I recently read the Debt Settlement Consumer Protection Act of 2010 and I have some major concerns about how this bill will effect consumers in a negative way. Much of the opposition to this bill is coming out of very low credibility organizations like TASC, USOBA, and rip off settlement companies concerned that they will be shortly run out of town. I certainly see a lot of finger pointing going on between the settlement and the credit counseling industry. From where I sit, both industries seem to be much more interested in fighting over market share and profit than they are about actually helping people.
If I may, I would like to provide the consumer with a voice in this debate. To whom it may concern, I am not a debt settlement company, a credit counseling company or a bankruptcy attorney. I am simply a financial consultant, providing guidance and answers to consumers dealing with debt and struggling to find the best options available to them. This bill will not put me out of business but will certainly have a direct and very harmful effect on my clients who are in a financial situation where a debt settlement strategy is their most viable option.
First let me say to Senators Schumer and McCaskill, I applaud your intentions behind the bill and think many of the ideas you have proposed are long over due. I understand that when you look at the debt settlement industry, most of what you can see is simply the drivel coming from the mouths of TASC, USOBA and all the other high fee, limited results settlement programs fighting for a consumer’s last dollar.
Frankly, if I were in your position and I sat and listened to John Ansbach (Legislative Director of the United States Organization for Bankruptcy Alternatives (USOBA)) tell me that charging their fees upfront was the only way they could do business I would have turned around and written a very similar bill that would likely put the entire industry out of business as well. After all, if TASC and USOBA, the self proclaimed industry regulators, say that in order to help 10 to 30 percent of their clients they have to rip off the other 60 to 90 percent of their clients, I would assume the world would be a better place if the industry simply ceased to exist.
I agree 100% that TASC and USOBA have created and fostered an environment that allowed bad actors to come into the industry with little to no investment, charge large fees to consumers upfront, and then provide very little service in return. Make no mistake, TASC and USOBA members allowed this to happen because they too profited in a major way from this practice.
TASC, USOBA and any other debt settlement companies that charge their clients via a front loaded fee structure, are all part of the problem, and are themselves the very same BAD ACTORS that they claim to want to rid the industry of. They claim their members have a success rate of only 34%. That means 66% of their member’s clients had no success, however, they still collected their fees. Maybe that is what Ansbach meant when he said they would go out of business if they couldn’t charge their fees upfront. I guess I agree with him. If a business model requires it to rip off 66% of its customers in order to be profitable, then I guess they would go out of business if they were no longer allowed to collect money without providing a service.
My main concern over this bill is that while it certainly will put most, if not all of the bad operators out of business, it is so restrictive when it comes to what a settlement company can charge, that it will also drive out the small number of honest and legitimate companies who are already and have been operating on a performance based fee model. This will in turn leave a consumer who needs this type of a debt strategy without any good options. The need for honest and legitimate help for consumers to settle their debt is indisputable, however where will those consumers turn? Already I see many rip off programs scrambling to convert to an “attorney model” because they feel that this loop hole will allow them to continue the status quo.
Now the language in the bill is a little vague and can be open to interpretation as to the attorney exemption. In any event, bad actors can convert to this model, and it could literally take years to put them out of business. They can claim attorney exemptions and continue to rip off consumers for quite a long time before regulators will be able to put a stop to them. However, the small number of legitimate settlement companies who understand that the “front loaded attorney model” is not beneficial to consumers, would be left in a position of being unable to offer a much better alternative to these rip off attorney models. Therefore consumers would be left with the option of dealing with the creditors themselves, or hiring a rip off program that tries to justify their existence by slapping an attorney’s name on their letterhead.
Essentially this bill as written, would make it impossible for an honest performance based company to even offer an alternative, to the rip off, scammer programs that will continue to operate for some time, in spite of the passage of this bill.
I have absolutely no problem with legislation banning the practice of front loading the program fees. This by itself would clean up most of the industry. In fact USOBA even stated that a front loaded fee ban would put 85% of their members out of business. Great. Lets focus on that first.
Currently the bill limits fees to a 50 dollar upfront fee, with no monthly fees and only a 5% of savings settlement fee. While on the surface, this looks to be great news for the consumer, lets look at this through the eyes of a business.
The small number of performance based programs that I am aware of, and often refer my clients to, enjoy success rates that are double and even triple that of front loaded settlement companies. The reason for this is that the settlement company has a financially vested interest in a successful outcome for the client. Also, the settlement company is much more selective on who they will bring on as a client with a model based on success. Personally I feel that capping a companies fees at only 5% of savings would be so severe, that a legitimate company could not profitably operate and would instead likely close its doors and be unable to continue helping consumers.
If this bill were to pass, lets look at the ramifications to consumers. Take a client struggling with 20,000 dollars worth of debt. Under the current bill, a debt settlement company would only be allowed to charge a consumer 50 dollars to bring on the client. Then that company would need to provide services to that client for lets assume 24 months in order to completely get the client out of debt. If this company is able to save the client 10,000 off his debts, then the company could only charge a maximum of $500.
How does this math work? That works out to a gross revenue of only 23 dollars a month. Out of that, the company would have to pay for all expenses to operate the business and not to mention the time invested with the client, and of course taxes, licensing fees, insurance costs and it goes on. If a company even attempted that, what kind of hands on, individualized, professional help would they be able to provide for that?
With this bill, almost all of the rip off programs will either scramble to an attorney model in an attempt to continue ripping off consumers or simply close their doors. My concern is for the estimated 1 million consumers that will be left high and dry when their current front loaded settlement company abandons them. This bill does not provide an environment for a legitimate company that has been operating in the consumers best interest for years, to be able to absorb the fallout and step in to assist abandoned or future consumers in need.
An owner of a legitimate and honest settlement company that currently operates on a performance based fee model, will be left with one of three choices if this bill passes, and none of them are helpful to consumers.
1. Finish working with all existing clients until they have settled all accounts, but not take on any new clients as they will not be able to earn a profit. Once all existing clients are finished, simply close their doors.
2. Dramatically cut all services and somehow try and survive and be profitable by cutting as many corners as possible. This will likely include outsourcing the entire operation overseas, in order to get a much cheaper labor rate and attempt to avoid U.S. laws. Not provide clients with any individualized services. Create one sized fits all plans to simplify and streamline operations. All of these things and many others would be to the consumers detriment.
3. Only take on clients with much higher debt loads. If this bill were to pass, then companies might have to simply stop helping consumers that have less than say 50,000 or possibly 75,000 or so worth of debt. The simple fact is they just can’t make a profit helping clients with smaller debt loads under the proposed restrictions. So this bill would cut off access to help to the very people that need it the most. The ones that are struggling, even with smaller amounts of debt. Those consumers are the ones that need ancillary services like financial education, the most. However all beneficial ancillary services would have to be cut out in an effort to help the company survive.
Unfortunately, TASC and USOBA should have been leading the charge on this years ago, and because of their arrogant profiteering, cleverly disguised as consumer protection, regulators likely feel that they have little choice but to put the entire industry out of business. This bill is unlikely to see much opposition from regulators. After all, who wants to spend any political capital, seemingly sticking up for debt settlement companies. However, I am not asking legislators to stick up for debt settlement companies. I am asking legislators to stick up for consumers by not passing legislation that will throw them to the wolves with no alternatives.
I am asking legislators to simply ban the practice of upfront fees and watch as the rats scatter from the sinking ship. This one simple act would dramatically clean up the industry and make it much more difficult for scam artists and profiteers to take advantage of consumers. At the same time, honest, and legitimate settlement companies that have been operating on a performance basis for years will be able to easily rise to the top, and continue to do what they do best, and that is to help consumers who are stuck in difficult financial situations. Without these few legitimate companies left to pick up the pieces, consumers are going to be harmed, and in my opinion, even more so then they are right now.