Debt Settlement Companies Put Under FTC Microscope
The debt settlement business, one that has become increasingly important for credit issuers and ARM firms, was put under review at an FTC workshop hosted last week in Washington.
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.
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“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.
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Comments
Comment from Tom De Coro Sr. Financial Consultant on November 4, 2008 at 8:17PM EST
Very interesting conversation here. The clients who come into a settlement program are clients who are in a financial hardship. These are people who are looking into a program that will shield them from filing BK. Many clients try to call the creditors and ask for help to no avail. These are consumers who can not afford a credit counseling programs because credit counseling often does not lower the client’s payment. Although credit counseling does lower the rate which is great however these are clients who are in a financial hardship and they need some sort of payment relief. Only 30% of clients who enroll into credit counseling ever graduate from it, I wonder why that is? That is where settlement comes into play.
Due to the extreme financial hardship people are facing many of them are already behind or they are about to fall behind. None-the-less their credit is already in jeopardy of being affected. With a settlement program it lowers the payment and allows the client to payoff their debt and get back on track. I have done many loans for clients who have come out of a settlement program and they all have decent fico scores after their debt has been paid and settled. Most importantly their debt to income ratio is much improved which really allows them to get back on track financially.
Settlement when done correctly is good for the consumer and it is good for the banks. These are people who would normally file for BK and in most cases they may qualify for a CH 7 Bk, in which the bank would get $0. In a settlement plan the creditor can expect anywhere from 40-60% of the original balance in addition that the creditor gets a 15% tax credit from the government. So a bank could recoup 75% of the debt within 3 years. Not a bad deal given the circumstances.
With all of that being said, Debt Settlement is not for everyone, it is for people who have a job loss, medical condition or variety of other reasons which makes it impossible to payback their debt. This is not for people who can afford their payments, that is what credit card counseling is for. These are people who are behind on their debt or who are about to fall behind. If this is the case how is their credit not already affected? They can not get a loan to consolidate the debt for a lower payment, they can’t afford the payments required by the creditors but they can afford 1/2 of what their payments are now. That is where settlement comes into play. It is an honorable way to discharge the debt with out filing for BK. BK stays on your credit for 10 years and I decline people for loans everyday for that reason. I have not declined anyone for having late payments on credit cards and that is what shows up on a client's credit report in a settlement program.
Debt Settlement is a release valve for the economy, if it did not exist these clients would file BK. How is that good for the economy? It is not. Now here is the deal, Debt Settlement needs better regulation and it needs better cooperation by the banks. You see it’s not the settlements firms’ fault the client gets sued, it’s the banks fault. If the banks were more cooperative the client would not be harassed constantly by the creditors. The client could make one affordable payment and the bank could get paid off something rather than nothing.
I am in the trenches everyday with the consumer and some of the statements above are really far from being true. Really not even close to what really goes on with the consumer and the banks. The bottom line is Debt Settlement is a necessary evil, it needs to be better regulated and there needs to be a miens test for the client to complete in order to enroll. This will help solve a lot of issues with that industry. If you would like to know what really goes on with the banks and the consumer I would be more than happy to shed some light on it for you.
Comment from Someone on November 13, 2008 at 3:20PM EST
Mr. Lerner,
You are clearly a bill collector and do not know of what you speak.
I work with a Debt Settlement Company that has been in business for almost 7 years. We value our clients and their situations and NEVER has my employer asked me to anything despicable. In fact, we do everything in our power to keep our noses clean so that our clients are satisfied as well as the lenders that we work with.
I can't begin to tell you how many clients have told me "Thank You, you have helped me avoid my BK" or call me in tears because they were threatened by a collector.
Too many times have I seen FDCPA violations on behalf of large national banks.
No one should have credit cards for more then $1000. This provides all one could need, car rental, emergency fund, etc. Any more and you are spending money that you don't have and that is the real drain on this economy. Too many Americans spending money that they do not and probably never will actually have.
Credit card companies have created a model in which a customer is penalized for making their payments every month.80-90% of the payments we all make go right into someones pocket and nothing will ever be done to change that as these companies have their hands in so many Government pockets they can do whatever they want know with no penalty.
Universal default is the perfect example of this.
How is it that almost every facet of our nation is struggling financially and credit card companies, in large part, are posting record profits.
Debt Settlement is a great service if it is done right. Sure, we make money. It is called convenience fee. Have you ever gone to a mechanic to have your oil changed or your tires rotated? Did you pay them? Why would you be so blind to pay someone for something that you can do on your own? Maybe because we don't want to get our hands dirty?
My clients are busy. They work, have children, pay bills and are barely keeping their hear above water. They don't need the extra hassle of contacting some collector who views them as a number to explain their situation only to hear, well that is to bad, pay me or I'll sue you.
I was 3 days late on a credit card this month and this company called my work line 43 times over this 3 day period. This is on an account with a $275 balance. Think of what you'd have been done if I owed $27,500!
In closing, I welcome the regulations to the Debt Settlement Industry. It will weed out fly by nights and make real companies who help consumers that much more successful. I just wish someone would take as much time to regulate the industry that causes us to be in business in the first place. The CREDIT CARD INDUSTRY
Thanks,
Joe
Comment from DONALD DALY on November 20, 2008 at 12:57PM EST
I DON'T KNOW WHERE MR FRANKLIN GOT HIS "VANILLA OR CHOCOLATE" THOUGHTS. CCCS OF UPSATE NY HAS BEEN PROVIDING FULL SERVICE BUDGET COUNSELING SINCE 1971 AND HAS DONE A REMARKABLE JOB. DEBT SETTLEMENT COMPANIES ARE SIMPLY ANOTHER WAY TO SCAM THE CONSUMER WHO IS DESPERATE FOR INSTANT GRATIFICATION AND WILL THROW GOOD MONEY AFTER BAD RATHER THAN FACE REALITY AND COMMUNICATE WITH THEIR CREDITORS. THIS COUNTRY DOES NOT NEED ANOTHER LAYER OF SERVICES TO CLEAN UP LENDERS OR CONSUMERS IT JUST NEEDS TO REGULATE WHAT IT HAS BETTER. IRRESPPONIBLE LENDERS AND THEIR IRRESPONSIBLE CUSTOMERS SHOULD BE ABLE TO DRAW UP NEW REPAY PLANS WITHOUT "FORGIVING" A CENT. THIS WAY THE LENDING INDUSTRY WOULD KNOW THEIR RESPONIBILITY AND SO WOULD THE CONSUMER AND HOPEFULLY PASS THAT EDUCATION ON TO FUTURE GENERATIONS.