States Want Coordinated Crackdown On Debt Relief Firms

Want tighter regulations at federal level

By Mark Huffman
ConsumerAffairs.com

October 27, 2009

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The attorneys general of 40 states have asked the Federal Trade Commission to tighten regulation of companies offering debt relief services to consumers. The FTC is currently reviewing a new rule proposal to amend the current Telemarketing Sales Rule.

The move follows a number of individual actions by various states. Earlier this month, Illinois Attorney General Lisa Madigan sued Credit Solutions of America (CSA) and its CEO Douglas Van Arsdale. The Attorney General's complaint alleges that the company falsely claims that its services can help to reduce consumers' credit card debt by 50 percent.

Madigan's lawsuit contends the company continually fails to negotiate with consumers' creditors even though consumers cease to pay their creditors directly and, instead, make months of upfront payments to CSA. As a result of CSA's failure to take any effective debt settlement action on behalf of consumers, according to Madigan's lawsuit, creditors frequently sue consumers to collect on the outstanding balances.

Madigan said her office has seen a sharp rise in debt- and credit-related consumer complaints. Over the last few years, her office has received more than 12,000 complaints regarding debt and credit issues.

Problem increases as economy fails

Last year, at the height of the economic downturn, consumer debt-related issues surged to the top category of complaints filed with the Attorney General's Consumer Fraud Bureau, including credit card debt, abusive collections and deceptive debt settlement practices.

Consumers with debt settlement complaints typically report that, after they enroll in debt settlement programs, the firms charge excessive upfront fees and advise consumers to stop paying their credit card bills.

All too often, consumers report that after they make many upfront monthly settlement payments, the debt settlers fail to negotiate with consumers' credit card companies. As a result, the credit card companies add interest, fees and penalties to consumers' credit card balances and begin collection efforts to recoup the debt, which in turn negatively impacts consumers' credit reports. In many instances, credit card companies have sued consumers enrolled in debt settlement agreements in an attempt to collect the balance of the consumers' accounts.

'Failing to deliver'

"In an ever-building wave of ploys and scams on consumers, debt settlement and debt negotiation companies promise to help consumers eliminate or reduce their debts, but often fail to deliver on these promises," said Ohio Attorney General Richard Cordray. "Tougher regulations will help to rein in some of the most deceptive and unfair practices in this industry."

Among other things, the new rule proposes:

• Prohibiting debt relief companies from charging fees until they have performed services. Requiring improved disclosures to consumers, including informing the consumer of the length of time it will take to settle debts and what the costs will be.

• Prohibiting misrepresentations, including misleading statements concerning fees, success rates, and the impact the services will have on a consumer's credit history.

• Extending the Telemarketing Sales Rule so that it covers incoming calls made to debt relief companies in response to advertisements.

The Ohio Attorney General's Office has received more than 600 complaints involving debt relief services since January 2007 and through its complaint resolution process has recovered more than $320,000 on behalf of consumers. ConsumerAffairs.com has also received hundreds of complaints over the years about debt settlement firms, including Credit Solutions of America.

"We signed up with Credit Solutions 3 months ago. We have made 3 payments of 600+, and they have done nothing for us," Virginia, of Inlet, N.Y., told ConsumerAffairs.com. "All creditors have contacted us and said we could negotiate directly with them. We have also been threatened with a lawsuit."

The letter of support was sent to the FTC on behalf of Cordray as well as attorneys general from Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Georgia, Guam, Hawaii, Idaho, Illinois, Iowa, Kansas, Maine, Maryland, Massachusetts, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Tennessee, Texas, Vermont, Washington, West Virginia and Wyoming.

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