CFPA Schumer Mccaskill Debt Settlement LOS

by admin in Financial Reform News

May 14, 2010

Senator
United States Senate
Washington, DC 20510

Re: End deceptive debt settlement practices identified by the GAO and tie debt settlement fees to results – Support Schumer-McCaskill amendment # 3960

Dear Senator:

Americans for Financial Reform supports the Schumer-McCaskill amendment #3960 to the Restoring American Financial Security bill, S 3217.

–  This amendment is vital to protecting consumers from deceptive, abusive and financially injurious practices rampant in the debt settlement industry.

-This amendment will stop debt settlement companies from telling consumers to stop paying their debts, a current practice which harms both consumers and creditors.

-This amendment will end harmful practices in debt settlement identified by the GAO to Congress in April 2010.

Debt settlement has been a growing problem that cries out for a solution:

  • 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, http://www.nytimes.com/2009/04/20/business/20settle.html?_r=1&emc=eta1.

The Schumer-McCaskill debt settlement amendment will protect desperate consumers who are over-burdened with unsecured debt from deceptive practices and misconduct in the debt-settlement industry.  The debt settlement industry purports to help consumers negotiate with creditors to pay off debts for less than the original balance due.  Debt settlement providers typically instruct consumers to accumulate money in a special account.  The idea is that the funds in the savings account will be used to make settlement offers to creditors, but first the debt settlement company deducts fees from those savings.  The company gets and keeps the fees even if it never settles one penny of the consumer’s debt.

The debt settlement industry’s practices often harm both consumers and creditors:

  • Debt settlement providers often charge a percentage of the debt as their fee – even if they never settle one penny of the debt.  The fees are deducted from the consumer’s savings regardless of whether any results are ultimately obtained.  Taking the fees out early makes it harder for the consumer to save enough money to fund the proposed settlement offer, and it is just unfair to charge consumers something for nothing – paying a fee for no elimination of the debt.  Amendment # 3960 requires that fees after the first $50 be computed based on the actual savings from real settlements that discharge the debt.
  • The GAO determined that debt settlement providers often tell consumers to stop paying their creditors and put their money in the settlement fund instead.  (GAO-10-593-T; April 2010)  They don’t tell consumers that this is likely to result in lawsuits by creditors, aggressive debt collection tactics and damage to the consumer’s credit score.  They also fail to tell consumers that any savings from the settlement may be taxed by the IRS as income. Amendment # 3960 would stop these practices.
  • Debt settlement fees take money from consumers that could have been paid directly to creditors. Amendment # 3960 will make it harder for debt settlement companies to recruit consumers who can’t afford debt settlement and who won’t benefit from their inflated promises of relief.  Under the amendment, those consumers won’t waste money paying high fees for little or no benefit—Instead that money will be available to pay creditors directly.
  • Even the industry’s own statistics show that debt settlement does not regularly eliminate all of the debt for most consumers.[1] An industry trade association survey shows most consumers do not eliminate all of their debt in debt settlement.  Only 34.4% of consumers who started debt settlement three years earlier had either “substantially completed” their debt settlement plans or were still actively saving for settlements.  Only 24.6% had eliminated at least 75% of their debt; while 9.8% were still trying to get rid of their debts through settlement three years after starting debt settlement.  The fact that it is so rare for consumers to eliminate all or, even most, of their debt a big part of why it is so unfair to charge consumers a percentage of the debt.  Amendment #3960 ends that percentage of debt fee approach.
  • Debt settlement doesn’t deliver on its promises.  The GAO found debt settlement companies’ claims of success to be “suspiciously high” and “significantly higher than is suggested by evidence obtained by federal and state agencies.”

    Over the past five years, 21 states have brought 128 enforcement actions against 84 debt relief companies for unfair or deceptive trade practices.[2] Most of these cases have been about debt settlement.  States enforcement actions have alleged:

    • Unsubstantiated claims of consumer savings.
    • Deceptive representations about the length of time needed to complete a debt relief program.
    • Misleading or failing to adequately inform consumers about the risk of debt collection efforts, lawsuits and increased debt balances while enrolled in debt relief programs.
    • Deceptive disparagement of credit counseling and bankruptcy as alternatives for debtors.
    • Failure to conduct individualized financial analyses to determine whether the debt relief is suitable for the consumer.
    • Collection of substantial up-front fees even when the debt relief company fails to provide services to the consumer.
    • Basing savings claims and settlement fees on the debt including the amount by which the debt has grown during debt settlement, rather than on the original debt amount that the consumer had upon entering the program.

Amendment # 3960 addresses these practices.

The Schumer-McCaskill amendment will protect consumers and creditors by banning large upfront fees by debt settlement companies; banning unfair or deceptive acts or practices in the debt settlement industry; giving consumers a right to cancel debt settlement contracts; and requiring clear disclosure of the risks and costs of debt settlement.

This amendment would protect the millions of working families who are struggling with substantial personal debt, and would encourage those families to talk directly with their creditors rather than to cut off communications in the false hope that a debt settlement company will eliminate the debt.

Americans for Financial Reform supports Amendment # 3960.  For more information, please contact Gail Hillebrand at Consumers Union, 415 431-6747, Susan Grant at the Consumer Federation of America, or Andrew Pizor at the National Consumer Law Center, 202-452-6252 x106.

This amendment is supported by, among others:

Consumers Union
Consumer Federation of America
National Consumer Law Center on behalf of its low income clients
National Foundation for Credit Counseling
Public Citizen
U.S. PIRG

Sincerely,

Americans for Financial Reform

Click here to download a copy of this letter (doc).

[1] Source:  The Association of Settlement Companies (TASC), October 26, 2009, comments to the FTC on the proposed amendments to the Telemarketing Sales Rule on the marketing of debt relief services, p. 9-11.  http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00202.pdf

[2] Source:  National Association of Attorneys General (NAAG) comments to the FTC on proposed amendments to the Telemarketing Sales Rule on the marketing of debt relief services, October 23, 2009, http://www.ftc.gov/os/comments/tsrdebtrelief/543670-00192.pdf

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