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RE: S.3264 – Debt Settlement Consumer Protection Act
Virtually all of the consumer protection elements of the bill are welcome and needed changes.
However, the fee structure imposed by the bill creates a large disparity between debt settlement and other existing consumer debt relief options, and therefore undermines and limits the choices available to consumers. The following recommended change to the fee structure (or, the alternative fee structure recommended below) will still eliminate 99% of the “front loaded” fees currently charged by debt settlement companies, accomplish every key purpose of the proposed legislation, and it will also level the playing field with other existing consumer debt agencies while promoting a spirit of free enterprise consistent with our country’s core economic principles.
I am proposing that a reasonable and refundable monthly fee, as well as a higher percentage contingency fee be adopted to achieve parity and fairness in compensation for all of those who provide debt relief options to consumers.
My company, Consumer Recovery Network (CRN), has provided consumer education and debt settlement solutions to consumers for the past 4 years. CRN uses an approach and business model that up to now has been unique in its field. There are many aspects of the CRN model that set us apart from virtually every company in this industry. I will not endeavor to highlight them all, but most of these features are now, and have always been, consistent with much of what is put forward in S.3264. I will briefly point out the two most unique aspects of the CRN model.
Educating and providing continued support to CRN members which empower those consumers to work out arrangements directly with their creditors without the need for 3rd party involvement.
Providing full service settlement to our members when they request it and only charging a fee of 15% of the savings when we reach a settlement that our member reviews, accepts and funds directly from their own account.
Some additional resources which will highlight the many unique features I reference above may prove useful to you and your staff:
Bullet point outline of CRN model found on the CRN website, here.
FTC commentary which lead to my participation as a panelist at the Nov. 4th FTC workshop discussing my support for the Telemarketing Sales Rule changes that would further regulate the debt relief industry, here.
I have been an outspoken critic of the debt settlement industry and its practices for several years. As will be seen from your review of the above resources, I do not write to you in any effort to maintain the status quo in the settlement service industry. In fact, I applaud S.3264 and see it as a means to expeditiously accomplish the necessary changes in an industry run amuck. I do however; Write to you in an effort to point out the inequality and partiality of compensation that is currently part of the proposed language in S.3264.
Please consider the disparity between how members of the National Foundation for Credit Counseling (NFCC) are compensated for providing a debt management plan (DMP) to consumers and how the current language of S.3264 allows for responsible and ethical settlement service providers to be compensated.
Using historical data provided by the NFCC and its members Cambridge Credit Counseling and GreenPath that I have sourced as available through FTC commentary as well as detailed reports compiled and submitted to Congress by organizations such as Consumer Federation of America, National Consumer Law Center, and PIRG, I can ascertain an accurate and current compensation model that is afforded to the nonprofit credit counseling groups when implementing DMP’s on behalf of consumers:
Credit counseling provides for:
Monthly fees averaging 30.00 for the life of the program (program length average is between 4 & 5 years).
Fair Share/Grant contributions from participating creditors that currently range between 5 & 8 percent of the account balance (a DMP does not reduce balances).
Using the lowest range of this data:
A consumer has 30,000.00 of unsecured debt and completes a DMP in 48 months:
Monthly Fee Total = 1440.00
Fair Share Estimate = 1500.00 (Assuming 5% fair share kickback from creditors)
Settlement service provider would receive the following under the proposed language of S.3264 (assuming 50% settlements):
Sign up fee = 50.00
Estimated Contingent fee = 750.00 (all debts enrolled are settled)
DMP providers are able to collect a fee to cover operating expenses on a monthly basis and receive grant and fair share contributions all along the way.
Settlement providers (given the current language of the S.3264) are expected to go into debt to work with a consumer with no certainty that they will be compensated at all.
Though DMP providers highlight their educational function as added value (this education is also how they maintain tax exempt status), they are simply receiving the consumers funds and then remitting same to the consumers creditors – for a fee. The processing and remitting of payments is automated, requiring little overhead. Therefore, there is little customer maintenance and contact once the consumer is enrolled into a DMP.
By contrast, our experience as a responsible settlement service provider often involves multiple personnel hours per consumer file each and every month. For example:
- Reviewing budget
- Strategizing and prioritizing creditors
- Fielding customer calls and emails after they have received collection calls and letters (the more creditors a customer has, the more calls they receive, the more resources needed)
- Creditor negotiations
- Statement review
- Scheduled customer follow up & check in
- Settlement document review
- Fielding all program implementation questions through phone and email
- Fielding calls from creditors and their assignees
If fairness and equality of compensation for DMP providers and Debt Settlement Service providers were the goal, than fees for Debt Settlement Services when compared to DMP providers (applying the lower ranges used above), fees should be set at:
1. Fair Fee Model:
39.00 monthly service fees
10% of savings success fee
Monthly Fee Total = 1404.00 (Assuming 36 month program)
Estimated Contingent Fee = 1500.00
2. CRN Suggested Fee Model:
50.00 monthly service fees (aggregate of which is applied as an offset to any and all later earned contingent fees)
15% of savings success fee
Because CRN has always credited the aggregate of any upfront fee and/or monthly fee as an offset to its earned contingency fee, the total cost to the consumer would actually be lower than the Fair Fee Model.
Were S.3264 to adopt language requiring monthly fees be applied as an offset to earned contingency fees, it would provide for an even more favorable outcome for consumers. Also, by adding the provision of a monthly service fee, it would give meaning to the current refund language in S.3264 and would provide an effective tool to ensure consumer satisfaction while still maintaining a deterrent against abuse.
To consider passage of S.3264 as it is worded today will show partiality to DMP providers who already enjoy:
- Tax exempt status
- Free exposure from the Federal Government through the Board of Bankruptcy Trustees after the 2005 passage of BACPA requiring consultation with an approved DMP provider
- Direct creditor referrals through creditor telephone contact with their account holders
- Direct creditor referrals through monthly billing statements resulting from the CARD Act
- Direct reference to credit counseling by virtually all mainstream media via television, print and web content
Based on my significant knowledge of the debt settlement industry, which is well laid out in my FTC commentary linked above, I can assure you that by adopting the CRN Suggested Fee Model or the Fair Fee Model shown above, S.3264 will still have the exact and desired affects of curbing all unfair and deceptive practices that are so problematic in the Debt Settlement Industry today. With my proposed fee structures, 80% or more of the industry will disappear, virtually all television and radio advertising will cease as it will become cost prohibitive. The FTC through its purview of the Telemarketing Sales Rules amendments which are yet to be published, as well as the current enforcement language of S.3264 given to the FTC as relates to advertisement will further ensure no bad actors remain.
Furthermore; the typical fees and/or compensation associated with Debt Settlement, Credit Counseling and Chapter 13 bankruptcy will be set at par with each other when considering the average middle class families unsecured debt load of roughly 30,000.00 (Source Elizabeth Warren, Harvard Law Professor in her book “The Two Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke”) .
DMP’s are not without flaw. Historically, DMP’s have less than a 30% success rate (consumer completes the full repayment of debts in the program). The NFCC and its member organizations have suggested that roughly 20% of their attrition is attributable to consumers who leave their program to “self pay” (consumer stops paying the DMP provider and remits their payments directly to their creditors). Looked at in a different light, it may be that the high “self pay” attrition rate may largely be comprised of consumers who did not need a DMP at all.
In any case, the over 70% of consumers who do not complete their DMP can generally be attributed to the inflexible nature of the payment plan or a material change to the consumer’s finances. If a consumer is unable to make their DMP payment one month, they lose the interest rate concession which is the only clear benefit of a DMP. I have often heard DMP providers referred to as “The kinder-gentler debt collector.”
Chapter 13 bankruptcy is not without flaws. It also has a roughly 30% historical completion rate. Its high attrition rate is also due to the rigidity and inflexible nature of the repayment plan, or a material change to the consumer’s finances.
The affects of S.3264, were it to become law as currently worded would:
- Heavily favor the NFCC and its member organizations allowing them to increase their market share at the expense of the consumer and all other debt relief market participants. The NFCC and its member organizations would not be able to survive without the funding they receive from creditors whom they remit payments to on behalf of consumers (funding which is a tax deduction for the creditors due to the 501c tax status enjoyed by most DMP providers and/or the grant designation of the funding). This has been, and will continue to be, a huge conflict of interest when representing the interests of consumers that no amount of jawboning can credibly explain away.
- Leave what will likely prove to be hundreds of thousands of consumers nationwide who are currently pursuing debt relief using a settlement approach with no resource to assist them through successful settlements because no ethical company will be able to assist them without a reasonable (though refundable) monthly service fee. This will cause an additional avalanche of negativity surrounding debt settlement as many hundreds of thousands of consumers will raise their voice in unison as people who have been recently harmed (though they would not have been but for the language in S.3264).
This avalanche will still occur, but can be reduced in size (see Benefits below). All debt settlement companies that were a sham from the outset, as well as the vast majority of well intentioned companies who provided that which was contracted for, will still be forced to close even if the Fair Fee or CRN Fee Models were adopted, because their overhead or profit goals cannot be realized.
It is necessary to address some of the talking points put forward by those whose agenda is best served by the current fee language contained in S.3264. These talking points are the same as they ever were, but the two main ones that have been and continue to be misunderstood are:
Settlement companies tell you to stop paying your bills!
It must be understood that settlement typically will not occur unless a creditor is approaching or has passed the time requirement to recognize a loss on the full balance of the unpaid debt. This is generally referred to as “charge off”. An account must be delinquent in order to achieve settlement. There is no way around this fact. What fails to be further appreciated or expanded on regarding this contentious point is that when a suitability test is applied to the ideal candidate for debt settlement, it will be shown that there already exists the inability to maintain current payments to creditors or that payment has already been missed or have been sporadic. The ideal debt settlement candidate cannot qualify for a DMP and may wish to avoid bankruptcy. Creditors benefit from consumers opting for settlement as opposed to bankruptcy. Creditors receive nothing 90% of the time in a chapter 7. Creditors receive what the bankruptcy trustee allows them in a chapter 13, which is quite often less than 60% of the full account balance and the creditor knows with a 70% historical likelihood, the consumer will not complete the repayment plan. Creditors understand the real time value of money and see wisdom in accepting 40% now as opposed to the chance of 60% recovery (on a maybe) over a 3 or 5 year chapter 13 plan.
All debt relief option providers are serving the same group of consumers; Consumers who are unable to maintain current payments to their creditors.
In the interest of brevity and for a better understanding of debt settlement, its lower recovery costs to creditors, and better creditor return compared to bankruptcy, please read the article I wrote found here.
Debt settlement ruins your credit!
This is the most often repeated, but misunderstood of all draw backs to debt settlement. I rarely encounter any material that fully and competently discusses this issue. When considering the most suitable candidate for debt settlement, the consumer has either already experienced a negative credit reporting event or soon will as a result of opting for any of the legitimate debt relief options which are; Chapter 7 or 13 Bankruptcy, a DMP or Debt Settlement. All of these options except for chapter 13 generally have the same impact on a consumer’s ability to get future credit within the same time frames (chapter 13 will be longer). In addition, a consumer with nothing but timely payments, but high credit utilization and a high debt to income ratio will be turned down for credit in today’s more risk adverse credit markets. Now consider the fact that someone who cannot maintain payments on the debt they have should not be applying for new credit, and this talking point is reduced to: All Debt Relief Options Available to Consumers Affect Your Ability to Get Credit. Which Option is the Right Choice For You and Your Family.
In the interest of brevity and for a better understanding of how Debt Settlement, Bankruptcy and DMP’s affect a consumer’s credit report and ability to qualify for new credit, please read the article I wrote found here.
S.3264 will have the desired and immediate impact for which it is designed. There will however, be massive fallout and negatives that will impact many consumers. These affects in many instances can be avoided and mitigated by the implementation of a fair and refundable monthly service fee. Remaining market participants will be able to assist those consumers who will be abandoned by the fly by night outfits whom can be re-evaluated as meeting settlement suitability requirements so long as they can absorb costs associated with doing so.
I see significant risks of unscrupulous debt settlement promoters working around language in S.3264 by fronting the “attorney model” of settlement service providers in their sales and high commission efforts. The fee model I am suggesting will assist in combating the industries attempts at exploiting any loopholes in the current language of S.3264. By implementing the Fair Fee or CRN Fee model, consumers will be assisted through price discovery in the marketplace.
Implementing the CRN Suggested Fee Model or the Fair Fee Model in S.3264 will provide for competitive free market principles in this industry, which this country has thrived on since its founding. An informed consumer will then be provided with options they need in these tumultuous times.
- At a time when consumers are faced with the decision of paying their mortgage over credit card debt or when home owners are declined a loan modification due to high credit card balances factoring too high a debt to income ratio in order to qualify for loan modification underwriting;
- At a time when a two income family due to job loss becomes a one income family or where hours have been cut reducing ones income;
- At a time when high numbers of the unemployed and underemployed are at extreme;
- At a time where responsible consumer spending and improved consumption levels are needed to incentivize hiring and job creation;
- At a time when Americas middle class, once the back bone of our economy, is being eviscerated;
Debt settlement services as provided through companies who operate independent from creditors and who have a history of delivering ethical, responsible and affordable results to consumers are needed more than we as a nation would perhaps care to admit.
It is my hope that in the effort to reign in and curb the abuse that has, up to now gone relatively unchecked, lawmakers will implement protection measures which are leveled fairly and with equality and impartiality for all debt relief market participants.
Thank you for your time in considering and weighing my comments. Please contact me if you have questions or to request further detail.
CRN – President