Debt Settlement Companies Put Under FTC Microscope

Some type of national legislation is needed to bring uniformity to the debt settlement industry rules, make enforcement easier and better protect consumers, a group of panelists said during a Federal Trade Commission workshop last week.

The panelists gave their opinions at the end of a day-long seminar on consumer protection and the debt settlement industry held last week in Washington. The FTC will be collecting comments through Dec. 1 on the subject.

The FTC said that it held the event to explore the growth of the for-profit debt settlement industry and to analyze how its model is affecting consumers and businesses.

Panelists agreed that the Comptroller of the Currency should be the national regulator, which would provide a better solution than individual state oversight. However, while he agreed that a national regulation would provide a good base, Ed Merzwinski, consumer program director with state Public Interest Research Group, a consumer advocacy organization, said states should still be allowed to have their own rules that go beyond the federal statute.

“Strong, enforceable laws start at the state level,” Merzwinski added.

Michael Kerr, the legislative director of the National Conference of Uniform State Laws, added that similar state laws would also serve the purpose of a federal law, namely reducing the cost of compliance because firms wouldn’t have to abide by vastly different laws in different states. Either a federal law or similar state laws would also make enforcement easier, Kerr added.

Carla Witzel, partner with the Gordon, Feinblatt, Rothman, Hoffberger & Hollander, LLC law firm, said any new laws should focus on consumer protection.

Beyond new legislation, some changes are needed in the industry itself to better help consumers, panelists agreed.

“Up until now, [the nonprofit credit counseling industry] has offered a vanilla or chocolate product – a full debt management services plan or bankruptcy,” said Alan Franklin, president of the American Credit Alliance, a nonprofit consumer credit counseling agency. “What I think is critical is that we somehow create an alternative product that offers the idea of settlement through a triage type arrangement with debtors and creditors. The credit counselor would then work out payment arrangements to satisfy all parties.”

Many of the consumer complaints about the debt settlement industry now stem from the wall the business puts up between debtors and creditors, said Jamie Welsh, director at Kaulkin Ginsberg. Once the consumer signs up with a debt settlement company, the firm typically uses legal means to prevent further communication between the debtor and creditor(s).

This sets off a chain of events leading to lower credit scores for the debtor. By being non-responsive to creditor communiqués, the credit score takes a hit. Additionally, the consumer now makes payments to the debt settlement company, which in turn does not make payments to the creditor until a minimum threshold is reached. For example, the debtor might pay the firm $100 a month, but the firm might not pay the creditor until in has collected $400 from the consumer. During those four months, the debtor’s credit scores continue to fall because the creditor isn’t receiving any payments.

“The panelists [in earlier sessions] agreed that debt settlement is a necessary evil,” Welsh added. But they need to work more like credit counseling firms that work with lenders and consumers, rather than preventing communication between the two, he noted.

Once an account goes to a debt settlement company, the lender no longer carries it on the books, Franklin said. But rather than valuing the account at zero, the lender should be able to value the account at the percentage of repayment it expects to recover.

Jeehna Keehnen, executive director of the United States Organization for Bankruptcy Alternatives, Inc., also called for uniformity in the industry practices and procedures themselves because so many of the debt settlement companies operate so differently that there is no good definition of what such a firm is.