In the ongoing fallout from the subprime mortgage mess, industry watchdogs bemoan the “Wild West” atmosphere that once pervaded the mortgage industry, where brokers could handle vital consumer transactions with little to no education or licensing requirements.
It took a historic wave of foreclosures to impose new rules on the mortgage industry. But now, consumer advocates point to another free-for-all industry: Debt settlement.
The settlement industry is another trade that handles millions of consumers’ finances with little or no oversight – indeed, many such agencies in the state may be operating illegally even now. The end result, credit counseling agencies say, is often ruinous to consumers.
Debt settlement services seem to be booming: with consumers drowning in debt and unemployment on the rise, many leap eagerly on offers from debt settlers, who promise – for a fee – to consolidate payments and cut down debt payments by 50 percent or more.
“Opportunists crawl out from under their rocks to prey upon vulnerable people,” said Gail Cunningham with the National Foundation for Credit Counseling, who said her association is made up of nonprofits dedicated to education and genuine help, not the false promises of debt settlement.
“Debt settlement is a whole ’nother animal – and it’s not an animal that I like very much,” she said.
A number of education-oriented nonprofits have the blessing of the U.S. Department of Justice. But otherwise, debt counseling and settlement companies are essentially unregulated in many states, including Massachusetts.
State law stipulates only an attorney or an approved nonprofit can offer credit advice, or take a person’s income and distribute it to creditors – meaning that it’s apparently illegal to run any for-profit credit counseling corporation at all.
Regardless, no regulator is in charge of overseeing any companies offering these services, anyway, said Leslie Linfield, executive director of nonprofit Institute for Financial Literacy. Linfield’s organization, based in Maine, is approved to offer credit counseling in Massachusetts.
A Division of Banks spokesman confirmed the division has no direct oversight of credit counselors or debt settlers.
Some companies are brazenly harmful to consumers: Boston bankruptcy attorney Neil Warrenbrand said he filed a lawsuit recently on behalf of a woman who had been paying $650 a month to a debt settlement company that apparently wasn’t paying her creditors anything at all.
“She has no idea where her money went,” he said.
That’s not to say all such companies are outright frauds: Linfield said some for-profit debt settlement companies do work to pay off debts, usually by having clients default on their loans and setting aside a pool of money for them to pay off creditors for 30-50 cents on the dollar.
The trouble is while your principle might eventually get paid off, you’ll have to pay income taxes on what you owed. Also, it’s murder on your credit rating, Linfield said.
Credit counseling agencies like Linfield’s distance themselves from their for-profit counterparts, and about 350 nonprofit credit counselors are approved by the U.S. Department of Justice to offer debt education and management.
‘No Guarantee’
A dire 2002 report in the Massachusetts Legislature discussed the ruinous results that sub-par debt settlers and credit counselors had on desperate consumers, and found that more than 75 percent of credit counselors operating in the state hadn’t bothered to register with the commonwealth as nonprofits, and were reaching out to customers through telemarking or ads – essentially, that they were illegal.
“Even if a credit counseling agency is registered in Massachusetts, there is no guarantee that it is operating with appropriately high standards because these firms are essentially unregulated,” according to the report, which was submitted by the Senate Committee on Post Audit and Oversight and entitled, “Losing Credibility: Troubling Trends in the Consumer Credit Counseling Industry in Massachusetts.”
Linfield said credit counseling scandals in 2002 prompted many states to tackle the problem, but Massachusetts did not pass new laws addressing the issue that year.
But a new movement is afoot to get more oversight of debt settlement agencies, she said: About 25 state legislatures, not including Massachusetts, are considering the Uniform Debt Management Services Act, a bill from advocacy group the National Conference of Commissioners for Uniform State Laws.
The act would require both credit counselors and debt settlers to get accredited, certified, have insurance and register with a state administrator. It also requires fee caps and certain disclosures on the agreement they make with consumers, who are only too susceptible to getting further mired in financial trouble.
“They’re easy prey,” she said.
