Consumer Group Criticizes Debt Settlement Firms in DOJ Letter
A group of bankruptcy attorneys is warning cash-strapped borrowers against the hazards of working with companies that promise to reduce debt in exchange for a fee.October 18
As 2012 begins, the California Department of Real Estate is still warning consumers to be wary of promises for loan modification, mortgage relief and foreclosure rescue scams as fraudsters to continue prey on vulnerable, financially stressed homeowners.January 3
WASHINGTON — Debt settlement firms settle only a fraction of customers' debts and often leave consumers worse off, the Center for Responsible Lending said in a letter to the Justice Department last week.
The group also accused a debt settlement industry trade group of making misleading statements about how the industry works and the results it produces.
Debt settlers typically offer to settle a customer's debt with creditors for substantially less than the principal, in exchange for fees. But they often require customers to stop paying their bills or communicating with creditors, and many debt collectors or credit card companies refuse to negotiate with the firms, and may even speed up their collection efforts once a customer signs up for debt settlement, CRL said.
"Requiring clients to default on their obligations to third parties, without any assurance of the third parties' cooperation, is debt settlement's central flaw," Ellen Harnick, a senior policy counsel at CRL, wrote in the letter, which was also sent to the Consumer Financial Protection Bureau, Office of the Comptroller of the Currency and Federal Trade Commission.
"Debt settlement exploits the desperation of financially strained families, and typically leaves them worse off than they were when they started," Harnick said.
The group's letter sent in response to a letter from the American Fair Credit Council, a debt settlement industry group criticizing a Justice Department blog post that warned about debt relief scams.
In the Aug. 16 post, the Justice Department said it is working with its "investigative partners" to prosecute unscrupulous debt relief firms.
"Unfortunately, many of these companies not only fail to fulfill their promises to consumers, but fail to offer any services at all," the agency said. "Companies charge large upfront fees, or multiple hidden fees. Often, a substantial portion of a consumer’s monthly payment goes to the company’s fees, with little to nothing offered toward reducing the debt’s principal."
The agency cautioned consumers to watch out for companies that promise to reduce debt principal by 50% or more, or offer a "one size fits all" solution. The agency also recommended using non-profit credit counselors, which cost "substantially less" than fees charged by debt settlement firms.
The American Fair Credit Council said the blog post was misleading and incorrect, and argued that recent rules from the Federal Trade Commission now prohibit many of the problems cited in the blog.
"In fact, by presenting outdated and, frankly, misleading information the DOJ had done exactly what they warn against: misleading consumers," the group wrote in the letter, dated Sept. 4.
The debt settlement industry has faced growing scrutiny in recent months.
The National Association of Consumer Bankruptcy Attorneys issued an alert on Oct. 18 warning cash-strapped borrowers about the dangers of working with debt settlement firms.
The warnings follow a string of efforts by regulators to police firms that offer to modify mortgages and other loans. The Federal Trade Commission filed three separate lawsuits last month in Florida, California and Ohio against three alleged scams that offer to relieve borrowers of mortgage burdens.
The Consumer Financial Protection Bureau in August sued a Los Angeles law firm over an alleged debt relief scam. California regulators warned consumers in January to be wary of promises for loan modification.