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A tipster (send in your tips here) forwarded me a copy of the April 6, 2011 correspondence by The Association of Settlement Companies (TASC) on the proposed amendment of the Delaware code relating to debt management services.
The Delaware Debt Management Services Act (source) was modeled after the uniform act developed by the National Council of Commissioners on Uniform Laws (NCCUSL). This Bill incorporates the 2008 changes for consistency with other states adopting the uniform act. Changes include a definition for a “certified debt specialist” and a provision for a temporary license when a criminal history has not yet been received.
In addition, in 2010 the Federal Trade Commission made changes to the telemarketing act that prohibits the collecting of advance fees by debt settlement companies. This bill incorporates changes to the uniform act by NCCUSL so that the provisions are consistent with federal regulation and no advance fees can be collected. Regulation of trust accounts is broader. The changes also make fee caps consistent with the uniform act.
In the copy of the testimony provided to me (source), TASC’s first real objection is of course, fee caps. They say:
- It is too early to make a determination as to what appropriate fee cap should be.
[Actually it is not. There has been years of study into this.]
- HB 72 is more restrictive on fee caps than the original UDMSA when it should be less restrictive.
[Would that be the original proposal that TASC fought hard against and now cites as better?]
- The fee cap in HB 72 for debt settlement providers is much lower then what nonprofit credit counselors may charge in the bill.
[Not true, see examples below.]
- The benefit to an individual in debt settlement should be measured by comparing the total cost of the consumer’s other options. Under such comparison, debt settlement compares very favorably without the need for a fee cap in HB 72.
[Really? How can that be when you discard bankruptcy as an option?]
- A fee structure mandating fees as a percent of savings frequently fails to consider what would be in a consumer’s best interest.
[Basing a fee on the performance is not in the consumers best interest?]
- HB 72’s fees are not comparable to an attorney’s contingency fee.
[And attorney fees represent what TASC members used to charge. Do they want those old days back?]
The testimony goes on to say “Debt settlement is also effective when compared to these other debt relief options.” And goes on to brag about the debt settlement completion rates for TASC members prior to the FTC rules. What they fail to disclose is that the majority percentage of TASC members failed to provide performance statistics and those numbers that were provided, the FTC found not credible.
The FTC said, “TASC sent the survey questionnaires only to the 20 largest TASC members, representing approximately 80% of the debt settlement consumers served by TASC members. TASC (Mar. 15, 2010). The survey included data on over 43,000 consumers who had enrolled in a debt settlement plan offered by one of the 12 firms that responded to the survey.” – Source
The TASC survey methodology has several limitations. First, the survey is not representative of the entire industry’s performance. Only 12 debt settlement companies reported sufficient data to determine a three-year dropout rate, a very small number relative to the hundreds of operating debt settlement providers. These companies may not be representative of the industry as a whole and, in fact, may have been comparatively more successful. Indeed, it is unlikely that providers that have low success rates would identify themselves by participating in a survey the results of which will be provided to a federal agency with enforcement authority over them. Second, many of the consumers counted as “completed” had significant debts left after exiting the program. Third, TASC members themselves reported the data to an accountant hired by the organization; neither the accountant nor any other entity validated that the data were complete or accurate. – Source
With a straight face TASC offers in their testimony “Moreover, unlike credit counseling, even those who complete part of a debt settlement program often benefit – for example, someone who had 10 debts coming into the program and now only has 5 may leave the program comfortable that his debt is now at a manageable level.” Really? So how does that jive with the fact that it appears TASC wants no performance based fees, wants higher fees, and would love to go back to the old days of charging fees based on enrolled debt. What benefit would this fictional consumer get from having paid money for those services not delivered and after having had those five accounts sitting in a debt settlement program? How in the world is the consumer going to be “comfortable” now that his creditors are chasing him and threatening to sue?
TASC says “debt settlement programs are typically three years in length” but isn’t the point that they shouldn’t be. Consumers should be in and out of debt settlement programs quickly. Leaving them to linger for that long only leads to harming the credit more and leading to a higher chance of the debtor being sued by their creditors.
Another favorite quote from the testimony, “Other variables include changing creditor policies/settlement rates or individuals “working the system” to deal directly with creditors after the individual has received significant benefit from the providers services without paying for them.” Okay, I’ll bite, what significant benefit? And as far as consumers doing a reach around and striking deals with their own creditors, yes, creditors will frequently mail favorable deals directly to the consumer. But is that really a circumvention of the debt settlement company or something the creditor would have done anyway. Let’s not forget here the debt settlement company is the third-party here, not the consumer or creditor.
I guess TASC members have yet to figure out that if you want to provide a service and get paid promptly for it then the issue here is to focus on enrolling the right consumer that has cash on hand now or very shortly to settle their debts. There is no waiting for 36 months for a program to run it’s course. A program by the way under which a majority of consumers will never settle all of their debt.
Playing Word Games
TASC says “HB 72 restricts the fees beyond what fees were allowed in the UDMSA prior to the FTC Rule,” but what they fail to say is that the current UDMSA (Uniform Debt Management Services Act) limits fees to the same percentage of savings allowed in HB 72. Nor does TASC mention that they fought hard against the original UDMSA proposals and spent tens or hundreds of thousands of dollars fighting back against proposed rules they now long for and cite as a benefit.
TASC Predicts They Will Go Out of Business
“TASC has lost 70% of its membership since the FTC Rule was finalized even with no fee cap. HB 72’s fee cap would put the rest out of business.”
That’s quite a statement since TASC’s former Executive Director, Dave Leuthold, bailed and is now promoting front loaded fee attorney model debt settlement. Seemingly not changing ways but changing horses.
TASC seems to have completely lost sight of the fact that the previous advanced fee models were not working for consumers nor leading to success for consumers. There was no incentive for a debt settlement company to rush to settle debt or provide exceptional customer service when they and the marketer that brought the consumer in had already been paid.
What TASC members apparently fail to understand is that the current difficulties are not a failure of fees but a failure of continuing the old business model. Gone are the days of rewarding lead generators and marketers with front loaded fees. Gone are the days of not caring about actual performance. And gone should be the days of enrolling consumers and letting them fester in long extended programs.
Fictional Fees Used as an Example
TASC cries poor in their testimony and says that nonprofit credit counseling companies can charge up to three times more than debt settlement companies.
For this fee example that “poor old misunderstood” TASC uses it is nothing more than a work of pure and utter fiction. In fact latter in the testimony TASC says
Most [debt settlement] companies do not take clients with less than $10,000 in debt and some have even higher threshold. The average debt in a debt settlement program ranges from $20,000 to $30,000 usually comprised of 6-7 credit cards.
You know, it’s funny how averages work. They are a specific number and not a range. So what is the average amount of debt of TASC member companies or does TASC even have any real data to know or is it purely a guess range? And if they already know what the “average” amount is they what was up with the example of the $10,000 account?
The example assumes the credit counseling program is a 60 month plan with an initial fee of $50. Delaware only allows a credit counseling program to charge a fee that is $10 times the number of creditors and not to exceed $50 per month. So are we to assume that in this example the consumer has five $2,000 creditors. If we are going to call this a real example then the assumption should have been that the consumer had two creditors for $20 per month.
The example also says that fairshare payments to credit counseling is at 8%, which it is not. Today it is around 3%. And the interest charged is 15% which it is really more like 9%. The interest rate example is interesting in light of the Briesch testimony that supposed to favor debt settlement which was provided to the FTC using a similar example in which the interest rate was claimed to be 10%. – Source
So let’s plug those numbers back in and see what it should really look like:
- Monthly fees – $1,250
- Payments to creditors – $12,455
- Fairshare at 3% – $373 (A fee not paid by the consumer but by the creditor.)
- Total Fees – $1,623
That’s a far cry from the $4,190 claimed by TASC. They claim their debt settlement program, assuming only a 50% settlement, would generate $1,500.
But let’s get real here and use a more likely example. My example consumer will have $50,000 in debt over ten cards at an average interest rate of 9%.
So the credit counseling example would look like:
- Monthly fees – $3,050
- Payments to creditors – $62,275
- Fairshare at 3% – $1,868 (A fee not paid by the consumer but by the creditor.)
- Total Fees – $4,918
Using the same assertions TASC used above, at a 30% fee the TASC member would have earned $7,500.
Debt Settlement Much More Labor Intensive
TASC claims fees need to be higher because debt settlement is a much more labor intensive process. That’s a cop out. One of the reasons it may be more labor intensive is because debt settlement companies spend so much time trying to calm down clients that are getting pressured by the creditors they owe.
In theory debt settlement does not have to be a labor intensive process to the point where it breaks the back of the debt settlement company. There are examples of companies that use highly efficient systems to reduce costs down extremely low.
In fact, the labor cost once a client is enrolled can be focused on contacting the creditor and offering a settlement once the consumer has the funds on hand or saved in an escrow account. If the settlements are rolling in at 50% as TASC claims in their example then that should be a labor saving process.
TASC Wants Us to Compare Costs
The TASC testimony wants us to compare the costs of other debt relief options but they leave out bankruptcy.
The TASC cost example claims that the interest rate in a debt settlement program is 0% but that’s not true. A debt settlement program does not intervene in the contractual relationship with the debtor and the interest rate, for a debtor that is not paying their creditor is going to be the maximum penalty interest rate plus fees.
The example claims debt settlement will earn $6,250 so the original debt used as an example would have been $41,666. Interesting since in the table claiming credit counseling was raking it in they only used $10,000.
Using the same calculations I used above the credit counseling fees would have actually been $4,606. That’s 26% less than the debt settlement company and the consumer would not have been in default with their creditors and having to fend off collections and lawsuits. A benefit the FTC noted in their report
However, credit counseling and debt management provide entirely different benefits from debt settlement, and it is misleading simply to measure how much a hypothetical consumer saves from each program. Dr. Briesch’s analysis does not account for a significant advantage of DMPs: consumers enrolled in DMPs receive the benefits – in the form of creditor concessions – within a short time, providing more certainty than debt settlement and eliminating additional collection efforts. Late fees and other penalty fees generally stop accruing on a DMP. In contrast, consumers who enter a debt settlement program typically do not receive benefits (i.e., settlements) for many months, if not years. During that extended period, the consumer has no certainty that he or she will be successful, and creditor collection efforts are likely to continue. In addition, consumers obtain some benefits from a DMP even if they do not complete the programs because most of each monthly payment goes to their creditors and reduces their overall debt balance. In contrast, in the typical debt settlement plan, most of the money, for the first several months, goes to the non-refundable fees of the provider.
Dr. Briesch’s analysis also failed to consider the relative impact of debt settlement and DMPs on consumers’ creditworthiness, a significant factor in determining under which type of program a consumer would obtain a better “outcome.” – Source
But if we are going to add debt relief options to the mix then let’s include a Chapter 7 bankruptcy at $2,000. The debtor in this case would have eliminated their debt in three months at a total cost of $2,000.
More Irrelevant Testimonials
The testimony drags out the happy testimonials from TASC member company consumers. These would be similar testimonials the FTC felt were not credible. TASC says,”As an example, the FTC sought comment on its proposed rule and received approximately 200 consumer testimonials regarding debt settlement of which only 4 were negative and of those, 3 of the negative comments focused on creditors.”
But let’s look at what the FTC actually said about those testimonials.
Two-hundred thirty-nine consumers filed comments about their experiences with debt settlement companies, 193 of which expressed positive views. Several industry commenters also incorporated positive consumer testimonials into their comments.
The Commission does not question that some consumers have had favorable experiences with debt settlement. That fact, however, does not establish that consumers generally benefit from these programs, or that they receive the results they were promised. Individual consumer testimonials are, by their nature, anecdotal; they do not constitute a representative sample of consumers who have enrolled in debt settlement programs. Moreover, it is not clear for many of the testimonials in the record that the individual consumer actually benefitted financially from the program. Many of the consumers did not provide any specific information about their debt settlement experiences, and, for some other consumers, it was not clear that they had obtained any settlements at the time they submitted their comment.
In addition to the individual consumer comments, the QSS-TASC customer survey discussed previously included a satisfaction question. The survey concluded that 88% of consumers said they were “satisfied” or “very satisfied” with their settlement amounts. As explained above, however, QSS did not provide any information as to whether the consumers were representative in any sense of the population of consumers who use debt settlement services.
This is especially true here, where some providers actively solicited positive comments from specific consumers. Ho at 2 (attaching email from debt settlement company encouraging the consumer to send positive comments to the FTC). – Source
If TASC is representing the debt settlement industry in whole then they have done a disservice to the entire industry with this testimony. It also serves as a painful example that TASC appears to have learned nothing from the FTC Telemarketing Sales Rule process and is resorting to their old strategy of only asking for more.
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This testimony provided to Delaware is completely lacking in the one thing the industry needs most, credible data and transparency. In stark contract to the good debt settlement companies that are members of the AACC, the TASC testimony does not call for their members to provide transparency, the publication of actual performance numbers, or act to protect consumers.
The cries of TASC appear to be nothing more than a demand to adjust legislation to increase money making potential and not to provide a safer service to consumers.
The testimony seems to be nothing more than an ill-fated assault on credit counseling using dubious numbers and calculations in an effort to simply line the pockets of TASC member companies through misdirection and falsehoods.
More than almost anything else in the past, this testimony from TASC seems to solidify that TASC, on behalf of its member companies, has no regard for providing fair or factual testimony to public officials and lawmakers in an effort to foster respect for the debt settlement industry and reliance they can be counted on as a credible source. I think they have significantly marginalized their role by providing this testimony.
Frankly I found the TASC testimony that contained a regurgitation of the same old failed strategy of asking for more to be be vile, repugnant and an insult to both consumers and debt settlement companies that work hard every day to do the right thing and provide an excellent service under performance based pricing models and who focus on enrolling consumers that are the most suitable for the service.
You can read the testimony here and post your conclusions in the comments below.
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