The Center for Responsible Lending submitted testimony last month to the Uniform Law Commission asking them to reconsider 30% success fee caps for debt settlement services under the soon to be modified Uniform Debt Management Services Act (UDMSA)
Currently the fee allowed to be charged is 30% of the amount saved by the consumer, between the original enrolled balance and the balance at the time of the debt settlement.
At the heart of the position by CRL is their assertion that in order for a consumer to receive an economic benefit. It is important to note that CRL’s cost-benefit analysis does not account for the other significant costs of debt settlement such as credit impairment, tax obligations from forgiven debt, collection activity, lawsuits and wage garnishments, all of which would be unlikely if the borrower works directly with his or he creditors.
The Center for Responsible Lender stated that the data supplied by TASC during the FTC hearings did not support consumers would receive a significant benefit from most accounts enrolled in a debt settlement program, 40% have no debts settled at all. CRL pulled this from the letter from the Association of Settlement Companies (TASC) to the Federal Trade Commission, commenting on the FTC’s proposed amendments to the Telemarketing Sales Rule on the marketing of debt relief services. – Source.
Testimony provided stated that only a fee based on savings could be beneficial for consumers. CRL felt that a fee based on enrolled debt presented incentives for the provider of the debt settlement service to not act in the best interest of the consumer. CRL stated such fees would create:
- Low Quality/Value Settlements. With a percentage-of-enrolled-debt fee, the provider is guaranteed a set fee regardless of the quality of the settlement, thereby incentivizing quick, low savings settlements so that the company can get paid quickly.
- Enrolling Debt Unlikely To Be Settled. A percentage-of-enrolled-debt fee provides an incentive for providers to include as much debt as possible in the program (even if they know through experience that the creditor will not engage with debt settlement providers) because doing so would increase the fees paid for other settlements.
- Fees Higher Than Savings. Under a percentage-of-enrolled-debt fee structure, a
provider may be paid a fee that is larger than the savings to the consumer from the settlement.
The conclusion of the testimony provided to the Uniform Law Commission was that there was no evidence to support charging a 30% settlement fee.
As I’ve been saying, debt settlement companies should prepare to operate under a 15% success fee moving forward. It appears to be a trend that is happening and with California considering enacting the 15% fee cap and Illinois already operating under such a cap (source) it is probable more states will adopt it as well. – Source
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