President of TASC writes on behalf of The Association of Settlement Companies (TASC) regarding the Better Business Bureau’s policy on the rating of debt settlement companies.
January 6, 2009
Stephen J. Cole
President and CEO
Council of Better Business Bureaus, Inc.
4200 Wilson Boulevard, Suite 800
Arlington, VA 22203-1838
Dear Mr. Cole:
I write on behalf of The Association of Settlement Companies (TASC) regarding the Better Business Bureau’s policy on the rating of debt settlement companies. TASC is the predominant national association of settlement companies representing over 170 member companies. It was formed to provide operating standards for member companies and to promote effective and fair legislation affecting the industry. TASC’s goals are to promote good business practice in the debt settlement industry, protect the interests of consumer debtors, and educate legislators and regulators at all levels of government with respect to the issues involved in the debt settlement industry. The mission of TASC is to encourage debt settlement companies to provide services in accordance with the highest professional and ethical standards in order to retain the confidence of the public, the credit industry and local, state, and federal government. Some of the standards we require our membership to adhere to include specific disclosure requirements that must be made when enrolling a consumer into a debt settlement program, form requirements for client agreements, fair marketing standards, record keeping requirements, authorization standards in negotiating and finalizing settlements, minimum service standards, and permission allowing TASC to monitor or “screen” the adherence to such standards. TASC proactively self regulates its membership by using a third party company to “secret shop” our members and review member websites for compliance with our standards.
A representative of TASC recently met with the Dallas, Texas BBB office to discuss the new rating system and how it works. I am concerned about how the new rating system fails to distinguish between good debt settlement companies and those deserving of poor ratings. Most notably the highest rating a debt settlement company can receive once it has been tagged with the debt settlement “type of business” category is a “C”. Debt settlement companies are almost never more than 5 years old and thus will automatically receive further point deductions for “time in operation”. If even a very small number of the thousands of consumers serviced files a complaint, then the combined impact of the various rating categories means that a debt settlement company will never grade more than a D or F . This results in consumers being unable to differentiate between debt settlement companies that have good business practices and those that are truly bad companies. It also appears inequitable when compared to businesses in other industries that have large volumes of complaints and yet have high A or B ratings.
Debt settlement companies serve a need for consumers that is not met by other means. Debt settlement is a necessary debt relief option for consumers especially in this economic environment when even Fortune 500 companies and state governments are unable to meet their financial obligations. Consumers do not receive direct governmental “bailouts” and thus debt settlement often is their best hope. Other options such as credit counseling/debt management or bankruptcy are often either unaffordable or unavailable. Even J. Thomas Rosch, Commissioner of the Federal Trade Commission, recognized that debt settlement is a viable and needed service for consumers. He recounted a talk show host’s comments about debt settlement :
“But she also acknowledged that debt settlement even at a cost can play an important role in solving what may seem like insurmountable problems of indebtedness faced by many consumers. I thought those remarks were right on.”
Thus, debt settlement is a service that will continue to be sought after by consumers. However, your current rating system does not benefit consumers and in fact hurts them by benefitting the bad companies. Those bad companies are now indistinguishable from good companies that maintain standards, disclosures and good business practices.
I have attached for your review two documents regarding TASC member company standards and disclosures. The first, attached as Exhibit A, documents standards that each member commits to regarding selling and providing debt settlement services including but not limited to standards on marketing, service agreements, client service, negotiations, and record retention. These standards, among many other things, help accomplish the following:
• Marketing of services are fair and representative of the plan
• Consumers are screened for suitability for the plan
• Plans are fully and accurately explained
• Fees are fully and accurately explained
• Important disclosures are made
• Service agreements are in writing
• Service expectations are set
• Settlements are properly authorized
• Settlements are properly documented
The second document, attached as Exhibit B, documents disclosures that must be made to consumers enrolling in a debt settlement program and that must be a part of every service agreement. These disclosures include the following:
• No specific results can be predicted or guaranteed.
• The consumer needs to set aside savings for settlements.
• The debt settlement company does not make payments to creditors.
• Creditors may continue collection efforts on delinquent accounts including phone calls, letters, hiring collection agencies, filing lawsuits or even garnishing wages.
• Debt settlement companies cannot force a creditor to negotiate or settle a debt.
• Fees paid to a debt settlement company are not funds to be used for settlement.
• Creditors may not be contacted immediately.
• Not paying creditors may result in negative credit reporting, increased interest rates and penalties. Interest and charges may continue to accrue until a settlement is reached.
• Settlement savings may be considered a taxable benefit.
To help ensure that the above guidelines are in fact being followed by our members, TASC started two programs of self regulation – one is a secret shopping program performed by a third party company wherein the company calls each TASC member debt settlement company posing as a consumer. The shopper makes certain inquiries and evaluates the responses on a check list to gauge whether the company is abiding by TASC standards. The second program is also performed by a third party and involves an examination of each debt settlement company member’s website to ensure that the advertising and statements made on the website are consistent with TASC standards. Companies who do not pass the examinations satisfactorily are notified of the issues and are shopped again shortly afterwards. Continued failure to meet TASC standards will result in revocation of that company’s membership in TASC.
Companies also may be accredited through BSi Management Systems (BSI), a national and international company recognized for its ISO 9000 and other industrial and service related accreditation standards. Accreditation by BSI involves an onsite audit of policies and procedures and their implementation by the debt settlement company under strict standards and requirements. Currently, we estimate only approximately 10% of debt settlement companies are accredited.
We believe that the above controls significantly protect consumers and promote good business practices. However, the Dallas BBB office stated that such self regulation, standards, disclosures and accreditation mean nothing. The BBB position apparently is that the business model of debt settlement is indefensible and that no set of standards are acceptable despite the fact that a number of state regulators and legislators recognize and license the practice while others are working with the industry to come up with standards. TASC ardently disagrees with the BBB’s rejection of its standards and requests the BBB review its stance on the rating system for debt settlement companies.
Below I address some specific issues raised by the Dallas BBB office related to the “type of business” rating system:
1. Creditors don’t get paid.
The BBB stated that one reason it views debt settlement as a bad business model is because the model inherently results in the creditors not getting paid as agreed to by the consumer. The BBB felt that the creditors had a right to get paid and that debt settlement obstructed that right. Included in this general line of thought was that debt settlement companies tell consumers not to pay their debts or that the business model “educates” consumers not to pay their debts.
a. TASC members do not tell consumers not to pay their debts.
TASC standards prohibit a company from advising a consumer to stop paying his or her debts. Consumers who enroll in debt settlement plans cannot afford to pay their creditors and independently decide to stop paying their creditors. Debt settlement sets up a plan for these consumers to pay back their creditors as they can afford to do so.
b. Debt settlement does not cause the problem of consumers failing to pay their debts.
Consumers’ own personal circumstances and hardships result in them being unable to pay their debts. Without debt settlement, there would still be collection lawsuits and thousands of collection agencies pursuing debtors for debts gone unpaid. Debt settlement simply provides a solution to those debtors and helps consumers pay back what they can afford.
c. There are circumstances when it is appropriate for a consumer not to pay their debts.
Consumers under financial hardship who cannot afford to pay back their debts in full simply aggravate the problem when they attempt to continue making payments. They borrow against one credit card to pay back another. They drain retirement savings or take out home equity loans to make payment. These are not solutions, but rather short term band aids which simply delay the problem after which the consumer is often in worse shape than before. The Federal Reserve has also recently concluded that creditors are at fault in using unreasonable policies that make it more difficult for a consumer to pay back his debt. For instance, creditors without notice or good cause increase interest rates. They also apply payments to lower interest debt instead of the high interest debt so that more interest accrues, create short payment windows to increase the odds a debtor will pay late thus accruing late fees, and charge overlimit fees on interest and fees added by the creditor. These types of actions penalize debtors so much that they often cannot catch up to pay their debts.
d. The BBB’s position would mean that bankruptcy should not be a viable consumer option either.
Bankruptcy contemplates the consumer not paying back the creditor some or all of the debt owed. Thus, in principle, the BBB would be opposed to bankruptcy whether utilized by consumers or businesses. The BBB has no answer for a consumer that cannot afford to pay back his debts and for whom other options are not affordable or viable. The BBB refuses to concede that debt settlement is a viable option and thus concludes a consumer should simply struggle with collections and debt rather than seek debt settlement as a solution.
e. Creditors are accepting debt settlement as a means of repayment.
Some major creditors and collection agencies have accepted the practice of debt settlement and do have formal agreements in place with debt settlement companies. TASC sees these types of relationships growing in the future as creditors see the value in debt settlement services.
2. Advance Fees.
The BBB states that charging a fee prior to settling debt results in consumers being charged for work not done. It contends that the fees charged by settlement companies are excessive when compared to a Debt Management Program administered by non-profit credit counseling companies.
a. Debt settlement companies provide significant services prior to the debt being settled.
Debt settlement companies provide much service beyond simply settling the debt and incur significant costs prior to plan completion. The program involves significant service by the company before the consumer is ready to settle his or her debt. Recent comparisons between a credit counseling/debt management company and a debt settlement company with the same number of clients reveal that the debt settlement company has up to 10 times the staff. The reason for the larger staff is the great demand and need for customer service that debt settlement companies provide throughout the term of a client’s contract. The number of hours required to service, negotiate, and administer the accounts for the duration of the program far exceeds what is expected and provided by credit counseling agencies. Debt settlement companies do not simply set up a fixed payment plan at the beginning of the contract and perform a bill paying service for the creditors, as is the case with many debt management plans. Debt settlement companies communicate regularly and frequently regarding the client’s account. Much like a personal trainer provides assistance in building good habits, discipline and continued affirmation of basic principles necessary for success, debt settlement companies provide continued accountability to follow the savings plan and to stay on budget, regular follow up to encourage financial discipline, and support to meet the plan goals. Regular communication is also needed to track the account placement with changing collection agencies and changing balances. Debt settlement companies must engage in repeated negotiations and actively monitor the creditor’s activities with respect to their client’s accounts throughout the length of the program. All of these activities result in significantly greater time expended per account and a greater level of service performed per client, and as such, fees must be collected before settlements are made.
b. Most service providers including creditors effectively charge advance fees.
Creditors collect interest on the front end of a loan. For instance, if a creditor gives a 10 year loan, most of the fee (interest) for the loan will be paid over the first few years of the loan. A consumer cancelling such loan after a few years will still owe most of the balance of the loan and have paid most of the interest/fee even though the contract was for a 10 year period. A consumer in a debt management plan experiences the same “front load” of interest being paid to the creditor.
c. The “effective interest rate” of such fees is significantly lower than what creditors charge.
Credit card companies often charge over 30% per annum. Pay day lenders charge effective rates of hundreds of percent per annum. Debt settlement companies charge fees equivalent to less than 7% per annum. As an example of a debt settlement program charging a maximum 20% fee based on the enrolled debt for a 36 month program, over three years, the fee averages less than 7% per annum. Even when collected over the first 18 months of a 36 month program, approximately 13% is collected in the first 12 months, and the remainder collected over the next 6 months. That equates to an effective interest rate of just 13% during the first year, and just over 7% for the second year and nothing in the third year. In many instances these consumers are paying creditors over 20% or even over 30% interest per year. Even in a debt management plan, the creditors’ concession interest rate averages 13% per annum plus the fees paid to the provider. The fee charged by settlement companies is a huge break over what the creditors are demanding. Further, actual fees are usually even less than the above example as most companies charge a total fee of 15% or less for a three year program.
d. Some debt settlement companies charge fees at the time of settlement.
Some debt settlement charge fees where a significant portion of the fee is earned and collected at the time the debt is settled. Usually these fees are calculated as a percentage of the savings the consumer realizes. The fees, when totaled, usually are greater than those charged by a company using a flat fee model due to the fact the fees are collected later in the process.
3. Unfair risk to consumers/results cannot be guaranteed.
The BBB faults debt settlement companies for the fact that results cannot be guaranteed and concludes that, as a result, the service is an unfair risk to consumers.
a. Companies disclose risks to consumers.
TASC members disclose the risk to consumers and explain that the companies cannot force creditors to negotiate with them nor can they guarantee a certain amount of savings. Consumers weigh the potential benefits and risks and make informed decisions as to whether they wish to participate in a debt settlement plan. However, the BBB’s position is that a consumer should not have the right to make such an informed and calculated choice. Yet the BBB offers no alternative solution to consumers who cannot use other debt relief options.
b. Many other services do not guarantee results.
Doctors, lawyers, financial planners, stock brokers and many other professions do not guarantee the results of their services.
c. Results reached or unreached are often a product of the consumer.
Success in a debt settlement plan does depend heavily on the consumer’s own actions such as his or her ability to stay on the savings plan. Consumers who fail in a debt settlement plan do so for a number of reasons, often including fault of their own. The BBB appears to ignore this fact when rating debt settlement companies.
d. Other debt relief industries are not held to the same standards.
Credit counseling companies historically have an approximate success rate of 21-26% . The national rate of completion for confirmed Chapter 13 bankruptcy plans is only 33%. Debt settlement completion rates are reported to be higher – between 40-55% .
4. Debt settlement negatively affects a consumer’s credit score.
The BBB is concerned that consumer’s credit score is negatively affected by a debt settlement plan and has other general “risk to the consumer” concerns.
a. Companies disclose risks to consumers.
Similar to paragraph 3a above, many companies such as TASC members make explicit disclosures about debt settlement plans to consumers so that they fully understand the risks of the program. Again, the BBB has no solutions for consumers who cannot afford to repay their debt in full.
b. Consumers usually have bad credit already.
Consumers who are looking at debt settlement as an option typically have bad credit, or are about to have bad credit. If they are maintaining good credit by using one credit card to pay another, or if they are using some other temporary, short term stop gap, the consumer is usually about to take a hit to their credit score.
c. Studies show that consumers who complete debt settlement plans have improved credit.
One formal study and one survey reveal that consumers who successfully complete the debt settlement plan usually improve their credit scores. However, TASC members usually only disclose that the plan may negatively affect a consumer’s credit score to avoid any confusion as to whether the company offers credit repair.
In conclusion, TASC strongly believes the BBB is performing a disservice to consumers by failing to distinguish between those companies who consumers ought to avoid with those companies who provide good faith services using standards that protect consumers. The BBB’s position regarding the debt settlement business model essentially takes away a valuable and needed option for consumers who cannot otherwise afford to repay their debt. The BBB current rating system shrugs its shoulders at these consumers and offers them no assistance. TASC requests that the BBB review its policies regarding rating debt settlement companies so that consumers choosing to use debt settlement can identify those companies who should be avoided instead of enabling them to continue their practices. TASC offers to meet with the Council to discuss this further or provide more information for your review. I look forward to your response soon.
President of TASC
cc: Chris Burgess, Dallas BBB
Lee Stallings, Dallas BBB
1. Credit Counseling in Crisis: The Impact on Consumers of Funding Cuts, Higher Fees and Aggressive New Market Entrants, Consumer Federation of America and National Consumer Law Center, April 2003.
1.“Bankruptcy by the Numbers: Measuring Performance in Chapter 13” by Gordon Bermant and Ed Flynn, Executive Office for the U.S. Trustees.
1.TASC Position Paper, September 11, 2006.