This record of a conference call was just recently placed on the public record. That call occurred on June 30, 2010.
On Monday, June 28,2010, representatives from the Attorney General offces of Ilinois, North Carolina, and Texas participated in a telephone conference with FTC Commissioner Rosch, his attorney advisor, and FTC staff members to discuss the proposed debt relief amendments to the Telemarketing Sales Rule.
The representatives expressed strong support for the proposed amendments, especially the prohibition on advance fees, which they view as the “cornerstone” of the proposal.
The North Carolina representative stated that North Carolina law has prohibited the collection of advance fees by debt relief servicers since 2005. He further stated that he has spoken with a number of debt settlement companies. He asserted that some of these companies do not charge up front fees, yet they can do – and in fact are doing – business in North Carolina. He noted that this stands in contrast to arguments by industry that it could not survive under an advance fee ban.
A Texas representative said that they have six cases against debt settlement companies in pending litigation. He asserted that the consumers in these cases make payments to the companies for several months (not realizing that most of the payments go towards fees, rather than settlement offers), then face lawsuits (from creditors and debt collectors), which forces them to drop out of the programs. He further asserted it is only at that point that the consumers realize the fees are non-refundable. He further stated that the alleged conduct in these cases mirrors the conduct described in the NAAG comments (dated Oct. 23,2009) submitted for the rulemaking record.
An Ilinois representative stated that the state has fied seven lawsuits against debt
settlement companies, including members of The Association of Settlement Companies
(“TASC”) and the United States Organization for Bankruptcy Alternatives (“USOBA”). For that reason, the representative stated that she sees no distinction between conduct by debt settlement
companies who are not affiiated with a trade association, and those who are members of one. She further asserted that there are widespread deceptive practices in the industry, and that she is hard-pressed to find cases where consumers have received net tangible benefits from debt relief services.
Another Ilinois representative described new state legislation that was passed by the
Ilinois legislature. The law bans advanced fees, caps fees at 15% of the savings achieved (a “success fee”) if debts are settled, and allows the companies to charge small sign-up fees. This representative also said that at the legislature’s hearing for this law, one consumer witness testified that his/her debt settlement company did not settle any of this consumer’s debts. The representative further stated that another consumer witness paid $2 in fees for every $ 1 saved from debts successfully settled by a debt settlement company.
A third Ilinois representative stated that the Ilinois AG’s offce has had frequent discussions with Chase Bank. According to this state representative, Chase Bank refuses to negotiate with any debt settlement companies. Since Chase Bank is one of the biggest creditors for consumers, this representative surmises that debt settlement provides no benefit for many consumers.
An Ilinois representative stated that industry members claim they wil go out of business under an advance fee ban regime. However, this representative said that one small debt settlement company met with the Ilinois AG’s offce and stated that it could operate on a fee- per-settled debt (“pay for performance”) basis. In addition, another debt settlement company located in Arizona told the Ilinois AG’s offce that it could operate without receiving advance fees.
An Ilinois representative questioned the fundamental value of debt settlement services if creditors wil not cooperate, the cost of the fees exceeds the amount of savings, the consumer stil risks being sued by creditors, and incurs harm to his or her creditworthiness. This representative reiterated that the advance fee ban is the “lynchpin” of the proposed amendments to the FTC’s rule because such ban would enable consumers to save money towards settlement.
An Ilinois representative stated that an U.S. Bankrptcy Trustee located in Ilinois expressed grave concerns about the number of consumers fiing for bankrptcy who previously paid a lot of fees to debt settlement companies.
Commissioner Rosch asked a few questions. First, he asked about the mechanics of the advance fee ban that the representatives were endorsing: it is to prohibit servicers from collecting fees until all debts are settled, or letting them collect fees proportional to each debt settled? An Ilinois representative stated that they are supportive of a per-debt settled basis, not requiring the servicers to wait until all debts are settled. The North Carolina representative stated that the North Carolina law allows the servicer to do either (collect fees per debt settled or for total debts settled). A Texas representative stated that its position is reflected in the NAAG comments; that is, the concern is collecting fees before providing any services. The Texas representative further stated that they have no objection to collection of a fee per debt settled.
Second, Commissioner Rosch asked, based on the NAAG comments, what is the most powerful evidence that advance fees are abusive or undesirable? The North Carolina representative stated that consumers pay fees, receive no services, and drop out – and that is fundamentally unfair. An Ilinois representative stated that while there are many factors, the drop-out rate is probably the biggest concern. A Texas representative stated that consumers do not appear to benefit from these services. For example, in a lawsuit against one debt settlement company, 80% of consumers never got any debts settled. In addition, the Texas representative asserted that there is a lack of any statistics or data from industry demonstrating that consumers benefit from these programs.
Third, Commissioner Rosch asked whether the representatives know why the drop-out rate is what it is or why consumers drop out? For example, did the representatives have any statistics? One Ilinois representative stated that their drop-out information was obtained anecdotally, not based on statistics. Another Ilinois representative cited a white paper by Richard Briesch, PhD? The representative described the white paper as demonstrating that 60% of consumers cancel within two years, and that consumers start to complain about their services approximately six to 12 months into their program. A Texas representative referred to the TASC 2008 Preliminary Survey attached to the NAAG Comments, describing the survey as showing program completion rates of 35-60%, where “completion” means at least half of all accounts were settled.
Fourth, Commissioner Rosch asked whether we would be doing consumers any favors by driving them into the hands of creditors such as Chase Bank (rather than seeking debt settlement services). An Ilinois representative asserted that of all the options available to a debtor, debt settlement is the worst: it aggravates the problem rather than solving it. In some cases, non profit credit counseling is better; in other cases, bankrptcy is better. The Ilinois representative expressed belief that Chase Bank would try to work with borrowers. However, she conceded that she did not have any statistics on how effective Chase Bank is in dealing directly with debtors.
Fifth, Commissioner Rosch noted that the proposed debt relief amendments are part of the Telemarketing Sales Rule. Thus, he asked what would prevent industry from moving to a different model, say door to door sales and charging advance fees? An Ilinois representative surmised that industry always manages to find the next way to get around rules. However, she noted that it would be hard for these companies to avoid telemarketing.
Sixth, Commissioner Rosch asked about the coverage of the Illinois statute. He first asked whether it is limited to telemarketing and second, how the legislature determined the 15% fee cap. As to the first part of the question, an Illinois representative stated that the Ilinois statute applies regardless of the method of solicitation (e.g., telemarketing, door-to-door). In addition, the statute allows the consumer to cancel at any time, and to be returned any unearned fees. As to the second part of the question, the Ilinois representative stated that they do not have actual statistics for determining the 15% fee cap. However, they thought 15% represented a fairly large percentage. Another Ilinois representative added that under the Ilinois statute, in addition to being eligible for up to 15% of the savings achieved, the company also could charge an enrollment fee as well as a back-end fee.
A FTC representative asked the state representatives how they selected the cases that became the subject of law enforcement action. An Ilinois representative stated that their defendant companies had more consumer complaints than other companies, but were not outliers in the industry. She also noted that many of the defendants are members of trade associations. A Texas representative stated that many of the cases name TASC or USOBA members and that the allegations in these cases are largely similar. Representatives of both states said that they have seen many other debt settlement companies engaging in ilegal practices, but they don’t have the resources to conduct full investigations of all of them.
A FTC representative asked the North Carolina representative whether he has noticed a decline in the number of debt settlement companies operating in North Carolina as a result of the advance fee ban in its law. The North Carolina representative stated that yes, many debt settlement companies have moved out of North Carolina, presumably due to the ban.
A FTC representative asked whether any of the state representatives were aware of debt relief services being offered over Skye or other telephone-type Internet programs. None of the representatives were aware of any such trend.
A Texas representative added that many auto warranty and credit card interest rate reduction telemarketers are shifting to debt settlement, since law enforcement actions have increased in the former two areas. One of the state representatives surmised that debt settlement is the new incarnation of these large fee scams.
[I found the last statement ironic since debt settlement companies were being sold auto warranty sales as the next big thing. See here and here.]
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Excellent job Steve, great summary of this conversation. I am personally disgusted at USOBA and TASC. They had an opportunity to consolidate, organize and help legitimize this debt relief industry, but they squandered that opportunity.
I am concerned about these types of committees coming to conclusions without any emperical evidence. Its largely based on consumer complaints and guestimates. They might be right, but this is no way to conduct an official investigation and create effective regulation.
I am curious though. The bad companies will not simply stop being bad they will just change course. What about all the books, CDs, DVDs and Self help / coaching programs? All of these are sold as “Do It Yourself” with huge price tags to “learn how”. Will every self help guru in the financial industry :IE you :-), Kawasaki, Dave Ramsey, Orman and the like be regulated under these laws? I could also go down the road of… I am paying for “health care” for the next two years, but will not recieve any health care benefits for the next 4 years… if ever. Seems to me, that is a pretty large up-front fee for a service that has absolutely no gaurantees! We don’t even know what it covers.
Do you believe that Credit Counseling, the credit card companies internal programs and bankruptcy court are the only viable solutions that consumers have for debt relief? The same company that increased interest rates to 30%, jacked up late fees, all while slashing down credit limits… these guys are going to to whats best for the consumer? Really? Plus, most late debts are with a collection company. Not Chase, which is why that stat is a bit off as well. Negotiation is rarely with the Original creditor, but with the collection company.
What happened to the free market? Again, if illegal business is being conducted, nail those folks. However, who gave the AG permission to tell businesses whats a fair price? And they guessed on 15% because it sounds like a large portion? What? I’m fairly unhappy at the price I had to pay an electrician recently…should the AG regulate him? And yes, I had to pay 30% to start the job. In construction you pay about 30%, same for many industries.
I guess I really disagree with establishing a precedent for the Government/AG or FTC to start regulating the prices of private companies. If you think the service costs too much DO NOT HIRE THEM. Is that too complex to understand?
Keep the information and reporting flowing.
Jacob,
I think I’d have to start with the reality of the debt relief landscape. See The Truth About The Success Rates, Failure Rates and Completion Rates of Credit Counseling, Debt Settlement, and Bankruptcy.
From there, in order to come up with a relevant solution to the situation you’d have to evaluate the goals the consumer wants to achieve and then match the most likely solution to achieve that goal to wind up with the best case scenario.
While the FTC solution is not perfect it is a start to rein in the largest group of “take advantage” debt settlement companies. This is not a precedent and the government has stepped in to protect consumers in other areas of debt relief, such as loan modifications and credit counseling.
It just so happens that the only debt relief program that gives consumers any control and authority is bankruptcy. There is no other solution backed by law that exists.
And this won’t be the last debt relief remedy that will get regulated. I was just writing about auto loan modification abuses just today. See this article.
Steve