Empowered by newly enacted regulations, the Federal Trade Commission (FTC) is investigating debt settlement companies for suspected illegal practices. The investigations follow the agency’s Operation Clean Sweep in 2009 that worked with 24 state agencies to prosecute companies for violations of the Credit Repair Organizations Act. In addition, the new FTC regulations also reflect many state criminal laws that were recently enacted.
Already, charges have been filed against a number of different debt settlement services by state and federal authorities. Defendants face criminal and civil prosecution, including possible restitution to the victims. A few of the recent cases demonstrate the scope and magnitude of the enforcement effort.
Debt Settlement Companies Flouting Regulations
US v. Mortgage Funding Inc., Debt Remedy Partners Inc., and LowerMyDebts.com LLC, along with individuals David Mahler, Jamen Lachs and John Incandela Jr.
The defendants were alleged to have falsely claimed that they could significantly lower the mortgage payments of clients desperate to save their homes. Evidence was presented that the company affiliated itself with several large mortgage lenders when, in fact, there was no affiliation. In exchange for an upfront fee, the defendants guaranteed to help homeowners – even clients who had previously been denied re-financing or had received a foreclosure notice. The company even claimed to have a 100% success rate in exchange for their upfront fee.
Defendants charged clients an average of $2,600 and asked for half of that amount in advance. Clients were promised that any fees paid would be refunded if they were unsuccessful in renegotiating mortgage payments with the lien holder(s). During the supposed renegotiation process, clients were instructed to refrain from contacting or speaking to the creditor and to stop making mortgage payments.
However, the charges actually filed were for violations of the FTC’s Telemarketing Sales Rule for contacting consumers who were listed on the National Do Not Call Registry. Because defendants’ advertising was placed before the effective date of new regulations, the company could not be charged under rules prohibiting upfront fees.
A Credit Card Debt Settlement Front
US v. Debt.com Marketing, LLC; Media Choice, LLC; 800 Credit Card Debt, LLC; and Stephen Todd Cook
The FTC has settled charges filed against defendants operating under the names 800 Credit Card Debt and Debt.com alleging deceptive business practices in violation of the FTC Act and the Telemarketing Sales Rule. Defendants claimed to reduce or eliminate clients’ debts and end phone calls from debt collectors. The company ran multi-media advertising campaigns that featured people posing as its customers and implied a public, non-commercial basis for the programs by making statements such as, “The following is a public announcement…”
In fact, the complaint alleges, defendants didn’t supply the debt settlement services advertised and could not substantiate their claims of reducing or eliminating debt. The defendants were alleged to have only sold the leads generated by their advertising to other debt settlement companies, or to lead brokers who then re-sold them. In reality, the defendants had no expertise in debt settlement services and, in most cases, did not even know the identity of debt settlement companies that ultimately responded to the consumer’s inquiry.
The settlement agreement imposed a $28.2 million judgment against the defendants, which will be suspended upon surrender of any funds in all corporate bank accounts, estimated at $500,000.
A Debt Settlement Service Making False Claims
US v. American Tax Relief LLC
The defendants were alleged to have defrauded consumers out of tens of millions of dollars by making false claims that complete tax relief would be achieved using their debt settlement programs. In multi-media advertising campaigns, according to the FTC complaint, the defendant claimed it could settle clients’ delinquent taxes, both federal and state, for a small percentage of the amount owed, and that tax liens, garnishment of wages, bank or tax levies, and seizures of property would stop.
The FTC has seized money and a Ferrari sports car from the defendant and a company owner. It has also placed liens on two homes, including an estate valued at over three million dollars. The company owners were also discovered to be leasing other expensive cars including a Bentley, Rolls Royce, two Mercedes, and two Porsches according to FTC documents.
These are just a few examples of the increased effort the FTC is putting into protecting consumers from unscrupulous companies that prey on those in debt. Despite the recent crackdowns some debt settlement companies are still finding loopholes in the FTC debt relief rules, and using them to their own advantage. Consumers should do their research and be aware of which companies have been flagged by the FTC and what to watch out for so they aren’t taken in by scammers.