FEDERAL TRADE COMMISSION PUTS DEBT SETTLEMENT COMPANIES OUT OF BUSINESS

The Shriver Center has previously reported on federal and state efforts to crack down on the rapidly growing debt settlement industry, particularly the industry’s pervasive practice of taking advantage of desperate consumers’ fears and financial troubles. 

Last year, the Federal Trade Commission (FTC) established the Telemarketing Sales Rule which bans advance fees, requires disclosures, and prohibits misrepresentations by debt settlement companies. Since October 2010, for-profit companies that sell debt relief services over the telephone may not charge a fee before they settle or reduce a customer’s credit card or other unsecured debt. Companies must disclose fundamental aspects of their services, such as how long it will take for consumers to see results, how much it will cost and the potential negative consequences from using debt relief services, before the consumer signs up for any service.  The rule also covers calls consumers make to these firms in response to debt relief advertising.

Most recently, the FTC settled two actions charging debt settlement companies with fraudulent practices including deceptive telemarketing calls, calling consumers on the Do Not Call Registry and using illegal robocalls.

In the first case, the FTC charged Advanced Management Services NW LLC for calling consumers and claiming that they could negotiate with credit card issuers to substantially lower the consumers’ credit card interest rates. The defendants allegedly used prerecorded “robocalls” with messages urging consumers to “press one” to speak with someone, falsely leading many consumers to believe that the calls came from the credit card company. They also charged consumers up to $1,590 and promised a refund if they failed to save at least $2,500 in interest savings.  Instead of arranging for interest rate reductions, the companies merely advised consumers to pay down their credit card debts early to save money on interest. When refunds were requested, the companies either denied the requests or deducted a $199 “nonrefundable fee” from the refund.

The US District Court for the Eastern District of Washington’s settlement order against Advanced Management Services imposes an 8.1 million dollar judgment and prohibits them from engaging in marketing, advertising, promoting, offering for sale, or selling debt relief services. They are also banned from misrepresenting facts about any good or service, selling or using customers’ personal information. These monetary judgments, which represent the total amount consumers lost, will be suspended when the defendants surrender virtually all of their assets.

In another case, the FTC charged Dynamic Financial Group and other defendants with making false claims by offering debt relief services with an up-front fee of up to $1,995. The defendants claimed to help consumers pay off their debts faster and promised a full refund if a consumer did not save a “guaranteed” amount. 

The settlement order from the US District Court for the Northern District of Illinois Easter Division prohibits the defendants from misrepresenting material facts about any good or service, violating the Telemarketing Sales Rule, collecting payments from their debt relief consumers and using or selling customers’ information. In terms of monetary damages, the defendants must pay over 30 million dollars.

While the FTC Telemarketing Sales Rule increased regulation over debt settlement services marketing, it only covers calls consumers make to debt relief firms in response to their advertising. It does not, unfortunately, cover in-person or internet-only sales of debt settlement services. More federal measures are therefore necessary. For example, the Federal government could follow states’, such as Illinois’, examples and require written contracts prior to a debt settlement company receiving a fee. Illinois’ debt settlement law requires a written contract that clearly indicates the terms of the debt settlement agreement and that must be signed by both the service provider and the customer. Most importantly, it caps the initial fee to $50 and forbids debt settlement companies from unfairly charging customers without having done any work. The settlement fee is capped at 15% of the savings and cannot be charged until the creditor has entered into a legally enforceable agreement with the consumer. Also, debt settlement service providers must warn consumers that debt settlement service is not suited for everyone and that it may have detrimental effects on the consumer’s credit history and credit score. Companies must provide detailed accounting reports, and consumers are entitled to cancel the contract and receive a refund.

 This blog post was coauthored by Ji Won Kim.

 

Debt Collection: Fake Courts the Latest Tactic

Fake CourtAs if debt collectors preying on desperate consumers’ fears and financial troubles were not enough, debt collection companies have begun to actually take the law into their own hands. 

Unicredit, a debt collection company in Erie, Pennsylvania, used fake court proceedings to deceive, mislead or frighten consumers into making payments or surrendering valuables without following the lawful procedures for debt collection. Although there have been cases in which debt collectors threatened arrests if debtors fail to pay their debt, this might be the first time a debt collection company has been accused of setting up a phony court.

First, Unicredit filed legal judgments against debtors in improper venues. Although Pennsylvania rules require judgments to be filed in the debtor’s district court or where the debt was incurred, Unicredit filed many of its cases at District Judge DiPaolo’s Office, located in the same office complex as Unicredit.

Next, according to Pennsylvania’s Attorney General, consumers received letters that were often hand-delivered by individuals dressed like sheriff deputies, implying that consumers would be taken into custody if they failed to appear at the fake court. Specifically, these subpoenas summoned consumers to an office in Erie, which included a room referred by Unicredit employees as “the courtroom.” 

The “court room” was located at the Unicredit “Debt Resolution Center.” This space was equipped with furniture and decorations similar to those used in actual court offices, including “a raised bench area where a judge would be seated; two tables and chairs in front of the ‘bench’ for attorneys and defendants; a simulated witness stand; seating for spectators; and legal books on bookshelves.” It is reported that during some proceedings, an individual dressed in black was seated where one would expect to see a judge. These bogus court proceedings were used to intimidate consumers into providing their bank account information and giving up vehicle titles and other assets.

The Pennsylvania Attorney General’s Office spokesman said that 370 affected consumers have been identified in Erie County Court records thus far. Two lawyers are believed to have been involved in these fraudulent, misleading practices. Erie County Chief Deputy Sheriff Jon Habursky told AOL News that Unicredit seems to have targeted the elderly and the sickly.

In October, the Attorney General’s Bureau of Consumer Protection filed a lawsuit against Unicredit America, Inc., and a petition for special and preliminary injunction, asking the court to prohibit the company from engaging in any debt collection and immediately stop all fake hearings or depositions.

At the first hearing, Unicredit agreed to put an end the tactics at the center of the government’s complaint and to stop sending letters threatening consumers with arrest. Judge Michael E. Dunlavey also ordered the mock courtroom to be torn down within 30 days. At the second hearing the judge ordered the entire Unicredit operation closed in order to reinforce the actions of the Attorney General’s office.

As discussed in a previous blog, Illinois recently passed the Debt Settlement Consumer Protection Act (Public Act 96-1420). The new law requires a written contract that clearly indicates the terms of the debt settlement agreement and that must be signed by both the service provider and the customer. The Illinois Department of Financial and Professional Regulation has accepted public comments on proposed rules implementing the law and is expected to announce the final rule within the next few months. This law will help protect Illinois residents as they consider whether or not to utilize a debt settlement company and does not include any new protections for consumers regarding debt collection practices. Given, however, the new debt collectors’ new schemes, it may be time to consider more regulation in this area as well.

This article was coauthored by Ji Won Kim.

 

Debt Collectors Beware: New Illinois Law Bites

Angry dogThe recent economic crisis has placed numerous Americans in vulnerable positions and consumer debt has risen to historic levels. As a result, deep concerns have arisen about the rapidly growing debt settlement services industry, particularly the industry’s pervasive practice of taking advantage of desperate consumers’ fears and financial troubles.

Debt settlement companies claim that they will negotiate with consumers’ creditors to drastically cut down their debts and lift them out of despair. In reality, however, enrolling in a debt settlement service often leaves consumers owing more than before, facing bankruptcy, and with ruined credit scores. These flawed practices are even more damaging to people on the lower rungs of the economic ladder, which are the very people that debt settlement services target. The National Consumer Law Center reports that certain companies work only with “insolvent customers.”

The Government Accountability Office's (GAO’s) recent investigation of the debt settlement industry revealed the appalling situations consumers face. GAO posed as fictitious customers and approached 20 companies across America. Seventeen of the companies said they collect upfront fees, and nearly all of them advised consumers to stop paying their creditors. Furthermore, some companies engaged in fraudulent practices such as claiming high success rates--despite the fact that the Federal Trade Commission (FTC) found that less than 10 percent of consumers successfully complete debt settlement programs.  

Many states across the country are taking action against debt settlement services that trick vulnerable consumers into unfair arrangements. Some states have implemented their own laws in response to the lack of federal initiative. Virginia enacted legislation that provides detailed requirements for debt settlement operations, and Arkansas and Wyoming chose to prohibit for-profit debt settlement companies in their states altogether.

Illinois has recently joined the ranks of other forward-minded states by passing the Debt Settlement Consumer Protection Act (Public Act 96-1420) this summer. The new law requires a written contract that clearly indicates the terms of the debt settlement agreement and that must be signed by both the service provider and the customer. Most importantly, the new law caps the initial fee to $50 and forbids debt settlement companies from unfairly charging customers without having done any work. The settlement fee is capped at 15% of the savings and cannot be charged until the creditor has entered into a legally enforceable agreement with the consumer. Also, debt settlement service providers must warn consumers that debt settlement service is not suited for everyone and that it may have detrimental effects on the consumer’s credit history and credit score. Finally, companies must provide detailed accounting reports, and consumers are entitled to cancel the contract and receive a refund. The Illinois Department of Financial and Professional Regulation has accepted public comments on proposed rules implementing the law and is expected to announce the final rule within the next few months.

In addition to the independent state efforts, 41 state attorneys general teamed up to support the FTC’s new rule governing the debt relief industry. In July 2010, the FTC announced the final Telemarketing Sales Rule.The new rule includes important provisions that ban advance fees, require disclosures, and prohibit misrepresentations. The advance fee ban provision will go into effect on October 27, 2010, and all other provisions went into effect last week on September 27, 2010.

While the new FTC regulation covers calls consumers make to the debt relief service firms in response to their advertising, it unfortunately does not cover in-person or internet-only sales of debt settlement services. Therefore, more federal measures are necessary, including passage of the Debt Settlement Protection Act (H.R. 5387 and S. 3264). It is time for more action in Washington to save countless American consumers from suffering from consumer debt settlement companies.

This article was coauthored by Ji Won Kim.