In a recent article I covered how debt settlement trade associations had returned to the FTC to make their pitch that banning advance fees for debt settlement services was a rotten idea. You can read that article here.
A couple of weeks after the trade associations had slogged up to the FTC offices, and after the consumer groups had made their appearance, the FTC, on June 18, 2010, had a nice little chitty-chat with representatives of the Attorney General offices of Illinois, North Carolina, and Texas. Now we know Illinois is tough against advance fees, North Carolina has an advance fee ban, but Texas is interesting since USOBA has been crying that protecting consumers with an advance fee ban will result in massive job losses in Texas and damnit we can’t have that, a position that always makes me laugh.
So how does the State of Texas feel about advance fee bans, let’s see.
Texas Supports Advance Fee Bans for Debt Settlement.
Not only does Texas support the advance fee ban but they are also litigating six cases against debt settlement companies and support statements made by other states that “only a very small percentage of consumers are getting any settlements from debt settlement companies.”
Not that long ago I had lunch with the AG staff member in North Carolina who said that once the advance fee ban passed in NC that complaints from consumers almost vanished. The FTC notes of the meeting say that Illinois conveyed:
An Illinois representative said that Illinois has prohibited advance fees for mortgage relief services, which raise similar concerns as debt relief services, and the prohibition has been successful in curbing abuses in that context.
An Illinois representative also said that in statistical review they have done in connection with debt settlement cases, they have found that debt settlement companies have helped less than 10% of consumers resolve any debts at all, and no consumers had had all of their debts resolved through a debt settlement program.
The conversation then turned to using escrow accounts for consumers to deposit funds into. The notes of the meeting go on to say:
Commissioner Brill stated that certain comments on the proposed rule discussed use of an escrow or dedicated bank account in connection with debt settlement programs. She asked whether the participants thought that the FTC could craft safeguards for such accounts in a rule, if it allowed providers to require consumers to place money for fees in the accounts. The Illinois representatives expressed concern that consumers in financial crisis would be injured by a company requiring that they put money into a separate account for fees that the consumers then could not use for living expenses. They also said that financially strapped consumers are not able to save sufficient funds to pay off their debts and to pay the settlement provider’s fees. As a result, debt settlement has harmful collateral effects (such as unpaid other bills, accruing fees, collection efforts).
An Illinois representative also stated that the AG’s office has received many complaints that consumers believe that the debt settlement company is going to pay creditors right away, but it does not. The AG’s office also has received consumer complaints that consumers authorize debt settlement companies to debit money from their bank accounts to be put in special purpose bank accounts, but money has been debited in amounts greater than the amount authorized. An Illinois representative also stated that it can be difficult to ensure that a third party is legitimate and refraining from collusion with the service provider. For example, in the phone bill cramming context, the office has seen evidence that certain third party verification services have colluded with the sellers to obtain false consumer authorizations for certain products and services.
A Texas representative stated that such a provision would help consumers who otherwise might have a difficult time obtaining refunds directly from a debt settlement provider. He stated, however, that it would not alleviate other consumer complaints, such as complaints that creditors file collection lawsuits or increase collection efforts after consumers join debt settlement programs. A Texas representative also expressed concern that if the debt settlement company held the accounts, the money could be subject to claims of the company’s creditors, particularly if the company filed for bankruptcy.
The North Carolina representative stated that if a consumer has full control over and access to the account, and the company could not debit money from the account until a consumer had agreed to the settlement, a provision for an account that held consumer savings and money for the provider’s fees would make sense. He recommended that the rule should ensure that debt settlement companies did not split fees with the account providers or charge unreasonable fees for the accounts.
An Illinois representative stated that a rule that allowed providers to require consumers to set aside money for their fees in separate accounts, but included specific protections for consumers, would be more difficult to enforce than an advance fee ban without such provisions. She also said that even if a federal rule or state law prohibited providers from requiring consumers to keep money in an escrow or other bank account for their fees, consumers would have the incentive to pay the provider if individual debts were settled because the consumers would want the provider to continue settling his or her other debts. She stated that it might be difficult for the provider to collect the fee for the last debt settled for the consumer.
A Texas representative stated that debt settlement providers have low barriers to entry, and it does not cost very much for them to set up consumers on a debt settlement program and maintain their accounts. Most of the costs that debt settlement providers incur are for advertising and marketing.
The state attorney general representatives said that debt settlement was not different from credit repair and certain advance fee loans, and the Telemarketing Sales Rule does not provide that such companies can put consumer fees in an escrow or other bank account before the services are performed.
The North Carolina representative said that the rule could be silent on the bank account issue, and that an account to be used for savings and fees would be workable, in his view. – Source
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