Tuesday, August 3, 2010
Federal Trade Commission Places New Restrictions on Debt Settlement Companies
The Federal Trade Commission introduced new restrictions on debt reduction and debt settlement companies to curb fraudulent activity within the industry. The announced rules seek to deal with complaints from customers alleging they were charged large fees and never saw a reduction in the amount they owed to creditors.
The new regulations require companies to settle or reduce a customer's debt before they are able to charge a fee for the service, as well as provide a timetable and estimates for the total cost of service. Widespread consumer complaints about these types of companies caused the Federal Trade Commission to act. The story was common, depressed and vulnerable consumers in deep debt see an advertisement on television or the internet for debt forgiveness and settlement companies. They then give their last dollars in an earnest attempt to satisfy their debt, but are left with nothing to show for their effort.
"This rule will stop companies who offer consumers false promises of reducing credit card debts by half or more in exchange for large, upfront fees," said Jon Leibowitz, chairman of the F.T.C.
After the housing market collapse many of the now infamous same sub-prime mortgage lenders switched business plans and are the same people now offering distressed borrowers debt settlement programs. Since the housing bubble burst in 2007 the number of settlement companies and complaints of their abuse have grown exponentially.
Advocates for debt reduction services complain that the new F.T.C. regulations place an unfair burden on the companies by forcing them to collect fees only after the customers debt has been reduced or settled. Most credit card companies require the deposit of the full debt into an independent account before it will begin settlement negotiations, and without upfront fees many of these companies would be forced out of business.
The new F.T.C. regulations are lauded as a victory for consumers, but some consumer advocates are criticizing a loophole that would allow settlement companies to avoid compliance if their interaction with debtors is conducted entirely over the internet. The regulations are an amendment to an existing rule that governs telemarketers and thus only protects consumers who use their phone to communicate with the debt settlement companies.
The F.T.C. acknowledged the loophole but argued nearly 100% of the complaints against debt settlement companies involved telephone traffic.