Last week the Government Accountability Office (GAO) came out with a scathing report on the debt settlement industry discovering pervasive fraud, deceit and abusive business practices. The Senate Committee on Commerce, Science and Transportation requested the GAO conduct a covert investigation into the industry, concluding that consumers who participate in the program are often left in more debt than when they started.
Debt settlement firms are for-profit companies that lure indebted customers through television advertisements promising to settle their debt “pennies on the dollar.” They function by advising consumers to stop paying their creditors and make monthly payments to an escrow account, often run by the debt settlement company, until the accumulated amount is sufficient enough to make an offer on the original debt. While consumers direct their payments to debt settlement companies, they rack up more fees from their creditors and their credit ratings drop. Meanwhile, it’s common for a debt settlement firm to charge 15% of the outstanding debt upfront, a $50 monthly fee and a contingency fee of 20% or more on the amount they save you. For example, in order to settle a $40,000 debt, the firm will charge $6,000 upfront, not including additional fees. Not only are the fees excessive, debt settlement firms do not advertise their fees and mislead consumers with statements like “free consultation.”
Currently state laws have governed debt settlement firms and states have taken action against the deceptive practices of debt settlement firms. According to the National Association of Attorneys Generals, in the past five years, 21 states have sued 128 debt-relief programs.The Better Business Bureau has received over 3,500 complaints against debt settlement companies from individuals in all 50 states accusing the companies of driving them further into debt. The BBB now recommends that consumers only use debt settlement as a “last ditch effort to stave off bankruptcy.”
In attempt to regulate the industry federally, the FTC proposed an expansion of the Telemarketing Sales Rule (TSR) to cover debt relief services. The new rule would require debt relief companies to more accurately disclose the details of the program and associated risks, before a program is initiated and prohibit them from collecting upfront fees. Senators Charles Schumer (D-NY) and Claire McCaskill (D-MO) have introduced The Debt Settlement Consumer Protection Act to regulate the industry by requiring greater disclosure, limiting fees and giving additional enforcement powers to state and federal agencies.
In light of the proposed regulations, the two leading trade associations representing debt settlement firms have made public statements opposing the new rules and hired federal lobbyists for the first time to combat federal attempts to regulate the industry. The Association of Settlement Companies (TASC), one of the leading trade associations representing debt settlement firms, hired powerhouse Patton Boggs to lobby Congress on their behalf. In 2009, TASC paid $240,000 in lobbying expenses and an additional $60,000 in the first quarter of 2010. Prior to hiring federal lobbyists, TASC has taken credit for successfully lobbying 7 states promoting legislation on their behalf and stopping legislation in 7 other states that would have prohibited or banned debt settlement services. The United States Organization of Bankruptcy Alternatives (USOBA), another leading trade association representing the “debt negotiation industry” hired the lobby shop Team Builders. Team Builders registered to lobby on behalf of USOBA in August of 2009, and has been paid $130,000 to date. (The information on lobbyists was obtained from the Lobbyist Disclosure Act Database, which can be found here.)
CREW previously scrutinized the heightened political activity of the payday lending industry as payday lenders faced unprecedented federal regulations. CREW’s “Payday Lender’s Pay Up” report found the industry ramped up their lobbying efforts, increased their campaign contributions and brought on hired gun Richard Berman to defend their corporate interests against the public good. CREW predicts the debt settlement industry will take the same route and attempt to influence policy outcomes.