Debt Settlement and Debt Collection: Friends, Foes and the FTC

On the surface, debt settlement and debt collection seem like they could be natural partners. Both have the same ultimate goal: resolving unpaid consumer debts. Yet in fact, the two are often in conflict. The good news is that they don’t need to be.

The issue is that some creditors and collectors are concerned that debt relief companies are trying to force customers into debt settlement (also known as debt resolution), when in fact these individuals should be working with other forms of debt relief, such as debt consolidation refinance, credit counseling or a self-managed paydown plan. However, it does debt relief firms no good to push someone in the wrong direction – and that is especially true for firms that comply with Federal Trade Commission (FTC) regulations issued in October 2010. To be fair, many debt relief firms were already working to get the right consumer into the right program before the FTC rules went into effect. Now, the incentives are very much aligned.

Today, for compliant debt relief companies, there is no reason to be in conflict with debt collection and ARM businesses. Here’s why.

Current market realities

In October 2010, the FTC issued a ruling to curb unethical debt relief companies. The new regulations included the well-known advance-fee ban, which prohibits companies from collecting fees until they have negotiated a result for a client, and the client has accepted that negotiation.

Because the rules include a strict prohibition on payment until the debt relief firm delivers a settlement that the client accepts, they provide companies with a strong incentive to keep people out of a debt settlement program if they don’t belong there. So, if a consumer has the means to pay off debts on his or her own, that consumer will be disappointed with the negative effects of a debt settlement program and drop out before accepting any settlements. If a consumer has no means to get through a debt settlement program, he or she will drop out because of no ability to settle any debts. In either case, a debt settlement company would be investing in a significant amount of work – with no payment.

Debt resolution clients who do their homework can find a company that will explain all the options available to them, get them into the most appropriate program for their situation, and, if that program is debt settlement, refrain from charging any fees until after delivering results. As a real-world example from my own company, following our pledge to adhere to the FTC regulations, approximately 80 percent of our enrolled clients see at least some of their debts resolved. On average, our clients see their first debt negotiated within three to four months of starting the program.

Who is the debt settlement client?

Many debt relief companies closely guard information about their clients; after all, it’s a competitive world. Therefore, speaking only for my own firm, a mere five percent of the consumers who reach out to us ultimately enroll in a debt settlement program. Many more are referred to debt management plans, debt roll-up plans, or consolidation loans.

The debt settlement, or resolution, process is by no means a one-size-fits-all process. Rather, it is best suited to a specific type of consumer. Typically, successful debt settlement clients are struggling with very serious debt (generally at least $10,000 across multiple debt accounts, and often more, depending on circumstances), cannot make required minimum payments, and otherwise might be considering bankruptcy.

On the other hand, individuals who are in mild hardship, but need more time to pay off their debt, can often find success with other types of debt and credit management programs, as listed above. Still others can, with time, and perhaps working out their own agreements with creditors, manage to repay their debts on their own.

This is where debt relief and ARM companies share common ground: The goal for each is to get to the bottom of a consumer’s troubling debt situation and resolve it to the best possible outcome for both parties. Debt relief firms work with some of the most challenging cases, seeking to develop holistic solutions for unsecured debt problems on a client-by-client basis. Unlike with most Chapter 7 bankruptcy filings, the outcome is one in which creditors receive at least partial payment from the consumer.

Debt settlement-debt collection interaction

Good debt settlement companies now receive payment only when they succeed in resolving debt – which often involves cooperating with debt collection companies. One benefit for companies in the ARM business is that the advance-fee ban has purged the debt relief industry of most of the unscrupulous players. The companies that remain are dedicated, professional organizations that serve consumers well. These companies understand that if they are not meeting their customers’ needs, they will not be in business for long.

Nevertheless, as with most rules, there are those who look to exploit the loopholes and/or exceptions, and find ways to do so. If consumers cannot discern whether a debt relief company is one of the ethical players, they could find themselves struggling – FTC rules or no.

One measure the industry has developed is a public endorsement of the FTC rules by the American Fair Credit Council (AFCC), formerly The Association of Settlement Companies. Membership in the AFCC is limited to companies that have agreed to adopt the no-advance-fee model. Consumers dealing with an AFCC member can have confidence that they will be treated fairly. They also gain assurance that the company is conducting honest and fair negotiations as a neutral party, without any incentive from creditors or collectors. Consumers who need significant debt help clearly find this arrangement assuring; AFCC members settled more than $1 billion of unsecured debt last year.

The more debt collection companies understand the full debt settlement industry, the new FTC regulations and how they work, the better the two industries will work together.

Andrew Housser

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Students’ loan debt may not be worth the cost of college

Some students may be forced to consider the payoffs of college when paying off the loans after student loan debt hit the $1 trillion mark last year, according to the Consumer Financial Protection Bureau.

According to the CSU Graduation Initiative, CSUN’s average graduation rate is less than 50 percent. About 43 percent of those students who graduated from CSUN in 2010 assumed loans with an average loan amount of $15,725, according to CSUN’s College Portrait.

“Most of our students work while going to school, and it often takes them much longer to get a degree,” said Dr. Bettina Huber, director of CSUN’s Office of Institutional Research, regarding the 50 percent graduation rate. “With the numbers these days, students who work simultaneously are not taken into account.”

These types of numbers show that the risks of student loans may not be worth the pay off, according to James P. Dow Jr., professor and chair of CSUN’s department of finance, real estate and insurance.

“Students borrow too much for the major they have, and they should think about how much they’re going to earn after college when they think about how much to borrow,” Dow said. “If you borrow $100,000 for a major that’s going to pay $30,000 when you graduate, that’s just not going to work.”

The media has been questioning the possibility of whether student loan debt could become the next bubble after the housing market crashed.

Dow shut down the possibility of concerns over whether the student loan debt or default situation may be the next “bubble” and said people should be careful with bubble terminology.

“The housing market itself was a bubble in terms of housing prices, so when the housing prices fell, the loans that backed them went into default,” Dow said. “Student loans are not the same, because it’s not like we are going to see a sudden fall in the lifetime income of students.”

Another difference between housing and student loans would be the ability to lose the home and file for bankruptcy, an option not available for student loans. According to the U.S. Bankruptcy Code, student loan debt is one debt that cannot be discharged in bankruptcy unless the person can prove paying back the loan will cause undue hardship.

Shirley Svorny, a professor of economics at CSUN, compared the targeting of students to the targeting of mortgage lenders to people who would potentially be unable to pay down loans.

“If the loans are guaranteed, it encourages banks to not look at the riskiness of the individual; otherwise, why would they loan money to a college student?” Svorny said.

Svorny suggested students view loans as an investment in “human capital,” something that will make one more valuable in the labor market after college. She also credits some of the student loan problem to pressure from parents, politicians and society to attend college.

“President Obama is saying ‘everyone should go to college,’ and that’s dismissive of people who have other types of skills who aren’t good in a classroom,” Svorny said. “We’ve moved in this direction of so-called equality where we think everyone should go to college, but forcing everyone to do the same thing isn’t equal, and it’s forcing square pegs into round holes.”

Miranda Mendoza, a sophomore communication studies major, said she will owe $20,000 by the end of this year.

“My mom makes too much to get other financial aid and not enough to pay tuition in full, so we had to take the loans,” said Mendoza, 19. “We agreed that I would pay her back half of the amount once I graduate and get a job.”

A study done by the National Consumer Law Center said “The Student Loan Default Trap” monitored 40 individuals who were in default on federal student loans.

The study was done over a year beginning May 2011 and found 80 percent were unemployed, 85 percent received public assistance, 69 percent said neither parent completed higher education, and only 47 percent completed their college education.

When asked if the student loans in default should be paid back at all, 47 percent said they did not believe they should pay back the debt, according to the NCLC. The average age of the borrowers was 43.

The numbers showing less than half of those surveyed not completing their attempt at a college degree also reflects the current status of many CSUN students.

Joshua Mendoza, a senior history major, said he currently owes $9,622 in student loans.

“I haven’t borrowed a huge amount because I don’t want to risk not being able to make the payments,” said Joshua Mendoza, 25. He said he will have to begin payments in 2014, and his hope is to have a full-time job as a teacher and to set up a loan payment plan with the loan company, Nelnet.

Alexandra Johnson, a senior English major, said both she and her parents took out student loans totaling almost $50,000 even though her family’s income could have covered the cost of college.

“My father thought we would need more money to pay for college so we took out the loans,” said Johnson, 23. “College ended up being cheaper than we thought, so now we still have these loans.”

Johnson encouraged students to consider the unsteady economy and not take out a loan in the first place if they doubt whether they will be able to pay it back.

“I think all students deserve some kind of financial aid,” Johnson said. “But I don’t think 10 years is a plausible amount of time to pay it back if students aren’t getting work.”

Christina Cocca

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Consumer borrowing up $18.1 billion in August

Total consumer borrowing increased by $18.1 billion in August compared with July, the largest increase in three months, Associated Press reports.

The August gains were split between a $13.9 billion boost in auto and student loans and a $4.2 billion increase in credit card borrowing, according to the Federal Reserve.

Activity through August left total consumer debt at $2.73 trillion, which is 5.5 percent above the peak for credit hit in July 2008.

Student loan debt was up nearly 50 percent from four years ago to $914 billion.

Evan Weese

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5 Reasons Why Your Credit Score May Not Matter

Credit scores and the confusion they cause have once again stepped into the national spotlight with the release last week of the Consumer Financial Protection Bureau’s (CFPB) Analysis of Differences between Consumer and Creditor-Purchased Credit Scores, as part of the Dodd-Frank Act requirement that the CFPB compare credit scores sold to creditors and those sold to consumers to determine whether differences between those scores put consumers at a disadvantage.

The study reported that as much as 73%-80% of the time, an “educational” score obtained from one of the many consumer websites is likely to place the consumer within the same “credit-quality category” as a creditor-purchased score – many of which are not available to consumers. While many reacted to the report with surprise that up to one in four scores for consumers are significantly different than the ones lenders see, some of us who have advocated for years for more score disclosure, were surprised that the scoring models were that accurate.  Such results indicate a strong correlation (.90 out of a possible one) between the educational and creditor-purchased scores.

While not necessarily the intent of the CFPB study, these rather unexpected results reveal that there just may be too much emphasis being placed on credit scores nowadays, while the underlying credit report information and score factors that accompany most credit scores – both educational and lender-purchases – can be just as important, or more so, than matching the three-digit number a lender may be using.

With a goal of getting past credit scores by refocusing on credit report accuracy and using score factors for improvement, what follows is a list of five reasons why your score may not matter all that much anyway:

 

  • If your credit is being reported accurately, just about any score based on your credit bureau information will provide a look into your creditworthiness as seen through the eyes of a lender.
  • The conventional mantra of paying on time, keeping debt low and avoiding opening new accounts will not only help to improve any credit risk score, but also provides a great general financial management strategy to follow, score or no score. Understanding where your credit report is falling short is important to understanding how to improve your score. The Credit Report Card gives you a grade for each of the five categories so you know where you stand.
  • In addition to credit bureau risk scores, lenders often use other types of scores, such as behavioral scores and custom application scores, which are not likely to be available to consumers under even the best score-disclosure scenario.
  • Credit scores lose their freshness very quickly, since their reliability is based on the accuracy of the underlying data, which can change as often as daily. So, even if the consumer is using a score derived from the same formula as the lender’s, if it isn’t of the same vintage it’s not likely to be the same score.
  • Credit score interpretation and other lending criteria differ from one lender to another, and can change frequently within the same lender’s credit programs. There is no realistic scenario where score “cutoffs” or other lending criteria will be available to consumers, so the mystery surrounding credit granting is all but guaranteed to continue.

Consumer access to credit scores over the past decade has helped consumers become more savvy and empowered than ever. Now it may be time to reassess the importance of credit scores as the main consumer empowerment tool, and instead refocus on the credit report, score factors and managing credit responsibly.

Barry Paperno

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U.S. consumers paying down debt, job growth needed: ABA

U.S. consumers made progress on paying down debt in the second quarter of 2012, but sluggish job growth and the struggling economy could weigh on Americans’ ability to pay back loans in the future, the American Bankers Association said on Thursday.

The group said a composite ratio made up of delinquencies in eight loan categories fell during the quarter, and bank card delinquencies dipped to an 11-year low.

But while the ABA’s first-quarter report found improvement in nearly every category tracked, the latest report did not show the same broad gains.

“Consumers are saving more and borrowing less as they work to pay down debt at a faster rate,” said James Chessen, ABA’s chief economist.

“Slow job growth and continued uncertainty means many consumers will face challenges managing their debt going forward,” he added.

The ABA report tracks late payments for bank-provided credit cards, auto loans and other consumer loans. It does not track delinquency rates for traditional mortgage payments.

The bank association defines a delinquency as a late payment that is 30 days or more overdue.

The composite ratio fell to 2.24 percent of all accounts during the second quarter, the ABA said. Bank card delinquencies, which are not part of the composite, tumbled from 3.08 percent in the first quarter to 2.93 percent, the lowest rate since 2001.

Delinquencies on auto loans arranged through auto dealers and other third parties fell from 2.41 percent to 2.23 percent. But delinquencies on auto loans from banks rose from 0.86 percent to 0.92 percent, the ABA said.

Chessen also said improvement in the housing market has not yet trickled down enough to reduce home loan delinquencies. Delinquencies in all three home-related loan categories rose.

Emily Stephenson,

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Paying down debt an ongoing battle

A couple of months ago I mentioned getting myself into a rather deep hole of credit card debt.

Historically, I’m the type of person who pays off credit card balances, so I don’t carry any over from month to month. It’s the interest that can add up quickly and if you don’t pay more than the minimum payment, and depending on what your balances are, it can take years to pay off that debt.

A close friend of mine and I discussed credit card debt recently. Life circumstances sometimes requires throwing a charge on a credit card because we lack the cash to pay for a service or unexpected expense.

What I kick myself for all the time are those small charges — $20 here, $15 there — for an assortment of daily needs, including gasoline or a few items at the grocery store. At the time they seem like nothing, but bundle several together and at the end of the month, the amount can be eye-opening.

Well, I had one of those moments again. Just when I thought I could make a rather large dent in what I define as my nightmare credit card, my designated only use if absolutely necessary credit card had a total amount due that was more than I expected.

Following the advice of the Financial Information and Service Center in Menasha, which offers financial and credit counseling services, I sent in a payment that paid off the balance of card, which had the higher interest rate. Though the nightmare card didn’t get paid down as much I was hoping it would, I still made a dent in that debt and following FISC’s strategy, which means paying as much on my debt as I can every month, I know in time the nightmare card will be paid off.

When I think of my situation with credit card debt, it’s nowhere near what the rest of the nation faces.

Statisticbrain.com, citing Federal Reserve, Sallie Mae and TransUnion data, said total U.S. credit card debt though late July was $793.1 billion and the average credit card debt per household was $15,799.

I understand how easy it can be to accumulate credit card debt. The challenge is keeping yourself from adding to it.

For the country, if people have too much debt, it may move some to scale back on spending. This isn’t a good situation, especially when nearly 70 percent of the nation’s economic activity relies on consumer spending.

When I can, I pay cash for my purchases, particularly necessities like gasoline and food. What I need to be mindful of are those frill or spontaneous purchases when I don’t have enough cash available.

I know I need to be more disciplined with credit cards. The task isn’t impossible; I just need to get it done.

Larry Avila

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American Express ordered to refund $85 million to consumers

The Consumer Financial Protection Bureau announced this morning it has ordered three subsidiaries of American Express to refund about $85 million to about a quarter of a million consumers.

According to the agency, an investigation found “that at every stage of the consumer experience, from marketing, to enrollment to payment to debt collection, American Express violated consumer protection laws.”

The three subsidiaries are supposed to identify the harmed customers and make sure they get their money back.

Update: American Express spokesman Michael O’Neill says: “We worked closely with regulators and cooperated fully with them throughout the reviews. We took responsibility for correcting the issues are are compensating customers where appropriate.”

O’Neill says the refunds will be made in the “coming months, as soon as possible.”

He also noted that American Express continues cooperate with regulators in an industrywide examination of add-on card products, as well as conducting its own review.

The CFPB says the illegal activity at the American Express subsidiaries was uncovered by the Federal Deposit Insurance Corp. and the Utah Department of Financial Institutions during a regular exam of American Express Centurion Bank. Once the CFPB took over the investigation, it found that similar violations were happening at American Express Travel Related Services Co. and American Express Bank.

Among the violations, according to the CFPB:

—    American Express Centurion Bank and American Express Bank charged late fees based on a percentage of the debt, a violation of the CARD Act.

—    Cards applicants were treated differently based on their age.

—    The two banks didn’t report when consumers disputed charges to the credit bureaus.

—    The three subsidiaries lied to consumers about the benefits to credit reports if they paid off old debt. (Apparently, there often wasn’t any benefit.)

—    American Express Centurion Bank led consumers to believe that they would get $300 in extra bonus points by signing up for a credit card program. Qualified consumers didn’t get the points.

The CFPB says several federal agencies are seeking a total of $27.5 million in civil fines against American Express, too.

The CFPB, working with other regulators, has been cracking down on card companies and ordering them to refund millions of dollars to consumers. Regulators ordered Capital One this summer to refund $140 million to customers and recently ordered Discover Financial Services to return about $200 million to consumers.

Eileen Ambrose

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