Act's
directive, the Commission promulgated the original TSR in 1995 and
subsequently amended it in 2003 and in 2008.
\8\ The Commission also has law enforcement authority and, in some
cases, regulatory powers under a number of other consumer protection
statutes specifically related to financial services, including the
Truth in Lending Act, 15 U.S.C. 1601-1666j; the Consumer Leasing
Act, 15 U.S.C. 1667-1667f; the Fair Debt Collection Practices Act,
15 U.S.C. 1692-1692o; the Fair Credit Reporting Act, 15 U.S.C.
1681-1681x; the Equal Credit Opportunity Act, 15 U.S.C. 1691-1691f;
the Credit Repair Organizations Act, 15 U.S.C. 1679-1679j; the
Electronic Funds Transfer Act, 15 U.S.C. 1693-1693r; the privacy
provisions of the Gramm-Leach-Bliley Act, 15 U.S.C. 6801-6809; and
the Omnibus Appropriations Act of 2009, Pub. L. No. 111-8, 626, 123
Stat. 524 (Mar. 11, 2009).
\9\ The FTC Act exempts banks and other depository institutions and
bona fide nonprofits, among others, from the Commission's jurisdiction.
15 U.S.C. 44 and 45(a)(2). These exemptions apply to the
Telemarketing Act and the TSR as well.
\10\ Since the beginning of 2009, the FTC has brought 40 cases
against defendants engaged in deceptive practices targeting
financially-distressed consumers.
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III. Overview of Debt Relief Services and FTC Law Enforcement Efforts
Debt relief services have proliferated over the past few years as
greater numbers of consumers are struggling with debts they cannot pay.
A range of nonprofit and for-profit entities--including credit
counselors, debt settlement companies, and debt negotiation companies--
offer to help consumers facing debt problems. As detailed below,
consumers have complained of deceptive and abusive practices in all of
these services, resulting in the FTC and state enforcement and
regulatory bodies bringing numerous cases.\11\
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\11\ The Commission has addressed similar problems with respect to
companies offering to resolve consumers' mortgage debts. The Commission
has engaged in an aggressive, coordinated enforcement initiative to
shut down companies falsely claiming the ability to obtain mortgage
loan modifications or other relief for consumers facing foreclosure. In
the past year, the FTC has brought 17 cases (against more than 90
defendants) targeting foreclosure rescue and mortgage modification
frauds, with other matters under active investigation. In addition,
state enforcement agencies have brought more than 200 cases against
such firms. Further, as directed by Congress under the Omnibus
Appropriations Act of 2009, Pub. L. No. 111-8, the Commission has
initiated a rulemaking proceeding addressing the for-profit companies
in this industry. Under the proposed rule, companies could not receive
payment until they have obtained for the consumer a documented offer
from a mortgage lender or servicer that comports with any promises
previously made. Mortgage Assistance Relief Services, 75 Fed. Reg.
10707 (Mar. 9, 2010).
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A. Credit Counseling Agencies
Credit counseling agencies (``CCAs'') historically were nonprofit
organizations that worked as liaisons between consumers and creditors
to negotiate ``debt management plans'' (``DMPs''). DMPs are monthly
payment plans for the repayment of credit card and other unsecured debt
that enable consumers to repay the full amount owed to their creditors
but under renegotiated terms that make repayment less onerous.\12\
Credit counselors typically also provide educational counseling to
assist consumers in developing a manageable budget and avoiding debt
problems in the future. Beginning in the late 1990s, however, some CCAs
registered as nonprofit organizations with the Internal Revenue
Service, but in reality operated as for-profit companies and engaged in
aggressive and illegal marketing practices. Other CCAs incorporated and
openly operated as for-profit companies.
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\12\ To be eligible for a DMP, a consumer generally must have
sufficient income to repay the full amount of his or her debts,
provided that the terms are adjusted to make such repayment possible.
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Since 2003, the Commission has filed six cases against for-profit
credit counseling providers for deceptive and abusive practices.\13\ In
one of these cases, the FTC sued AmeriDebt, Inc., at the time one of
the largest CCAs in the United States.\14\ On the eve of trial, the FTC
obtained a $35 million settlement, and thus far has distributed $12.7
million in redress to 287,000 consumers.\15\ In the various cases, the
FTC charged that the credit counseling agencies engaged in several
common patterns of deceptive conduct in violation of Section 5 of the
FTC Act and the TSR, including:
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\13\ See Appendix A (items 10, 12, 13, 16, 18, and 20).
\14\ FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. MD., final order
May 17, 2006).
\15\ See FTC Press Release, FTC's AmeriDebt Lawsuit Resolved:
Almost $13 Million Returned to 287,000 Consumers Harmed by Debt
Management Scam (Sept. 10, 2008), www.ftc.gov/opa/2008/09/
ameridebt.shtm. A court-appointed receiver is continuing to track down
the defendant's assets, and the FTC expects to make another
distribution this year.
misrepresentations about the benefits and likelihood of
success consumers could expect from the services, including the
savings they would realize; \16\
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\16\ See United States v. Credit Found. of Am., No. CV 06-3654
ABC(VBKx) (C.D. Cal., final order June 16, 2006); FTC v. Integrated
Credit Solutions, Inc., No. 06-806-SCB-TGW (M.D. Fla., final order Oct.
16, 2006); FTC v. Debt Mgmt. Found. Servs., Inc., No. 04-1674-T-17-MSS
(M.D. Fla., final order Mar. 30, 2005).
misrepresentations regarding CCA fees, including false
claims that they did not charge upfront fees; \17\ and
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\17\ See FTC v. Express Consolidation, No. 06-cv-61851-WJZ (S.D.
Fla., final order May 5, 2008); FTC v. AmeriDebt, Inc., No. PJM 03-3317
(D. MD. 2006).
deceptive statements regarding their purported nonprofit
nature; \18\
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\18\ See FTC v. Integrated Credit Solutions, Inc., No. 06-806-SCB-
TGW (M.D. Fla. 2006); FTC v. Express Consolidation, No. 06-cv-61851-WJZ
(S.D. Fla. 2008); United States v. Credit Found. of Am., No. CV 06-3654
ABC(VBKx) (C.D. Cal. 2006); FTC v. Debt Mgmt. Found. Servs., Inc., No.
04-1674-T-17-MSS (M.D. Fla. 2005); FTC v. AmeriDebt, Inc., No. PJM 03-
3317 (D. MD. 2006). Although the defendants in these cases had obtained
IRS designation as nonprofits under Section 501(c)(3) of the Internal
Revenue Code, they allegedly funneled revenues out of the CCAs and into
the hands of affiliated for-profit companies and/or the principals of
the operation. Thus, the FTC alleged that the defendants were
``operating for their own profit or that of their members'' and fell
outside the nonprofit exemption in the FTC Act. 15 U.S.C. 44.
violations of the TSR's provisions that require certain
disclosures and prohibit misrepresentations, as well as the
requirements of the TSR's Do Not Call provisions.\19\
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\19\ See FTC v. Express Consolidation, No. 06-cv-61851-WJZ (S.D.
Fla. 2007); United States v. Credit Found. of Am., No. CV 06-3654
ABC(VBKx) (C.D. Cal. 2006).
Over the last several years, in response to abuses such as these,
the IRS also has challenged a number of purportedly nonprofit CCAs--
both through enforcement of existing statutes and new tax code
provisions--resulting in the revocation, or proceedings to revoke, the
nonprofit status of 41 CCAs.\20\ In addition, state authorities have
brought at least 21 cases against CCAs under their own statutes and
rules.
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\20\ Eileen Ambrose, Credit firms' status revoked; IRS says 41 debt
counselors will lose tax-exempt standing, Baltimore Sun, May 16, 2006;
see generally TSR Proposed Rule, 74 Fed. Reg. 41988, 41992 (Aug. 19,
2009). To enhance the IRS's ability to oversee CCAs, Congress amended
the IRS Code in 2006, adding Section 501(q) to provide specific
eligibility criteria for CCAs seeking tax-exempt status as well as
criteria for retaining that status. See Pension Protection Act of 2006,
P.L. 109-280, 1220 (Aug. 2006) (codified at 26 U.S.C. 501(q)).
Among other things, Section 501(q) of the Code prohibits tax-exempt
CCAs from refusing to provide credit counseling services due to a
consumer's inability to pay or a consumer's ineligibility or
unwillingness to agree to enroll in a DMP; charging more than
``reasonable fees'' for services; and, unless allowed by state law,
basing fees on a percentage of a client's debt, DMP payments, or
savings from enrolling in a DMP. In addition, as a result of changes in
the Federal bankruptcy code, 158 nonprofit CCAs, including the largest
entities, have been subjected to rigorous screening by the Department
of Justice's Executive Office of the U.S. Trustee. Finally, nonprofit
credit counseling agencies must comply with state laws in 49 states,
most of which specify particular fee limits.
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B. Debt Settlement Services
For-profit debt settlement companies purport to obtain lump sum
settlements for consumers with their unsecured creditors for
significantly less than the full outstanding balance of the debts.
Unlike a traditional DMP, the goal of a debt settlement plan is to
enable the consumer to repay only a portion of the total owed. Debt
settlement providers heavily market through Internet, television,
radio, and print advertising. The advertisements typically make claims
about the company's supposed ability to reduce consumers' debts to a
fraction of the full amount owed, and then encourage consumers to call
a toll-free number for more information.\21\ During the calls,
telemarketers repeat and embellish many of these claims.
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\21\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D.
Colo., final order Apr. 11, 2008); FTC v. Edge Solutions, Inc., No. CV-
07-4087 (E.D.N.Y., final order Aug. 29, 2008); FTC v. Connelly, No. SA
CV 06-701 DOC (RNBx) (C.D. Cal., final order Oct. 2, 2008); FTC v.
Jubilee Fin. Servs., Inc., No. 02-6468 ABC (Ex) (C.D. Cal., final order
Dec. 12, 2004).
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Most debt settlement companies charge consumers hundreds, or even
thousands, of dollars in upfront fees, in many cases with the entire
amount of fees due within the first few months of enrollment and before
any debts are settled. An increasing number of providers spread their
fees over a longer period--for example, 12 to 18 months--but consumers
generally still pay a substantial portion of the fees before any of
their payments are used to pay down their debt. And most consumers drop
out of these programs before completion because they cannot afford, as
many of the plans require, to simultaneously: (1) pay the provider's
fees, (2) save money for the settlements, and (3) continue making their
monthly payments to creditors to avoid late charges and additional
interest. Consumers who drop out typically forfeit all of the money
they paid to the debt settlement company, regardless of whether they
received any settlements from their creditors.
Since 2004, the Commission has brought eight actions against debt
settlement providers, alleging that they failed to deliver the results
promised to consumers and deceived consumers about key aspects of their
programs.\22\ The defendants' misrepresentations included claims that:
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\22\ See Appendix A (items 1, 7, 8, 11, 15, 16, 17, 19).
the provider will, or is highly likely to, obtain large
reductions in debt for enrollees, e.g., a 50 percent reduction
or elimination of debt in 12 to 36 months; \23\
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\23\ See, e.g., FTC v. Edge Solutions, Inc., No. CV-07-4087
(E.D.N.Y. 2008); FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 GAF
JTLx (C.D. Cal., final order July 13, 2005).
the provider will stop harassing calls from debt collectors
as well as collection lawsuits; \24\
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\24\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D.
Colo. 2008); FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 (WG4)
(D. Mass., final order Mar. 28, 2005); FTC v. Jubilee Fin. Servs.,
Inc., No. 02-6468 ABC (Ex) (C.D. Cal. 2004).
the provider has special relationships with creditors and is
expert in inducing creditors to grant concessions; \25\
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\25\ See, e.g., FTC v. Debt-Set, Inc., No. 1:07-cv-00558-RPM (D.
Colo. 2008); FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 (WG4)
(D. Mass. 2005). Some providers are also misrepresenting that their
service is part of a government program through the use of such terms
as ``government bailout'' or ``stimulus money.'' See, e.g., Steve
Bucci, Settle Credit Card Debt For Pennies?, Feb. 2, 2010,
www.bankrate.com/finance/credit-cards/settle-credit-card-debt-for-
pennies-1.aspx; see also FTC, Press Release, FTC Cracks Down on
Scammers Trying to Take Advantage of the Economic Downturn (July 1,
2009), available at www.ftc.gov/opa/2009/07/shortchange.shtm.
the consumer will not have to pay substantial upfront
fees,\26\ and
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\26\ See, e.g., FTC v. Debt-Set, No. 1:07-cv-00558-RPM (D. Colo.
2008).
the consumer will be able to obtain a refund if the provider
is unsuccessful.\27\
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\27\ See, e.g., FTC v. Innovative Sys. Tech., Inc., No. CV04-0728
GAF JTLx (C.D. Cal. 2005).
The Commission also has alleged that debt settlement companies
represented that consumers can, and should, stop paying their
creditors, while not disclosing that failing to make payments to
creditors may actually increase the amount consumers owe (because of
accumulating fees and interest) and would adversely affect their credit
rating.\28\ In addition to the FTC cases, state attorneys general and
regulators have filed over 117 law enforcement actions against debt
settlement providers under state statutes that, among other things, ban
unfair or deceptive practices.\29\
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\28\ See, e.g., FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) (C.D.
Cal. 2008); FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 ABC (Ex)
(C.D. Cal. 2004).
\29\ See, e.g., Minnesota v. American Debt Settlement Solutions,
Inc., No. 70-CV-10-4478 (Minn., 4th Dist., filed Feb. 18, 2010);
Illinois v. Clear Your Debt, LLC, No. 2010-CH-00167 (Ill. 7th Cir.,
filed Feb. 10, 2010); Colorado Attorney General Press Release, Eleven
Companies Settle with the State Under New Debt-Management and Credit
Counseling Regulations (Mar. 12, 2009), available at
www.ago.state.co.us/press_detail.cfmpressID=957.html; Texas v. CSA-
Credit Solutions of Am., Inc., No. 09-000417 (Dist. Travis Cty, filed
Mar. 26, 2009); Florida v. Boyd, No. 2008-CA-002909 (Cir. Ct. 4th Cir.
Duval Cty, filed Mar. 5, 2008).
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C. Debt Negotiation
For-profit debt negotiation companies assert that they can obtain
interest rate reductions or other concessions from creditors to lower
consumers' monthly payments. Such companies often market debt
negotiation services through so-called automated ``robocalls.'' Like
debt settlement companies, many debt negotiation providers charge
significant upfront fees and promise specific results, such as a
particular interest rate reduction or amount of savings.\30\ In some
cases, the telemarketers of debt negotiation services refer to
themselves as ``card services'' or a ``customer service department''
during calls with consumers in order to mislead them into believing
that the telemarketers are associated with the consumer's credit card
company.\31\
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\30\ See FTC v. Economic Relief Techs., LLC, No. 09-CV-3347 (N.D.
Ga. 2009); FTC v. 2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill.
2009); FTC v. JPM Accelerated Servs. Inc., No. 09-CV-2021 (M.D. Fla.
2009); FTC v. Group One Networks, Inc., No. 8:09-cv-352-T-26-MAP (M.D.
Fla.2009); FTC v. Select Pers. Mgmt., No. 07-0529 (N.D. Ill., final
order May 15, 2009); FTC v. Debt Solutions, Inc., No. 06-0298 JLR (W.D.
Wash., final order June 18, 2007).
\31\ See cases cited supra, note 30.
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The FTC has brought six actions against defendants alleging
deceptive debt negotiation practices.\32\ In each case, the Commission
alleges that defendants: (1) misrepresented that they could reduce
consumers' interest payments by specific percentages or minimum
amounts, (2) falsely purported to be affiliated, or have close
relationships, with consumers' creditors,\33\ and (3) violated the
TSR's Do Not Call provisions, among other TSR violations.\34\
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\32\ See Appendix A (items 2, 3, 4, 5, 6, and 14).
\33\ See FTC v. Economic Relief Techs., LLC, No. 09-cv-3347 (N.D.
Ga. 2009); FTC v. 2145183 Ontario, Inc., No. 09-cv-7423 (N.D. Ill.
2009); FTC v. Group One Networks, Inc., No. 8:09-cv-352-T-26-MAP (M.D.
Fla. 2009); FTC v. Select Pers. Mgmt., No. 07-0529 (N.D. Ill. 2009);
FTC v. Debt Solutions, Inc., No. 06-0298 JLR (W.D. Wash. 2007).
\34\ See FTC v. Economic Relief Techs., LLC, No. 09-CV-3347 (N.D.
Ga. 2009); FTC v. 2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill.
2009); FTC v. JPM Accelerated Services Inc., No. 09-CV-2021 (M.D. Fla.
2009).
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Our law enforcement colleagues at the state level also have focused
attention on bogus debt negotiation companies. The states have brought
at least ten cases against such firms, and the FTC will continue to
work closely with our state partners on these and related issues.
IV. The Commission's Rulemaking Proceeding
In August 2009, the Commission published in the Federal Register
proposed amendments to the TSR to address abuses in the debt relief
industry.\35\ Congress authorized the FTC to conduct rulemaking
proceedings under the Telemarketing Act using the Administrative
Procedure Act's ``notice-and-comment'' procedures,\36\ and this
proceeding has moved expeditiously and is nearing completion.
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\35\ TSR Proposed Rule, 74 Fed. Reg. 41988 (Aug. 19, 2009).
\36\ 15 U.S.C. 6102(b).
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The TSR amendments proposed last August would, among other things:
extend the existing protections of the TSR to inbound debt
relief calls, i.e., those where consumers call a telemarketer
in response to a general media or direct mail advertisement;
\37\
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\37\ Outbound calls to solicit the purchase of debt relief services
are already subject to the TSR.
mandate certain additional disclosures and prohibit
misrepresentations in the telemarketing of debt relief
---------------------------------------------------------------------------
services; and
prohibit any debt relief service from requesting or
receiving payment until it produces the promised services and
documents this fact to the consumer.
In response to this proposal, the Commission received written
comments from 314 stakeholders, including representatives of the debt
relief industry, creditors, law enforcement, consumer advocates, and
individual consumers.\38\ In November 2009, Commission staff hosted a
public forum on the proposed TSR amendments, at which participants
representing all of the major stakeholders discussed the key consumer
protection issues and problems that are present in the debt relief
industry and possible solutions for them.\39\ After the forum,
Commission staff sent letters to industry trade associations and
individual debt relief providers that had submitted public comments,
soliciting follow-up information in connection with certain issues that
arose at the forum.\40\ Sixteen trade associations and companies
responded and provided data. At this time, the Commission staff is
reviewing the entire record in this proceeding and drafting a final
rule for the Commission's consideration.
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\38\ These public comments are available at www.ftc.gov/os/
comments/tsrdebtrelief/index.shtm.
\39\ A transcript of this forum is available at www.ftc.gov/bcp/
rulemaking/tsr/tsr-debtrelief/index.shtm.
\40\ The letters are posted at www.ftc.gov/os/comments/
tsrdebtrelief/index.shtm.
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V. Efforts to Educate Consumers
To complement its law enforcement and rulemaking, the Commission
has made significant efforts to educate consumers about debt relief
services and alert them to possible deceptive practices. Most recently,
the agency released a brochure entitled ``Settling Your Credit Card
Debts,'' which offers struggling consumers tips on seeking assistance
with their debts and spotting red flags for potential scams.\41\ This
brochure, along with additional educational materials on debt
relief,\42\ is available at a new FTC web page, www.ftc.gov/
MoneyMatters.\43\
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\41\ The brochure is available at www.ftc.gov/bcp/edu/pubs/
consumer/credit/cre02.shtm.
\42\ Fiscal Fitness: Choosing a Credit Counselor (2005), available
at www.ftc.gov/bcp/edu/pubs/consumer/credit/cre26.shtm; For People on
Debt Management Plans: A Must-Do List (2005), available at www.ftc.gov/
bcp/edu/pubs/consumer/credit/cre38.shtm; Knee Deep in Debt (2005),
available at www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm. In
the last year and a half, the FTC has distributed more than 248,000
print versions of these three publications combined, and consumers have
accessed them online more than 760,000 times.
\43\ Over the last 6 months, the Money Matters website has received
approximately 50,000 hits per month.
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In addition, the Commission has conducted numerous education
campaigns designed to help consumers manage their financial resources,
avoid deceptive and unfair practices, and become aware of emerging
scams. For example, the FTC has undertaken a major consumer education
initiative related to mortgage loan modification and foreclosure rescue
scams, including the release of a suite of mortgage-related resources
for homeowners.\44\ Moreover, the agency has focused outreach efforts
on a number of other issues faced by people in economic distress,
including stimulus scams, rental scams, church ``opportunity'' scams,
offers for bogus auto warranties, and solicitations for phony charities
that exploit the public's concern for the welfare of our troops and
public safety personnel in a time of crisis.
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\44\ NeighborWorks America, the Homeowners Preservation Foundation
(a nonprofit member of the HOPE NOW Alliance of mortgage industry
members and U.S. Department of Housing and Urban Development-certified
counseling agencies), and other groups are distributing FTC materials
directly to homeowners at borrower events across the country, on their
websites, in their statements, and even on the phone. The Nation's
major mortgage servicers now provide to consumers, while they are on
hold, information derived from FTC materials about the tell-tale signs
of a mortgage foreclosure scam.
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The Commission encourages wide circulation of all of its
educational resources and makes bulk orders available free of charge,
including shipping. We provide FTC materials to state attorneys general
and other local law enforcement entities, consumer groups, and
nonprofit organizations, who in turn distribute them directly to
consumers. In addition, media outlets--online, print, and broadcast--
routinely cite our materials and point to our guidance when covering
debt-related news stories.
VI. Conclusion
The FTC appreciates the opportunity to describe to this Committee
its work to protect vulnerable consumers from deceptive and abusive
conduct in the marketing of debt relief services. Stopping the
purveyors of empty promises who prey on consumers facing financial
hardship is among the FTC's highest priorities, and we will continue
our aggressive law enforcement and educational programs in this area.
Appendix A
FTC Law Enforcement Actions Against Debt Relief Companies
1. FTC v. Credit Restoration Brokers, LLC, No. 2:10-cv-0030-CEH-SPC
(M.D. Fla., complaint issued Jan. 20, 2010) (debt settlement and credit
repair)
2. FTC v. 2145183 Ontario, Inc., No. 09-CV-7423 (N.D. Ill.,
preliminary injunction issued Dec. 17, 2009) (debt negotiation)
3. FTC v. Econ. Relief Techs., LLC, No. 09-CV-3347 (N.D. Ga.,
preliminary injunction issued Dec. 14, 2009) (debt negotiation)
4. FTC v. JPM Accelerated Servs. Inc., No. 09-CV-2021, (M.D. Fla.,
preliminary injunction issued Dec. 31, 2009) (debt negotiation)
5. FTC v. MCS Programs, LLC, No. 09-CV-5380 (W.D. Wash. preliminary
injunction issued July 13, 2009) (debt negotiation)
6. FTC v. Group One Networks, Inc., No. 09-CV-00352 (M.D. Fla.,
preliminary injunction issued March 25, 2009) (debt negotiation)
7. FTC v. Edge Solutions, Inc., No. CV 07-4087-JG-AKT (E.D. N.Y.,
final order Aug. 29, 2008) (debt settlement)
8. FTC v. Debt-Set, No. 1:07-cv-00558-RPM (D. Colo., final order
Apr. 11, 2008) (debt settlement)
9. FTC v. Select Pers. Mgmt., Inc., No. 07C 0529 (N.D. Ill., final
order May 15, 2009) (debt negotiation)
10. FTC v. Express Consolidation, No. 0:06-CV-61851-WJZ (S.D. Fla.,
final order May 5, 2007) (credit counseling)
11. FTC v. Connelly, No. SA CV 06-701 DOC (RNBx) (C.D. Cal., final
order Oct. 2, 2008) (debt settlement)
12. United States v. Credit Found. of Am., No. CV06-3654 ABC(VBKx)
(C.D. Cal., final order June 16, 2006) (credit counseling)
13. FTC v. Integrated Credit Solutions, Inc., No. 8:06-CV-00806-
SCB-TGW (M.D. Fla., final order Oct. 16, 2006) (credit counseling)
14. FTC v. Debt Solutions, Inc., No. CV06-0298 (W.D. Wash., final
order June 18, 2007) (debt negotiation)
15. FTC v. Jubilee Fin. Servs., Inc., No. 02-6468 ABC(Ex) (C.D.
Cal., final order Dec. 12, 2004) (debt settlement)
16. FTC v. Nat'l Consumer Council, Inc., No. ACV04-0474CJC (JWJX)
(C.D. Cal., final order Apr. 1, 2005) (credit counseling and debt
settlement)
17. FTC v. Better Budget Fin. Servs., Inc., No. 04-12326 (WG4) (D.
Mass., final order Mar. 28, 2005) (debt settlement)
18. FTC v. Debt Mgmt. Found. Servs., Inc., No. 8:04-CV-1674-T-17MSS
(M.D. Fla., final order Mar. 30, 2005) (credit counseling)
19. FTC v. Innovative Sys. Tech., Inc., No. CV04-0728 (C.D. Cal.,
final order July 13, 2005) (debt settlement)
20. FTC v. AmeriDebt, Inc., No. PJM 03-3317 (D. MD., final order
May 17, 2006) (credit counseling)
The Chairman. Thank you very much.
Senator McCaskill, do you have a--opening thoughts,
comments that you would like to make?
Senator McCaskill. Well, I have questions, and I will
certainly defer to the Chairman for questions first.
My thought is that, if doing away with advance fees does
away with these companies--probably a good thing. Probably a
good thing.
So, I will defer to your questions and look forward to my
opportunity to ask questions.
The Chairman. I think you are looking forward to your
opportunity.
Mr. Kutz, I'd like to ask you the following. First of all,
thank you for your testimony. And thank you, in fact, for all
the work that GAO does, in general. And I understand that, in
your testimony, you've not named the particular companies
you've investigated. You've given them case numbers. It's
very--that's very professional, and it's correct. I've decided
that I'm not particularly professional, and so, I'm just naming
the names of all the companies. And I hope that you'll forgive
me for that.
So, let's start with what you call ``case number 1.'' Your
investigators, who were pretending to be financially distressed
consumers, started a website called
``FreeDebtSettlementNow.com'' Can you please describe this
website?
Mr. Kutz. Yes. If we could also put up, on the monitor, one
of the advertisements they had on that.
[The information referred to follows:]
But, actually, Senator, this case came to us through a spam
e-mail from Lebanon. And when you actually clicked on the e-
mail, it took you to FreeDebtSettlementNow. And so--and, for
example, on the monitor, it shows some of the advertisements
they had about a government program. If you read that, you can
see that's another one of these outrageous cases of false,
deceptive--in this case, I call this fraudulent marketing. So,
that's a company that then led you--so, they're one of the
front companies that Mr. Lehman described here, and they were
funneling work to companies called Procorp and Web Credit,
which are members of the trade associations: TASC and USOBA.
And that's where the actual back-end processing of the actual
debt settlement was.
And within that, there were a whole number of, I guess,
deceptive and fraudulent claims. For example, one of the
companies--Web Credit--claimed a 100-percent success rate--and
you heard that in the tape, at the beginning, or the excerpts
in the beginning--I mean, ``100 percent of consumers
successfully settle within 3 years.'' And, as you've heard from
my colleagues at the table, that's just an outrageous claim.
The Chairman. All right. And you say, in your testimony,
that Web Credit advisors belongs to a debt settlement industry
association, which is called USOBA, United States Organization
of Bankruptcy Alternatives. That's an organization that Mr.
Ansbach is representing here today, is that not correct?
Mr. Kutz. That's correct.
The Chairman. And you also say, in your testimony, that the
telephone representative from Web Credit advisors made multiple
statements that GAO found to be, quote, ``deceptive or
questionable,'' close quote. Can you please describe these
statements, and explain why they are deceptive, and why they
are questionable?
Mr. Kutz. Certainly. The first one is the 100-percent
success rate for people enrolling in the program. As we've
described, I believe the FTC and the State AGs would say it's
closer to less than 10 percent. No one knows for sure, I don't
think. If you look across the industry, one of the
organizations says it's 34 percent. But, 100 percent is
something that would not be reasonable to expect under any
circumstances.
Another one says everyone in the program makes the
independent decision to stop paying their creditors. Worst-case
scenario, you will save 40 cents on the dollar. They also
promise that hiring the company would ensure that calls from
creditors would slow down and eventually stop. So, those are
combinations, Senator, in my view, of some fraudulent claims
or, at a minimum, deceptive or otherwise questionable.
The Chairman. And, as I think you mentioned before, they
sort of claim to be somehow a part of government activity.
Mr. Kutz. Yes. In this particular case, you see on the
monitor exactly what they had advertised.
The Chairman. I think what you've just described to me is
out-and-out fraud. I'm not a lawyer. Senator McCaskill is. And
don't mess with her; she's a very good one.
[Laughter.]
The Chairman. Mr. Ansbach testified that companies in his
organization are ``honest and ethical.'' That was in quotes. It
sounds like you don't agree.
Mr. Kutz. I can't speak to all 150 or 200 companies, but
several of our worst cases were, in fact, members of his trade
association, yes.
The Chairman. I'm just going to--we're going to have some
fun here, Senator McCaskill. We've got lots of time and few
members. So, it's yours.
STATEMENT OF HON. CLAIRE McCASKILL,
U.S. SENATOR FROM MISSOURI
Senator McCaskill. I--let me first ask Mr. Ansbach. Mr.
Ansbach, have you made public all the members of your
organization?
Mr. Ansbach. No, ma'am, we have not.
Senator McCaskill. And why not?
Mr. Ansbach. I think that's something that's going to
change. We've discussed that. We've been asked about that. As
the Senator may know, the Association of Settlement Companies
does. That's our sister group. In the past, the leadership in
our trade group, candidly, was concerned that publishing a list
of members ended up being a subpoena list. We were concerned
about----
Senator McCaskill. Probably a genuine concern.
Mr. Ansbach. Well, ma'am, we do think that we represent a
lot of very good folks. But, the reality is, I think that these
are good folks, and we have an agenda item on our conference
this summer to talk about that. I think that all that should be
published.
Senator McCaskill. Well, I'm looking at all the case
studies--GAO's case studies--and I see that Prime Debt Services
is a member of yours. American Debt Settlement Group is a
member of yours. Credit Solutions of America, I'm familiar
with, because our attorney general has sued them. They're a
member of yours.
You have to understand that the premise of the business is
offensive, in this way. The premise is that when people are in
debt and worried, they are more easily persuaded that someone
can help them, because they're desperate for help. And when
someone tells them, ``You don't have to pay your bills anymore
and we're going to make a lot of your bills go away,'' that is
like asking a 5-year-old if they want to get a Happy Meal. It
is equivalent to that. And what is hard for me to understand is
how your association thinks you can stop the inevitable march
of regulation, lawsuits, enforcement actions, because I don't
think you can produce statistics that show that you're helping
anyone.
I have prepared for this hearing. I'm not aware of any
statistics that show that you've helped anyone. In fact----
And let me ask Mr. Lehman this. It's my understanding, Mr.
Lehman, that one of the problems in these lawsuits that are
being brought by the attorneys general is the fights over
discovery, that it has been very difficult to get the
documents, to get the data, to be able to make sure that every
fact is uncovered so that, first, the members of Mr. Ansbach's
organization have due process, but, most importantly, if--
whether or not these are civil cases for consumer action, or
whether or not these are criminal fraud cases.
Mr. Lehman. Yes, Senator McCaskill. That is true; it's been
very difficult for the attorneys general to get any
verification of any of the claims that are made.
Senator McCaskill. I'm sorry. I don't think you have your--
does he have his microphone on?
Mr. Lehman. I'm sorry.
Senator McCaskill. Yes. There you go.
Mr. Lehman. Yes, it has been very difficult for attorneys
general to get any verification of the claims made by debt
settlement companies about success rates and amounts of--
numbers of debts settled and that kind of thing. And I know, in
the Credit Solutions case that you refer to, that the Missouri
attorney general has brought, and along with, I might add, four
or five other States, they have said that it has been very
difficult to get information from--on their investigations of
that company.
Senator McCaskill. Mr. Ansbach, do you have data that you
could give the Committee today?
Mr. Ansbach. Yes, ma'am.
Senator McCaskill. OK. And is it data that has been--that
is subject to our questioning of the companies and getting at
the--I mean, are you actually maintaining that the majority of
people that you sell this service to, that you actually
produce?
Mr. Ansbach. Senator, I have data that I would provide to
you, and the only reason I would bring it to you is if I
trusted it. What I can tell you, if I may--and I apologize, I
don't remember if you were in the room when we first started--
our members, alone, have settled $1.4 billion in unsecured
debt.
Senator McCaskill. And how much was the unsecured debt that
they were--that was the outer perimeters of what they were
given to try to settle? Does that represent 10 percent? Five
percent? Forty percent?
Mr. Ansbach. Sorry, I don't appreciate the question.
Senator McCaskill. Well, you say you've settled $1.4
billion in debt.
Mr. Ansbach. Yes, ma'am.
Mr. Ansbach. That means you have saved your customers that
much debt?
Mr. Ansbach. No, I'm sorry. The aggregate value of the debt
that was----
Senator McCaskill. OK.
Mr. Ansbach.--held is $1.4 billion.
Senator McCaskill. OK.
Mr. Ansbach. TASC, the other trade association, last year
alone, settled another $1.1 billion in debt. That debt is
settled at roughly somewhere around 53 to 50 cents on the
dollar. So, with all due respect, Senator, when you say that
we're not providing any value, there are a lot of folks that
would disagree--folks that received these settlements--folks
that got their debts settled and ultimately paid 53 cents on
the dollar and who are now on their way to financial stability.
I think there is significant value in that.
Senator McCaskill. Well, then, why isn't a contingency fee
appropriate? Why do you have to have the money up front?
Mr. Ansbach. Right. The----
Senator McCaskill. Why is that--why do you go out of
business--if, in fact, you are successful in settling that
percentage of your debt, there is no way you go out of business
with depending on your success as the parameter for your fee
payment.
Mr. Ansbach. Again, with respect, Senator, I disagree. The
issue is really a very simple one. No business, big or small--
but most of ours are small business owners--can operate without
revenue for a year. It cannot be done. I run a business. I
don't think you'll find anyone in this room that runs a
business that will tell you that it is a stable financial model
to operate without revenue.
Now, please, if that--that being said, I agree absolutely
100 percent with what's being said here today, particularly
about these egregious ads that have government seals on them.
Every time we've gotten one, we've sent it to the Federal Trade
Commission or some of the Senators that have expressed interest
in that. The question here is not regulation or no regulation.
And you said we can't stop the inevitable march. I don't want
to stop the inevitable march. I spend more time in Sacramento
and Tallahassee and Austin and Springfield, Illinois, than I do
in my hometown, trying to get regulation in place. The question
is, Can we get regulation that will protect consumers from this
very bad stuff, but still allow honest, ethical companies to
provide the services?
Senator McCaskill. Well, you now have the premier auditing
investigative agency in the world that has now determined that
a number of your members engaged in flat-out fraud--
uncontroverted facts. Now, are you going to ask those members
to leave your organization because they have participated in
this kind of activity? Are you going to take any action against
them, and clear out these clearly deceptive practices that are
going on? Because I know why these people did this on the
phone. They get paid by how many people they sign up. Correct?
Mr. Ansbach. Not all do. No, ma'am.
Senator McCaskill. Are you telling me that the people that
he did these case studies on--are they all your members, or
just some of them?
Mr. Ansbach. I do not know.
Senator McCaskill. Well, let me read them to you.
Web Credit. Are they one of your members?
Mr. Ansbach. Senator, we have 200 members. I do not know
all----
Senator McCaskill. You don't have a list with you?
Mr. Ansbach. No, ma'am. I do not.
Senator McCaskill. You--is Procorp Debt Solution a member
of yours?
Mr. Ansbach. Ma'am, I just saw the GAO report as--well,
actually I've not seen the report. So----
Senator McCaskill. OK.
Mr. Ansbach. I don't know----
Senator McCaskill. Well, here's what--here's--you
understand the credibility gap that exists in this hearing, I
assume, by now.
Mr. Ansbach. Senator, what I understand is that there are
serious problems that we need to talk about. And what I also
understand is that there is an attempt to say that, because
there are serious problems, that nobody should do business in
this industry. And with that, I absolutely disagree.
Senator McCaskill. Well, I will tell you, that since the
Chairman is in a frisky mood--as Desi Arnaz would say, ``You've
got some `splainin' to do.''
There is a serious issue facing this country. I will not
sit on this committee--and I know the Chairman--the Chairman
will not--and I know, having gone through the confirmation for
the new Commissioner at the FTC--I can't decide which is worse,
the FreeCreditReport.com or you guys. You are preying upon the
fears of people. You're making a lot of money, and you're
delivering a substandard product; and many, many times, you're
engaging in fraud to get the customers, by promising something
that you know is not true, that they can quit paying their
bills, that you've had 100-percent success, that you're going
to settle the debts, and your record of success--and you've had
so few dropouts--on and on and on. And, you know, you should
just tell your members--and I look forward to learning all--
will you give us the list of all 200 of your members?
Mr. Ansbach. Yes, ma'am, I will talk--again, I'm not the
legislative director, and I'm certainly not--I'm sorry--I'm not
the executive director and I'm not the owner of the trade
group. My plan is to go back to our board and say, ``This is
important and we should publish the list.'' So, assuming that,
then, yes, ma'am, you have my word.
Senator McCaskill. OK, well I will be checking in with the
Missouri attorney general. We are told that Credit Solutions of
America is one of your members.
Mr. Ansbach. Yes, ma'am.
Mr. Ansbach. And if they have to keep fighting for
discovery, I think the U.S. Congress is going to have their
back. So, I think the word needs to go out--if you can prove
what you say, I suggest you get to proving it.
Mr. Ansbach. Senator, I'm trying my very best with you to
say that anybody that makes a claim of 100 percent--I'm a born
and raised Texan, so pardon me if say this with some lack of
delicacy--let's take him out back and beat him with a stick.
Senator McCaskill. Well----
Mr. Ansbach. I mean, I don't--you are not going to find me
or my group, or anybody that believes in responsible service,
defending any of that. Now, what I would like to say to you,
and I'm desperately trying, is to say to you, ``I have
statistics. I have numbers.'' I even have some numbers that are
specific to Missouri that show how much money we've saved
consumers in Missouri. I'm simply asking you, please don't
throw the baby out with the bathwater. There are people that do
this well, and there are customers that get help. Two of them
are right here with us today.
Senator McCaskill.--well, I--listen, I'm willing--you know,
I'm from the ``Show Me State.'' But, it's awfully hard, when an
organization won't even tell who's in the organization, to take
your data very seriously. And I say that as a former auditor.
You've got to show the data, and you've got to let us look, and
let these attorney generals look, and let the people that are
trying to fight for consumers look, and they've got to get
everything. And if what you're saying is true, you've got
nothing to be afraid of. But, it doesn't appear that way. It
appears that everyone has circled the wagons. You've told your
salespeople, ``Close them, close them, close them. Get the
money up front. If they drop out, don't worry about it; we've
already made our money.'' That's what it looks like, Mr.
Ansbach. And it looks that way to anybody with common sense.
So, I'm just giving you the challenge--and I know the
Chairman wouldn't have this hearing if he didn't feel the same
way--I'm giving you the challenge, and telling you, if what
you're saying is true, then you've got to show us.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator McCaskill.
I believe the states, Mr. Kutz, that have sued are Texas,
New York, Maine, Missouri, Florida, Illinois, and Idaho. Now,
that's just on case number 6, which is Credit Solutions of
America, which is part of your organization, right?
Mr. Kutz. Yes, sir.
The Chairman. Now, you answered that rather quickly, but
when asked by Senator McCaskill about other companies--you
know, a list of 200 is very small, and you pointed out that you
weren't the----
Mr. Kutz. Executive Director, Mr. Chairman.
The Chairman. Yes. No, that you weren't the Chief
Compliance----
Senator McCaskill. [inaudible.]
Mr. Ansbach. It's OK, ma'am. I--I mean, at the risk of
perhaps talking out of turn, I understand the passion in this.
I'm sitting two chairs down from Mrs. Haas, who obviously had a
horrific experience that I would never, in my life, defend.
But, you know, I have an office full of folks that I believe in
very much. I know sometimes even they make mistakes. But, I
think there's good work to be done here, and I just want to
find us a way to do it.
The Chairman. That's just an amazing statement.
Let me try to get at it a different way. What percentage of
the people that you say that you serve--I mean, 200 companies
is a very small amount. You're actually the Chief Operating
Officer--you corrected me--you're not Chief Compliance, you're
Chief Operating--you have even more reason to know what these--
what the 200 companies are. But, you don't. You simply don't.
Mr. Ansbach. I'm sorry, Mr. Chairman. Perhaps I misspoke.
I'm--my role with USOBA, the trade association is--I'm the
volunteer as a Legislative Director. I'm the Chief Operating
Officer of just my company.
The Chairman. So, you didn't have to get--you didn't have
to pay up front. You didn't have to get paid up front. I'm
sorry. I'm just being cynical.
The--what percentage of the people that you take on, and
your 200 organizations take on, do you think do well by their
clients?
Mr. Ansbach. If you'll permit me, I want to--I know I've
got some data to provide you with. And, by the way, I want to
encourage you--if you want to ask questions to anybody else on
the panel, I'm sure----
The Chairman. No, you're my interest right now.
[Laughter.]
Mr. Ansbach. I just--I don't want to hog the microphone--so
I'd be happy to do that.
The Chairman. You can joke about this, if you want.
Mr. Ansbach. No, sir, I don't think it's a joking matter at
all. I will tell you that the statistics that we've discussed--
the 35-percent number--34, 35 percent, which I think was
referenced--is a TASC number. We think that number has merit.
That means that 35 percent of consumers will settle all of
their debts in a particular debt settlement program. What that
means is that there's still 65 percent that do not complete the
program. It's very important to understand what that means. And
this is the difficulty we've had with the discussion on success
rates.
The Chairman. How would you react to that, Mr. Kutz and
Commissioner Brill--35-percent successful?
Mr. Kutz. It was 34. But--and I think there may be a
question of what the definition is of ``success'' there,
because, I mean, I think success--we would assume that you
settle all your debts. I think the success rate there may have
been some or all of the debts. But, it's very different from
what the State AGs have found, which is less than 10 percent.
So, certainly less than 50 percent is clearly--makes sense to
me, given who you're talking about. And I don't know if FTC has
any further data on that. But, I think less than 34 or--34 has
got to be the high end of what we're talking about.
The Chairman. Commissioner Brill?
Ms. Brill. Mr. Chairman, we have asked for this kind of
data as part of our rulemaking procedure, and we are currently
analyzing data that has been provided to us, not only by Mr.
Ansbach and some of his compatriots in the industry, but also
by the State attorneys general and others. And at this point,
because the rulemaking process is underway, I don't want to
comment on my view or the Commission's view about that data.
But, to the extent that the information we have is public, we'd
be more than happy to share that with you. I don't have the
numbers with me right here today. But, we'd be more than happy
to share what----
The Chairman. OK, well----
Ms. Brill.--with you what we have.
The Chairman.--you could have just said that.
Mr. Ansbach, in your testimony, you present a lot of
numbers showing the debt settlement companies that save
consumers money. I didn't hear anything about the numbers
showing how much your industry costs consumers. Remember, in my
opening statement I said they often end up owing more than they
did before. So, you say that you're saving them money. How much
are you costing them money?
Mr. Ansbach. If I understand the Senator's question, you're
asking, What damage does debt settlement, as a program, cause?
The Chairman. Yes.
Mr. Ansbach. You know, it's--actually, it's a very
important question, and it gets to the root of the 35-percent
number. In and of itself, a debt settlement program does not
cause damage. What does cause damage is not paying your
creditors. Obviously, that's whether you're in a debt
settlement program or not. What does cause damage--of course,
not paying your bills causes damage in the form of a worsened
credit rating or litigation. And that's the very reason, Mr.
Chairman, that I would join with the colleagues here at the
table--disclosure agreements in contracts must tell people
that, ``If you stop paying your bills, then these things will
happen.'' And that is a disclosure requirement for USOBA. It is
a disclosure requirement for TASC. Clearly, the members that
have been related here today failed, and did not, in those
respects. And I know Senator McCaskill has left us, but to that
extent, we will absolutely be following up with those
companies.
The Chairman. I think that--Mrs. Haas, didn't you say that
you and your husband owe $20,000 more now than when you
enrolled?
Mrs. Haas. We owed $13,000 more, 6 months after we
enrolled, immediately after we terminated our attorney--
$13,000.
The Chairman. So, you ended up owing $13,000 more.
Mrs. Haas. Thirteen--that's not including what we had
already paid our attorney. We had paid our attorney $3,800.
The Chairman. And, Mr. Kutz and Commissioner Brill, would
you say this is pretty standard? Because, that's the question,
Mr. Ansbach, I was asking you--costing people, as opposed to
saving.
Mr. Kutz. Well, I would say you have the additional fees,
plus, of course, many creditors are going to continue to charge
interest, penalties, and late fees. So, again, how the numbers
shake out with the industry savings, I'm not sure how they
calculate that, but there's--it's a fairly interesting possible
calculation you could make.
Ms. Brill. I agree. There are different levels of potential
damage. And I think that was what your question was getting at.
So, I agree that it's something that's important to consider as
a whole.
The Chairman. Mr. Lehman, the--when a company decides to go
into business, it's not my understanding that they raise their
capital to go into business from customers and then offer, as
an excuse, that, ``We couldn't have--since we charged you fees
up front, that's the way we could do business.'' And then, I
believe that Mr. Ansbach said that only went on for a year.
But, this has been around for quite a long time. Does that
mean--do you think he thinks that, after that first year, that
the fees don't have to be paid up front? It would be my
impression that they continue to have to be paid up front as
new customers come in.
Mr. Lehman. Mr. Chairman, I think one of the----
The Chairman. I mean, is business done that way in this
country?
Mr. Lehman. Well, I think any kind of business that you
start, even a law practice--you've got to start it and you've
got to buy books, you have to have clerical help, you have to
have equipment of various kinds. I know people who have started
a law practice, and it takes--it does take some time to make
any money. You do have to have a capital investment. If you're
starting a restaurant or a car repair shop, you have to put
money into it first.
The Chairman. But, you put your money into----
Mr. Lehman. You put money into it.
The Chairman.--it first. Somebody else puts their money
into it first. You don't----
Mr. Lehman. And what----
The Chairman. You don't charge the restaurant customer
upfront fees and then feed that person a month or a year later,
right?
Mr. Lehman. Exactly right. It would be like--yes--somebody
contributing to the restaurant today for the privilege of
having a meal, 2 years from now. And that is one of the
problems with the industry, is that the entry barriers are very
low. That's why we have, by the industry's estimates, over
1,000 of these companies out there. You need very little money.
Most of the work, that we've found, is outsourced. Somebody can
set up a debt settlement company, outsource all the marketing
and lead-generation work, can outsource the work to actually do
the negotiations, to the extent they're done, can outsource the
accounting, the drafting of consumers' banks accounts to
deposit in the debt settlement account. And, frankly, this
confuses consumers, because they don't know where the ``there''
is, who is actually doing the work. As I gave the example
before, with the law firm, the law firm is out there, in its
name and with the retainer agreement, but it wasn't performing
the services. So, you have this kind of network of companies,
and it's hard for the consumers to identify who is the
responsible party. And it could be hard for regulators, too, to
determine, you know, where the real action is.
The Chairman. Mr. Ansbach, you say you're a volunteer? Are
you here as a volunteer?
Mr. Ansbach. As hard as it is to believe, yes, sir.
The Chairman. You believe in it so strongly that you're
here as a volunteer.
Mr. Ansbach. I have seen the benefits of this program, when
done right. I do believe in it. Yes, sir.
The Chairman. Why is it, Mrs. Haas, that I'm having a hard
time accepting that as anything but a joke?
Mrs. Haas. Chairman, because I've been through a lot, I
don't believe him, either. I don't think debt settlement should
be allowed to practice any kind of consumer help whatsoever.
The Chairman. Do you think, if they charge fees before they
provide services, which, in most cases, they don't do, that
they should be in business at all?
Mrs. Haas. Absolutely not. Absolutely not. The attorney
that we had paid took our money and did absolutely nothing. And
we got no refund.
The Chairman. And if that were the case in, let's say, 60
percent of all their clientele--and let's--and it's probably
more than that--would that not be enough reason to say they
should not be in business at all, that they are harming the
majority of their customers?
Mrs. Haas. I don't think they should be in business,
because of their illegal practices. They don't follow State and
local rules. They mislead the consumers. And they take their
consumers' money and are--and the credit reports--the credit--
your credit is damaged beyond belief.
The Chairman. Mr. Kutz, and particularly Commissioner
Brill--no, I would say, actually, particularly Mr. Lehman--
the--there is so much of this we--in this country, right now
and always. Americans can always find a way to skim a buck, and
they can always find a way to take it off of somebody who is in
crisis, is desperate, and who will fall for what they have to
say. And they don't have to make their promise. And the
glorious way that America works is that we concentrate on the
big picture and on the big people, and we don't concentrate on
the little people who are hurting and in trouble. That's what
you do. That's what you do, and that's what you do, and that's
what you do. And that's what you have suffered through. It's
sad.
My question is, how can they remain in business? And is
there a way, if they are practicing fraud--and you say
deceptive--the fraud and deceptive practices--why are they in
business?
Mr. Lehman. Mr. Chairman, as I mentioned, there are many,
many companies out there. If that over-1,000 figure is
accurate, that's a lot of companies. We have a lot of attorneys
general that are interested in this issue that are bringing
enforcement actions. There is no way that we can target the
number of companies that are out there.
And, as I also said, the barriers to entry to this business
are very low, so it is not hard for companies to shut down,
move on, and reopen. So, for enforcement purposes, it's kind of
like playing a game of whack-a-mole. You can get a few, but you
cannot cover the whole realm of bad practices out there.
But, I--you know, the--I think the answer is to continue
enforcement, to continue cooperative enforcement efforts among
the States, to advocate for strong Federal rules or Federal
legislation and to--you know, and encourage legislation in the
states. But, it's--it is a big problem, and it's going to take
a lot of resources to address it.
The Chairman. Is this something--I mean, I would be
delighted to prepare legislation in this committee. Is this
better done by states?
Mr. Lehman. The--as I said earlier, the 41 attorneys
general supported the proposed FTC rule. So, I think it's fair
to say the attorneys general would approve and appreciate
Federal legislation to create at least a Federal floor of
practices for the debt settlement industry. There are some
States that do have laws. And it was interesting for me to see
some of the attorneys general of those States that still
advocate for a--for Federal law in this area.
The Chairman. This has already been gone over, but it's so
utterly repulsive to me that I can't help but talk about. This
is one of their products. And we've had many other hearings on
the scamming of poor people. And we had one which simply--see
this way, this is, ``Find out if you are eligible,'' in big
blue print.
[The information referred to follows:]
And in this previous one, this--the fact that this was big
blue print--and you don't have a lot of small print on here;
it's down here. The other one, there's a lot of small print.
And so, people sort of ``find out if you're eligible.'' Well,
you can't very well say ``no'' to that. You're desperate.
You've got debts. You've got people closing in on you. So, you
push it. And then you're kind of hooked into that thing.
This is the--what is this? The--yes, that's your
Commission. Now, Mr. Ansbach has already said that he's
appalled that this is on this piece of material. But, this is
available broadly, under the companies that he represents.
And then, I think we have, over here, the Social Security
Administration, which strikes me as an enormously--those two--
an enormously cynical attempt to--along with the--sort of, the
stimulus-package aspect of this--it's a cynical attempt to sort
of give credibility to a group that doesn't have any
credibility.
And I look up here. Where's that lovely American flag? No.
I'm talking about the other chart. Yes. See, now this--I--this
is really wonderful, ``The future of debt settlement begins
with accountability, credibility, and transparency.''
[The information referred to follows:]
I would say to--ask Mr. Kutz, Mrs. Haas, Mr. Lehman,
Commissioner Brill, How many of those tests do you think that
his group of 200, with this eagle and American flag as their
symbol, meet?
Mr. Lehman. It doesn't measure up, from the evidence and
the complaints we've received, Mr. Chairman.
The Chairman. Mrs. Haas, would you have a view on that?
Mrs. Haas. I know when we looked into our credit counseling
on the Internet, and we found Credit--Consumer Credit
Counseling of America, that's what sold us. It was American.
Why--you know, we can't go wrong. If it says ``America'' in
there, we can't go wrong.
The Chairman. And there's no way that you can analyze this,
because you haven't gotten into it.
Mrs. Haas. No.
The Chairman. Commissioner Brill?
Ms. Brill. We have been very concerned about offers that
make representations that they're somehow part of the
government, part of the stimulus plan, that have shields like
this on it. We've brought cases in this area, as have the
States. It's a tremendous concern, for the exact reasons that
Mrs. Haas is pointing out. It lends an air of credibility. That
is the concern.
The Chairman. Well, but the question I was asking Mr.
Lehman--and then I'll say Mr. Kutz--they don't measure up on
those three promises, do they? That's not a question; I
shouldn't have said that. Do they measure up on these three
promises?
Mr. Kutz. All but one of the USOBA members we spoke to and
dealt with did not meet up to them. And the other one, we just
didn't get anything that was not--that was bad, necessarily.
One was reasonably good. The other five or so would not measure
up to those standards, in our judgment.
The Chairman. OK. I sort of think that we've gotten what we
can out of this. There are a lot of questions. I feel a great
sense of sadness about this. And also anger--not denying that
there may be, you know, a couple of your companies that do a
good job. And you've got some nice people sitting in the back
who are ready to come up front and testify. But, boy, we sure
didn't run into any of those people. And we've worked very
hard, and these are professional investigators behind me, and
they are hired on to this committee to do--that's what they do,
they investigate. They look for wrong-doers and people who take
advantage of people. And we have a lot of hearings about this.
And it's very, very sad to me that, at a time of such economic
distress, that there are so many companies, in so many ways
with people, whether they are pop-up Internet deals or, you
know, all kinds of scams. People fall victim to them.
I come from the State of West Virginia, where there are a
lot of very, very poor people who are desperate and, for a
whole lot of reasons, are in all kinds of trouble. And they--
you know, they give their faith to God and their money to these
companies. And I don't know how you---on a net basis, I guess
you probably turn out all right, in that case; but, you
certainly don't turn out all right financially.
And I just express disdain and contempt for these kind of
efforts. And I, frankly, am glad there are committees, like us
and the Federal Trade Commission, that look for these things
and try to stop them. We've got to be honest in this country.
We've got to treat our people with respect. A lot of people
don't. Or----
Do any of you have closing comments?
Mr. Kutz. Can I make a comment----
The Chairman. Please.
Mr. Kutz.--on what you said, I mean the faith in God?
Interesting thing is, three of the companies used Christianity
as the link to bring people in. Giving, of course----
The Chairman. Good point.
Mr. Kutz.--an air of credibility. Then they provided the
fraudulent and deceptive information after that. And I found
that, Senator, to be particularly despicable.
The Chairman. Any others?
Mr. Lehman. Mr. Chairman, I'd just say, attached to my
written remarks that I've submitted to the Committee are some
other examples of misuse of Federal information or Federal debt
relief programs, stimulus money, and that kind of thing. The
one that was blown up, that you just displayed, is one that is
running right now. We heard about that within the last week.
And it's--if you go onto the Internet, on many sites, that link
will pop up and it's--the one you showed said ``North Carolina
Relief Act,'' but there are similar sites for West Virginia--
West Virginia Relief Act, Florida Relief Act, and so forth.
So, yes, the problem is still ongoing.
Mr. Ansbach. Mr. Chairman, just the few last remarks that I
would leave the Committee with. One of the things that we did
not get to today, but I think perhaps the Chairman wants to be
sure that you consider. There does appear--and it's not just
from our point of view, but consumer activists have stated
this, as well--there is going to be some type of a need to help
people that cannot afford credit counseling, but who want to
still avoid bankruptcy. And, in that regard, we have tried--
obviously with some failing, but we have tried very hard to
fill that particular void. Some numbers say as high as 30
percent of folks cannot afford credit counseling, but want to
avoid bankruptcy. I would simply ask the Chairman that, as we
move forward on this important issue, allow us to continue to
work on this and get better at this, allow us to join you in
condemning some of the particularly egregious ads that we've
seen here today. And we will continue to join, as best as we
are able to do, if you allow us for that.
The Chairman. That was a touching closing statement. I
guess mine would be, I don't know how you sleep at night.
Mr. Ansbach. Well, with all due respect, Senator----
The Chairman. This hearing is adjourned.
[Whereupon, at 4:10 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Kay Bailey Hutchison, U.S. Senator from
Texas
Thank you, Mr. Chairman, for holding this afternoon's hearing. The
continuing home foresclosures, high unemployment, and unprecedented
levels of consumer debt that have accompanied our current economic
recession have given rise to new industries tailored to helping those
in need. The recession has also given rise to just as many scams and
unscrupulous individuals willing to take advantage of those who have
fallen on hard times. We have a responsibility to understand the
services available to consumers to address their economic troubles and
ensure those services are accompanied by appropriate consumer
protections.
As more and more people are being overwhelmed by their debt, there
is a greater demand for debt relief services. Consumers unable to fully
repay their debt generally have three choices--credit counseling, where
consumers enroll in a program designed to allow them to pay off the
full balance of their debts over a longer period of time; debt
settlement, where a third party negotiates with creditors to lower the
overall balance due from the consumer; and bankruptcy.
Debt settlement can seem very appealing, with promises of lowering
the overall debt owed and avoiding the negatives associated with filing
for bankruptcy. Unfortunately, too little is known about the debt
settlement industry. It is unclear exactly how many of these businesses
are in operation, how many consumers use their services, and--more
importantly--whether the current debt settlement business model
benefits a significant number of consumers.
There have been a number of concerns raised about debt settlement.
Foremost among these is the allegation that many companies use
deceptive advertising to lure vulnerable consumers. These
misrepresentations may include promises about settling debts in an
extremely short timeframe, for unrealistically high savings, and
without disclosing the actual costs to the consumer. In Texas, such
misrepresentations have given rise to more than half a dozen
enforcement actions by Attorney General Greg Abbott's office.
Last fall Chairman Rockefeller commissioned GAO to conduct an
investigation into the advertising and marketing practices of debt
settlement companies, and I am interested to hear their findings.
I am also interested in learning more about the fee structure used
by debt settlement companies. Many reportedly charge a significant
portion of their fees at the outset of a consumers' program, and
critics have expressed concern that these fees are being paid before
any real service has been performed or any debt has been settled. The
fee structure is the subject of a current rulemaking at the Federal
Trade Commission, and we are fortunate to have Commissioner Brill here
today to discuss this. I am curious to hear how different fee models
work. There is no question that a business must have revenue to
operate. However, there does appear to be the potential for abuse in a
system where the majority of fees are paid before any tangible benefit
to the consumer is realized.
I am also pleased to welcome John Ansbach here today as a
representative of the debt settlement industry. Mr. Ansbach, who is
from my home state of Texas, is Legislative Director for the United
States Organization of Bankruptcy Alternatives (USOBA) and General
Counsel for EFA Processing, based outside Dallas. My staff has met with
Mr. Ansbach on a number of occasions, and he has been a tireless
advocate for the industry, relaying USOBA's support for sound business
practices among debt settlement companies. Mr. Ansbach and other
representatives of the industry have worked very closely with the FTC
during the creation of their proposed rule, and I know they support
many of its provisions.
Among other things, I understand Mr. Ansbach is prepared to discuss
the stories of some consumers who may have benefited from debt
settlement services. At the same time, we will hear from Mrs. Holly
Haas and her husband today. I want to thank them for being willing to
share their experience with us, so that we can better understand how a
consumer can be negatively impacted by a debt settlement program.
Again, Mr. Chairman, thank you for holding this hearing today. I
look forward to hearing from all of our witnesses.
______
Prepared Statement of Hon. Mark Pryor, U.S. Senator from Arkansas
I thank Chairman Rockefeller, for holding this hearing on the
consumer's experience in the debt settlement industry. Today's dialogue
is important as many consumers continue to be targeted in a distressed
economy.
According to the Commission's 2010 annual report on the Fair Debt
Collection Practices Act, ``the FTC receives more complaints about the
debt collection industry than any other specific industry.'' In 2009,
the FTC received over 88,000 complaints about third-party debt
collectors--comprising almost 17 percent of all consumer complaints the
agency received that year.
The FTC report also notes that many consumers may never file a
complaint with an entity other than the debt collector. Therefore,
consumers may not recognize that debt collection violations have
occurred or that the FTC manages a complaint database and enforces
specific consumer protection laws. By extension, this means that not
all consumers' experiences may have been recorded.
In Arkansas, abusive debt collection practices appear to be on the
rise. Our state attorney general's staff has reported a steady increase
in the number of abusive debt collection consumer complaints received
in the state. In 2007, the state received 510; in 2008, 659 complaints;
in 2009, 667 complaints.
As Chairman of the Consumer Protection, Product Safety, and
Insurance Subcommittee with oversight authority over the Federal Trade
Commission, I recognize the FTC's important work to enforce against
consumer abuse in the debt collection and debt settlement areas. I look
forward to hearing Commissioner Brill's perspective and her thoughts
about what else should be done.
We also will hear from members of the business community with us
today. I welcome their thoughts regarding how to better police the
marketplace from actors that violate consumer protection statutes.
In this tough economic environment, Americans are repeatedly
targeted by fraudulent actors seeking to exploit their vulnerabilities.
I know today we will hear from some consumers first-hand about their
experience and I welcome their insights.
The investigation instigated by Senator Rockefeller is important
and I commend him for his vigilance and illumination of consumer abuse.
As we strive to protect Americans from unfair or deceptive financial
practices, the importance of the FTC's role in this domain is
underscored. I look forward to a robust conversation.
______
Prepared Statement of John Mark Spaulding
Thank you, Chairman Rockefeller, Ranking Member Hutchison, and
members of the Committee for the opportunity to share my experience
with you. My name is Mark Spaulding and I am a resident of South
Charleston, West Virginia. I am writing to tell you about an experience
I had with a debt settlement company.
A few years ago, my wife and I were both having medical problems
and were starting to fall behind on our bills. I did not want to file
for bankruptcy, so I contacted a debt settlement company. In March
2008, I contacted U.S. Debt Settlement Company (USDS) from an Internet
advertisement that I had seen. When I called, I spoke to a lady and
told her I was trying to pay off some hospital bills, some old and some
new. I was asked what other types of unsecured debt I had, and I told
her that I had some credit card debt, but was current with all of my
payments. I was asked how much I owed the hospitals and the credit card
companies, and I told her. I was then asked to fax copies of my bills
for them to review.
After the review, I was told that USDS could help me reduce my debt
as much as half, and sometimes for as low as 40 cents on the dollar. I
was told they have the best success with credit card companies. I was
also told I could be well on my way to financial freedom and
reestablishing my good financial situation. This all sounded very good
to me, so I went with it.
I filled out an application and gave USDS all of my medical bills
and credit card information. I also gave my banking information so they
could automatically withdraw the enrollment fee and monthly service
fee. I was asked to sign a ``power of attorney'' form so they could
contact my creditors on my behalf. After that, I was signed up for a
48-month pay-off schedule.
I was told it was best not to have any contact with my creditors,
and that USDS would handle them. Within 2 months the credit card
companies were calling me for payments. I called USDS to ask what I
should do. I was told that I should screen my calls and send any and
all correspondence to USDS and they would take care of it. I asked if I
should let the credit card companies know that I was in a debt
settlement program. They said no, and that if I were to do that, they
would not negotiate a settlement. I was reassured that settling with
credit card companies is what they do best.
During that time, calls and letters from my creditors were coming
in. Calls at home and at work seemed nonstop. I would fax the
collection letters to USDS and they said that they would handle it and
not to worry.
After paying $296.41 per month for 6 months and $55.00 per month
after for service fees, nothing in the way of negotiations had started.
I called USDS to ask why nothing had started yet, and I was told that
waiting is all part of the negotiation process. They told me that I
should start saving money to start negotiations, and wait.
A few months later, I started receiving letters from my creditor's
lawyers and summons from the courts. Again, I forwarded this
information to USDS, and they told me not to worry and that this was
all part of the negotiation process. At that point, 14 months had gone
by and nothing had been done to settle my debt. I called USDS to
express that I was afraid of being sued by the credit card companies. I
was told I should ``hurry up and wait.'' At that point, USDS asked me
how much money I had saved in my banking account. I told them about
$1,200.00. They told me that was not enough to settle anything, and
that I should agree to the terms of the credit card lawyers.
Now I have two judgments against me and will end up paying 40 cents
more on the dollar than I originally owed. In December 2009, my
negotiator said bankruptcy would be my best option. I had paid over
$2,400.00 to USDS for a service that I never received. I was strung
along all that time for them to say that they could not help me. I was
furious about the lack of service and their slow response time.
I asked for a refund and was told that they would settle with me
for $600.00. That is when I decided to file a complaint with the West
Virginia State Attorney General's Office. Since then, USDS has given me
a full refund. No one should have to go through this type of grief from
a company that has been entrusted to help with someone's personal
finances. Now I am back to square one, only worse off than I was
before. This has been a costly lesson that will take me several years
to recover from.
______
American Coalition of Companies Organized to Reduce Debt
(ACCORD)
Phoenix, AZ, April 20, 2010
Hon. John D. Rockefeller IV,
Chairman,
Committee on Commerce, Science, and Transportation,
U.S. Senate,
Washington, DC.
Hon. Kay Bailey Hutchison,
Ranking Member,
Committee on Commerce, Science, and Transportation,
U.S. Senate,
Washington, DC.
Dear Chairman Rockefeller and Ranking Member Hutchison:
The American Coalition of Companies Organized to Reduce Debt
(ACCORD) is a trade association representing debt settlement firms and
related businesses that are committed to ensuring the highest standards
of professionalism and integrity in the debt settlement industry.
ACCORD and its members support fair regulation of debt settlement
practices that will fully protect the interests of consumers who can
benefit from debt settlement services.
Responsible debt settlement is unquestionably a benefit to
consumers, especially in economic times like these, when large numbers
of consumers are facing unmanageable credit card debt. One conservative
estimate of the obligations to credit card issuers and other unsecured
creditors that debt settlement companies resolved for consumers last
year is $1 billion.\1\ Not only do consumers facing financial hardship
benefit from debt settlement, creditors do as well because it allows
them to collect debts that might otherwise be discharged in bankruptcy
or sold to debt buyers for a small fraction of their face value.
---------------------------------------------------------------------------
\1\ See October 26, 2009, and March 8, 2010, letters from Andrew
Housser, on behalf of The Association of Settlement Companies, to the
Federal Trade Commission, available at: http://www.ftc.gov/os/comments/
tsrdebtrelief/index.shtm.
---------------------------------------------------------------------------
Despite these benefits, the bona fide debt settlement industry has
suffered from bad publicity arising from bad actors in the industry and
consumers who, for various reasons, did not achieve expected results.
Consumer groups and law enforcement have charged some companies with
exploiting the financial vulnerability of debt-strapped consumers by
taking fees from them and not delivering the promised services. In some
cases, it appears that purported debt settlement firms engaged in
outright fraud.
Often, however, debt settlement firms enroll consumers who simply
lack the financial resources to succeed in a debt settlement program.
Front-loaded fees provide a strong economic incentive for debt
settlement companies to do this. Consumers complain when they find
themselves unable to save the money needed to settle with their
creditors. They may have already paid hundreds or thousands of dollars
in fees to a debt settlement firm, only to find themselves with unpaid
debts to their creditors that have grown even larger through
accumulated interest and late fees. When debt settlement companies have
the contractual right to collect fees whether or not a consumer's debts
are settled and creditors paid, this sad outcome is often inevitable.
Creditors remain unpaid; consumers fall even deeper into debt. The only
person who benefits is the debt settlement company.
The essential problem is that, under this fee model, debt
settlement companies have the incentive to sign up every possible
consumer for their programs. Whether the consumer succeeds or not, the
company collects its fees. In many cases, careful screening of
potential clients would reveal that a consumer is not a suitable
candidate for debt settlement. Debt settlement companies have no
incentives, however, to perform such screening. This is the
disincentive the Federal Trade Commission's current rulemaking would
correct.
A key initiative of ACCORD since its 2009 formation has been to
support the Commission's proposed amendments to the Telemarketing Sales
Rule addressing the practices of debt settlement companies and other
providers of debt relief services to consumers. In particular, ACCORD
believes that the proposed ban on collecting fees until services are
performed is a vitally important provision, which will benefit both
consumers and the debt settlement companies that work for them.
ACCORD believes that adhering to two principles will generate the
respect the industry deserves from consumers, consumer advocates,
Congress, law enforcement, and the consumer financial services
industry.
1. A ban on advance fees; \2\ and
---------------------------------------------------------------------------
\2\ The common short-hand reference to an ``advance fee ban'' can
cause confusion. Some industry members have begun to advocate a ``pay-
as-you-go'' model, which they define as collecting a fixed fee on a
monthly basis over the first half of the expected duration of the
program. This model, which at best is a very accelerated pay-as-you-go
scheme, does little to solve the problem of collecting fees from
consumers unlikely to experience any or much debt relief. It entitles
the debt settlement firm to collect sizable fees regardless of whether
any debt is settled. On the other hand, proposals that require a debt
settlement firm to settle all of a consumer's debts before collecting
any fee go too far in the opposite direction. ACCORD advocates a fair
compromise: the debt settlement firm should be permitted to collect a
portion of its fee as each debt is settled and the creditor is paid the
negotiated amount.
---------------------------------------------------------------------------
2. Fees based on the savings achieved for consumers.
These two principles protect consumers from the nightmare we all
fear--a debt settlement program that leaves a consumer in worse
financial shape than when he started the program. By agreeing to take
no fee until a creditor is paid, and by basing the fee on the amount of
savings negotiated, the debt settlement company will ensure that its
client debtors always benefit from its services. ACCORD members have
either already adopted these two principles or pledged to transition
their operations to incorporate them in the coming months.
With these two simple changes, a true ban on advance fees and a fee
calculation based on the success of debt settlement negotiations,
abuses in the debt settlement industry can end. These principles align
consumers' interests with their debt settlement company's interests--
the consumer can work her way out of unmanageable unsecured debt and
the company can earn an appropriate fee for its services.
Critics of the debt settlement industry sometimes point out that
some consumers drop out of the program before a single settlement is
negotiated. When that occurs today, the debt settlement company can
usually collect its fee even though the consumer has received no
meaningful benefit from the program. This is a situation ripe for
abuse. Careful screening of prospective clients will reduce the chance
of enrolling consumers for whom debt settlement is not a suitable
choice. This is precisely the effect of the Commission's proposed
advance fee ban. The debt settlement company will bear the risk that
the consumer will not see the program through to the settlement of her
debts.
Some industry members will point out that many consumer ``drop
outs'' do so through no fault of the debt settlement firm and that even
the most careful screening will not eliminate the problem of drop outs.
This is unquestionably true. ACCORD and its members have found,
however, that careful screening, excellent customer service, and full
disclosure greatly reduce this problem.
The ban on advance fees is an important step in transforming the
industry to one that always works for consumer interests. Alone,
however, it is not enough. Equally important is the concept of a fee
based on the company's success for the consumer. This provision ensures
that a consumer will not be left worse off by beginning a debt
settlement program.
Some industry members suggest that abuses can be prevented by
simply capping the fees a debt settlement company can charge, based on
the amount of a consumer's unsecured debt. ACCORD disagrees. Such an
approach still allows companies to collect fees even when the consumer
receives no benefit. Even when a settlement occurs, under this approach
the net cost to the consumer, including the debt settlement company's
fees, can exceed the original debt. Indeed, ensuring a debt settlement
company's right to collect a fee based on the enrolled debt ensures a
disconnect between the value of the service and the size of the fee. In
contrast, a success-based fee links the consumer's benefit and the
amount of the company's fee, providing the debt settlement company with
a strong incentive to achieve good results for its clients.
Occasions will exist in which the debt settlement company cannot
negotiate a significant savings for the client debtor from a particular
creditor. It may seem unfair to the company to deny it a fee despite
its best efforts on the consumer's behalf. This objection does not
withstand scrutiny, in ACCORD's view. On average, creditors do
negotiate significant reductions for appropriate consumers. Despite the
occasional situation in which the success-based fee structure yields no
fee, the debt settlement company will generally be able to earn fair
fees while achieving valuable benefits for its clients.
Perhaps the most important issue facing the Federal Trade
Commission as it considers its final rule on debt relief service
providers is whether to provide a broad exemption from the advance fee
ban when debt settlement services are offered by licensed attorneys.
ACCORD believes that such an exemption is unjustified and will
effectively negate the consumer protection provided by the advance fee
ban. Today, in anticipation of a likely FTC rule banning the collection
of fees before debts are settled and paid, debt settlement companies
are affiliating with ``attorney networks'' that hope to circumvent the
advance fee ban. If affiliating with attorneys proves to be an
effective strategy for the continued collection of advance fees, the
Commission rulemaking is likely to have little impact on the abusive
practices that have concerned the agency and this committee.
ACCORD is grateful for the Committee's leadership and continued
interest in this important consumer protection issue. We appreciate the
opportunity to make our views part of the record of this hearing.
Best regards,
Jean Noonan,
Counsel.
______
Consumers Union
San Francisco, CA
To: Federal Trade Commission, Office of the Secretary
From: Gail Hillebrand, Financial Services Campaign Manager, Consumers
Union
Re: Telemarketing Sales Rule--Debt Relief Amendments--R411001
Date: October 9, 2009
Consumers Union, the nonprofit publisher of Consumer Reports, will
be filing joint comments during the extended comment period with the
Consumer Federation of America, the National Consumer Law Center, and
other consumer and community groups. We are also separately submitting
this analysis of the white paper entitled `Economic Factors and the
Debt Management Industry'' by Richard A. Briesch, PhD, Associate
Professor, Cox School of Business at Southern Methodist University
(August 6, 2009). The white paper has significant limitations that
render questionable its ability to support claims about the level of
any benefit to consumers from using debt settlement services. That
report fails to demonstrate that debt settlement services benefit most
consumers who sign up for it.
This report was released by the industry-sponsored organization
Americans for Consumer Credit Choice (ACCC) and is branded as ACCC. The
report does not disclose whether it was funded by ACCC or by members of
the debt settlement industry. The ACCC's website does not disclose its
members. When ACCC released the report in August 2009, it stated that:
``ACCC, with other industry and interested groups'' requested the
analysis. (Press Release, ``Americans for Consumer Credit Choice
Releases Debt Management Industry Study,'' August 7, 2009, http://
www.consumercreditchoice.org/node/4.) ACCC also stated that it asked
the study's author for an independent objective assessment of the
consumer benefit, if any, provided by debt settlement companies.
The study includes data from only one debt settlement company,
which is not identified. There is no way to tell from the study report
if that company, its undisclosed fee structure, practices, dropout
rate, or success rate are or are not representative of the debt
settlement industry as a whole. In addition, the study does not
describe important information relevant to the consumer experience such
as the amount or timing of the fees, the total fees paid by the
consumers in the sample to the debt settlement company, or the amounts
by which the debt grew during the time of the debt settlement program.
The study also does not provide data on the number or percentage of
debts settled for all consumers in the sample, nor even for all of the
40 percent of consumers who did not drop out of the program during the
study period.
The study's author forthrightly admits some of its limitations. The
study's author discloses that: ``it is unclear whether or not the
findings can be generalized beyond this firm to the industry as a
whole.'' (p. 23) The study also states bluntly that: ``Accurate
measures of consumer completion and cancellation cannot be
calculated.'' (p. 2) For consumers with canceled accounts--those who
dropped out of debt settlement--the author states: ``. . . it is very
difficult to determine if value was generated for these customers.''
(p. 23) The study states that the dataset included no information about
either settlements or offers of settlement for the consumers who
canceled, even though that was more than a majority of the sample.
The study documents a shockingly high cancellation rate.
The study reports that that 60 percent of the customers in the
large sample canceled the service within 2 years. (p. 2) The majority
of consumers who signed up for debt settlement dropped out. For more
than half of these consumers, the only reason given in the study for
cancellation is ``other.'' The consumers who owed the most dropped out
at a higher rate than the overall dropout rate (64.5 percent vs. 60.57
percent overall). (p.15, Table 2)
This is a very high cancellation rate for an industry that often
charges substantial fees upon signing up. The author asserts that a 60
percent cancellation rate is not excessive because other subscription-
based businesses such as wireless service providers also have high
cancellation rates. (p.15) However, there is no discussion about how
the fee structures of those services compare to the fee structure in
debt settlement. In addition, consumers who pay monthly for a cell
phone also receive services each month, and are heavily marketed to
upgrade their current plans or to switch companies. In debt settlement,
consumers pay sizable fees upfront, and those who cancel without having
any debts settled have not gotten what they sought- relief from their
debts. The median duration of the debt settlement contract at
cancellation was 5 to 6 months.
The study contains incomplete information about the reason for
consumer cancellations. Reasons for cancellation are attributed as
follows: bankruptcy--13.5 percent; inability to save--6.8 percent;
buyer's remorse, that is, cancellation in an initial period of up to 90
days--9.2 percent; actual or attempted settlements directly by the
consumer--14 percent; and ``other''-- 56.5 percent. (p.16) Because more
than half the canceling consumers are listed under ``other,'' the study
gives no detail on the reasons for cancellation for the majority of
consumers who canceled. Categories such as ``debt not being settled'';
``unhappy with service''; ``program unsuitable for the consumer'' or
``consumer did not understand the program'' or ``promises to consumer
not kept'' apparently were not used.
The author suggests that the cancellation rate is overstated
because the debt settlement company's records indicated that 14 percent
of those who canceled did so in order to ``settle/try to settle on
own.'' (p.16) But these consumers still canceled; presumably after
paying some fees. It is not reported whether those consumers later
settled their debt on their own; but even if they did so there is no
reason to attribute that to the efforts of the debt settlement company.
In addition, if consumers did not settle their own debts, those debts
presumably may have grown in size before the consumer canceled the debt
settlement contract due to creditor charges such as late fees or
penalty interest rates.
With respect to the category of consumers who canceled due to
bankruptcy, the study's author states that these consumers were
``forced out of the program due to litigation.'' A different
perspective is that these consumers should have filed for bankruptcy
instead of signing up for debt settlement and saved paying an upfront
fee of perhaps 2 percent to 4 percent to start a debt settlement
program.
Common reasons that consumers would cancel any type of service are
that they are unhappy with the service, think it costs too much, or it
doesn't meet their expectations. The large ``other'' category may
include customers who were signed up for an unsuitable program, those
who were not satisfied with the program, and those with other reasons.
It is simply impossible to tell from this study.
The study cannot support any conclusions about the results for
consumers, because information about any settlements or even offers is
missing for more than half the sample.
The report fails to include any information about debt settlements
or offers of settlement for those customers who canceled, because the
company studied did not retain this information. (p.17) Consumers who
canceled may have experienced worse results than other consumers--they
may not have had any debts settled at all. Indeed, this might be why
they chose to cancel. The study's author forthrightly concedes: ``it is
very difficult to determine if value was generated for those customers
[who canceled].'' (p.23)
The remaining conclusions are of limited value because they don't
reveal what portion of the non-canceling consumers are excluded from
the table on consumer welfare metrics.
For that 40 percent of the sample for which there is data about
offers and settlements, the study reports information about the size
and frequency of offers and settlements, but only for those consumers
who had at least one settlement or one offer of settlement. The report
doesn't disclose how many consumers had no debts settled, and how many
had no offers of settlements. It simply reports settlement data
``conditional on the client settling at least one account.'' (p.17)
While it is not entirely clear, it appears that the information about
offers also includes only consumers who had at least one offer. The
study appears to essentially divide the non-canceling 40 percent of the
sample into groups--those with at least one settlement or offer, and
those without. The study doesn't disclose the size of each group, and
it gives success-related data only for the first group--those who
experienced some success. This is like calculating average results by
first omitting from the average all of the people who received zero
results.
The comparison between debt settlement costs and consumer credit
counseling costs attributes some costs to credit counseling that are
not paid by the individual in order to receive that service.
The study's comparison of the relative costs of consumer credit
counseling and debt settlement include payments made by creditors, and
not by the consumer, in the cost of consumer credit counseling. (p.11)
The author suggests that creditors should be indifferent between making
a fair share payment to a consumer credit counseling agency or giving
individual consumers a discount of up to the same amount on the debt.
However, the study offers no evidence that this is the case in
practice. In addition, this argument ignores the value that creditors
place on the services that legitimate credit counseling services
provide such as education, advice on budgeting, and overseeing monthly
payments to creditors over multiple years.
Since the cost analysis in the study includes some costs not paid
directly by the individual consumers using the service, but instead
spread throughout the credit system, the cost comparison discussion in
the study does not provide a valid cost comparison from the perspective
of the individual.
The study's discussion about the relative cost of consumer credit
counseling and debt settlement also does not appear to consider the
fact that the 60 percent of consumers who dropped out of debt
settlement in the sample still owe all of the debt they started with;
may have paid a set-up fee plus monthly fees or more; and because of
late fees or penalty interest rates, may owe more debt at the end of
the program than they did at the beginning on any debt that has not
been settled.
The study cites another source stating that the average cost of
consumer credit counseling services with a 5-year plan to pay off debt
is $910 paid by the consumer and another $764.89 paid by the creditors.
(p.11) Debt settlement would cost these consumers much more in fees. If
these consumers were charged a total fee of 18 percent fee of the debt,
which is within the range cited in the report, then they would owe an
average debt settlement fee of $4,338 (averaging the three mean debt
levels for the three subsamples to yield an overall mean debt for the
sample of $24,099). (See p.15, Table 2; calculation of the overall
sample mean by Consumers Union) These numbers make clear a conclusion
not drawn by the report; that consumers pay much higher service fees
for debt settlement than for debt management plans offered through
consumer credit counseling agencies. Of course, it is difficult to
compare the costs of apples and oranges. If consumers do get their
debts settled, they should pay less on those debts, but the report
provides no basis to assess how frequently that occurs overall for the
full sample. Also, with a debt management plan administered by a
consumer credit counseling organization, the amount owed falls each
month as the payments are made. That benefit is missing in debt
settlement.
The study shows that many consumers did not benefit from debt
settlement.
In spite of the methodological limitations, the numbers reported in
the study suggest that the majority of consumers did not feel that they
were benefiting from debt settlement since 60 percent of them canceled.
The study also shows that even those consumers who did not cancel
received offers or settlements on less than all of their debt at each
of the three time periods comprising the sample of 12, 18, and 24
months. (p.15)
The study's reported percentages of debts settled appear to be
calculated using only consumers for whom at least one debt was settled.
(p.17) These results do not reveal how many consumers had no debts
settled at all. These results also do not reveal how many consumers
came in with the apparent median of four debts, and left the program
with some of those debts unsettled and having grown larger in the time
elapsed during debt settlement program. (p.15, Table 2) This is like
estimating the consumer benefit without averaging in all of the ``zero
benefit'' people who got no settlements at all.
Even for those consumers for whom at least one debt was settled, it
appears that the debt settlement provider studied was consistently
unable to settle all of the debt during the time of the sample. (For
reasons not disclosed by the author, the study did not sample results
at a time period that matched the usual end time for a debt settlement
program.) The study concludes that ``conditional on receiving at least
one offer, clients seem to receive offers from more than 67 percent of
their accounts and debts.'' (p.20) This means that even if the consumer
had saved enough to fund all of the offers, and accepted all of the
offers, this would still leave the consumers who got some offers
saddled with 33 percent of the debts they started out with, plus
additional creditor charges which might include late fees, additional
interest, and perhaps penalty interest, accrued during the time period
for debt settlement.
The numbers from the study's tables can illustrate some points not
drawn by the study (Data from study is noted, other calculations are by
Consumers Union)
The study examined 4,500 customers of one debt settlement provider.
(p.15) Here is some further analysis by Consumers Union using the
average debt, cancellation rate, and average results reported in the
study.
The sample was divided into three groups of consumers, who owed an
average (mean) debt of $7,927; $16,966; and $47,404. (p.15, Table 2)
Since each group was equally represented, this yields an overall
initial average debt for the full sample of $24,099.
Just over 60 percent, or 2,700, of those consumers canceled the
program within 6 months to 2 years of entering the program. (p.15) The
study doesn't disclose the total fees paid by those consumers. Using
the mean debt in the sample and a 2 percent set up fee, which is the
low end of the range cited in the study, those consumers who dropped
out would have paid $1.3 million in fees, and there is no evidence as
to whether or not they received any settlements before leaving the
program. Under the 6 percent set up fee cap promoted by the trade
organization USOBA in its recent model act, a similar group of
consumers could be charged $3.9 million in front-loaded set up fees
before canceling.
Of the 1,800 consumers who remained in the program, the study does
not disclose how many settled at least one account. However, for
consumers who did settle at least one account, the author reports at
Table 5 that the mean `` percent total debt'' for the three sub-samples
was 54.7 percent, 54.1 percent, and 53.1 percent, respectively. (p.17)
The average of those three numbers is 54 percent. In other words, an
undisclosed percentage of the minority of consumers who did not cancel
had at least one debt settled, and among those consumers, 54 percent of
their debt was settled at either 12, 18, or 24 months from entering the
program. These consumers still had substantial remaining debt--46
percent of what they started with.
These consumers also had a substantial number of accounts
remaining. For the undisclosed percentage of consumers who had at least
one account settled, the percentages of all accounts settled were 52
percent, 51.5 percent, and 53 percent, for a mean of 52 percent. (p.17,
Table 5)
Let's look at those results in plain language:
After one to two years under a debt settlement contract,
even those consumers who had not canceled and who had at least
one debt settled still owed 46 percent of the total debt that
they owed when they started the debt settlement program, plus
whatever amount that debt had grown to during the interim.
After one to two years under a debt settlement contract,
even those consumers who had not canceled and who had at least
one debt settled still owed money on 48 percent of the debt
accounts that they brought into the debt settlement program.
The study's numbers suggest that the 4,500 studied consumers:
Cancelled at a rate of 60 percent, or 2,700 consumers. (p.
2)
Owed a total of $108.5 million in debt. (extrapolation from
table 2, combined mean debt of $24,099 for each of 4,500
consumers)
Paid $2.2 million in set up fees if they were charged a 2
percent set up fee. (This is a conservative estimate; the study
cites other sources noting a range of 2 percent to 4 percent
set up fees). (p.12)
Lost $1.3 million in those set up fees when 60 percent of
them dropped out.
Would owe over $19 million in fees if they were charged an
overall fee of 18 percent of the debt, which is within the two
ranges cited by the report of 14-20 percent or 15-25 percent
(this does not include a reduction for any fees still owed when
the consumer dropped out). (p.12)
Continued to owe $85 million in debt one to 2 years after
starting debt settlement.
The remaining debt calculation is based on the full initial debt,
of just over $65 million, for the 60 percent who canceled and just
under $20 million for the 46 percent of remaining debt for those who
got at least one settlement. The actual remaining debt number may be
higher, because this calculation applies to the entire 40 percent non-
canceling group the remaining debt percentage of 46 percent which the
study provides for that subset of consumers in the non-canceling group
who received at least one settlement, and the study does not document
or claim that each non-canceling consumer had even one debt settled
during the study period. Of course, the debt numbers could actually be
higher because the debt amounts for unsettled debt can be expected to
continue to increase during the settlement program.
The study does not analyze or discuss the cost to consumers of high
upfront payments for debt settlement.
The study asserts that charging consumers reasonable upfront fees,
i.e., fees before settlement, ``can be justified'' but it offers no
analysis of the actual fee amounts charged for debt settlement. (p. 24)
The fee structure and fee amounts imposed on the 4,500 consumers in the
sample is not disclosed, and the report also has no discussion of the
amount of fees lost by the 60 percent of customers who canceled, every
presumably after paying both a setup fee and monthly fees.
The study also contains some internal inconsistencies.
As released in August 2009, the study contains some inconsistencies
and makes some assertions it does not support. The study states on page
13 that 20.5 percent of consumers who canceled did so because of
bankruptcy, while Table 3 on page 16 says that bankruptcies accounted
for 13.5 percent of cancellations.
Table 3 identifies 14 percent of consumers who canceled in order to
``settle/try to settle on own,'' but the text on pages 16 and 20 treats
the consumers in that 14 percent as if all of them in fact did pay off
their debt on their own.
On page 3, the study says that more than 57 percent of clients have
offers to settle at least 70 percent of their debt, but the only table
of data to support this, found at page 17, contains data only on the
offers for those consumers who received at least one offer to settle a
debt. Consumers who received no offers are omitted from the analysis of
results, which would bias the reported results upwards by excluding the
``zero'' category from the calculations of mean (average) results.
Analysis prepared by:
Gail Hillebrand,
Financial Services Campaign Manager.
______
Response to Written Questions Submitted by Hon. Mark Pryor to
Gregory D. Kutz
Question 1. What is the average fee amount charged to consumers as
a percentage of the consumer's unsecured debt?
Answer. We are unable to provide information about the average fee
amount charged to actual consumers nationwide, as this analysis was
beyond the scope of our investigation. However, we were able to obtain
fee information from 18 of the 20 debt settlement companies we called
while posing as fictitious consumers. Of these 18 companies, 17
represented that they collect advance fees before debts are settled.
Representatives of these companies told us that the advance fees are
calculated based on a percentage of the consumer's debts to be settled.
The advance fees cited most commonly ranged between 15 and 17 percent.
Moreover, representatives from several companies told us that our
monthly payments would go entirely to fees for up to 4 months before
any money would be reserved for settlements with our creditors. Only 1
of the 20 companies we called represented that it followed a contingent
fee model where primary fees are charged based on a percentage of the
reduction of debt it says it obtains for consumers (in this case, 35
percent). Some companies also represented that they assessed monthly
maintenance and other fees. One of the 17 advance-fee companies also
revealed that it charged a contingent fee after each debt is settled
based on a percentage of the debt reduction.
Question 2. On average, how long does it take for consumers to
buildup sufficient funds in an escrow account before those funds are
used by debt settlement companies to negotiate and reduce the
consumers' credit card balances?
Answer. We are unable to provide information about how long it
takes for actual consumers to buildup funds to be used for settlements,
as this analysis was beyond the scope of our investigation. However,
based on our knowledge of the industry, the length of time needed to
obtain a settlement for a consumer may depend upon several factors,
including: the consumer's number of accounts, amount owed to each
creditor, availability of pre-existing funds, the length of time the
consumer's accounts are past due, and the willingness of creditors to
negotiate settlements, among other things.
Question 3. In instances where consumers with insufficient income
indisputably cannot pay a debt settlement company, how often do debt
settlement companies turn away consumers after their initial
consultation?
Answer. We are unable to provide information about how often
companies turn away actual consumers who do not have sufficient income
to afford a debt settlement program, as this analysis was beyond the
scope of our investigation.
Question 4. Could you describe to the Committee, based on your
investigation, the method of solicitation most often associated with
consumer abuse in this area? (Are you seeing mostly online
solicitations touting consumer savings, telemarketing, mailings, radio
advertisements)?
Answer. We did not conduct an assessment of method of solicitation
most often associated with consumer abuses as part of our
investigation. However, during the process of identifying debt
settlement companies and selecting 20 companies to call, we found
examples of online, television, print, and radio solicitations, some of
which we found to be fraudulent, abusive, or deceptive. In one case, we
identified a company through an unsolicited spam message received by
one of our investigators through his private e-mail account. This
message advertised debt settlement services, listed a mailing address
in the country of Lebanon at the bottom, and contained a link that took
us to the company's website. Most of our investigative work to identify
debt settlement companies was conducted online.
______
Response to Written Questions Submitted by Hon. Mark Pryor to
William and Holly Haas
Question 1. By what percentage were you told your principal would
be reduced? Did your chosen debt settlement company achieve that level
of promised reduction?
Answer. We were told (and it's written in the contract) our
principal would be reduced to 46 percent of the total debt that we
owed. We did NOT receive any reduction from our debt. Instead, numerous
fees and penalties were added onto our balances because we were not
paying them (as instructed by the debt settlement company). It actually
increased our debt approx. $9,000 more than what we owed before going
thru debt reduction for the 6 months that we continued with them.
Question 2. Did your debt settlement company clearly explain to you
how your monthly payments would be used?
Answer. No. The referring company told us that the monthly payments
would go into a holding account where it would stay until there was
enough money in the pot to pay a settlement and pay the attorney fees.
They did not tell us that the $7,500 attorney's fees would be paid
first, before the credit card companies and the debt settlement company
negotiated our settlement.
Question 3. What do you believe law makers should do to encourage
better protection of consumers from abusive debt collection practices?
Answer. Clearly, there should be some regulation of the way they
take your money. Debt settlement companies, if allowed to exist, should
have to document and prove how much time they work on your settlements
each month, and be allowed to take out a certain percentage each month
when they do work on your case, with a maximum cap of some sort (5
percent) of your monthly payments, just for overhead expenses. Only
after they negotiate and the settlement is complete, should they be
allowed to charge and receive payment for their services. What
incentive to do they have to negotiate a settlement if they take their
fees off right from the start? This is how any ``normal'' business
works, and so it should be for debt settlement. We also believe that
these debt settlement companies should receive heavy monetary fines if
they don't document time as required, (or falsely report time) and for
falsely advertising things that they simply cannot do. They should be
licensed in the same state that they do business, regulated and watched
with a paper or electronic trail, and affiliated with credit card
companies so the consumer knows that they are honest and legitimate.
______
Response to Written Questions Submitted by Hon. Mark Pryor to
Philip A. Lehman
Question 1. Mr. Lehman, consumer complaints related to debt
collection are on the rise in Arkansas. You mentioned in your
testimony, ``In our experience, most consumers are worse off after
enrolling in debt settlement programs.'' Could you elaborate upon that
for the Committee please?
Answer. The typical debt settlement program requires a consumer to
pay substantial advance fees, to cease direct communications with
creditors, and to cease making payments on credit accounts. As a
result, the consumer's limited funds are diverted to the debt settler
instead of the consumer's creditors. The consumer becomes further in
arrears while interest and default charges mount and the consumer's
credit standing deteriorates. Since the consumer is not communicating
with creditors, collection efforts intensify and collection lawsuits
are more likely. The debt settler offers little protection against
collection activity and typically does not begin settlement efforts for
a year or more. In the meantime, the consumer is left to deal with
collection pressure and ballooning account balances.
It is undisputed that the large majority of consumers drop out of
these debt settlement programs before they are completed. Many of these
consumers cancel because they are not seeing any results. These
consumers may have paid thousands of dollars in advance fees to the
debt settler. They are not likely to get refunds because the fees are
deemed fully earned when paid. Therefore, these consumers have lost
valuable time and money due to being sidetracked in a debt settlement
program. Many could have resolved their delinquent accounts directly
with their creditors. Many end up filing for bankruptcy after the debt
settlement program fails.
Question 2. Do you think that a fixed-fee pro-rated payment
structure over a certain period of time, as proposed by some members of
the debt settlement business community, is a salient solution to the
consumer complaints reported by many state attorneys general?
Answer. No. The prorated payment models we have seen still
frontload the consumer's fees. Typically, they require the consumer to
pay a total of 15 to 18 percent of the consumer's debt as a fee
collected over the first 12 months of the program. Since settlements
often do not take place until after a year or more, the debt settlement
company gets paid whether it delivers results or not.
Once its fees have been fully earned, the debt settler has little
economic incentive to perform. The program becomes like a Ponzi scheme,
requiring new customers to generate revenue in order to provide
services to earlier customers.
Question 3. What do you see as Congress's or the Federal Trade
Commission's role in further preventing consumer abuse in the area of
debt collection and other relief services?
Answer. A Federal role is appropriate because debt settlement
abuses are national in scope and most debt settlement providers operate
on an interstate basis. The State Attorneys General, in their public
comments to the Federal Trade Commission, have strongly supported the
FTC's proposed debt relief services amendments to the Telemarketing
Sales Rule. The FTC's proposed Rule comprehensively addresses consumer
abuses through enhanced disclosures, prohibitions on deceptive
representations, coverage of attorney-led debt settlement providers,
and prohibitions on advance fees. S. 3264, the Debt Settlement Consumer
Protection Act, sponsored by Senators Schumer and McCaskill, has a
similar comprehensive approach that will protect consumers.
While the Attorneys General support Federal regulation and
enforcement in this area, it is important that the States have the
authority to enforce any Federal laws or rules. The Federal standards
should set a floor of consumer protection and should not prevent the
States from enacting stronger legislative measures.
Question 4. What is our recommendation for better protecting
consumers from debt collection abuses moving forward?
Answer. The debt settlement industry has been characterized by
deceptive advertising, misleading representations, spotty performance
and the charging of excessive fees before delivery of services. As
noted above, a comprehensive approach as proposed by the FTC rulemaking
and S. 3264 is best suited to address the widespread consumer
protection problems.
However, the key to protecting consumers from future harm is a
prohibition on advance fees. Debt settlement companies should not be
allowed to profit while the consumer loses. North Carolina and now
Illinois have adopted strict limitations on advance fees for debt
settlement services. There is precedent for such a prohibition from
regulation of other debt-related services that were notorious for
widespread consumer abuses. Under the Federal Credit Repair
Organizations Act and most state credit repair laws, advance fees are
prohibited for credit repair services. The FTC's Telemarketing Sales
Rule bars advance fees in loan brokering, another area characterized by
false promises and minimal performance. Many states currently prohibit
advance fees for foreclosure relief or mortgage loan modification
services, and the FTC has recommended a similar ban in its proposed
Mortgage Assistance Relief Services Rule.
Question 5. What qualities or criteria would help distinguish debt
settlement programs that legitimately help consumers versus those that
take advantages of vulnerable people?
Answer. A legitimate debt settlement program should have a
demonstrated record of performance and should earn its compensation
from successful completion of settlements. Unfortunately, reliable
evidence of completion rates and settlement results has not been
available from the debt settlement industry. Without such evidence, it
is difficult to acknowledge any debt settlement company as beneficial
to consumers.
A more responsible debt settlement program would incorporate the
best features of credit counseling and debt management plans. Consumers
would be offered budget and financial planning counseling before
beginning any payment program. As with debt management, consumers would
make monthly payments that would be distributed to creditors under a
plan agreed to by the creditors. The consumers would then be relieved
of collection efforts and escalating finance charges. If the consumer
performed under the payment plan, the consumer would receive an earned
benefit of significant principal reduction. This hybrid debt
management/principal reduction model is supported by lenders and
nonprofit credit counseling agencies but accounting rules from Federal
banking regulators have impeded its implementation.
______
Response to Written Questions Submitted by Hon. Mark Pryor to
John Ansbach
Question 1. What is the range of administrative fees charged to
consumers by your member companies?
Answer. Although USOBA has not surveyed its members to determine
the range of fees charged to consumers by each, USOBA believes that the
most common service fee charged by USOBA members is 15 percent of the
debt enrolled by a consumer at the time of contract formation. Further,
we are pleased to share the following data and statistics, all of which
were provided to the Federal Trade Commission in January: \1\
---------------------------------------------------------------------------
\1\ Please note that the definitions reflected here were provided
by the Federal Trade Commission and were posed to USOBA members
verbatim.
(a) 77.58 percent of USOBA member companies providing
information in a recent survey primarily use a ``fixed fee''
model in which fees are spread out in a series of payments over
---------------------------------------------------------------------------
a fixed period of time.
(b) 10.34 percent of USOBA member companies providing
information in a recent survey primarily use a ``front-end fee
model'' in which the company requires consumers to pay as much
as 40 percent or more of the fee within the first three or 4
months of enrollment and collects the remaining fee over an
ensuing period of 12 months or less.
(c) None of USOBA member companies providing information in a
recent survey primarily use a ``back-end model'' in which the
consumer pays all of the fee upon program completion, paying a
fee equal to a percentage of total savings.
Question 2. What do you believe is the ideal pay structure a debt
settlement company should implement to assist consumers in reducing
unsecured debt?
Answer. USOBA believes that the ``ideal pay structure'' is the one
adopted in State of Tennessee. Under such a structure, fees are capped
not only in amount, but in timing, as well, i.e., fees are capped at 17
percent of the enrolled debt and providers are then required to spread
fee collection out over ``half the life'' of a consumer's program.\2\
Because programs are typically 3-4 years in length, this means that
fees must be spread out over a period of 1\1/2\ to 2 years. Such an
approach has been adopted in Nevada, Colorado, Delaware, Iowa, Montana,
Idaho, Tennessee and Utah and is under consideration in Texas,
California, New York and several other states.
---------------------------------------------------------------------------
\2\ By way of example, if a consumer enrolls $10,000 of debt in a
debt settlement program, the maximum allowable fee would be 17 percent
of that debt, or $1,700. That fee would then be spread out over half
the life of the consumer's program, or 18 months in an average three-
year program. As such, the maximum allowable monthly fee under this
hypothetical would be $94.44 per month ($1,700 in equal payments over
18 months).
Question 3. Do any of your member companies encourage consumers to
discontinue communication with their credit card companies?
Answer. While USOBA cannot speak to the specific practices of every
one of its members, it is against USOBA member policies to encourage
consumers to discontinue communication with their creditors. What USOBA
does support in this area is member companies fully informing consumers
of their rights as well as providing information, generally, pertaining
to the repayment of unsecured debts. Whether or not to continue
servicing any particular debt is ultimately a decision that consumers
must make on their own and in consideration of their own personal
circumstances. It is a debt settlement company's responsibility to arm
consumers with as much information as possible so that such a decision
can be made considering all of the facts and consequences.
Furthermore, USOBA would also advise that most of USOBA's members'
clients are already unable to meet their monthly creditor obligations
by the time they first contact a debt settlement provider. A recent
survey of USOBA members revealed that approximately 61 percent of
consumers were missing debt payments \3\ prior to starting their
program. This number climbed to 93 percent when consumers who would be
missing payments ``very soon'' were factored in.
---------------------------------------------------------------------------
\3\ ``consistently,'' ``often'' or ``occasionally''
---------------------------------------------------------------------------
In short, although USOBA is aware of instances where consumers have
been told not to pay their bills, USOBA also believes that many if not
most potential debt settlement consumers are already not able to pay
their bills when they come to a debt settlement program. What they need
is accurate information to make informed decisions about how to address
their specific situations, and USOBA encourages its member companies to
provide that information.
Question 4. What do you see as the best solution for preventing
consumer harm in the debt settlement sector?
Answer. USOBA believes that the best solution for preventing
consumer harm in the debt settlement sector is a strong state licensing
and registration regime, coupled with insurance and/or surety bonding
requirements for providers to ensure ability to address consumer
wrongs. While we do believe that the states are best positioned to
articulate appropriate rules and regulations pertaining to contract
requirements, as well as reasonable fee regulation, we do also believe
that there is a role for the Federal Trade Commission to play in
prescribing debt settlement rules, regulations and guidelines for what
is and is not proper advertising. We would also respectfully suggest
that there is an additional role for the FTC to play in working with
the industry to promulgate appropriate standards for consumer
disclosures and a common vocabulary that could normalize disclosures
across all forms of debt relief providers, not just debt settlement
companies. USOBA also respectfully suggests that the debt settlement
law recently enacted in the State of Tennessee, which contains many of
these provisions, should serve as a model for any effort to prevent
consumer harm in the provision of debt relief services.
Further, two additional regulatory and/or legislative tools should
be considered to prevent abuses in the debt settlement sector. First, a
change in the United States tax code regarding debt settlement tax
treatment should be considered. In much the same way that short sales
under certain circumstances no longer create a taxable event (pursuant
to the Mortgage Forgiveness Debt Relief Act and Debt Cancellation),
debt settled by consumers (through the services of an intermediary and
otherwise) should not create a taxable event. This change would remove
a major impediment to debt resolution and eliminate abuses created by
such taxation.
Second, USOBA would also respectfully suggest the provision of some
measure of protection from creditors for consumers who can demonstrate
they are actively, faithfully working a debt settlement program,
similar to the forbearance enjoyed by customers of credit counseling
programs. Because aggressive collection activity is generally the
single most significant reason why consumers are forced to withdraw
from debt settlement programs, often seeking protection in bankruptcy,
providing insulation from collection efforts to those consumers would
go a long way toward raising program completion rates.
______
Response to Written Question Submitted by Hon. Kay Bailey Hutchison to
John Ansbach
Question. Mr. Ansbach, you stated at the hearing that two
individuals that had positive debt settlement experiences had prepared
statements about their experience. Please provide copies of those
statements to the Committee.
Answer. As requested, please see the statements from Mr. Gary Ross
and Ms. Faith Zabriske, which are attached to this document. Both Mr.
Ross and Ms. Zabriske are individuals who had positive debt settlement
experiences and traveled to Washington, D.C. (from Illinois and Texas,
respectively) to tell their stories. They were both in attendance at
the Senate hearing.
______
Testimonial
Gary Ross
Harwood Heights, IL
My name is Gary Ross and I've come here today to tell my story of
how debt settlement successfully helped me get my finances in order.
Without the option of turning to a debt settlement company, I would be
either sinking further into a debt load from which I would never
escape. This industry is very important for people, like myself, who
have fallen into hard times. Please do not take away this option when
you are drafting your legislation.
My story begins 5 years ago. I had always made it a point to pay my
debts on time, but, when I was terminated from my position after
thirty-nine years of service, I was faced with enormous financial
hardship. I was out of work for a year and a half. During this time, I
accrued a great deal of debt. And although I was lucky enough to find a
job, my expenses including mortgage, utilities, groceries and credit
card payments seemed insurmountable.
I was paying the minimum on my debts but I couldn't keep up. With
the late fees and high interest my creditors were charging, I fell into
even greater debt. I was scared and felt desperate. I wanted to pay my
debts, and I certainly did not want to file for bankruptcy or I was
petrified of losing my home. Even after I got a job, I was paying the
minimum payments and I felt like I would never be able to pay off
everything I owed.
After researching my options, I decided to pursue debt settlement.
I had heard good things and I liked that the debt settlement company
would take responsibility for all of my debts and communicating with my
creditors. As soon as I started working with the debt settlement
company, I felt relieved. They took over everything. All of their
personnel were polite, understanding and professional.
They explained the program, what was required of me and what I
could expect. I was told the importance of good communication and
keeping current with my payments. They explained that while I was
accumulating money in my account, they would make settlements with my
creditors. They also explained that if I was sued by any of my
creditors, they would point me to resources that would guide me through
the process. That was exactly what happened! I was sued, but I wasn't
scared. I was able to complete the paperwork and appear in court. This
company gave me the courage to handle court appearances.
After 3 years, I completed the program and am now debt free. I did
not lose my house like I would have in Chapter 7 bankruptcy--I have
since paid off my house and I own it. I have to say that without debt
settlement, I would not have been able to resolve my financial
problems. I think it's very important for consumers like me to have
this option. Please keep that in mind as you look at the industry.
Thank you for letting me tell my story.
Gary Ross
______
Distinguished Members of the Committee:
My name is Faith Zabriskie and I live in Bedford, Texas. I am the
Director of Finance for a prestigious downtown Dallas business. While
money matters are an important part of my professional career, like so
many American citizens, health concerns placed me in a difficult
financial situation. Without the help of debt settlement, I might have
lost my home or wound up in bankruptcy, both of which would have been
devastating on both a personal and professional level.
In 2007, I suffered an injury to my knee and was forced to turn to
my credit cards in order to pay medical bills and other expenses
necessary to survive. I recovered but was overwhelmed with the debt
created by my ordeal.
I contacted my credit card company to find out if they could work
with me on repaying my debt. I had an ``excellent'' credit score in the
high 700s and had always paid my debts on time. To my dismay, I was
told that until I was 6 months delinquent they would not help me.
I tried credit counseling as well, but they were even more
unhelpful. Among other things, they advised me to sell my house and
move into an apartment. I simply could not accept that my only options
were losing my home or filing for bankruptcy.
It wasn't until I enrolled in a debt settlement program that I
found true support. After working the program and saving money as
needed, my provider was able to help me settle all of my debts. I am
currently making payments on my last account and am well on my way
toward being debt free and financially stable.
I am so thankful to have had debt settlement available to me and I
implore you to preserve it as an option for other American consumers
who are so desperately in need. Thank you for your time.
Best Regards,
Faith Zabriskie
Bedford, Texas
______
Supplement to the Statement of Faith Zabriske
The following is from an unsolicited e-mail dated May 3, 2010,
received by a debt settlement provider from their debt settlement
consumer Faith Zabriske:
``I wanted to share with you an absolutely exciting experience that
occurred this weekend but was in the making for the last 2 years--with
the help of your company. . .
As you know, back in 2007, a slip and fall at home resulted in
reduced income--thus a fall back on credit cards to make ends meet.
Increased rates by the cc companies created disaster and I connected
with (your debt settlement company) -
Prior to the slip & fall--I had zero balances on credit cards and a
credit score of 780. My mortgage rate is 3.125 percent. After the
fiasco with the credit cards, my score plunged as low as 480!!!
After 2 yrs and a successful settlement on all accounts (almost
debt free)--my score has climbed back.
Trans Union score: 651--which qualified for a ``preferred''
customer rate with Honda finance--I was able to purchase a new 2010
Odyssey EX-L with ease--the credit report did indicate that several
credit cards were paid on a reduced scale--settlement. And, because
scores are also based on debt to income ratio, the debt that was erased
through [your company's] negotiations, left a revolving balance $4.0k--
down from $90k!!!! And, yes, I was required to pay taxes on portions
settled--and planned accordingly. In addition, the paid on time
mortgage, utilities, etc assisted the cause. [Your] consumer counseling
encouraged paying these items FIRST--and then cc debt next.
The Honda Pre-approval process--on line--was painless! By following
the Consumer Report new car process--[I] realized a $4.0k savings via
Internet sale and a waiver of $700 destination fee by choosing a
vehicle on their lot--pre-visit assisted choice of dealer--by knowing
their inventory. Self-education of consumer issues was also encouraged
by your counselors.
I wanted you to know how good it feels to be able to reclaim my
life--provide for my family--and truly enjoy the accomplishments of my
hard work--and the help and guidance (you) provided played a huge role.
. . .
I can't thank you and your team enough!!!!
Best,
Faith"
______
Response to Written Questions Submitted by Hon. Mark Pryor to
Hon. Julie Brill
As I stated in my testimony, in August 2009, the Commission
published in the Federal Register proposed amendments to the
Telemarketing Sales Rule (``Rule'') to address abuses in the debt
relief industry. Given the pendency of the Rule before the Commission,
it would be inappropriate for me to comment on matters on which the
Commission may have to render a judgment in that proceeding.
Accordingly, my answers are limited to information the Commission has
obtained in its law enforcement in this area.
Question 1. In your opinion, why have reported consumer complaints
of unscrupulous debt settlement companies been on the rise over the
past few years?
Answer. Consumer debt has soared to record levels in the past 2
years, and when consumers are in financial distress, fraudsters
peddling phony solutions generally follow. As you stated, reported
complaints about debt settlement companies have increased in recent
years. Complaints to the FTC about debt relief services (which include
debt settlement companies) have increased about 18 percent in the last
year.
The FTC takes into account the nature and number of complaints it
receives when making enforcement decisions. The Commission has brought
eight cases against debt settlement companies in recent years, alleging
that the defendants deceived consumers into paying hundreds or
thousands of dollars in upfront fees through false promises that they
would obtain settlements of consumers' credit card debt for
substantially reduced amounts, such as 50 to 60 cents on the dollar.
The Commission also has brought a number of cases against other debt
relief operations, including actions against sham nonprofit credit
counselors and debt negotiators.
In addition, State Attorneys General and state regulators are
extremely active in this area. In recent years, the states have brought
124 actions against debt settlement companies.
Question 2. Based on the cases the FTC has brought and research
conducted by your staff, do these debt settlement companies generally
retain upfront and administrative fees even in instances where they
have not successfully reduced consumers' debt?
Answer. All of the debt settlement companies sued by the FTC
allegedly had fee structures allowing them to retain all upfront and
administrative fees, even in instances where they did not successfully
reduce consumers' debt. Some of the defendants provided partial refunds
in isolated cases when consumers complained, typically to the Better
Business Bureau, the State Attorney General, or the FTC, although this
appears to have been infrequent.
Question 3. Are there some legitimate companies in the debt
settlement industry that do in fact achieve their stated goals and aid
consumers in reducing their debt? If so, how do they achieve these
goals and how do their approaches differ from the practices of the
unscrupulous companies?
Answer. The extent to which there are companies in the debt
settlement industry that achieve their stated goals and aid consumers
in reducing their debt is a central issue in the ongoing rulemaking
proceeding. It would therefore be inappropriate for me to express a
view on this issue at this time.
Question 4. You mention in your written testimony the FTC has
alleged that some companies were encouraged to ``stop paying their
creditors'' while failing to disclose that not making payments to
creditors could increase the amount owed and could adversely affect
their credit score. Could you elaborate on that for the Committee
please? How common is that practice in the debt settlement industry?
Answer. Based on the cases the FTC has brought, many debt
settlement companies advise consumers to stop paying their creditors
without disclosing that this could increase the consumer's debt burden
(through accrued interest and late charges) and adversely affect his or
her credit rating. The FTC has charged five companies with advising
consumers to stop paying their creditors. I also note that the GAO
testified that, out of calls that investigators made to 20 debt
settlement companies, 17 companies encouraged the investigator to stop
paying creditors.
Question 5. How does the Commission alert consumers to deceptive
financial practices including some abusive debt collection activities
and what else do you think needs to be done to protect consumers?
Answer. To complement its law enforcement and rulemaking
activities, the Commission works diligently to educate consumers about
deceptive financial practices, providing information to consumers in
both English and Spanish. For example, the agency recently released
English and Spanish versions of a brochure entitled ``Settling Your
Credit Card Debts,'' which offers struggling consumers tips on how to
obtain assistance with their debts and spot red flags for potential
debt relief scams. The FTC has distributed more than 248,000 print
versions of this or two other debt relief brochures in the past 18
months, and consumers have accessed one or more of them online more
than 760,000 times. These materials are now available at a new FTC web
page, www.ftc.gov/MoneyMatters. Over the last 6 months, the Money
Matters website has received approximately 50,000 hits per month.
More broadly, the Commission has conducted numerous education
campaigns designed to help consumers manage their financial resources,
avoid deceptive and unfair practices, and become aware of emerging
scams. For example, the FTC has undertaken a major consumer education
initiative directed at consumers who are struggling to pay their
mortgages. The initiative, which includes a suite of mortgage-related
resources for homeowners, explains how to avoid mortgage loan
modification and foreclosure rescue scams. NeighborWorks America, the
Homeowners Preservation Foundation (a nonprofit member of the HOPE NOW
Alliance of mortgage industry members and U.S. Department of Housing
and Urban Development-certified counseling agencies), and other groups
are distributing FTC materials and information directly to homeowners
at borrower events across the country, on their websites, in their
mailings, and over the telephone.
With respect to abusive debt collection activities, the FTC
educates consumers about their rights and responsibilities in a number
of ways. An FTC brochure, entitled ``Debt Collection FAQs: A Guide for
Consumers,'' explains the Federal Fair Debt Collection Practices Act in
plain language. The brochure is accessible at www.ftc.gov/bcp/edu/pubs/
consumer/credit/cre18.shtm. In 2009, the FTC distributed 123,500 paper
copies of the brochure to consumers in response to inquiries to the FTC
and through non-profit consumer groups, state consumer protection
agencies, Better Business Bureaus, and other sources of consumer
assistance. In addition, online users accessed the brochure on the
FTC's website 456,162 times. The FTC also publishes Spanish-language
versions of this and related brochures, including ``Credit and Your
Consumer Rights'' and ``Knee Deep in Debt.'' \1\ The FTC distributed
12,400 paper copies of the Spanish version of ``Debt Collection FAQs''
in 2009. Online users accessed the brochure in Spanish 7,792 times in
2009. Most recently, in September 2009, the FTC released a video
explaining consumer rights regarding debt collection. The video can be
found at www.ftc.gov/debtcollection and www.youtube.com/ftcvideos.
---------------------------------------------------------------------------
\1\ The Spanish-language version of ``Debt Collection FAQs''
(``Preguntas Frecuentes sobre Cobranza de Deudas: Una Gu!a para
Consumidores'') is accessible at www.ftc.gov/bcp/edu/pubs/consumer/
credit/scre18.shtm; ``Credit and Your Consumer Rights'' (``El Credito y
Sus Derechos como Consumidor'') is accessible at www.ftc.gov/bcp/edu/
pubs/consumer/credit/scre01shtm; and ``Knee Deep in Debt'' (``Endeudado
Hasta el Cuello'') is accessible at www.ftc.gov/bcp/edu/pubs/consumer/
credit/scre19.shtm.
---------------------------------------------------------------------------
The Commission also provides consumer education through its
Consumer Response Center (``CRC''), whose highly trained contact
representatives respond to telephone calls and correspondence from
consumers, in both paper and electronic form, and provide them with
relevant information and materials. A toll-free number, 1-877-FTC-HELP,
makes it very easy for consumers to contact the CRC.
The Commission encourages wide circulation of all of its
educational resources and makes bulk orders available to anyone free of
charge, shipping included. We provide FTC materials to State Attorneys
General and other local law enforcement entities, consumer groups, and
nonprofit organizations, who in turn distribute them directly to
consumers. In addition, media outlets--online, print, and broadcast--
routinely cite our materials and point to our guidance when covering
debt-related news stories. Finally, the FTC extends the reach of its
consumer education initiatives through public speaking engagements to
groups across the country.
Question 6. What is your recommendation for better protecting
consumers from these types of abuses moving forward?
Answer. Given the pendency of the rulemaking proceeding, it would
be inappropriate for me to express a view as to how to best protect
consumers from these types of abuses. Aside from that issue, I fully
expect that the agency will continue to expand both its enforcement
efforts and its consumer education initiatives and outreach.
Question 7. What is one example of an egregious and fraudulent debt
settlement practice the FTC has reviewed or resolved, and in your view,
how could it have been avoided?
Answer. As one example, in October 2007 the Commission alleged that
four companies and their principals, Robert and Miriam Lovinger,
marketed their services through websites that offered a ``Debt Meltdown
Program,'' described as ``an aggressive method of helping consumers out
of the debt trap and away from the bankruptcy path.'' The FTC's
complaint alleged that the defendants told consumers that they would
obtain settlements that would substantially reduce the consumers' debt.
The defendants allegedly promised to negotiate with creditors and begin
making payments to them within several weeks after consumers joined
their program, and to provide personalized financial counseling.
Defendants also allegedly told consumers to have no further contact
with their creditors and to stop paying them immediately, enabling the
defendants to negotiate for them. The defendants, however, allegedly
failed in many cases to contact each creditor as promised, and
consumers continued hearing from creditors about their debts. In
addition, the Commission alleged that defendants regularly withdrew
money from consumers' trust accounts to pay their operating expenses.
In August 2008, the defendants agreed to settle the Commission's
charges. The settlement barred the defendants from violating the law
again and barred the Lovingers from offering debt settlement services
to consumers in the future without first obtaining a $1 million
performance bond. The settlement imposed a $7 million judgment on the
defendants that was partially suspended based on an inability to pay.
The judgment may be imposed in full in the future if the Commission
learns that the defendants misrepresented their financial condition
during settlement negotiations. The judgment also required the
Lovingers to transfer proceeds from the sale of property they owned to
be used for possible restitution to injured consumers.
The Commission works to prevent scams like this one from taking
advantage of consumers by a combination of aggressive law enforcement
(including seeking consumer redress where appropriate), extensive
consumer education, guidance to industry as to how to comply with the
law, and, where appropriate, promulgating rules.
______
October 16, 2009
Donald S. Clark, Secretary,
Federal Trade Commission,
Washington, DC.
RE: Telemarketing Sales Rule--Debt Relief Amendments--R411001
Dear Secretary Clark:
These comments are being submitted by Consumer Federation of
America,\1\ Consumers Union,\2\ Consumer Action,\3\ the National
Consumer Law Center on behalf of its low-income clients,\4\ the Center
for Responsible Lending,\5\ the National Association of Consumer
Advocates,\6\ the National Consumers League,\7\ U.S. PIRG,\8\ the
Privacy Rights Clearinghouse,\9\ the Arizona Consumers Council,\10\ the
Chicago Consumer Coalition,\11\ the Consumer Assistance Council,\12\
the Community Reinvestment Association of North Carolina,\13\ the
Consumer Federation of the Southeast,\14\ Grass Roots Organizing,\15\
Jacksonville Area Legal Aid, Inc.,\16\ the Maryland Consumer Rights
Coalition,\17\ Mid-Minnesota Legal Assistance,\18\ and the Virginia
Citizens Consumer Council.\19\
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\1\ Consumer Federation of America is a nonprofit association of
some 300 nonprofit consumer organizations across the U.S. CFA advances
the consumer interest through research, education and advocacy.
\2\ Consumers Union of United States, Inc., publisher of Consumer
Reports, is a nonprofit membership organization chartered in 1936 to
provide consumers with information, education, and counsel about goods,
services, health and personal finance. CU's publications and services
carry no outside advertising and receive no commercial support.
\3\ Consumer Action is a national non-profit education and advocacy
organization that has served consumers since 1971. CA serves consumers
nationwide by advancing consumer rights in the fields of credit,
banking, housing, privacy, insurance and utilities.
\4\ The National Consumer Law Center is a nonprofit organization
specializing in consumer issues on behalf of low-income people. NCLC
works with thousands of legal services, government and private
attorneys, as well as community groups and organizations, from all
states that represent low-income and elderly individuals on consumer
issues.
\5\ The Center for Responsible Lending is a not-for-profit, non-
partisan research and policy organization dedicated to protecting
homeownership and family wealth by working to eliminate abusive
financial practices.
\6\ The National Association of Consumer Advocates is a non-profit
corporation whose members are private and public sector attorneys,
legal services attorneys, law professors, and law students, whose
primary focus involves the protection and representation of consumers.
NACA's mission is to promote justice for all consumers.
\7\ The National Consumers League, founded in 1899, is America's
pioneer consumer organization. Its mission is to protect and promote
social and economic justice for consumers and workers in the United
States and abroad.
\8\ U.S. PIRG serves as the federation of non-profit, non-partisan
state Public Interest Research Groups, which take on powerful interests
on behalf of their members. The PIRGs have long advocated for a fair
financial consumers marketplace.
\9\ The Privacy Rights Clearinghouse is a nonprofit consumer
education and advocacy organization, established in 1992 and located in
San Diego, CA.
\10\ The Arizona Consumers Council has been educating, protecting
and advocating on behalf of Arizona consumers since 1966.
\11\ The Chicago Consumer Coalition advocates for social and
economic justice.
\12\ The Consumer Assistance Council, located on Cape Cod, works
with the Massachusetts Attorney General's office to provide consumer
information and to mediate complaints.
\13\ The Community Reinvestment Association of North Carolina is a
bank watchdog agency promoting and protecting community wealth.
\14\ The Consumer Federation of the Southeast is a not-for-profit
consumer advocacy group founded in 2003 and dedicated to consumer
advocacy in the Southeastern United States. Its goal is to establish a
vigorous, new, pro-consumer agenda built upon public awareness,
consumer education, and coalition-building.
\15\ Grass Roots Organizing is a 501(c)3 nonprofit organization in
Missouri, with a membership of more than 450 households. Founded in
2000, GRO's mission is to create a grassroots voice for economic
justice and human rights for all Missourians.
\16\ Jacksonville Area Legal Aid, Inc. is a nonprofit law firm that
provides free legal services to low income, elderly and working poor
individuals in 17 counties in Northeast Florida. JALA's consumer law
unit focuses on assisting those who have been victims of predatory
lending, unfair collection practices and other illegal business
practices.
\17\ The Maryland Consumer Rights Coalition was founded in
Baltimore, Maryland in 2000 to provide a voice for Maryland consumers.
Its mission is to advance and protect the interests of Maryland
consumers through education and advocacy and to ensure fairness and
safety in the marketplace.
\18\ Mid-Minnesota Legal Assistance is one of the network of Legal
Aid programs in Minnesota that provides legal advice and representation
for low-income clients in a wide range of areas, including consumer
law, family law, health law, housing and landlord/tenant law, public
benefits law, youth law, disability law, and elder law. Among its
services, MMLA, through its Legal Services Advocacy Project, engages in
legislative and administrative advocacy, conducting research and policy
analysis and providing community education and training.
\19\ The Virginia Citizens Consumer Council is a statewide
grassroots volunteer consumer education and advocacy organization.
---------------------------------------------------------------------------
We applaud the Federal Trade Commission (FTC) for its thorough
analysis of the debt relief industry and for the essential amendments
that it has proposed to the Telemarketing Sales Rule (TSR) to protect
consumers from abusive practices in debt relief, including for-profit
debt settlement services, debt counseling services, and debt
negotiation services. These amendments are crucial to protecting
consumers from deception and ensuring that they do not pay for false
promises rather than real results.
Summary of Comments
We strongly support the proposed rule, and in particular these
crucial elements:
A strong, effective ban on requesting or taking fees in
advance of achieving final, documented results for consumers.
We recommend that the results must be based on the consumer's
acceptance of the creditor's offer, as documented in writing.
Coverage of calls that consumers make in response to
advertisements for debt relief services in the general media.
Since for-profit debt counseling, debt settlement, and debt
negotiation services are commonly advertised on the Internet,
on television, or by other means which are designed to induce
consumers to make inbound calls, not covering those calls would
create a huge loophole.
Prohibitions on specific material misrepresentations. This
provides greater clarity to debt relief service providers
regarding the types of claims that the FTC will consider to be
deceptive.
Specific required disclosures about how the service works
and other important information. We recommend that these
disclosures be made before the consumer enrolls for the
service, whether they have to pay or not at that point.
In addition, we recommend that the TSR should prohibit debt relief
services from these other abusive practices:
Changing the addresses on the consumer's accounts so that
the debt relief company receives the bills and notices, not the
consumer.
Instructing or advising consumers to have no further contact
with their creditors.
Instructing or advising consumers not to make any payments
to their creditors directly.
Making any representations about the percentage or dollar
amount by which debts or interest rates may be reduced, or in
the alternative, requiring that any representations about
results be based on those which are documented by actual
customer experience over the prior 2 years for all of the debt
those consumers brought into the program.
Failing to provide a ``money-back'' cancelation period of at
least 90 days in the contract, plus more time if there has been
a material breach of the contract or a material violation of
law.
We further recommend that the exemption in TSR for telephone calls
in which the sale of goods or services is not completed, and payment or
authorization of payment is not required, until after a face-to-face
sales presentation should not apply with respect to telemarketing of
debt relief services. This exemption could swallow the rule, as well as
favor some debt relief providers over others.
In our comments we will address the problems in the debt relief
industry and why the proposed amendments to the TSR will help address
those problems. We will also explain why specific language changes and
additions are needed in order to improve the coverage and workability
of the TSR in regard to debt relief services. We believe that strong
FTC rules will benefit not only financially distressed consumers but
also creditors who are owed money and legitimate debt relief services
that truly provide consumers with help for their debt problems.
The Proposed Amendments are Sorely Needed
In its Notice of Proposed Rulemaking (NPR), the FTC has vividly
described the pervasive illegal conduct that has occurred as for-profit
debt relief services have emerged.
1. Debt settlement services are fraught with problems.
A debt settlement service promises to attempt to settle credit card
and other unsecured debts for significantly less than the full amount
owed. However, the consumer has to save enough to fund those lump sum
settlements to each creditor. Settlement negotiations do not commence
until the consumer has saved enough to settle at least one of the debts
involved, and there is no likelihood that all of the debt can be
eliminated unless the consumer saves a very sizable amount of money.
Since multiple debts are often involved, the process may take several
years. While the savings period is running, the debts grow in size due
to creditor charges for interest and penalty fees. Entering a debt
settlement program does not stop the consumer from being called by debt
collectors, experiencing negative credit history, being sued for the
debt, and having wages garnished after a judgment.
The fee is often calculated on the amount of the consumer's debt or
on the projected savings, regardless of whether the debt is ultimately
settled or not. As the FTC noted, there are different fee models, but
the most common is the ``front-end fee'' which requires consumers to
pay a significant portion of the total amount within the first few
months and the balance within a year or less--often well before any
negotiations have taken place. Individuals who can't save enough to
settle their debts end up paying hundreds, even thousands of dollars
but getting no benefit in return. The so-called ``flat fee'' approach
also involves significant fee payments well before any settlement is
achieved. For example, the consumer may be charged a set-up fee of from
2 percent to 4 percent, plus additional fees until the fees total from
14 percent to 20 percent of the full amount of the original debt
brought into the settlement program, with the entire percentage fee
paid over the first half of the program.\20\
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\20\ ``Economic Factors and the Debt Management Industry,'' Richard
A. Briesch, PhD, Associate Professor, Southern Methodist University,
August 6, 2009, at 12, available at http://
www.consumercreditchoice.org, see also Keest, supra.
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Non-completion rates are very high and the rate of successful
settlements is very low, as we will discuss further in our comments on
the proposed prohibition against advance fees.
Earlier this year, Consumer Federation of America (CFA) testified
before Congress that debt settlement firms often mislead consumers
about the likelihood of a settlement, cannot guarantee that a creditor
will agree to a reduced payment, often mislead consumers about the
effect of the settlement process on debt collection and their credit
worthiness, and charge such high fees that consumers often don't end up
saving enough to make settlement offers that a creditor will accept,
causing many consumers to drop out of the program.\21\
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\21\ Testimony of Travis B. Plunkett on behalf of the Consumer
Federation of America, the National Consumer Law Center, and U.S. PIRG
before the Committee on Commerce, Science, and Transportation of the
U.S. Senate regarding consumer protection and the credit crisis,
February 26, 2009, http://www.consumerfed.org/elements/
www.consumerfed.org/File/Plunkett_Testimo
ny_Senate_Commerce_Feb_26(3).pdf.
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The problems consumers face in debt settlement have been much in
the news:
The New York Times reports that consumers rarely benefit
from debt settlement services. ``More often, they say, a
settlement company collects a large fee, often 15 percent of
the total debt, and accomplishes little or nothing on the
consumer's behalf.'' Debt Settlers Offer Promises But Little
Help, New York Times, April 19, 2009.\22\
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\22\ http://www.nytimes.com/2009/04/20/business/
20settle.html?_r=1&emc=eta1.
The New York Attorney General Andrew Cuomo has called debt
settlement a ``rogue industry.'' Cuomo Subpoenas Debt
Settlement Firms, Los Angeles Times, May 8, 2009.\23\
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\23\ http://articles.latimes.com/2009/may/08/business/fi-debt-
relief8.
Debt settlement was identified in the March 2009 issue of
Consumer Reports as one of five ``financial traps.'' Financial
Traps are Flourishing, Tough Times Have Bred Five Costly Come
Ons: High Fee Debt Settlement, Consumer Reports, March
2009.\24\
---------------------------------------------------------------------------
\24\ http://www.consumerreports.org/cro/magazine-archive/march-
2009/money/scams/high-fee-debtsettlement/scams-high-fee-debt-
settlement.htm.
The CBS Morning News says that complaints to the Federal
Trade Commission about debt settlement ``more than quadrupled
between 2006 and 2007.'' Debt Settlement Can Hurt More Than
Help, May 12, 2009.\25\
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\25\ http://www.cbsnews.com/stories/2009/05/12/earlyshow/living/
money/main5008357
.shtml.
Smart Money reports that using these companies is ``fraught
with risk, not to mention outrageous fees.'' Debt Settlement: a
Costly Escape, August 6, 2007.\26\
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\26\ http://articles.moneycentral.msn.com/SavingandDebt/ManageDebt/
DebtSettlement
ACostlyEscape.aspx.
The Better Business Bureau of Los Angeles, Orange, Riverside and
San Bernardino Counties offers this caution about debt settlement
---------------------------------------------------------------------------
services:
Complaints on these companies allege that creditors continue to
harass clients, fees and interest continue to accumulate, and
that the companies do not contact the creditors. Usually,
creditors turn the claims over to collection agencies, file
suit and pursue collection of the money owed to them. Debts are
seldom settled, customer's credit is ruined, and many people
are sued forcing them to seek bankruptcy protection. Typically,
it is difficult to obtain refunds from the companies.\27\
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\27\ http://www.la.bbb.org/BusinessReport.aspx?CompanyID=100046948.
The FTC and state agencies have brought many cases against debt
settlement companies. The FTC case against Edge Solutions, Inc.
provides a good example of the types of problems that consumers have
encountered with debt settlement services.\28\ The company allegedly
promised to reduce consumers' debts to 55 cents on the dollar; told
consumers to stop making payments to their creditors, which would place
them in a ``hardship condition,'' making negotiations possible;
promised that debts would begin to be paid to creditors within several
weeks; required consumers to set up direct debits from their bank
accounts to an account controlled by the company, from which their fees
and debts would be paid; promised one-on-one financial counseling,
which in most cases was never provided; buried in the agreement the
fact that consumers must pay 45 percent of the total fee upfront before
any payments would begin to creditors and that this might take several
months; failed to negotiate with and pay creditors as promised; and
caused consumers to incur late fees, finance charges, overdraft
charges, and negative information on their credit reports, and to face
various types of legal action by creditors.
---------------------------------------------------------------------------
\28\See FTC press release at www.ftc.gov/opa/2008/08/edge.shtm.
---------------------------------------------------------------------------
In its Congressional testimony, CFA concluded that, ``The essential
promise made by debt settlement firms to the public, that they can
settle most debts for significantly less than what is owed, is often
fraudulent. There is general consensus that credit counseling, if done
well, can provide significant benefits for some financially distressed
consumers. No such consensus exists for debt settlement.'' \29\
---------------------------------------------------------------------------
\29\ Testimony of Travis B. Plunkett on behalf of the Consumer
Federation of America, the National Consumer Law Center, and U.S. PIRG
before the Committee on Commerce, Science, and Transportation of the
U.S. Senate regarding consumer protection and the credit crisis,
February 26, 2009, http://www.consumerfed.org/elements/
www.consumerfed.org/File/Plunkett_Testimo
ny_Senate_Commerce_Feb_26(3).pdf.
---------------------------------------------------------------------------
2. The proposed amendments wisely cover all types of for-profit debt
relief services.
The FTC has taken the correct approach in covering all types of
for-profit debt relief services in the proposed amendments to the TSR.
While they may operate differently,\30\ for-profit debt counseling,
debt management, and debt negotiation services share some of the same
characteristics as debt settlement services (in fact, sometimes the
terms debt settlement and debt negotiation are used interchangeably).
These businesses often charge significant fees upfront and make
representations that lead consumers to believe that they will get debt
relief in return--representations that are sometimes false.
---------------------------------------------------------------------------
\30\ Debt management services offer to make arrangements for
consumers to pay their entire debts with reduced interest rates and
fees and over longer periods of time; debt negotiation firms offer to
make consumers' debts more affordable by obtaining lower interest rates
and other concessions from the creditors.
---------------------------------------------------------------------------
A 2003 report \31\ by the National Consumer Law Center (NCLC) and
CFA about credit counseling and debt management programs described
problems with some debt management services, including: failing to make
consumers' debt management program on time, or at all; deceptively
claiming that fees are voluntary; not adequately disclosing fees;
charging excessive fees; and falsely purporting to be nonprofit
organizations. The report also noted that newer entrants in the
industry were generally more aggressive in their marketing tactics,
particularly with Internet and telemarketing advertising.
---------------------------------------------------------------------------
\31\ ``Credit Counseling in Crisis: The Impact on Consumers of
Funding Cuts, Higher Fees and Aggressive New Market Entrants,''
National Consumer Law Center and Consumer Federation of America, April
2003, http://www.consumerfed.org/elements/www.consumerfed.org/file/
finance/credit_counseling_report.pdf.
---------------------------------------------------------------------------
The FTC has cited many enforcement actions against debt counseling
and debt negotiation services that illustrate the need to protect
consumers by bringing these companies under the amendments to the TSR.
For instance, in the largest debt management cases ever brought by the
FTC, AmeriDebt allegedly misled consumers into believing that it was a
nonprofit credit counseling service that would teach them how to handle
their debts.\32\ Instead, it enrolled them in debt management plans
operated by a service provider. Furthermore, contrary to AmeriDebt's
claims that there were no upfront fees, it kept consumers' initial
payments as fees rather than disbursing them to creditors as promised.
---------------------------------------------------------------------------
\32\ See FTC press release at www.ftc.gov/opa/2008/09/
ameridebt.shtm.
---------------------------------------------------------------------------
In the case against Debt Solutions, Inc., the FTC alleged that the
company charged consumers hundreds of dollars for a ``debt elimination
program'' that, despite its claims, did not greatly reduce interest
rates or result in thousands of dollars in savings as represented.\33\
Furthermore, consumers were not told that the promised savings would
take decades to achieve and that the majority of savings would come
from increasingly paying more toward their debts every month, not from
reduced interest rates.
---------------------------------------------------------------------------
\33\ See FTC press release at www.ftc.gov/opa/2007/05/dsi.shtm.
---------------------------------------------------------------------------
To protect consumers from deception and abuse, all types of for-
profit debt relief services should be covered by the proposed
amendments. If debt counseling and debt negotiation services were not
included, some debt settlement companies might try to escape the
requirements and prohibitions by claiming to be engaged in those
businesses instead. Furthermore, as the FTC has seen, some companies
provide a range of debt relief options. For instance, Debt-Set offered
a ``debt consolidation program'' for consumers whose unsecured debts
were overdue by 1 month or less and a ``debt settlement program'' if
the debts were overdue by a longer period.\34\ The FTC must be careful
not to create any loopholes that would allow some businesses to escape
the rules that apply to their competitors.
---------------------------------------------------------------------------
\34\ See FTC press release at www.ftc.gov/opa/2008/02/
debtreduct.shtm.
---------------------------------------------------------------------------
We agree that ``product'' should be added to the definition of debt
relief service so that the rules cannot be evaded by recasting the
service as a product. In addition, we suggest adding ``or seek to
alter'' to the definition to avoid creating a loophole for services
that might simply claim to attempt to alter the terms of the debt. The
revised definition in 310.2 (m) would read:
Debt relief service means any product or service represented,
directly or by implication, to renegotiate, settle, or in any
way alter or seek to alter the terms of payment or other terms
of the debt between a consumer and one or more unsecured
creditors or debt collectors, including, but not limited to, a
reduction in the balance, interest rate, or fees owed by a
consumer to an unsecured creditor or debt collector.
Key Aspects of the Proposed Amendments
1. Advance fees must be prohibited to prevent substantial consumer
injury.
We strongly support the proposed restriction in section 310.4
(a)(5) to ban fees in advance of consumers actually getting the
services they are paying for. The FTC has proposed that debt relief
services should not request or receive any payment until providing the
customer with documentation that the particular debt has been
renegotiated, settled, reduced, or otherwise altered. We agree that
this is essential to protect consumers from the substantial injury that
is caused when they pay fees upfront and little or no services are ever
rendered.
Consumers pay significant fees for debt relief services, often
before any services are actually provided.
Consumers pay significant amounts of money for debt relief
services. For instance, Homeland Financial Services and four other
companies charged non-refundable fees of up to 15 percent of consumers'
unsecured debts with the promise of reducing those debts by as much as
40 to 60 percent.\35\ This seems to be typical of debt settlement
companies; whether the fees are based on the total amount of debts or
the projected savings, they appear to range from 14 to 20 percent.\36\
For instance, for debts totaling $25,000, the consumer would pay $3,500
to $5,000 if the fee was based on the amount of the debt, which seems
to be the most common method of calculation. This is a very large
amount of money, especially for consumers who are already in financial
distress.
---------------------------------------------------------------------------
\35\ See FTC press release www.ftc.gov/opa/2006/09/nationwide.shtm.
\36\ See comments to the FTC by The Association of Settlement
Companies, December 1, 2008, page 2, http://www.ftc.gov/os/comments/
debtsettlementworkshop/536796-00036.pdf.
---------------------------------------------------------------------------
Furthermore, as in the case of Homeland Financial Services,
negotiations with the creditors usually begin only after the consumer
has paid a large percentage of the fees. One company representative at
the FTC's September 2008 Public Workshop on ``Consumer Protection and
the Debt Settlement Industry'' indicated that in the front-end fee
models consumers could pay 40 percent or more within the first three or
4 months, 65 percent within 6 months, ``without any results at that
point.'' \37\ We also note the comments at that workshop of the United
States Organization for Bankruptcy Alternatives acknowledging that
``Some business models call for the fee to be paid up front in its
entirety, over the first several months of the program prior to any
negotiating with creditors takes (sic) place.'' \38\ The flat fee
model, the second most common according to industry representatives at
the workshop, works similarly, with the entire amount collected over
the first half of the enrollment period.
---------------------------------------------------------------------------
\37\ See U.S. Debt Resolve (Johnson), Tr. at 72-74 mentioning that
40 percent or more is collected within the first three or 4 months and
the rest in 12 months or less and again at Tr. 108 that 65 percent of
the fees will be paid in 6 months ``and the client won't have any
results at that point in time.''
\38\ See http://www.ftc.gov/os/comments/debtsettlementworkshop/
536796-00022.pdf, page 12.
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As we commented previously, debt settlement negotiations cannot
start until consumers have saved enough money for the service to make
offers to their creditors. That can take years, depending on the amount
of the debt, the willingness of various creditors to cooperate, and the
consumer's capacity to save. For consumers with multiple debts,
negotiations are typically initiated in sequence; when one is settled,
the consumer starts saving for the next. This stretches the process out
even further. Debt settlement companies typically advertise that they
will help consumers become ``debt free'' within two to 4 years; none
claim that they can resolve debt problems in less than 12 months.\39\
Part of the reason why the process takes so long is that in addition to
saving funds toward a settlement, consumers are paying a substantial
portion of the fees upfront.
---------------------------------------------------------------------------
\39\ See Debt Consolidation Care at http://
www.debtconsolidationcare.com/debt-settlement
.html, Fidelity Debt Solutions at http://www.fidelitydebt.net/debt-
consolidationlp1.html?s=gaw
&kw=Debt%20settlement&gclid=CIayr5ikip0CFQ62sgod9xz32Q,
FixYourDebtProblems.com at http://www.fixyourdebtproblems.com/debt-
relief-help-settlement/, Debtamerica Relief at http://
www.debtmerica.com/a/
debtsettlement_google.html?gclid=CND21LGmip0CFSTFsgod
qlEd3g.
---------------------------------------------------------------------------
Meanwhile, the consumers are instructed not to make any payments to
their creditors, or even to have any contact with them. Even if a
settlement company does not explicitly direct customers not to pay
their creditors, such encouragement is implicit. There is simply no way
that the vast majority of highly indebted consumers can save enough to
make a viable settlement and pay fees without reducing or eliminating
the payments they make to creditors. By the time settlement
negotiations begin, if at all, consumers' debts have become higher
because of interest and penalties, and the amount of money at their
disposal has been reduced by the fees they have paid, diminishing the
chances that they will be able to make viable offers to their
creditors.
For-profit debt negotiation and credit counseling companies also
charge significant fees before providing services. Debt Solutions
charged $399 to $699 in advance for its debt negotiation ``program.''
Consumers paid $675 upfront to Select Management Solutions, which
promised to reduce their credit card interest rates. When the service,
which consisted of three-way telephone calls with their credit card
companies, did not produce the results that consumers were led to
expect, the company allegedly refused to honor its refund policy.\40\
National Consumer Council, masquerading as a nonprofit credit
counseling service, debited $500 from consumers' banks accounts as an
``establishment fee'' and $50 per month thereafter from the monthly
payments that consumers thought were going to their creditors, without
disclosing that the company would not start negotiating a payment plan
with creditors until 6 months or longer had elapsed.\41\
---------------------------------------------------------------------------
\40\ See FTC press release at www.ftc.gov./opa/2008/08/
smsomax.shtm.
\41\ See FTC press release and link to complaint at http://
www.ftc.gov/opa/2004/05/ncc.shtm.
---------------------------------------------------------------------------
Disclosures and prohibited misrepresentations, no matter how
effective, are inadequate to prevent substantial injury by themselves.
Unjustified fees and abusive practices must also be prohibited.
While the disclosure requirements and prohibitions against
misrepresentation that the FTC has proposed are helpful, they alone are
not sufficient to prevent the substantial injury that the FTC has
described. As the FTC has correctly pointed out, when consumers are
considering debt relief services, they have no way to know whether the
representations being made are true or not; they can only judge that
after they have enrolled (sometimes long after), when the programs have
either produced results or failed to do so.
Furthermore, consumers who need help with debt problems are often
in very stressful situations. A survey CFA recently conducted showed
that the fastest growing complaints that state and local consumer
protection agencies received last year were about aggressive debt
collection practices.\42\ As the FTC noted in the NPR, this makes
consumers very vulnerable when they respond to solicitations that
promise them relief. The required disclosures that the FTC proposes
will help consumers understand the total cost of debt relief services,
how they work, and what other alternatives may be available. But
desperate consumers will tend to focus most on the representations made
in the advertisements about how these services can relieve them of
their debt worries. We see the required disclosures and prohibited
misrepresentations as good complements to, but not substitutes for, the
proposed ban on advance fees.
---------------------------------------------------------------------------
\42\ See press release with link to ``2008 Consumer Complaint
Survey Report,'' July 30, 2009, http://www.consumerfed.org/elements/
www.consumerfed.org/File/Consumer%20Complaint%20
survey%20Report%20PR%207-30-09.pdf.
---------------------------------------------------------------------------
It is abusive to charge fees in advance for services when most
consumers do not benefit.
The information that the FTC and state agencies have gleaned from
enforcement actions against debt relief companies revealed extremely
low success rates. The vast majority of consumers who signed up for
those services derived absolutely no benefit in exchange for the fees
they paid. For example, in the case against National Consumer Council,
the court-appointed receiver found that only 1.4 percent of consumers
obtained the promised results.\43\ In recent New York cases against
debt settlement companies, the state attorney general alleges that only
1 percent and \1/3\ percent of consumers received the services they
were promised.\44\
---------------------------------------------------------------------------
\43\ See FTC press release at http://www2.ftc.gov/opa/2005/03/
creditcouncel.shtm.
\44\ See press release at www.oag.state.ny.us/media_cetner/2009/ma/
may19b_09.html.
---------------------------------------------------------------------------
The Center for Responsible Lending (CRL) testified in Congress in
2009 that the debt settlement business is inherently problematic
because it specifically targets consumers who are least likely to
complete their programs. CRL said that the business model which
requires consumers to pay between 14 and 20 percent of their debt in
fees before they can reach a settlement means that few were likely to
benefit and most were likely to drop out because they could not keep up
the monthly payment to the debt settlement company and save funds for
settlements at the same time.\45\
---------------------------------------------------------------------------
\45\ Testimony of Kathleen Keest on behalf of CRL, CFA and NCLC
before the House Committee on Energy and Commerce, Subcommittee on
Commerce, Trade and Consumer Protection, May 12, 2009,
www.responsiblelending.org/credit-cards/policy-legislation/congress/
ftc-ccdp-testimony-5-12-2009final.pdf.
---------------------------------------------------------------------------
In case after case against various types of for-profit debt relief
services, the FTC has found that very few, if any, consumers got real
help with their debt problems after having paid hundreds, even
thousands of dollars in fees. We agree with the FTC that it is an
abusive practice to charge consumers in advance for debt relief
services that they are likely never to receive. Not only do financially
distressed consumers lose what little money they have left to the high
fees charged by these companies, but they are left worse off than they
were before when the promised results are not achieved, facing higher
debts, further damage to their credit records, and the possibility of
lawsuits and wage garnishment. In this respect, the consumer harm is
more severe than in situations involving recovery services, credit
repair, and advance fee loans.
Furthermore, even in the minority of situations where the results
are achieved, that is often long after the consumer first enrolled. In
the meantime, it is not clear what services have been provided for
which the firms should be compensated beyond a de minimus amount, as we
will discuss later. This situation is very similar to that of credit
repair, in which there is little evidence of success and a long lag
time before results, if any, are achieved. The approach that Congress
took in addressing this problem was to enact the Credit Repair
Organization Act, which bans advance fees.\46\ That is the correct
approach here.
---------------------------------------------------------------------------
\46\ 15 U.S.C. 1679 et. seq.
---------------------------------------------------------------------------
Industry has not provided reliable, credible empirical evidence of
the value or success of for-profit debt relief services.
There has been no reliable, credible empirical evidence from
industry of the value or success of for-profit debt relief services. In
researching the debt settlement industry for a 2005 report, NCLC found
that it was very difficult to obtain information from companies or
industry associations and was forced to conclude that ``Unfortunately,
it is not easy to determine what the companies actually do to earn
these fees.'' \47\ As the FTC has noted, what little information has
been provided by the debt settlement industry fails to show the success
rate--that is, the number or percentage of consumers who pay for
services and fully achieve the promised results.
---------------------------------------------------------------------------
\47\ ``An Investigation of Debt Settlement Companies: An Unsettling
Business for Consumers,'' National Consumer Law Center, March 2005,
http://www.nclc.org/issues/credit_counseling/content/
DebtSettleFINALREPORT.pdf.
---------------------------------------------------------------------------
A recent study \48\ released by Americans for Consumer Credit
Choice (ACCC) does not provide this evidence. There is no list or other
information about the ACCC's members on its website, but it appears to
be a debt settlement industry group.\49\ The study is based on data of
4,500 customers from only one debt settlement company, which is not
identified. The author contends that this is a ``very significant
sample of consumers in this industry.'' \50\ However, there is no
information about what percentage of the company's customers, or of the
industry as a whole, this represents to support that contention. There
is also no information about the company's fee structure.
---------------------------------------------------------------------------
\48\ ``Economic Factors and the Debt Management Industry,'' Richard
A. Briesch, PhD, Associate Professor, Southern Methodist University,
August 6, 2009, available at http://www.consumercreditchoice.org.
\49\ The August 7, 2009 press release states that ``ACCC, with
other industry and interested groups'' requested the study, see http://
www.consumercreditchoice.org/node/4.
\50\ Id. page 15.
---------------------------------------------------------------------------
The author points to other limitations--for instance, the company
does not retain information regarding offers and settlements for
consumers who dropped out of the program--and acknowledges that the
results from this company may not be applicable to the industry as a
whole.
We also note that there is no explanation of how this company was
selected for the study, or by whom. While the data cannot be taken as
representative of all debt settlement companies, if this is an example
of the industry at its best, it reveals some serious shortcomings. For
example, a shocking 60 percent of customers canceled their
participation in the program before completing it. The author touts
this drop-out rate as better than the 80 percent \51\ or more that some
have described as typical of debt settlement and compares it favorably
with the churn rate for subscription services such as mobile phones.
---------------------------------------------------------------------------
\51\ ``Look Out for That Lifeline, Debt Settlement Firms are Doing
a Booming Business--And Drawing the Attention of Prosecutors and
Regulators,'' BusinessWeek, March 6, 2008.
---------------------------------------------------------------------------
We would not characterize the majority of customers dropping out of
a debt settlement program before completing it as a good result,
especially when there is no evidence that any of the drop-outs settled
even one of their debts through the company's efforts. Furthermore, the
comparison to the churn in the wireless phone industry does not fit.
Cell phone customers don't usually pay in advance of receiving the
service, as debt settlement customers do. And many undoubtedly switch
their wireless service provider because another one has offered them a
better deal. It's unlikely that debt settlement customers drop out
because another debt settlement company has offered them a better deal.
Given the predominant front-loaded fee structure in the debt
settlement industry and the fact that the customers of this company who
canceled had been in the program for a median of 5 to 6 months (and
some for much longer), we can assume that many paid a substantial
portion of their fees before dropping out. The report provides
explanations for why some customers canceled (13.5 percent of the drop-
outs filed for bankruptcy, 6.8 percent were unable to save, 9.2 percent
had ``buyer's remorse'' within the first 2 or 3 months, and 14 percent
settled on their own or were going to try to do so), but there is no
explanation for why more than half (56 percent) of those who dropped
out did so. Some may well have been discouraged after paying fees for
months and getting no satisfactory results. It also seems clear that,
with such a high cancelation rate, the settlement firm was enrolling
customers in the program for whom it was not appropriate in the first
place. In fact, it seems likely that this company made little or no
effort to determine suitability at all, which we believe should be a
requirement for all debt relief services.
Of the 40 percent still in the program, the report does not make
clear how many had actually settled even one of their debts. The report
provides results only ``conditional on'' settlement of one debt or
receipt of one settlement offer. No statistics are provided in the
published report for the people who had no debts settled. CFA asked the
author and was told orally that 55.7 percent of those who did not drop
out had settled at least one debt. That means that 44.3 percent of
those still in the program had not settled any debts at all. And of the
total of 4,500 customers in the study, only 22 percent had settled even
one debt.
The 40 percent remaining in the program at the time of the study
had been in it for at least 12 months; some had been in for 18 months
and some for 24. It is possible that more of these customers may
eventually settle at least one debt, and that those who have already
settled at least one debt may settle more. It is also possible that
more customers may drop out without settling any debts.
Since there are no statistics based on customers actually
completing the program, which supposedly takes 36 to 48 months, the
study does not answer the fundamental question that the FTC has long
posited--what is the number or percentage of consumers who pay for debt
relief services and fully achieve the promised results of the
elimination of debt?
Furthermore, the fact that the rate of offers was higher than the
rate of settlements (for those who had settled at least one debt) shows
that not all offers are acceptable. Some offers may be for more money
than the consumers can afford, and some may be rejected because they
are not as good as consumers were led to expect. At any rate, the
percentage of offers made, which is highlighted in the report to
demonstrate the value of this company's services, cannot be used as a
real measure for success.
The author of that study argues that prohibiting any fees until
debt relief services have actually been provided is analogous to
forbidding insurance companies from collecting premiums until a claim
is filed. But when consumers buy insurance they receive a legally
binding commitment that the company will pay in the event of specific
future events. For-profit debt relief services cannot make similar
promises of specific results, even if they attempt in good faith to
help consumers. First, creditors are under no obligation to agree to
settle debts, reduce interest or enter into payment plans. Indeed, as
some creditors say they choose not to deal with for-profit debt relief
services at all.\52\ Second, these services have no control over
whether their customers will be willing or able to accept and fund any
offers that creditors may make.
---------------------------------------------------------------------------
\52\ See comments made at the FTC's September 2008 public workshop
on debt settlement by American Express (Flores), Tr. 142-43, and the
ABA (O'Neill), Tr. at 96-97; see also comments by Bank of America in
``Look Out for that Lifeline, Debt-Settlement Firms are Doing a Booming
Business--and Drawing the Attention of Prosecutors and Regulators,''
BusinessWeek, March 6, 2008.
---------------------------------------------------------------------------
Nonprofit credit counseling services have ongoing relationships
with creditors and understand what their payment requirements are. They
determine in advance if consumers can afford acceptable payment plans
and, if not, provide advice about other alternatives such as
bankruptcy. There may be a modest consultation fee or set-up fee, but
the charges for administering debt management programs are usually
assessed on a ``pay as you go'' basis for the services provided. From
the information available about for-profit debt relief services, it
appears that they charge significant fees early on in the programs
without any reasonable assurance that they can help consumers and
without providing real educational or other services. There is no
reliable, credible evidence that even a majority of their customers get
the relief they have paid for.
The advance fee ban must not be weakened by preconditioning its
application on guaranteeing or representing a high likelihood of
success.
The FTC's questions ask whether there is another formulation of the
advance fee ban that would be more appropriate than a ban conditioned
on the provision of the promised goods or services. The answer is no.
Limiting the ban only to instances of a guarantee or representation
of a high likelihood of success has been made would create numerous
opportunities for evasion. First, an impression or expectation of
future success could be created by the lead generator, rather than the
representations of the direct seller or telemarketer. Once an
impression of likely success has been created, it could be very hard to
dispel. Furthermore, and most fundamentally, the very reason that a
consumer would use a debt relief service is to get their debt problems
resolved. A rational consumer would not sign up without the expectation
of a high likelihood that he or she would get satisfactory results.
In essence, the expectation of a high likelihood of success is
inherent in the customer's acceptance of a debt relief service. A
representation of success should not have to be shown as a separate
requirement for application of an advance fee ban. Such a limitation
would very significantly undercut the value of a ban. In fact, we
believe that representations of success should not be allowed at all,
for reasons that we will explain later.
The FTC also asks whether there are alternatives to an advance fee
ban that would sufficiently address the problem of low success rates in
the debt settlement industry. There are not.
A small initial fee may be acceptable in limited circumstances.
Some claim that for-profit debt relief services are entitled to
front-loaded fees because of they provide assistance to the customer or
provide value at the onset. This is not supported by the facts. There
is no evidence that these companies provide meaningful consumer
education, and even if they did, that would not justify charging
hundreds, let alone thousands of dollars. Until satisfactory outcomes
for customers are actually accomplished--setting up a debt management
plan, settling the debts, or negotiating changes to the debts--the
basic service that is promised is not rendered even if some minor
preliminary steps to provide a possible future agreement have been
taken. The concerns expressed by some companies about how to get
customers to pay their fees are somewhat ironic--how can they represent
with confidence that customers will be able to pay off their debts
through their programs when they are not confident that the customers
will have sufficient funds to pay them? At any rate, those concerns are
outweighed by the concerns about substantial injury to consumers when
they pay in advance for debt relief services that may never be
provided.
A small initial fee could be reasonable when a debt relief service
performs substantial work at the onset such as conducting a real,
individualized financial analysis to determine if the program is
suitable for and will result in a tangible net benefit to that
consumer. Such a fee should be capped at $50, to avoid reintroducing
the market incentive to sign up people who are unlikely to benefit from
the service. Several states have enacted laws that limit the set-up fee
that debt settlement services can charge to $50 or less.\53\ Set-up or
enrollment fees for debt counseling services are also limited in some
states; for instance, Arizona caps them at $39.\54\
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\53\ Florida, Oregon, Iowa, North Carolina, and Kansas.
\54\ National Consumer Law Center, Fair Debt Collection, section
12.3, 6th edition 2008 and Supp.
---------------------------------------------------------------------------
Adequate proof of results must be provided before fees may be
requested or paid.
It is essential that consumers be provided with adequate
documentation that their debts have been renegotiated, settled,
reduced, or otherwise altered before payment can be requested or
received. The FTC's proposal describes the types of documentation that
would be acceptable but does not specify the form in which it should be
provided. This portion of the proposed rule should be clarified to
specify that the documentation be provided to the consumer in writing
and be from and binding on the creditor.
Furthermore, for debt settlements, it is extremely important that
the documentation show that debt has been fully settled for a specific
dollar amount. A fully executed debt settlement agreement is the
preferred document. Other documents should be considered only if they
are equally binding. This is particularly important in order to avoid
any confusion about what can trigger an allowable fee--actual
settlements, not unaccepted offers to settle, and not preliminary
conversations between a debt settlement service and a creditor.
Finally, we are concerned that debt relief services may assert that
they should be able to charge fees if they have obtained offers from
consumers' creditors, even if the consumers do not accept them. As the
ACCC study of one debt settlement company illustrated, not all offers
are accepted. Allowing fees to be collected based on offers could
provide incentives to negotiate offers that do not reduce or alter the
debt in any significant way and that do not benefit consumers. We do
not believe that this is what the FTC intended and the amendment should
make clear that the fee payments are contingent upon, and payable no
earlier than, on consumers having accepted binding settlement offers
made by creditors.
Fees should not be disproportionate to the results achieved.
The proposed ban on advance fees for debt relief services would
mean that fee payments could no longer be disproportionate to the
results that are actually achieved in terms of the elimination of the
debts. For instance, if a consumer asked a debt settlement company for
help with three debts, a fee would be paid for each debt as it is
settled; the consumer could not be asked to pay a fee based on the
total amount of all three debts when only one has been settled and the
other two are still outstanding.
In the case of debt management plans, payments to creditors are not
made in a lump sum but are spread out in monthly installments. If we
understand the FTC's intentions correctly, under the proposed amendment
the debt management company would take a portion of the fee each month
when it makes the payments to the consumer's creditors. However, the
language in the proposed amendment does not make this clear. We are
concerned that consumers could be required to pay the entire amount or
a significant portion of their fees at the time that they are enrolled
in a debt management plan, giving them no protection if the service
stopped forwarding their payments to their creditors.
To address this and other issues we have raised, we suggest that
proposed 310.4 (5) be revised to read:
Requesting or receiving payment of any fee or consideration
from a person for any debt relief service until the customer
has agreed to the creditor's offer and the seller has provided
the customer with written documentation in the form of a
settlement agreement, debt management plan, or other such valid
contractual agreement, from and binding on the creditor, that
the particular debt has, in fact, been renegotiated, settled,
reduced, or otherwise altered and that shows the specific
dollar amount, interest rate, or other terms as applicable, and
in the case of debt settlement, that shows that the debt has
been settled and released. With respect to a debt management
plan that calls for making payments over time to a creditor, no
fee may be received earlier than the proportional amount of
progress made toward reducing the debt.
The advance fee ban as structured will not prohibit consumers from
using legitimate escrow services.
We agree that the ban on advance fees will not prohibit consumers
from using legitimate escrow services that they control in order to
save money in anticipation of a settlement, including money that may
eventually be used to pay a debt service provider. However, it is
crucial that no fees can be deducted by or on behalf of the debt relief
company until the services have been provided and consumer has been
given the required documentation. We are concerned about business
models in which the consumers open accounts with third-party services
and give the debt settlement services a power of attorney to remove the
fees from those accounts. This arrangement is described in some detail
in a California case involving Nationwide Asset Services.\55\
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\55\ California Department of Corporations vs. Nationwide Asset
Services, Inc., No. 38300, 4-5, August 4, 2006, http://www.corp.ca.gov/
OLP/pdf/oah/N2005120755.pdf.
---------------------------------------------------------------------------
Any escrow arrangement must give the consumer, and only the
consumer, the right to withdraw the funds at any time. Furthermore, the
consumer should be able to choose the escrow service and not be obliged
to use one that assesses higher fees than other bank accounts of the
same type.\56\
---------------------------------------------------------------------------
\56\ Taking a power of attorney over any bank account held in the
name of the consumer or held by any third-party should be determined to
be an unfair business practice. It is inherently deceptive to encourage
the consumer to open a bank account and then take the right to remove
funds directly out of that bank account by a power of attorney. If the
consumer wishes to authorize an electronic debit from his or her bank
account, the Federal Electronic Fund Transfer Act provides the
framework for that transaction, including a right to cancel an
authorization for preauthorized periodic payments.
---------------------------------------------------------------------------
2. Other abusive practices should be prohibited.
In addition to banning fees in advance of actually providing debt
relief services, there are other abusive practices that should be
addressed by the TSR in order to provide adequate protection for
consumers.
Changing the addresses on consumers' accounts so that the debt
relief company receives the bills and notices, not the consumer, should
be prohibited.
This prevents consumers from receiving notices about penalties,
referral to collection, and other impending actions--information
consumers need in order to protect their interests pending any
reduction, settlement or other negotiated resolution of the debt.
Instructing or advising consumers to have no further contact with
their creditors should be prohibited.
This prevents consumers from responding to notices and offers for
direct negotiations from their creditors and could worsen their
situations by prolonging their debt problems and increasing the fees
that they must pay to the debt relief services and the likelihood of
lawsuits and other adverse actions. It may also prevent the consumer
from receiving information about how high the debt has grown during the
delay for debt settlement/negotiations.
Instructing or advising consumers not to make any payments to their
creditors directly should be prohibited.
This prevents consumers from making even minimum payments to their
creditors in order to forestall or reduce the risk of penalties, damage
to their credit reports, lawsuits, and other adverse actions while they
are waiting for the debt relief services to be rendered.
Making any representations about the percentage or dollar amount by
which debts or interest rates may be reduced should be prohibited.
This is inherently misleading because each person's debts and
capacity to pay them is different. Furthermore, there are varying
levels of cooperation among creditors; some will not even deal with
for-profit debt relief services at all. Even if a debt relief service
has a high rate of success overall, the success rate does not guaranty
that every customer will achieve the same results. Moreover, fine-print
disclaimers do little to dampen the expectations created by such
claims.
Representations of results are also misleading when they are not
regularly achieved for all of the debts for a significant majority of
the customers. For example, suppose that a debt settlement company
regularly settles half of the debts for half of the initial debt
amount--an assumption which we believe is very optimistic in light of
high drop out rates. If half of the debts are settled, that means that
the debt settlement company's customers still owe the full amount, plus
new creditor interest charges, on the remaining unsettled half of their
debts. It would be very misleading to claim: ``We settle debts for 50
cents on the dollar,'' in this circumstance. A consumer who had started
debt settlement with two debts of $12,000 each and had one debt settled
for $6,000 would have paid the $6,000 settlement and still owe
$12,000--that consumer would be on the hook for 75 cents on the dollar
in remaining debt and the payment for the settlement, not even counting
the amount of the debt settlement company's fees.
We believe that a prohibition against making any representations
about the percentage or dollar amount by which debts or interest rates
may be reduced is the best way to protect consumers from expectations
that may not be fulfilled. If this recommendation is not adopted, we
suggest as an alternative a ban on making any representation about the
percentage or dollar amount at which a debt may be reduced or the
amount a consumer may save unless the provider maintains evidence that
the represented result was achieved for all debt enrolled in the
program for at least 80 percent of the clients who began the service in
the most recent two calendar years. Evidence supporting claims of
results should be verified by an independent audit.
However, if any representations about the percentage or dollar
amount by which debts or interest rates may be reduced are allowed,
there should also be a required disclosure that those results cannot be
guaranteed for each individual customer. Furthermore, debt relief
companies should be required to submit their audits to the FTC so that
the information is publicly available.
Failing to provide a ``money-back'' cancelation period of at least
90 days in the contract, plus more time if there has been a material
breach of the contract or a material violation of law should be
prohibited.
A cancelation period gives consumers time to assess whether a
product or service is right for them. In the case of debt relief
services, a minimum of 90 days to cancel with return of all monies paid
except for payments that have already been made to creditors would
enable consumers to make that assessment and provide a disincentive for
debt relief services to market to and contract with consumers who are
not likely to benefit from the services.
We also suggest that consumers should have the right to cancel in
the event of a material violation of law or breach of contract by the
seller. This would protect consumers from the worst actors and give a
competitive advantage to sellers who honor the law and comply with
their contractual promises.
3. Inbound calls for debt relief services must be covered by the rule.
We strongly support the extension of the existing telemarketing
sales rule's disclosure and misrepresentation provisions to inbound
calls to debt relief services. Limiting the coverage only to outbound
calls would ignore the marketing realities and allow a very large
loophole in the TSR to continue. For-profit debt counseling, debt
settlement, and debt negotiation services are commonly advertised on
the Internet, on television, and by other means which are designed to
induce the consumer to make an inbound call. Protecting the consumer
from misrepresentation and requiring disclosure of key information only
for those potential debt relief customers who receive a phone call,
rather than also for those who are induced by an advertisement to make
a phone call, would make no policy sense, leave a large loophole in
place, encourage evasion of the rules, and give a competitive advantage
to those who use advertising to induce inbound calls.
An additional reason that inbound calls must be covered is the role
of lead generators. For example, National Consumer Council used pre-
recorded messages left on consumers' answering machines as well as
direct mail to induce consumers to call in order to generate leads for
several other companies. Both the representations used to induce calls
from consumers and those made during the calls should be covered. The
TSR should make clear that it applies to lead generators. Furthermore,
we believe that the debt relief providers who accept those leads to
should be held responsible for the representations made to generate
them, including those made during inbound calls.
4. We support the disclosures required in the proposed amendments.
Consumers must be told the truth about the debt relief services. It
is very important that the current general disclosure requirements
under the TSR apply to inbound calls for debt services as well as
outbound calls, as the FTC has proposed. We also agree that the
additional disclosures pertaining to debt relief services are needed.
They will help consumers understand exactly how these services work,
what to expect from them, and whether they are likely to serve their
needs. Combined with the advance fee ban, the disclosures would provide
strong consumer protection.
The disclosures will also help consumers understand their own
obligations and the impact that the services may have on them. For
example, it is crucial for consumers to know that contracting with a
debt relief service will not necessarily prevent their creditors from
taking collection action, that their credit ratings may be affected,
and that the savings they may realize may be considered taxable income,
and that the debt balance increases when payments are not being made.
We understand that payments for debt relief services are often
debited from consumers' bank accounts within a few days after they have
enrolled in the programs. However, if the disclosures are designed to
help consumers make informed decisions about whether to sign up or not,
they need the information before making the contractual commitment even
if the payment will be later. Therefore, we suggest that 310.3 (a)(1)
could be improved to provide greater protection to consumers, not just
for debt relief services but in other types of telemarketing sales as
well, if it required the disclosures to be made before the earlier of
payment or an obligation to pay. The revised subsection would read:
Before the earlier of payment or an obligation to pay for goods or
services offered, and before any services are rendered, failing to
disclose truthfully, in a clear and conspicuous manner, the following
material information:
5. Prohibitions against specific misrepresentations are useful.
We agree with the FTC that it is useful to add a specific
prohibition in 310.3 (a)(2)(x) against misrepresenting any material
aspect of a debt relief service, such as the amount of money or
percentage of debt that consumers must accumulate before negotiations
with their creditors are initiated, the effect of the service on
collection efforts, how many consumers attain certain results, and
whether the service is nonprofit. This provides greater clarity to debt
relief service providers about what they can and cannot do.
6. The exemption for transactions that are not concluded until after a
face-to-face sales presentation should not apply to debt relief
services.
We believe that the exemption under 310.6 (a)(3) should not apply
to debt relief services. Even if the exemption may have made sense for
certain types of telemarketing sales, in the sale of services to be
delivered in the future such as debt relief, the fact of a face-to-face
meeting simply does not create a sufficient safeguard. It would be far
too easy for the real sales process to occur by phone or other remote
means and then a simple signing meeting to be used to escape all
application of the rule.
Furthermore, a face-to-face exemption could create the anti-
competitive result in which industry players who deal with potential
customers only via the Internet or phone must adhere to standards of
disclosure, non-misrepresentation, and the very important advance fee
restriction, while those who arrange for a face-to-face meeting do not.
Conclusion
The ``police the marketplace'' approach taken by the FTC will
protect not only consumers but any legitimate debt relief services that
actually provide real benefits to consumers. Those debt relief services
will be entitled to fees, and should have a better chance of succeeding
in the marketplace when their competitors are stopped from taking
significant fees without achieving real debt relief.
We agree with the FTC that additional measures must be taken to
address America's debt problem, including continued enforcement,
consumer education, and more flexibility in the options that creditors
provide to consumers. There should also be obligations for debt relief
services that may go beyond the scope of the TSR. For example, debt
relief providers should be required to conduct an individual financial
analysis for all potential customers to determine whether the service
is suitable for and will provide a tangible net benefit to them before
enrolling them.
Furthermore, there should be similar rules to protect debt relief
customers when the use of the telephone is not involved in the
transaction, such as when they are solicited for and enroll in debt
relief services entirely through the Internet.
The FTC has not included mortgage foreclosure rescue and
modification services in the proposed amendments to the TSR because it
has received authority from Congress to promulgate separate rules in
that regard. However, the issues are very much the same and the FTC
should address them with equally strong rules.
We believe that the proposed amendments to the TSR are a good and
necessary step to protect debt relief customers from false promises and
financial injury. We appreciate the opportunity to provide our comments
and will be happy to answer any questions that the FTC may have in
regard to our views and suggestions.
Submitted by:
Susan Grant,
Director of Consumer Protection,
Consumer Federation of America.
On behalf of:
Consumer Federation of America
Consumers Union
Consumer Action
The National Consumer Law Center on behalf of its low income clients
The Center for Responsible Lending
The National Association of Consumer Advocates
The National Consumers League
U.S. PIRG
The Privacy Rights Clearinghouse
The Arizona Consumers Council
The Chicago Consumer Coalition
The Consumer Assistance Council
The Community Reinvestment Association of North Carolina
The Consumer Federation of the Southeast
Grassroots Organizing
Jacksonville Area Legal Aid, Inc.
The Maryland Consumer Rights Coalition
Mid-Minnesota Legal Assistance
The Virginia Citizens Consumer Council
______
Economic Factors and the Debt Management Industry
Richard A. Briesch, Ph.D.--Associate Professor, Cox School of
Business--Southern Methodist University
August 6, 2009
Executive Summary
The current economic climate makes the need for debt management
programs even more acute. More consumers are finding themselves in
financial hardship due to high unemployment, low home equity rates,
lack of access to bankruptcy protection, and the ``credit crunch'' so
well documented in the press and by legislators. This economic climate
implies that many consumers are one emergency away from financial
hardship. There is no question that the multitude of people currently
in financial distress need programs that reduce the principal of their
debt to stave off bankruptcy (Manning 2009, Plunkett 2009).
Debt management programs (DMPs) come in several forms, but their
basic structure is similar: they require some sort of consumer
education if they are accredited by national trade associations
(Keating 2008, USOBA 2008), consumer participation is voluntary (Hunt
2005, Plunkett 2009) and a plan is set up to make the consumer debt-
free in two to 5 years. The key differences in the organizations are
the mechanisms they use to finance the organization and to help
consumers pay off their debt (Hunt 2005, Plunkett 2009). In this paper,
I refer to organizations that help consumers pay off their debt by
reducing interest rates as consumer credit counseling services (CCCSs)
and organizations that help consumers pay off their debt by reducing
principal as Debt Settlement Programs (DSPs). The efficacy of these
different approaches has been discussed by a variety of authors, but
these discussions have lacked a clear and detailed consumer welfare
analysis, which is provided in this research.
One of the most important findings of this research is that the
different approaches (CCCS or DSP) help consumers by increasing their
economic welfare as compared to paying off the debt under the original
conditions. However, the consumer welfare analysis suggests that DSPs
create the greatest consumer welfare of any approach. In fact, consumer
welfare is higher under DSPs than under the 60-60 rule (repay 60
percent of the debt principal in 60 months) suggested in the literature
(see e.g., Keating 2008, Manning 2009). If consumers are allowed to
repay their debt over 3 years, the affordability of the DSPs (as
measured by monthly payments) is similar to the affordability of a
program based upon the 60-60 rule. Additionally, creditors are helped
by both CCCSs and DSPs as their losses are lower when consumers use
DMPs as opposed to other alternatives.
This research empirically examines the efficacy of one DSP company
in this industry. Key findings, which are consistent with the
observation that programs which reduce the principal of the debt may be
the only means to keep a growing number of consumers out of bankruptcy,
include:
1. Accurate measures of consumer completion and cancellation
cannot be calculated from the data, as almost 30 percent of the
cancellations are due to the consumers either directly paying
off the debt or being forced into bankruptcy. Further, the
cancellation data does not contain information regarding offers
received or debt repaid, so it does not accurately reflect
value generated by the company. That said, the raw cancellation
rate (60 percent over 2 years) is much less than speculated (85
percent within 1 year) and is similar to or better than other
subscription-based service industries (e.g., mobile telephone
and cable television companies) that have Better Business
Bureau certified members.
2. Conditional on the consumer receiving an offer or
settlement, the firm had mean, median and mode settlement
offers at or below 50 percent of the original debt. This number
beats the 60-60 rule and suggests that the firm is generating
significant consumer benefits.
3. The debt settlement company generates tremendous value to
its clients, as more than 57 percent of the clients have offers
to settle at least 70 percent of their original debt, and the
most common situation (almost 30 percent of the clients) having
settlement offers for at least 90 percent of their original
debt.
4. The debt settlement company has an increasingly higher value
to customers with higher account balances and higher total
debt, but lower number of accounts.
5. Once ``fair share'' payments are taken into account, CCCS
fees and payments for a consumer account can exceed 29 percent
of the consumer debt, levels which Plunkett (2009) calls
``exorbitant.'' This finding suggests that regulation is
required to ensure transparent reporting of all fees and
payments is required for all companies offering Debt Management
Programs.
6. Reasonable upfront fees by DSPs (before settlement) should
be allowed because DSPs generate value for consumers and incur
expenses generating this value. This fee structure is similar
in nature to the one used by CCCSs, attorneys and other
service-providing firms.
These findings suggest that a ``common sense'' approach should be
used with the DMP industry. A common sense approach implies that
regulatory and other consumer advocacy groups focus on ensuring that
there is sufficient regulation to be able to identify and, if
necessary, prosecute bad actors without harming economic competition
which increases consumer welfare. The industry analysis also suggests
several regulatory recommendations which could further benefit
consumers:
1. Focus on making alternatives transparent so consumers can
make better decisions: disclose total fees including ``fair
share'' and all other consumer fees, success metrics of offers
received, settlements accepted and percent of debt settled.
This disclosure has the additional benefit of allowing
interested third parties, e.g., consumer advocacy groups and
government agencies, to calculate the economic impact of this
industry on consumers and other industries.
2. Provide guidance for handling of client monies in
``fiduciary'' accounts, especially in terms of timing between
audits, what happens if a consumer cancels service, appropriate
interest rates, and whether or not (and under what
circumstances) companies can make payments on behalf of
consumers. The regulators should allow DSPs to establish trust
accounts with their clients, which would include:
a. Requiring consumers to save money every month as one
condition of making ``satisfactory progress'' in the
program. DSPs should have the ability to monitor, but
not control (or make disbursements from) these funds.
b. Proving regulatory protection for consumers from
litigation and creditor calls while consumers are
making ``satisfactory progress.'' Other protections to
ensure that consumers are protected from cancellation
fees paid to DSPs and unethical business practices,
e.g., ensure that the financial institutions holding
the funds are independent of the DSPs and no fees are
disbursed from the accounts without full disclosure and
regulatory oversight and approval.
c. Allowing disbursements from these accounts only with
consumer and DSP approval and for payment to creditors,
approved fees, and to the consumer if they cancel the
program or for new financial hardships.
3. Require financial education of consumer, and require
specific metrics in terms of meeting short-term and long-term
education and outcomes (see, e.g., Clancy and Carroll 2007,
Keating 2008, Staten and Barron 2006).
Introduction
While the current economic climate (discussed below) provides
strong support for programs which help consumers get out of debt, the
strongest arguments for programs which take the approach of reducing
the principal comes from organizations and individuals who are either
antagonistic or agnostic to this approach. For instance, the 2005
Bankruptcy Abuse Prevention and Consumer Protection Act (or BAPCPA)
suggests a ``60-60'' standard for debt repayment outside of bankruptcy,
where the 60-60 refers to the consumer entering into an agreement with
their creditors 60 days prior to bankruptcy to repay 60 percent of
their debt within a ``reasonable'' timeframe. Additionally, both
Plunkett (2009) and Keating (2008), who use pretty strong rhetoric in
denouncing companies using this approach, support a 60-60 rule that
allows consumers to repay 60 percent of their debt within 60 months and
acknowledge that a growing number of consumers may be forced into
bankruptcy without access to ethical and proconsumer companies offering
this alternative. For the remainder of this document, the term ``60-60
rule'' refers to repaying 60 percent of the debt within 60 months, not
the BAPCPA plans.
Within the debt management industry, firms have taken two different
approaches in their debt management programs (DMPs). The first
approach, called Consumer Credit Counseling Services (or CCCSs), helps
consumers by reducing the interest payments and, potentially, fees on
the debt, but still has consumers pay 100 percent of the principal. The
second approach, called Debt Settlement Programs (or DSPs), helps
consumers by reducing the principal on the debt (Hunt 2005, Plunkett
2009). These approaches also differ in how the firms are funded and
their taxable status. CCCSs are generally nonprofit firms and are
funded by both account maintenance fees from consumers as well as
``donations'' from creditors which may take the form of ``fair share''
payments and/or direct grants (Boas et al., 2003, Plunkett 2009). DSPs,
on the other hand, are generally for-profit firms, and are funded
through fees charged directly to consumers without any payments from
the creditors (Hunt 2005).
Before proceeding further, I acknowledge that both types of
organizations have had firms which have taken advantage of vulnerable
consumers (US Senate Hearings 2005, Clancy and Carroll 2007, Plunkett
2009), so some of the heated rhetoric directed at different approaches
by organizations with vested interests is not only self-serving, but is
also counterproductive. The focus of legislative efforts should be to
protect consumer welfare by ensuring that the goals of the industry
(consumer education and debt relief) are met, to ensure that
organizations act in ethical and transparent ways and to impose
appropriate sanctions on any company that willfully take advantage of
consumers, i.e., ``bad actors.''
One of the reasons that I argue that the heated rhetoric and trying
to use regulation to eliminate other approaches are counterproductive
is based on the notion that competition produces efficiencies, which,
in turn, increase consumer welfare and economic growth. A fundamental
principal of the Federal Trade Commission is that competition benefits
consumers through lower prices and increased variety. This philosophy
is summarized as:
Competition in America is about price, selection and service.
It benefits consumers by keeping prices low and the quality and
choice of goods and services high (FTC 2009a).
Therefore, rather than take the position of being an advocate for a
specific approach to helping consumers to get out of their situation,
this research is focused on understanding the different approaches and
calculating the consumer benefits associated with each approach. The
benefits are measured in terms of both total consumer welfare (i.e.,
how much will consumers pay in total for different approaches) consumer
affordability (how much must the consumer pay each month), and how much
are firms collecting as a percentage of the original debt from the
consumers and creditors. It is important to include payments from
creditors to the firms, as they represent indirect fees charged to
consumers because the creditors should be indifferent between giving
consumers a discount of the same amount that they pay the firms in
``fair share'' payments or any other way the firm is compensated.
Probably the most important finding of this research is that both
CCCSs and DSPs increase consumer welfare over the alternative of the
consumer paying off their debt using a fixed payment of 2 percent of
their original debt every month (the recommended minimum payment).
However, DSPs increase consumer welfare much more than CCCSs and have
similar affordability to CCCSs when the payments can be made over 3
years (instead of 5 years for CCCSs). Given the findings in the extant
literature that creditors are also better off when consumers use DMPs,
it appears that DMPs are a ``win-win'' for both consumers and
creditors, so regulators should be encouraged to use a common sense
approach to this industry: protect the vulnerable consumers while
supporting competition among the different approaches to getting rid of
consumer debt. This competition is consistent with the Federal Trade
Commission's approach to other industries and would result in increased
consumer welfare over the long term.
Some of the key recommendations for regulatory agencies include:
(1) protecting consumers from litigation and calls/threats from
creditors while they are making ``satisfactory progress'' in accredited
DMPs. Satisfactory progress needs to have measurements related to
educational goals as well as financial goals (i.e., being current on
payments for CCCSs and saving enough for DSPs); (2) providing DSPs with
the ability to set up trust accounts for their clients that have very
specific limitations on disbursements (i.e., approved payments to
creditors, approved fees to DSPs, payments to consumers for
cancellation or new hardships, etc.); (3) require full disclosure of
all fees consumers directly or indirectly (e.g., ``fair share''
payments, grants from creditors, etc.) pay; and (4) provide guidance of
how companies can accurately measure program effectiveness, e.g., does
receiving offers for all enrolled debt constitute program completion?
The remainder of this document is organized as follows. In the next
section, the economic factors which are increasing the necessity of
this industry are briefly reviewed. Next, the different alternatives
are provided with an eye toward understanding the economics and
limitations of the alternatives. In section three, the performance of a
specific DSP is analyzed. This firm provided a significant dataset, the
details of 4,500 randomly selected clients. In analyzing the clients,
we use a stratified sampling approach, also called a ``strata
approach.'' The clients are combined into different groups, based upon
their debt levels. These different stratums are then analyzed to see if
consumer behavior or firm performance differs between the groups. As
far as we know, this type of analysis of the efficacy of Debt
Settlement Programs has not been published.
In the next section, the economics (both for consumers and the
firms) of the debt management programs is analyzed in more detail.
Specifically, consumer welfare is estimated and compared under a
variety of assumptions. This paper concludes with public policy and
industry recommendations.
Current Economic Climate
The importance of the consumer debt management industry has become
increasingly important as the U.S. economic recession continues. Table
1 shows the seasonally adjusted unemployment rate in the United States,
which has reached 9.4 percent as of May 2009.
Table 1--U.S. Unemployment Rate
------------------------------------------------------------------------
Year Month Percent
------------------------------------------------------------------------
2008 May 5.5
Jun 5.6
Jul 5.8
Aug 6.2
Sep 6.2
Oct 6.6
Nov 6.8
Dec 7.2
2009 Jan 7.6
Feb 8.1
Mar 8.5
Apr 8.9
May 9.4
------------------------------------------------------------------------
Source: U.S. Bureau of Labor Statistics (http://www.bls.gov/opub/ted/).
Even worse, the long-term unemployment rate (those unemployed more
than 27 weeks), rose in May by 268,000 to 3.9 million U.S. Households,
roughly triple the number at the start of the recession (U.S. Bureau of
Labor Statistics 2009). Note that employment is generally a lagging
indicator (e.g., it improves after the economy improves), an uptick in
the U.S. economy will not provide immediate relief for these
households.
The high unemployment rate coupled with the fact that the average
credit card balance at the end of 2008 was more than $10,000 for
approximately 91 million households (158 million individuals or 78
percent of all households) who have credit cards (Woolsey and Schulz
2009). A silver lining is that in April of 2009, seasonally adjusted
total consumer debt was decreasing at a 7.5 percent annual rate
(Federal Reserve 2009). However, household leverage (total debt to
disposable income), while decreasing, still remains at 130 percent from
a high of 133 percent in 2007. This number can be contrasted to the 55
percent leverage in the 1960s and 65 percent leverage in 1980s
(Zuckerman and Todd 2009).
An implication of these statistics is that many consumers are
barely able to pay their debts and are one emergency away from
financial hardship--a recent study found that medical bills were a
contributing factor in more than 60 percent of all bankruptcy filings
(Himmelstein et al., 2007). From this hypothesis, one would then expect
consumer credit card and personal loan default rates to be increasing.
Figure 1 confirms this belief, as consumer default rates on credit
cards stands at 7.49 percent in the first quarter of 2009, and consumer
defaults on personal loans stand at 2.93 percent in the same period. If
anything, these numbers understate the problems consumers are having.
In a report prepared for the National Foundation for Credit Counseling,
Harris Interactive (2009) found:
26 percent of households admitted to not paying their bills
on time. Minorities may be more severely impacted, with this
number rising to 51 percent for African American households.
In the last 12 months, 15 percent of individuals were late
paying a credit card and 8 percent admitted to missing at least
one payment, and 6 percent have their debts in collection.
32 percent admit that they have no savings, and only 23
percent state that they were saving more than a year ago.
57 percent of households do not have a budget, and 41
percent give themselves a grade of C, D, or F in their
financial knowledge.
One may conclude that given the financial turmoil in this market,
credit card companies may be hurt as well. However, a recent study
found that since the bankruptcy law was reformed in October 2005 (2005
Bankruptcy Abuse Prevention and Consumer Protection Act or BAPCPA), the
credit card industry has recorded record profits, although more factors
(e.g., interest rate spreads, increased fees, etc.) enter into this
profitability than simply the increased difficulty of entering into
bankruptcy (Simkovic 2009).
A recent study estimated that as many as 800,000 households have
been precluded from entering bankruptcy due to BAPCPA (Lawless et al.,
2008). Therefore, the need for a service which helps consumers manage
and pay down their debts and to work with the credit card companies is
more acute than ever. In fact, recent legislation requires credit card
companies to recommend credit counseling education and debt management
programs to consumers in financial trouble (Reddy 2009). So what are
consumers' alternatives when they find themselves in financial
hardship? Their alternatives are grouped into four broad categories
(Hunt 2005) that vary in terms of a continuum of how much of the debt
can the consumers afford to repay (all, partial or nothing):
1. Bankruptcy--either chapter 7 or chapter 13.
2. Debt Management Programs--This includes any service which
tries to help the consumers pay off their debts (outside of
bankruptcy) either through reduction in interest rates, debt
reduction or other means.
3. Other financing--This includes raising money through sales
or refinancing of current assets (e.g., home equity loan).
4. Repayments on original terms.
Figure 1--Bank Charge Off Percentages
Source: U.S. Federal Reserve Bank.
Overview of Consumer Alternatives
This section provides an overview of the different alternatives
that are available to consumers who are in financial hardship. Before
discussing the alternatives, a brief discussion of the process or
stages involved is provided (based on Mojica 2009).*
---------------------------------------------------------------------------
\*\ Sources: Bank of America 2008 10K; page 127--Table 15, page
128--Table 16, page 172--Table 37; American Express 10K; page 50, page
56; Chase 2008 10K; page 155, page 81, page 128; CapitalOne 2008 10K;
page 73--Table C, page 76--Table F.
---------------------------------------------------------------------------
1. Financial Hardship
First, consumers have some financial hardship which limits a
family's ability to continue paying their debts. For instance,
Himmelstein et al. (2007) found that medical bills were a contributing
factor in more than 60 percent of all bankruptcy filings and that
medical portion of the debt was more than $5,000 or 10 percent of
family income. A creditors willingness to work with a consumer, e.g.,
give grace periods, reduce interest rates and/or debts, is directly
linked to the consumer's ability to demonstrate that a true hardship
was the cause of the household's financial crisis (Dash 2009).
2. 30 Days
Once the consumer is at least 30 days late in payment, and for
every 30 days thereafter, a notice is sent to credit bureaus indicating
delinquency. At this point the consumer usually starts receiving calls
from the creditors requesting payment. Eventually, credit cards and
other revolving credit are canceled for the consumer. Once the account
is delinquent, credit card fees may be dramatically increased, although
new Federal legislation has put curbs on credit card companies in terms
of fees and interest rate changes (Reddy 2009). Reddy did cite a
consumer whose interest rate jumped from 12 percent to 24 percent due
to late payments even though the credit card company did agree to work
with the consumer.
In the current economic crisis, credit cards are willing to extend
the grace periods for consumers who have true hardships, even reducing
the total debt amount. However, these deals come at a price--a
consumer's credit score may drop 70 to 130 points as a result (Dash
2009).
3. Six Months
The creditor writes off the debt. At this point, the account may be
sold, sent to a collections agency or a law firm. Generally, the amount
of debt collected by these agencies varies, but examination of 10K
reports from various creditors indicates that credit card companies are
receiving about 10 percent of the outstanding debt when it is sold.
More recently, credit cards have become more willing to negotiate
terms with consumers, but they generally require that consumers be at
least 90 days delinquent and are accepting ``dimes if not pennies on
the dollar'' (Dash 2009). Given the relatively low recovery rate, it
suggests that other alternatives (e.g., lawsuits, selling debts to
collection agencies) provide even lower returns for the creditors.
4. Lawsuit as Option
Creditors may sue consumers to collect bills. From a consumer
standpoint, this option adds legal fees to the debt they already cannot
afford. Assuming that the creditor gets a judgment, it may be enforced
by garnishing wages, sales of assets, etc.
From a consumer standpoint, there is a mine field waiting for them
once they get into financial trouble. Generally, the creditors will not
work with a consumer until they are at least 90 days delinquent, and
they may increase interest rates or fees simply because the consumer
contacts the creditor for help (Dash 2009). Further, creditors are more
likely to help consumers who do not have a history of financial
troubles, so they are less likely to help those most in need (Dash
2009). Under a practice known a ``global default'', creditors can move
an account that is current into default because the consumer is
delinquent to a different creditor, (see, e.g., testimony U.S.
Committee on Financial Services 2007). Once the credit card is in
default, legislation limiting harassing calls really does not apply to
the original creditors, only third party collectors. One would expect
very high dropout or cancellation rates for the first 6 months a
consumer is enrolled in a program, until the regulatory protections
take effect. Therefore, some sort of protection for consumers who want
to settle their debt and have enrolled in certified debt management
programs is required. Ironically, studies have found that credit card
losses are 32 percent lower for the clients who enter DMPs before fair
share payments are included (Hunt 2005), so it is against the creditors
own best interests to force the consumer into litigation. England has
solved this problem for their consumers in financial difficulty using
the insolvency act of 1986. In this act, if enough creditors (generally
75 percent) agree to the debt reduction plan, the other creditors are
legally bound by the repayment plan even if they did not agree to the
plan.
Bankruptcy*
---------------------------------------------------------------------------
\*\ Source: Fair Debt Collections Practices Act (FDCPA) at http://
www.ftc.gov/bcp/edu/pubs/consumer/credit/cre27.pdf. See http://
www.insolvency.gov.uk/insolvencyprofessionandlegis
lation/legislation/uk/insolvencyact.pdf, for a description of the
insolvency act of 1986 which established this system.
---------------------------------------------------------------------------
Both Chapter 7 and Chapter 13 bankruptcy are legal means of
settling debts. Chapter 7 is a liquidation of assets, and the reform
act of 2005 (2005 Bankruptcy Abuse Prevention and Consumer Protection
Act or BAPCPA) placed many hurdles for consumers to use Chapter 7 (and
instead force them to use Chapter 13). These hurdles includes means
testing, higher fees and increased costs and risks for those assisting
consumers filing Chapter 7 (Simkovic 2009). Once a consumer uses
chapter 7, they cannot file again for 8 years and are limited in filing
for other legal remedies for several years. Additionally, the filing
stays on their credit report for 10 years (Hunt 2005). One unfortunate
side effect of filing bankruptcy is that many employers check potential
employee credit history, so this may have an effect on future income
and job prospects.
Chapter 13 filings on the other hand are considered ``wage earner
plans'' where the debt amount is reduced based on the consumer's
ability to pay, and a plan is set up so that consumers pay their debts
in three to 5 years (Hunt 2005). Hunt (2005) suggests that attorney and
trustee fees amount to approximately 14 percent of the debt, and
creditors' average about 35 percent recovery of the debt. However, he
also suggests that only 33 percent of consumers finish the program,
less than the average for voluntary debt management programs. In a
white paper, the United States Organization for Bankruptcy Alternatives
suggests that the completion rate is much lower, only 20 percent to 25
percent (USOBA 2008). As with Chapter 7, Chapter 13 filings go on a
consumer's credit report (although for a shorter period of time), and
their ability to file in later years is limited.
Bankruptcy as an alternative for most consumers has become much
more limited since BAPCPA was passed in 2005 (Lawless et al., 2008).
They estimate that as many as 800,000 U.S. households have been
prevented from filing bankruptcy in the last few years.
However, this does not mean that total bankruptcy filings are down,
only that consumers are being moved from Chapter 7 (liquidation) to
Chapter 13 (partial payment) to move this option away from paying
nothing toward paying something. When these settlements are sold on the
open market, they generally receive only 18-21 cents on the dollar
(Manning 2009). Given the above estimates that the judgments only
return 35 cents on the dollar, the net effect to the creditors is that
they only receive pennies on the dollar through this route. One would
expect that creditors would attempt to stay away from this alternative.
However, once there is more than one creditor, they face a classic
``prisoner's dilemma'' (Poundstone 1992). The basic idea is that even
though all of the creditors are better off by avoiding bankruptcy and
legal judgments, each individual creditor is better off by cheating
(e.g., initiating legal judgments to be the first one in line). This
problem has also been called the creditor's dilemma (Bainbridge 1986).
Therefore, some regulatory guidance is required beyond BAPCPA, which
suggests the 60-60 (pay off 60 percent of debt in 60 months) as a
standard, and would limit creditors to 80 percent of the debt principal
if they do not reach an agreement (Manning 2009). Assuming that they
collect on the judgment, this 80 percent rule provides the wrong
incentive to the creditors, as they are better off using litigation.
Therefore this 80 percent standard should be lowered to 60 percent to
match the 60-60 rule.
Consumers must also go through counseling services (regardless of
whether or not they enroll in debt management programs) prior to filing
for bankruptcy. The National Foundation for Credit Counseling estimated
that their members provided 1.26 million education sessions for
bankruptcy in 2007 (Keating 2008). Some recent research has suggested
that the educational component may be important for consumers (Staten
and Barron 2006). Staten and Barron find that consumers who enter
counseling are significantly less likely to file for bankruptcy in
later years, and have significantly lower risk scores than consumers
who choose to not enter counseling.
A nagging concern is whether the reason for the good outcomes is
self-selection (e.g., motivation of consumers) or efficacy of the
program (Clancy and Carroll 2007; Hunt 2005). That said, academic
arguments over the source of the outcomes of these programs miss the
key point. Regardless of the underlying cause, if consumers are more
successful once they enter the programs, shouldn't those programs be
encouraged and protections for consumers who are making satisfactory
progress enacted, so that their chance of finishing the programs and
gaining their benefits are enhanced? This is a classical agency problem
where the credit card companies (and public policy) should not care
about why clients are more successful, only that they are more
successful once they enter into the educational programs. While it may
be difficult to determine measures of the program outcomes, an approach
similar to that used in Stanten and Barron (2006) where consumers are
surveyed years after exiting the programs to determine financial health
through risk scores, credit scores, bankruptcy rates and other measures
would seem to be a good start and should be required for all
organizations offering counseling services.
Refinance
Refinancing the debt using assets is a viable alternative for only
a few consumers, as it requires consumers to receive appropriate
interest rates and to have sufficient equity in their home or other
assets to pay down the debt. The second criteria can be a very high
hurdle given that the median household filing bankruptcy has a negative
$25,000 net worth (Lawless et al., 2008) and that household home equity
is at historic lows--below 50 percent--and economists expect this trend
to continue (AP 2008, Keating 2008).
The other problem is that some consumers may have already used this
option to pay off debts or to get needed cash for ongoing expenses,
even education (Chu and Achohido 2008). Given the current crisis in
getting loans, declining home values and variable interest rate
mortgages that are getting ready to reset, this option is becoming less
viable for most consumers (Manning 2009).
The problem is that the credit cards use risk assessment to set
interest rates, implying that consumer interest rates increase once
delinquencies are noted on their credit reports (Chu and Achohido 2008,
Plunkett 2009). A clear consequence is that consumers may not receive
good interest rates, even on a home equity loan due to the credit
problems. In addition, by refinancing, a consumer can lose their assets
(e.g., their homes and cars) if they default on the loan as they have
converted unsecured debt into secured debt.
Debt Management Programs
Debt management programs (DMPs) come in several forms, but their
basic structure is similar: they require some sort of consumer
education if they are accredited by national trade associations
(Keating 2008, USOBA 2008), consumer participation is voluntary (Hunt
2005, Plunkett 2009) and a plan is set up to make the consumer debt-
free in two to 5 years. The key differences in the organizations are
the mechanisms they use to finance the organization (consumer fees vs.
``fair share'' payments from credit card companies) and to pay off
consumer debt (reduce interest rates and fees vs. reduce debt
principal) (Hunt 2005, Plunkett 2009). In this paper, I refer to
organizations that reduce interest rates as consumer credit counseling
services (CCCSs) and organizations which reduce principal as Debt
Settlement Programs (DSPs). It should be noted that neither of these
organizations can force the creditors to accept their terms. It is the
case that some creditors do not work with DMPs (of either type) or only
make very small concessions (Hunt 2005). Given the national
organization's call for debt principal reduction as part of DMPs, it
appears that, over time, the distinction between these two types of
organizations may blur (Keating 2008), making a stronger case for the
strong value of DSPs to consumers.
The importance of full disclosure of the funding sources cannot be
overstated. Because the CCCSs receive some of their funding from the
creditors (Keating (2008) estimates that about 50 percent of the
funding for CCCSs come from creditors), there is a conflict of interest
for these organizations, especially when the funding is tied to the
amount of debt under management (Boas et al., 2003, Hunt 2005, Manning
2004). Second, because the CCCSs receive some of their fees indirectly,
there may be an impression that they are less expensive than DSPs.
However, the economic welfare of the creditors is unchanged if they
give these fees to consumers as a reduction in the debt principal
instead of to the CCCSs in the form of grants or ``fair share''
payments. Therefore, consumers are paying increased and undisclosed
fees in their monthly payments. Further, the FTC recommends consumers
ask about the funding sources as part of their consumer protection
program (FTC 2009c). I believe that stronger action should be taken,
requiring disclosure of the fees, as information is the basis of
education, and education is the first line of defense against fraud and
deception, it can help you make well-informed decisions before you
spend your money (FTC 2009b).
Consumer Credit Counseling Services (CCCSs)
CCCSs generally try to get rid of a consumer's debt over 5 years
and generally receive the majority of their funding from credit card
companies (Boas et al., 2003, Hunt 2005), although the terms of the
agreements have been evolving over time. Hunt states that the average
account set up fee is $25 and monthly maintenance fee is $15. Over 5
years, this translates into $910 paid directly to the CCCS.
Additionally, he notes the firms receive ``fair share'' payments (or
even grants) from the credit card companies which average 6 percent of
the amount that the credit card receives--which is more than 6 percent
of the debt. For instance, assuming equal payments over 5 years and a
10-percent interest rate, a consumer with $10,000 in debt will pay
$12,748.23 to the credit card company, which implies that the
consolidator would receive another $764.89 in fees (for a total of 16.7
percent of the debt). The levels of the fees in this example appear to
be similar to those in Chapter 13 bankruptcy noted above.
It should be noted that CCCSs collect the money from the consumers
and distribute the money to the creditors (Boas et al., 2003), which
implies a fiduciary duty is accepted by these organizations. However,
they implicitly assume that consumers will pay back 100 percent of the
debt, only at a reduced interest rate and potential reduction of some
or all of the fees.
Therefore, not only do they not conform to the 60-60 rule noted
above, but this alternative may not be viable for some consumers who
could pay back the debt under the 60-60 rule, forcing them into
litigation and/or bankruptcy (Manning 2009).
From a consumer welfare standpoint, the key drivers of consumer
welfare are the terms of the agreement: how much are the interest rates
reduced, and how many payments are required? Plunkett (2009) suggests
that these terms vary widely by creditor and by CCCS, so one area of
needed disclosure are median terms negotiated by the CCCS for each
creditor, as well as median consumer fees and ``fair share'' payments
and/or grants from creditors. Clearly, the CCCS would need to disclose
to their customers if a creditor did not accept the terms presented and
would need to adjust the required payments.
In terms of calculating efficacy of the programs, both measures and
approaches for the educational component are discussed above, so I
focus on the debt reduction portion of the business. One set of
measurements relate to the terms negotiated with the creditors. For
instance, in the settlement offers and final settlements, how much is
the original debt amount reduced? And how much of the original debt
receives settlement offers? A second set of measurements are the
successful completion rates of the program, although without some
regulatory protection of consumers enrolled in these programs, these
are not accurate measurements of firm performance because consumers can
always be forced out of the programs through litigation by one or more
creditors.
Debt Settlement Programs (DSPs)
For DSPs, the general idea is to have the consumers save money and
pay the creditors in one or a few payments (depending upon the size of
the debt) with the goal of paying off the debt in two to 4 years.
Instead of focusing on interest rates, DSPs negotiate to reduce the
principal of the debt, which implies one set of metrics is their
ability to meet or beat the 60-60 rule noted above. Details of the size
of the principal reduction are missing in the literature (although they
are examined in the next section for one company), but companies claim
to be able to reduce up to 50 percent of the principal. Instead of
taking money from the credit card companies, these organizations
generally receive their fees from consumers. Plunkett (2009) writes
that these fees average somewhere between 14 and 20 percent, and
Manning (2004) claims that these fees can include a set up fee ranging
from 2-4 percent, and service fees range from 15-25 percent.
Without defending the veracity of the assumptions, if we take the
same consumer above, who has $10,000 in debt, receives a 20 percent
reduction in the debt principal and pays a lump sum at the end of 2
years? The consumer would end up paying $8,000 to the Credit Card
Company or $4,748 less than they would have under the CCCS example
above. Whether or not the consumer is better off would then depend upon
the fees charged--the consumer would be indifferent (i.e., pay the same
amount) if the fees were $4,748+$910 or $5,658 (56.6 percent of the
original debt).
As with the CCCSs, consumer welfare is strongly influenced by the
key assumptions of the model, i.e., number of years before lump-sum
payment, interest rate and the principal reduction amount. This example
also shows where some confusion may enter into marketing and other
communications: the consumer received a 20 percent reduction from the
initial debt, but did they still have to pay interest on the debt while
saving for the payment (note the results are the same as making
payments for 2 years). So, a consistent method of communicating the
principal reductions is required, where the amount of the final payment
in relation to the initial debt is reported. Similar to CCCSs,
transparency implies that median settlements for different creditors
and credit status (e.g., in litigation) would have different principal
reductions and would need to be disclosed.
This model has some unique difficulties as well as common problems
with the CCCSs. A key difference would be that consumers (or clients)
are not required to accept settlement offers from the creditors.
Therefore, any metric which attempts to only look at settlements would
tend to underestimate (i.e., bias) the effectiveness of DSPs, meaning
that a second set of metrics related to offers received from creditors
would also be required.
A second problem for DSPs is whether or not they should put client
money into fiduciary accounts. In the data provided by the DSP analyzed
in the next section, 6.8 percent of the cancellations gave the
inability to save as the reason that they canceled the service. On one
hand, one could argue that the consumer must learn how to handle their
savings to really get out of the cycle of debt, so no fiduciary
accounts should be necessary. However, one could use the analogy of
learning to crawl before learning to walk to analyze this situation.
The end goal of the program is to have consumers self-sufficient, but
they may need to learn how to save, and how to not dip into these
savings for luxury items while paying off their debt. Therefore, it
seems, at least at the beginning, the companies should at least monitor
the savings of their clients to ensure that they are making progress.
In a similar vein, one could argue that the companies should
establish fiduciary accounts for their clients to ensure that they can
actually pay off the offers once they are received. Otherwise, what
should the company do with their clients who are not saving? However,
the extant literature is ripe with examples of abuses for these
accounts (see, e.g., Plunkett 2009). Therefore, guidance from
regulatory, consumer advocacy and industry groups would be helpful in
this area.
My recommendation in this area is to strike a balance from the
different approaches. First, allow DSPs to set up ``trust'' accounts
where monies can only be released to pay creditors (with a signed
letter from the creditor and consumer), to pay agreed upon reasonable
program fees (agreed upon on the creation of the account) or refunded
to the client upon termination of the program or upon demonstration of
a new financial hardship (e.g., medical bills). Second, the DSPs should
be allowed to monitor these accounts to ensure that their client is
saving, and consumer saving being one condition of making
``satisfactory progress'' in program. If the protections noted above
were in place for consumers making ``satisfactory progress,'' the
effect of not saving would remove their protections from creditors and
litigation, creating a very strong incentive to save. It would be an
interesting area for future research to investigate the savings rates
for consumers who are enrolled in programs which have trust funds as an
aspect of their programs.
Finally, both CCCSs and DSPs suffer from the same problem where the
original creditors (but not third parties) can continue calling them
after they have signed up for a program and have asked (or the DMP has
asked) for the creditors to stop calling (source: Fair Debt Collections
Practices Act or FDCPA). Even worse, even though the consumer is trying
to avoid bankruptcy and litigation, it can be forced upon the consumer
by only one out of many creditors. This phenomenon has been called the
``creditor's dilemma'' (Bainbridge 1986). In conversations with the DSP
analyzed below fully 20.5 percent of the consumers who canceled the
service gave bankruptcy as the reason for canceling the program, and
another 19.3 percent who canceled the service gave a reason that was
categorized as an ``outside influence.''
The problem is that consumers may be acting in good faith and
trying to climb out of debt, the DMP may be acting in good faith to
help the consumer and most of the creditors can be acting in good faith
working with the DMP and the consumer, but one creditor can force
failure of the entire process. To be honest, I can't see a way out of
this problem without regulatory action, as similar problems (called
``prisoner's dilemmas'') have been extensively studied and the
solutions generally require modifying incentives of the actors
(Poundstone 1992). The clear implication is that consumers need
regulatory protection from litigation and harassing calls while they
are making satisfactory progress in these programs.
Timing of Fees
Throughout the above discussion, the issue of when DMPs should
receive fees has not been addressed, so this issue is addressed in this
section. This issue is one of the most contentious for DSPs where
Plunkett (2009) and others have suggested that other than small account
set up fees, DSPs should not receive any fees until the debt is
settled. A general response to this recommendation is that this
requirement is analogous to forbidding insurance companies from
collecting premiums until a claim is filed, or forbidding attorneys
from collecting fees until the matter is settled or forbidding doctors
or hospitals from collecting fees until the patient is healthy.
The recommendation also ignores when value is created for the
customers and when expenses are incurred by the DSPs in creating the
value. DSPs create value for their clients in multiple ways. First,
they offer financial education, budgeting, etc. as part of the program.
Given that CCCSs charge consumers for this education (and receive
Federal funding to support the education) (Keating 2008), there can be
no argument that this provides value to the customers. Also, DSPs
create value for the customers (and incur expense) when offers are
received from creditors to reduce their debt (see empirical section
below for quantification of this value) whether or not the consumers
actually accept the offers. As shown in the next section, offers are
received on some accounts within 2 months of enrollment in the program.
This recommendation is also inconsistent with the way that CCCSs
receive their fees. An analogous situation would require that CCCSs
receive no fees (including grants and ``fair share'' payments from
creditors and monthly account maintenance fees) until the debt is paid
off (generally in 5 years), which would make the business economically
unviable without massive government funding. Given the current Federal
and state deficits, this funding is unlikely.
Finally, the fact that consumers have to make payments, in and of
itself, is educational. It forces consumers to get in the habit of
saving and making payments. If the DSP has a ``trust'' account or is
otherwise monitoring the savings of the client, similar expenses to
those of CCCSs are incurred.
Therefore, DSPs should be allowed to charge consumers fees prior to
the final settlement because value is generated for the clients and
expenses are incurred by the DSP to generate that value. That said, to
help protect consumers, any fees before settlement should reflect
actual value generated and expenses incurred. As noted above, full
disclosure of fees is required for consumers to make good choices.
Repayment on Original Terms
The problem with this alternative is that consumers are already
delinquent and cannot afford the payments. The delinquency may be
temporary, but even under the new credit card rules, consumers would
still have 6 months of increased interest rate payments due to the late
payment (Reddy 2009).
Analysis of Debt Settlement Program
In this section, we analyze data from a DSP firm. The purpose of
this section is to analyze specific performance metrics for the firm to
establish as a basis for estimating consumer welfare in the next
section. Given that the firm has not tracked education and financial
health after a consumer leaves the program, these metrics are not
analyzed. The remainder of this section is organized as follows: the
next part provides a brief description of the data. Next, specific
performance metrics are analyzed taking care to control for when a
consumer enters the program.
Description of Data
The firm provided three cohorts of random, stratified samples of
their data. The data was stratified into the lowest quartile, middle 50
percent and top quartile in terms of total indebtedness of the client
with a random sample of 500 clients drawn from each stratum. Three
cohorts were also drawn from the data: clients entering 24 months, 18
months and 12 months prior to the date of the data being accessed.
Therefore, the database contains 4500 clients--a very significant
sample of consumers in this industry. The client confidentiality is
maintained through no identifying information (e.g., demographics,
names, credit card account numbers, etc.). One limitation of this data
is that once a consumer cancels their account, no information is
retained regarding offers, settlements, etc. That said, the sampling
methods imply that the results can be applied to the entire database of
clients for this firm. While the results may not be applicable to the
industry as a whole without some strong assumptions, they are likely
applicable to similar firms in industry and allow several conjectures
to be examined in detail.
---------------------------------------------------------------------------
Credit Solutions.
---------------------------------------------------------------------------
All creditor accounts, offers to settle (whether or not the client
accepted the offer), offer amounts, date of the offer, whether or not
the offer was accepted and if/when the client canceled the account are
included in the data. In addition, the original creditor was provided
so the question of whether or not there are differences in settlement
offers due to the volume of accounts could also be tested. Table 2
provides simple descriptive statistics for the data.
Table 2--Descriptive Statistics for Strata
----------------------------------------------------------------------------------------------------------------
Stratum 1 (Lowest 25%) Stratum 2 (Middle 50%) Stratum 3 (Top 25%)
--------------------------------------------------------------------------------
Mean Median Std Dev Mean Median Std Dev Mean Median Std Dev
----------------------------------------------------------------------------------------------------------------
Total Debt 7,927 8,000 1,223 16,966 16,138 6,788 47,404 40,201 21,884
Num Accts 3.7 3.0 1.7 4.6 4.0 3.3 6.3 6.0 3.3
Weeks in Program 49.9 49.0 33.4 49.4 50.0 46.1 46.9 46.0 32.4
Pct Cancelled 59.1 58.1 64.5
----------------------------------------------------------------------------------------------------------------
Several points are obvious in the table. First, the median weeks
are similar for the three stratums. Therefore, from a time in program
standpoint, it appears the strata are identical. Second, as expected,
the number of accounts increases as the total debt increases. Finally,
the cancellation percentages are roughly similar across the different
stratums. However, the top stratum appears to cancel at a much higher
rate. We can calculate the weighted average cancellation rate to be
approximately 60 percent, this rate is comparable to cell phone
companies that average 2-3 percent monthly churn, or cancellation,
rates (Mozer et al., 2000). Clearly, this rate is high, but it does
compare very favorably with the 84 percent yearly churn rate (Plunkett
2009). However, further analysis of the reasons for cancellation point
to the difficulty in calculating accurate cancellation and/or
completion rates.
The reasons for cancellation for the customers in the database are
summarized in the five reasons provided in Table 3. There are several
striking results from this table. First, if the outcome of paying off
debts is considered a success, then the cancellation rate is overstated
because 14 percent of the consumers included as cancellations actually
paid off their debt.
Table 3--Reasons for Cancellations
------------------------------------------------------------------------
Reason Percentage
------------------------------------------------------------------------
Bankruptcy (Chapter 7 or 13) 13.5%
Can't Save 6.8%
Buyer's Remorse a 9.2%
Settle/try to settle on own 14.0%
Other 56.5%
------------------------------------------------------------------------
Note: a Buyers remorse is limited to those customers who cancel within
30 days of the initial payment to the DSP, which can be 30-60 days
from the initial enrollment date.
Second, a significant portion of the consumers (13.5 percent) are
being forced out of the program due to litigation. Therefore,
protection of consumers from litigation is required for those consumers
making satisfactory progress in the program. Third, a significant
amount of the cancellations (6.8 percent) are due to consumers not
being able to save. Because the DSP does not monitor/require savings, a
significant portion of the cancellations could have been prevented by
significant incentives for the consumers to save.
Therefore, the aggregate cancellation rate is a poor measure of the
quality of the service provided. To help put the cancellation rate into
context, Table 4 provides yearly and monthly churn rates across a
variety of industries, companies and time periods (selected sample from
Kohs 2006) and shows that the churn rate is lower than or comparable to
some companies and subscription-based industries which also have Better
Business Bureau (BBB) certified members.
Table 4--Churn rates in other industries
------------------------------------------------------------------------
Annual Monthly Data
Churn Churn Company Industry Year
------------------------------------------------------------------------
7.20% 0.62% Sirius Satellite 2006
Radio
10.00% 0.88% Web Hosting 2003
10.00% 0.88% Western Wireless Wireless 2001
11.00% 0.97% Alamosa PCS Wireless 2001
15.00% 1.35% Nascar.com (premium Sports Media 2004
subscribers)
16.00% 1.45% Nextel Wireless 2005
17.00% 1.55% Colorado teachers in Education 2004
``excellent'' schools
17.00% 1.55% Schnader Harrison (lawyers) Legal 2003
17.00% 1.55% DBS TV 2002
18.00% 1.65% DirecTV DBS TV 2003
19.00% 1.76% Alltel Wireless 2005
22.00% 2.07% Analog cable subscribers Cable TV 2002
23.00% 2.18% Cingular Wireless 2005
23.00% 2.18% Colorado teachers in Education 2004
``unsatisfactory'' schools
26.00% 2.51% Sprint Wireless 2005
26.00% 2.51% Subscribers Cable TV 2002
31.00% 3.09% Pagers 1998
34.80% 3.56% T-Mobile Wireless 2005
35.00% 3.59% Maricopa County (anglers) Recreation 2002
45.00% 4.98% E-mail 2004
addresses
46.00% 5.13% Prepaid 2004
Calling
Cards
46.00% 5.13% Digital cable subscribers Cable TV 2002
51.00% 5.94% Globe Prepaid 2004
Wireless
52.00% 6.12% Florence (AL) Times Daily Newspapers 2005
(readers)
58.00% 7.23% Snowball.com E-mail 2000
newsletter
78.00% 12.62% Touch Mobile Prepaid 2004
Wireless
93.00% 22.16% VOOM HD TV 2004
93.00% 22.16% Runoff at time of sale Home Mortgage 2002
------------------------------------------------------------------------
Analysis of Data
In this section, different performance metrics are examined for the
firm at the client-level.
The first set of metrics in Table 5 provides performance metrics
that can be used to calculate consumer welfare. The first column
represents the conditioning of the metric: Settle--did the client
settle at least one account, Offer--did the client receive at least one
offer on the account, Cancel--did the client cancel all of their
accounts. Note that the company did not retain offer and settlement
information once the accounts were canceled.
Table 5--Consumer welfare metrics
----------------------------------------------------------------------------------------------------------------
Stratum 1 (Lowest 25%) Stratum 2 (Middle 50%) Stratum 3 (Top 25%)
-----------------------------------------------------------------------------
Condition Metric Std Std Std
Mean Median Dev Mean Median Dev Mean Median Dev
----------------------------------------------------------------------------------------------------------------
% Debt 51.0 48.8 0.19 48.5 46.7 0.27 49.2 47.5 0.19
% Total Debt 54.7 50.7 0.30 54.1 50.6 0.45 53.1 49.4 0.32
Settle % Accounts 52.0 50.0 0.27 51.5 50.0 0.39 53.0 50.0 0.29
Days first 211 a 189 116 196 a,b 177 154 183 b 163 99
settlement
% Debt 62.2 64.2 0.29 56.6 52.2 0.39 56.8 55.7 0.17
% Total Debt 56.5 b 51.5 0.18 63.7 a, 67.8 0.43 67.7 a 72.1 0.29
b
Offer % Accounts 57.3 b 50.0 0.28 59.6 b 50.0 0.40 64.7 a 66.7 0.28
Days first 210 a 188 126 186 b 172 148 168 c 148 95
offer
Cancel Days Cancel 196 168 145 197 163 207 202 171 155
----------------------------------------------------------------------------------------------------------------
Notes: Superscript a>b>c with probability less than or equal to 5 percent than they are the same. Values with
same letter are not significantly different.
The second column represents the metric and the remaining columns
report the mean, median and standard deviations for the metrics.
Medians are included as a second measure of central tendency. The
percent debt metric measures what percentage of the original debt the
consumer paid when the account was settled. There are not significant
differences between the strata, although the results indicate that the
median is less than 48 percent, or that the households received an
average discount more than 50 percent. The percent of total metric
indicates the percentage of the original debt that has a settlement
(conditional on the client settling at least one account). Once again
there are no significant differences between the strata, but the median
across the three stratums is around 50 percent. The percent of accounts
settled is not different between the strata, and hovers around 50
percent. This indicates that the size of the debt is not a driving
factor in getting the account settled. Interestingly, the only
significant effect conditional on settling one account is the number of
days until the first settlement, where the smaller accounts take longer
than the other two. However, the medians for all three strata hover
around 6 months. Note that, conditional on settlement, this
organization beats the 60-60 rule noted above.
But when the offers are examined, they suggest a slightly different
story. First, there are no significant differences in the average
amount offered (% Debt) for the three strata. However, the median offer
is around 56 percent, much higher than the 48 percent settlement,
although both numbers beat the 60 percent of debt rule noted in the
introduction. Hence, it can be concluded that the negotiations work for
the clients. In terms of the percent of the original enrolled total
debt (% total debt) that receives an offer, the highest quartile
(median 72%) is significantly different than the lowest quartile
(median 51.5%), but neither quartile is significantly different from
the middle 50 percent (median 67.8%). This result (as well as the
differences between means and medians) suggests high variance in the
percent of debt settled, and that the significance on this metric may
be spurious. If it is not spurious, it then appears that the creditors
are more willing to make offers on higher debts, which is consistent
with the analysis of Dash (2009). The results for the percent of
accounts and days until the first offer support this hypothesis, where
the highest quartile receives their first offer sooner than the lowest
quartile and median strata, and the highest quartile has a larger
percentage of accounts receiving offers than the other two strata.
Figure 2 provides a histogram of the percent of total debt that has
either been settled or offered combining all three strata. There are a
couple of striking elements to this figure. First, the most frequent
value (also called the ``modal value'') for both settlements and offers
is between 90 and 100 percent, indicating that the firm is generating
value for their customers. Second, the distribution for both appears to
be uniformly distributed (ignoring the mode). This seems to imply that
consumers are progressing through the program; otherwise I would expect
to find another mode where the clients get ``stuck'' in their progress.
That said, the firm should strive to have 100 percent of the debt with
offers. This figure also points to the difficulty in calculating a
completion rate. Given that consumers are receiving offers on their
debt but not accepting all of the offers, how should the accounts be
counted?
Figure 2--Histogram of Percent of Debt Settled and Offered
Figure 3 provides a histogram of the percent of the enrolled debt
(i.e., original debt amount) that was either paid during settlement or
had a settlement offer, conditional on settlement or receiving an
offer. The settlement data appears to be normally distributed with the
mean, mode and median slightly less than 50 percent, much better than
that 60-60 rule noted above. A striking feature is that the average
offers are almost normally distributed, but have a positive skew. This
positive skew implies that the creditors tend to make more offers above
the mode than below the mode. Given the distribution of the settlements
is more balanced; it implies that the firm does a good job in
negotiating better terms for their clients. Specifically, we see that
the absolute frequency (not just percentage) is much higher for
settlements below the mode than for offers. Similarly, the frequency
for offers above the mode (and median) is much higher for offers than
for settlements. The mean, median and mode (all measures of central
tendency) appear to be the same, suggesting that the firm generates
value to their clients by beating the 60-60 rule. However, to manage
client expectations about possible benefits from the program, the firm
should be transparent about the median and 75 percent quartile (i.e.,
25 percent quartile in terms of discount) when calculating savings for
the consumer. Given the convergence of mean, median and modes, a
standard deviation should also be reported.
Figure 3--Histogram of Percent of Debt Paid for in Settlements and
Offers
Next, we look at the cancellation data. There are no significant
differences between the three strata. However, the median time to
cancel hovers between five and 6 months. Even though there is no data
on the offers and settlements for these clients, I find it highly
unlikely that this group received no offers in this time, as the median
time approximates the median time for offers and settlements. It is
much more likely that other, unobserved factors were more influential
in this decision. Figure 4 combines the data from the three strata, and
provides a histogram of the time it takes an account to be settled or
the time it takes for an account to receive the first offer. For both
settlements and offers, a negative skew is observed for the
distribution.
Figure 4--Histogram of Time for Settlement or Offer to be Received
Interestingly, this implies that the creditors are generally very
interested in settling the account, with the modal offer time being
between 6 and 8 months. The firm can clearly improve in their
performance by reducing the right tail of the offer distribution, i.e.,
ensuring that all accounts receive offers in a timely manner. This
graph also depicts how the firm generates value for their customers in
the negotiations. By receiving many offers quickly, they can make the
creditors compete against each other for the lump sum payment from the
consumer. This competition is in the form of reducing the principal of
the debt.
A problem with this distribution is that, without some sort of
regulatory protection, the spurned creditors (i.e., those who do not
offer good enough discounts on the debt, so they are not selected for
the lump sum payment) can initiate litigation that would drive the
consumer into bankruptcy, creating unnecessary cancellations for the
firm. A second challenge for this firm is that the savings plan ought
to require their clients to save enough in the first 6-8 months to pay
off one of their creditors, potentially the creditor with the smallest
balance. This finding supports the call for protection of consumers
making ``satisfactory progress'' in paying their debts through Debt
Management Programs.
In summary, this analysis has several key findings:
1. Creditors seem to make lower offers sooner to consumers with
higher balances,
2. The median cancellation time is between 5 and 6 months,
implying (due to a lack of data) that the clients likely
received offers, as the median is not very different than the
median offer time. However, it is very difficult to calculate
accurate cancellation rates (often used as a measure of
``failure'' of the programs) due to the fact that almost 30
percent of the clients cancel due to paying off their debts or
going into bankruptcy.
3. Both the median offer (approximately 56 percent of debt) and
median settlement (48 percent) are better than the proposed 60
percent rule, so the firm is offering value vis-a-vis the
proposed 60-60 rule. Further, the difference between the
settlement and offer percentages implies differences between
households (potentially due to hardship) and that some
households receive tremendous value from the negotiations and
relationships of the firm.
4. Conditional on a client settling at least one account, the
client seems to settle more than 50 percent of their debt and
50 percent of their accounts. This statistic is impressive as
the program lasts 36-48 months, whereas the data only captures
the first 12-24 months for the client. One would expect that at
the end of the program, the settlement rate would increase.
5. Conditional on receiving at least one offer, clients seem to
receive offers for more than 67 percent of their accounts and
debts.
6. The figures seem to indicate that clients are progressing
and paying off their debt, as the mode for the number of offers
and settlements is between 90 and 100 percent of the enrolled
debt. However, the firm does have room for improvement, as the
optimal graph would have 100 percent of the debt with offers.
Calculation of Consumer Welfare
In this section, the empirical results are used to calculate
consumer welfare under a variety of assumptions and conditions.
Table 6 provides the initial base-line estimates for consumer
welfare. We use assumptions of 18 percent annual interest rate and
minimum fixed monthly payments of 2 percent and 3 percent for debts of
$4,000 and $10,000 (for similar assumptions, see, e.g., Warnick 2005).
The fixed monthly payment of 2 percent is similar to current minimum
monthly payments as noted in Warnick (2005). Affordability is measured
using monthly payments, and consumer welfare is measured by the length
of time required to pay off the debt and total amount paid by the
consumer. By doubling their payment, consumers are able to cut the time
to repay the loan in half and increase their total welfare by paying
less to the credit card company.
Table 6--Baseline Consumer Affordability and Welfare Calculations
------------------------------------------------------------------------
Payment 2% 3% 2% 3%
------------------------------------------------------------------------
Debt Level $4,000 $4,000 $10,000 $10,000
Annual Interest Rate 18% 18% 18% 18%
Fixed Monthly Payment $80 $120 $200 $300
Years to Pay 7.8 3.9 7.8 3.9
Total Payments $7,488 $5,616 $18,720 $14,040
Percent of Original Debt 187% 140% 187% 140%
------------------------------------------------------------------------
The first scenario examined is when the same consumer receives help
from a CCCS, and the firm is able to cut the interest rate to 10
percent from 18 percent, and has 5 years to repay (this may be an
optimistic assumption, as Plunkett (2009) says that creditors are
becoming less willing to reduce interest rates). The results of the
consumer welfare calculations are provided in Table 7. In order to
calculate total payments (to credit card and the firm), we assume the
industry average of $15 per month and a fair share payment of 5 percent
of the payments to the credit card company (Hunt 2005).
Table 7--Consumer Affordability and Welfare Calculations for
hypothetical CCCS
------------------------------------------------------------------------
------------------------------------------------------------------------
Debt Level $4,000 $10,000
Annual Interest Rate 10% 10%
Years to Pay 5 5
Fixed Monthly Payment $85 $212
Monthly Account Fee $15 $15
Total Monthly Payments $100 $227
% Baseline Payments 125% 114%
Total Payments $5,999 $13,648
Percent of Original Debt 150% 136%
Percent of Baseline 80% 73%
Firm Fees $900 $900
% Fair Share 5% 5%
Fair Share Fees $255 $637
Total Revenue to firm $1,155 $1,537
% Original Debt 29% 15%
------------------------------------------------------------------------
In terms of affordability, both cases are less affordable, i.e.,
have higher monthly payments than the base case of paying off the debt
using with fixed monthly payments of 2 percent of the original debt.
However, consumers are better off with this solution as they end up
paying much less overall (range from 73 percent to 80 percent of the
base case payments), even when the monthly account fees are included.
We can conclude that this alternative does help consumer welfare, but
it is a generally less affordable solution. If we examine total fees
paid, they range from 15 percent to 29 percent of the total debt. Given
Plunkett's (2009) description of 30 percent fees as exorbitant, his
standard suggests that the CCCS charges exorbitant fees to lower debt
consumers. Additionally, if it is assumed that lower income consumers
have lower debt then CCCS charges higher fees as a percentage of the
debt to lower income consumers than to higher-income individuals. In
fairness, they can argue that cost of education is the same, regardless
of the debt level, but it does not change the fact that they have a
regressive fee structure.
The 60-60 rule is analyzed in the next scenario.
In this case, we assume 40 percent reduction in the debt principal,
the interest rate remains at 18 percent and the firm has varying fees
of 15 percent and 20 percent of the original debt balance. Table 8
provides the results of this analysis. This scenario is more affordable
than both the base case and the hypothetical CCCS firm. Further,
consumer welfare is highest where the consumer is paying 57-60 percent
of the original base case scenario, even though the consumer ends up
paying more than the original debt. The fees are now neutral in terms
of percentages versus debt and/or income levels, and are progressive in
terms of the total fees with respect to debt/income.
Table 8--Consumer Affordability and Welfare Calculations for
hypothetical 60-60 rule
------------------------------------------------------------------------
------------------------------------------------------------------------
Debt Level $4,000 $4,000 $10,000 $10,000
Annual Interest Rate 18% 18% 18% 18%
Reduction 40% 40% 40% 40%
Years to Pay 5 5 5 5
Fees as percent of 15% 20% 15% 20%
Debt
Monthly Credit $61 $61 $152 $152
Payment
Monthly Fee $10 $13 $25 $33
Total Monthly $71 $74 $177 $186
Payment
Total Payments $4,257 $4,457 $10,642 $11,142
Percent of Original 106% 111% 106% 111%
Debt
Versus baseline 57% 60% 57% 60%
Fee Payments $600 $800 $1,500 $2,000
------------------------------------------------------------------------
The next scenario is a simplified version of the DSP analyzed in
the empirical section above. It is assumed that the fees on the account
are 15 percent of the total debt, debt is reduced to 40, 50 or 60
percent of the original debt amount and the household makes a balloon
payment at the end of 1 year (much shorter than normal estimates of 3
years). Table 9 provides the results of this analysis. First, this
option creates the highest amount of consumer welfare among all of the
different options: it is the only option where the consumer pays less
than the original debt amount. It is also the least affordable of the
options, with monthly payments three times the base case scenario.
Therefore, we can conclude that the firm should carefully screen
consumers for their ability to save and make this payment within 1
year. However, this finding is highly dependent upon the assumption
that the consumer will repay the debt in 1 year, much less than the
above scenarios.
Table 9--Consumer Affordability and Welfare Calculations for hypothetical DSP
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Debt Level $4,000 $4,000 $4,000 $10,000 $10,000 $10,000
Reduction 40% 50% 60% 40% 50% 60%
Years to Pay 1 1 1 1 1 1
Fees as percent of Debt 15% 15% 15% 15% 15% 15%
Monthly Credit Payment $200 $167 $133 $500 $417 $333
Monthly Fee $50 $50 $50 $125 $125 $125
Total Monthly Payment $250 $217 $183 $625 $542 $458
% Baseline Payments 313% 271% 229% 313% 271% 229%
Total Payments $3,000 $2,600 $2,200 $7,500 $6,500 $5,500
Percent of Original Debt 75% 65% 55% 75% 65% 55%
Versus baseline 40% 35% 29% 40% 35% 29%
----------------------------------------------------------------------------------------------------------------
Therefore, we analyze a scenario with a more reasonable time-frame
of 3 years, consistent with Manning's (2009) assumptions, but still
shorter than the CCCS or the 60-60 rule. Table 10 provides the results
of this final scenario where the only change from the previous scenario
is that the time to repay the debt is increased from one to 3 years.
Not surprisingly, consumer welfare has not changed from the previous
scenario.
However, the affordability has increased to the point where it is
comparable or better than the base-case and 60-60 rule scenarios, even
though the consumers pay their debt in 3 years instead of 5 years. This
result once again suggests that it would increase consumer welfare if
they have protection from creditors and litigation while they are
making satisfactory progress in a DSP. It also suggests that DSPs need
a mechanism in their program to monitor client savings to demonstrate
to the creditors that clients are making progress toward being able to
afford settlements.
Conclusions and Discussion
Similar to most studies, this research has several limitations.
First, the empirical analysis only examines a single company over a
single time period and does not contain educational measurements or
other behavioral measurements after the clients exit the program.
Therefore, it is unclear whether or not the findings can be generalized
beyond this firm to the industry as a whole. Second, the data does not
include information on settlement offers for canceled accounts, so it
is very difficult to determine if value was generated for these
customers. However, given that the median cancellation time is similar
to the median time until the first offer, I find it unlikely that all
of these clients received no offers if they stayed in the program long
enough.
Probably the most important empirical finding is that this firm
adds significant value to their customers where the median and modal
settlement offers are less than 50 percent of the original debt, much
better than the 60-60 rule. This finding confirms the assumptions in
Manning (2009) and calls for programs which reduce the debt principal
as an effective means of helping consumers (Plunkett 2009). Given the
high rate of cancellations due to bankruptcy (13.5 percent), this
finding also suggests that consumers need regulatory protection from
creditors (i.e., the ``creditor's dilemma'') while they are making
satisfactory progress in the program.
A second important empirical finding is that the upper bound for
the cancellation rate is much lower than speculated (Plunkett 2009).
However, accurate cancellation and completion rates cannot be
calculated from the data, as consumers who cancel due to paying off
their debt and who cancel due to entering bankruptcy are included in
the cancellation rates. Further, completion of the program requires
consumers to accept the offers. The data indicate that many more
accounts have offers than are settled, with the modal client having
more than 90 percent of their debt with offers. Even without adjusting
the cancellation rate for these factors, the rate is comparable to or
lower than other subscription-based businesses which have BBB-certified
members. Therefore, excessive cancellation rates cannot be used as a
rationale for excluding DSPs from certification.
Finally, a large portion of the consumers who cancel (6.8 percent)
indicate that they are not able to save enough. This implies that the
DSPs need to monitor consumer savings as part of their program. One
effective means for doing this would be to establish third-party trust
accounts that have consumer protections in place:
1. Require periodic audits of the accounts,
2. Require arms-length relationship with the DSPs,
3. Only allow disbursements to creditors (with signed letter
from creditor and consumer), to DSPs (for pre-approved fees),
to consumers who cancel the program or encounter new financial
hardships.
If appropriate savings are pre-conditions for consumer protection
from litigation and harassment from creditors, consumers will have very
strong incentives to save and pay off their debts. The policy
simulations have strong implications as well. First, both CCCSs and
DSPs increase consumer welfare versus the consumer paying off their
debt. However, DSPs are the only option where consumers end up paying
off less than 100 percent of their debt, so they create the greatest
amount of consumer welfare of any option considered. Not surprisingly,
the affordability of the DSP is dependent upon the length of time the
consumer has to save to pay off their debt. If a three-year period is
used, the DSP is comparable in affordability to the 60-60 rule and can
be more affordable than CCCSs. This finding adds support to the
recommendation of protecting consumers in the programs to ensure that
they have enough time to build their savings to pay off their debts.
This finding also supports the regulatory recommendation of
establishing fiduciary accounts that can be monitored by the DSPs to
ensure that consumers are saving enough.
The policy simulations also suggest that CCCSs may be overcharging
some of their clients, where CCCSs receive 29 percent or more of the
original debt amount in consumer fees and ``fair share'' payments. Even
worse, their fee structure is regressive: where lower debt (and income)
clients pay a larger percentage of the original debt amount in fees
than higher debt (and income) clients. This finding suggests regulatory
action to require CCCSs to disclose all fees, including fair share
payments to consumers, is required to ensure transparency and that
consumers can make good decisions. This finding also suggests that DMPs
need to ensure that their fee structures are at least neutral or
progressive in terms of the percentage and amount of the original debt
amount to ensure lower income consumers are not paying unnecessarily
large fees.
While not discussed in the empirical or policy sections, the extant
literature suggests that education should be required to be provided as
part of any certified DMP due to the positive outcomes. However,
``satisfactory progress'' in DMPs should also include satisfactory
progress in the educational programs, which implies firms need to
monitor and measure educational attainment. Technologies for this
already exist, where consumers can already take driving educational
courses over the Internet.
Finally, we find that charging consumers reasonable ``up-front
fees,'' i.e., fees before settlement, is consistent with practices in
other industries, e.g., legal industry, and can be justified based on
value provided to consumers as well as expenses incurred generating
this value. Any attempt to ban these fees would have a chilling effect
on the industry and is inappropriate for this industry.
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Appendix A: Definition of Acronyms
BAPCPA--Bankruptcy Abuse Prevention and Consumer Protection Act
CCCS--Consumer Credit Counseling Service.
DMP--Debt management program--this term refers to a program that is
intended to help a consumer pay off their debt, so it refers to both
CCCSs and DSPs.
DSP--Debt Settlement Program.
Settlement--refers to when the consumer and creditor agree to terms
(may be one or more payments, could be all or only some of the
principal, fees and interest) to repay the debt.
About the Author
Richard A. Briesch is Associate Professor of Marketing. He received
his BS degree in Applied Mathematics from Carnegie Mellon University,
MBA from Rice University and PhD from Northwestern University. His
research interests include: modeling consumer decisionmaking, sales
promotions, and econometric methods, including non-parametric
techniques. His articles have appeared in journals such as: Marketing
Science, Journal of Marketing Research, Journal of the American
Statistical Association, Journal of Consumer Research, Journal of
Retailing, Marketing Letters and Journal of Business and Economic
Statistics. He has won the Davidson award for the best paper in the
Journal of Retailing in 2002, the Cox School's research excellence
award in 2009, and outstanding teaching award in 2007.
For more information, visit: http://www.cox.smu.edu/academic/
professor.do/briesch