QUESTION
We allow our loan applicants to pay for certain services by credit card. One service that we do not offer is credit relief. But our loan officers send applicants with poor credit to a credit relief company. The credit relief company repairs their credit, which makes it possible for us to get them a mortgage on improved terms. Most of the time, their credit problems involve credit card debt.
Recently, an attorney for one of our loan applicants contacted us about the applicant being scammed by the credit relief company. He's threatening to contact law enforcement, the state banking department, the FTC, and the CFPB. For what it's worth, I had told the CEO not to use credit relief companies, but he ignored me.
I know you have written about all kinds of scams over the years. I want to show the CEO your feedback. Maybe he will change his mind about using a credit relief company.
What are some dangers of using a credit relief company?
ANSWER
Yes, indeed, I have written extensively about credit relief companies. They pose a threat to the banks and nonbanks in many ways. Your scenario, unfortunately, happens all the time. The Federal Trade Commission (FTC) is very aggressive in going after these companies.
If your CEO calls me, I will tell him to knock it off! He's playing with fire. Whatever his reasons (which I assume are based on profit incentives), the risk is much too high to justify such a tactic to originate mortgage loans.
There is a constant stream of administrative and litigious actions against credit card relief scams. I'll pick just one bad actor out of the barrel of thousands of bad actors that have been caught in the FTC's net. But other federal and state agencies are continually monitoring and prosecuting these scammers. If your company is referring clients to them, you could come in for rather unpleasant special treatment by these agencies.
Let's take a brief look at the FTC's action against a credit card debt relief scheme operated by Sean Austin, John Steven Huffman, and John Preston Thompson and their affiliated companies that allegedly took millions from people by falsely promising to eliminate or substantially reduce their credit card debt.
In the Complaint, Federal Trade Commission v Acro Services LLC, et al,[i] the FTC alleged that, since 2019, Austin, Huffman, and Thompson operated a network of companies incorporated in Tennessee, Nevada, New Mexico, and Wyoming that worked together as a common enterprise to support their deceptive credit card debt relief scheme.[ii] Their companies allegedly operated under multiple names, such as ACRO Services, American Consumer Rights Organization, Consumer Protection Resources, Reliance Solutions, Thacker & Associates, and Tri Star Consumer Group.
The deceptive and unlawful tactics allegedly included:[iii]
Deceptive Telemarketing
The operators violated the Telemarketing Sales Rule[iv] by using telemarketers to call consumers and pitch their deceptive scheme. The telemarketers often falsely claimed to be affiliated with a particular credit card association, bank, or credit reporting agency and promised they could greatly reduce or eliminate consumers' credit card debt in approximately 12-18 months.
Making Phony
Debt Relief Promises
In marketing their services, the scheme's operators claimed to use several bogus methods to reduce or eliminate consumers' credit card debt. For example, they falsely claimed that consumers may qualify for a federal debt relief program or that a consumer doesn't owe the debt because it hasn't been "validated."
Charging Deceptive
Upfront Fees
Consumers who agreed to sign up for the debt relief program were charged an upfront enrollment fee of thousands of dollars depending on a consumer's available credit. They were falsely told it is part of the debt that will be eliminated as part of the program. Consumers were also charged monthly fees ranging from $20-$35 for "credit monitoring" services.
To compound the misery, consumers who signed up for the defendants' services were allegedly told to stop making payments to their credit card companies and communicating with those companies. Consumers, however, were never informed that as a result of such actions, they could be sued for failing to pay their credit card debt, may accrue even more debt, and could damage their credit scores, which could also harm their ability to get credit in the future, the FTC alleged. Nice guys!
They wound up being temporarily shut down, and their assets were frozen.[v] QED
Consumers often do not know how to spot a debt relief scam. Two signs of this fraud are (1) the consumer gets an unsolicited call from a scammer helping to eliminate their debt, and (2) the scammer asks for upfront fees. Another trick of this nasty scam is where the scammer tells the consumer to cut off communication with creditors. When a debt settlement company says the consumer must cut off all contact with the creditors and doesn’t disclose potential consequences such as collection actions or damage to the consumer’s credit, that’s a red flag of a debt settlement scam.
Other ornery stratagems include where the scammer refuses to send the consumer information about the debt relief company unless the consumer first provides financial information (such as credit card account numbers and balances, and offering guarantees about lowering or erasing the debit.
I do not want to paint all debt relief companies with too broad a brush. Legitimate debt relief companies can help consumers to avoid bankruptcy and get their credit back on track. Most debt relief companies are debt settlement companies whose ultimate goal is supposedly to help the consumer settle their debt, sometimes for less than what they owe. But their services are never free, and often costly, with some companies charging significant fees for their help.
Debt settlement companies may tell the consumer to stop paying debts during the negotiation process with creditors to enable them to expedite the settlement process; however, they do not tell the consumer to cease contact with the creditors. The idea of negotiating is to convince the creditors that the consumer cannot repay the borrowed amount. Through the negotiation, leading to a debt management plan, the goal is for the creditor to settle for less rather than getting nothing by pushing the debtor into bankruptcy.
If your CEO wants to continue to use a credit relief company, he should insist that the company comply with applicable FTC guidelines. According to the FTC, upfront, a debt settlement company must disclose the fees, conditions, and terms of service; how long it will take to achieve results; the amount the consumer must save in a dedicated savings account before the company makes an offer to each creditor on the consumer’s behalf; money in a dedicated account is the consumer’s to withdraw at any time without penalty; and the account administrator is not affiliated with the debt settlement provider and doesn’t get referral fees
Based on your question, your company is currently at legal and regulatory risk. I have only grazed the surface. Careful planning and appropriate due diligence must be done. Until that undertaking is conducted, resulting in legally sound guidelines, your loan officers should stop referring applicants to any credit relief company.
Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
[i] Federal
Trade Commission v Acro Services LLC, et al, US District Court, Middle
District of Tennessee, 3:22-cv-00895, November 7, 2022
[ii]
See FTC Halts Debt Relief Scheme that Bilked Millions from Consumers While
Leaving Many Deeper in Debt, Release, November 30, 2022, Federal Trade
Commission,
[iii]
Idem
[iv] The
Federal Trade Commission (FTC) enforces the Telemarketing Sales Rule.
[v] Temporary
Restraining Order, Federal Trade Commission v Acro Services, et al, US District
Court, Middle District of Tennessee, 3:22-cv-00895, November 21, 2022
