The Federal Trade Commission has announced that it is mailing almost 7,000 redress checks to victims of a nationwide debt relief scam that promised to reduce consumers’ debt but that, instead, ultimately led customers to financial ruin and bankruptcy (“FTC Mails Redress Checks Totaling $1.2 Million to Debt Reduction Scam Victims,” FTC press release, Oct. 26, 2010).

Two companies, Homeland Financial Services and Prosper Financial Solutions, and two individuals, Dennis Connelly and Richard Wade Torkelson, were initially sued by the FTC in 2006 for deceptive and unfair practices in violation of the Federal Trade Commission Act. The defendants settled with the FTC in 2008 (“Debt-Negotiation Defendants Agree to Settle FTC Charges,” FTC press release, Sept. 25, 2008).

The defendants were charged with four major violations of the FTC Act:

• Falsely claiming that they could reduce consumers’ debt by up to 60 percent through a debt settlement program that involved customers ceasing to make payments on outstanding debts
• Failing to disclose the likelihood that consumers could be sued if they stopped paying their creditors as part of the debt relief program
• Failing to disclose that consumers’ outstanding account balances would grow during the debt relief program as a result of interest, interest rate increases, late fees, collection fees, penalties, and other charges
• Falsely claiming that negative information that appeared in consumers’ credit reports as a result of participating in the debt settlement program would be removed upon completion of the program

Consumers were charged upfront fees equal to about 5 percent of their unsecured debt in order to enroll in the debt reduction program.

The restitution fund, established by the settlement, represents the available assets of the defendants and is valued at $1.2 million. Although the amount of each check will vary based on the amount each customer paid the defendants, the average refund check will be $180.

Those who receive redress checks are required to cash them on or before Dec. 24, 2010. Checks are being mailed by Gilardi & Co., the redress claims administrator, and can be cashed directly by the recipients.

For more information, consumers are asked to visit www.ftc.gov/refunds or call Gilardi & Co. at (877) 987-3923.

Claims of fraudulent, deceptive, or unfair business practices can be filed online in English or Spanish with the FTC Complaint Assistant or by calling (877) FTC-HELP (382-4357).

Read the FTC’s court filings against the defendants:
Final order for Financial Liberty Services, Homeland Financial Services, National Support Services, and United Debt Recovery; FTC v. Connelly et al. Filed September 15, 2008.

Settlement agreement and final order for Richard Wade Torkelson, FTC v. Connelly et al. Filed September 21, 2007.

Settlement agreement and final order for Dennis Connelly, FTC v. Connelly et al. Filed September 21, 2007.

Settlement agreement and final order for Prosper Financial Solutions, FTC v. Connelly et al. Filed February 23, 2007.

First amended complaint for injunctive and other equitable relief, FTC v. Connelly et al. Filed November 27, 2006.

Temporary restraining order with asset freeze and other equitable relief, FTC v. Connelly et al. Filed August 11, 2006.

Complaint for injunctive and other equitable relief, FTC v. Connelly et al. Filed August 3, 2006.

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A federal judge has halted the operations of a national tax debt relief firm that allegedly scammed consumers out of more than $60 million by falsely claiming it could reduce people’s tax debts.

The decision by a U.S. District Court in Illinois to shut down American Tax Relief LLC came at the request of the Federal Trade Commission, which filed a complaint against the company for deceptive marketing practices, including false claims that agents of the company could help consumers take advantage of a “one-time opportunity” to qualify for a rare, unadvertised tax debt relief program offered by the Internal Revenue Service that could “settle the debt once and for all.”

According to the FTC complaint, American Tax Relief charged consumers upfront fees ranging from about $3,200 to $25,000 for purported tax debt help that the company’s TV, radio, and Internet ads promised could settle customers’ delinquent federal and state tax debts for a fraction of what was owed.

The company also advertised that it could provide tax debt relief by removing tax liens while halting wage garnishments, bank and tax levies, property seizures, and “unbearable monthly payments,” even though it had no authority or power to do so.

Watch one of American Tax Relief’s TV ads.

Company Lied to Customers About Its Authority to Provide Tax Debt Help

Consumers drawn in by American Tax Relief ads called a toll-free number for “free consultations,” which were conducted by commission-based salespeople at the company referring to themselves as “tax consultants.” On the basis of these consultations, virtually all consumers were told that they “qualified” for one or more IRS tax debt relief programs when, in fact, almost none did.

Many consumers were told they qualified for an “offer in compromise,” the only IRS program that allows people to have a portion of their tax debt forgiven and settle their tax debts for less than the full amount of back taxes owed. However, this tax debt settlement program is available only in limited circumstances and only after other payment options have been exhausted and a person’s ability to pay has been fully reviewed by the IRS.

Other consumers were told they qualified for a “penalty abatement,” which agents of American Tax Relief claimed would eliminate accumulated penalties and interest from late tax payments, even though penalty abatements are considered by the IRS only in very limited “reasonable cause” circumstances, such as death, serious injury, or natural disaster.

In reality, most people who paid thousands of dollars to American Tax Relief for tax debt relief services qualified only for an installment payment plan with the IRS, which still requires full payment of all taxes owed and which most consumers can easily arrange themselves directly with the IRS without having to go through a third party that charges tax debt settlement or debt negotiation fees.

Tax Debt Relief Scam Continued Even After Feds Raided Headquarters

The FTC complaint names as defendants American Tax Relief LLC; the company’s owners, Alexander Seung Hahn and Joo Hyun Park; and Park’s parents, Young Soon Park and Il Kon Park. The complaint is seeking restitution for victims of the tax debt settlement scam, which the FTC says continued even after federal agents executed a criminal search warrant on the operation’s Beverly Hills property in April.

At the time, authorities seized money from the defendants’ bank accounts, took possession of a Ferrari belonging to one of the owners, and placed liens on two residences, including a $3.4 million house. The FTC noted that one of the owners was at that point also leasing another six cars — a Rolls Royce, a Bentley, two Porsches, and two Mercedes-Benzes.

In late September, a federal judge in Chicago entered a temporary restraining order against American Tax Relief that prohibited deceptive claims, froze the defendants’ assets, and appointed a receiver to manage the company.

“We’ve made it a top priority to go after scammers who try to exploit the financial hardship of others,” said David C. Vladeck, director of the FTC’s Bureau of Consumer Protection, in an agency statement announcing the federal judge’s decision.

“For people having a tough time paying their taxes, the last thing they need is to lose more money to a fraud,” Vladeck said (“At FTC’s Request, Court Halts Tax Relief Scam That Collected More Than $60 million,” FTC press release, Oct. 6, 2010).

Ironically, ATR’s license to conduct business in California was suspended by the state last year because the company failed to pay its own taxes.

Read the FTC’s court filings against American Tax Relief:
Complaint for permanent injunction and other equitable relief, FTC v. American Tax Relief et al. Filed September 24, 2010.

Temporary restraining order with asset freeze and other equitable relief, FTC v. American Tax Relief et al. Filed September 24, 2010.

FTC memorandum in support of motion for temporary restraining order, FTC v. American Tax Relief et al. Filed September 24, 2010.

Expert declaration from Arthur J. (Kip) Dellinger, CPA, in re. FTC v. American Tax Relief et al. Submitted September 2, 2010.

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Florida Attorney General Bill McCollum announced that his office has been awarded a $4.3 million judgment against what is perhaps the state’s largest home mortgage debt relief operation (“Attorney General’s Office Receives Multimillion-Dollar Judgment From Loan Modification Operation,” Florida Attorney General’s Office press release, Oct. 15, 2010).

The judgment resolves a lawsuit brought by McCollum’s office last March against Wineberg, Lopez, & Rodriguez, and its owners, William Rodriguez Jr. and Freddie Lopez Sr.

McCollum sued the company and its owners for charging consumers upfront fees for home mortgage modification services, a practice that violates Florida’s Foreclosure Fraud Prevention Act. Hundreds of consumers seeking mortgage debt relief reportedly paid upwards of $1,995 each for mortgage loan modifications that were never completed.

The judgment is comprised of a civil penalty of more than $3 million, a consumer restitution fund of more than $1 million, and nearly $140,000 in compensation to the Attorney General’s office for litigation costs. The defendants were additionally issued an order requiring them to follow all applicable Florida laws.

Rodriguez was also a defendant in an earlier complaint filed by McCollum’s office against two debt relief companies, National Payment Modification Company and The Bostonian Group, which were similarly sued for charging consumers upfront fees for home loan modification services.

The earlier lawsuit was resolved in August with a judgment against Rodriguez for close to $500,000 in civil penalties, restitution, and legal fees. In a news release posted on the Attorney General’s website, homeowners are cautioned to try and negotiate with their home loan lender before seeking mortgage debt relief services or foreclosure help from a third party.

For more information, Florida homeowners can visit www.myfloridalegal.com/mortgagefraud.

Florida consumers who believe they have been victims of improper debt relief, debt help, or loan modification practices are asked to go to the Attorney General’s website at www.myfloridalegal.com or call the state’s toll-free fraud hotline at (866) 966-7226 in order to file a complaint.

Read the full text of the Florida Foreclosure Fraud Prevention Act:
Foreclosure Fraud Prevention Act. Florida Statute 501.1377.

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The owner of several New Jersey debt relief companies that assured homeowners they could avoid foreclosure with the help of the companies’ mortgage modification services has settled with the state after the attorney general’s office accused him of fraud.

The businesses owned by Stephen Pasch — New Day Financial Services Inc., American Credit Repair and Settlement, NDROA Inc., and Paramount Debt Settlement USA — are alleged to have collected upfront fees from homeowners after promising them mortgage loan modifications, a practice that is illegal under state law, and then failed to provide any mortgage debt relief, often leaving the customers in worse financial shape, according to Attorney General Paula Dow’s lawsuit.

Under terms of the settlement agreement, Pasch will pay the state an $805,000 civil settlement, be prohibited from applying for a state banking license for 10 years, and be banned permanently from conducting any debt relief business in New Jersey related to loan modification, debt adjustment, or credit repair (“Mortgage Rescue Firm Owner Will Pay $805,000 to New Jersey in Settlement,” Bloomberg, Oct. 18, 2010).

Ejike N. Uzor, a licensed attorney and co-defendant in the lawsuit, settled claims against two of his companies — Uzor Financial Solutions and Ejike N. Uzor and Associates — for $25,000.

The two men together were also alleged to have fraudulently used a purported nonprofit organization called the American Financial Advocacy Council as part of their scam.

The settlement agreement resolves the charges brought by Dow that Pasch and his companies misled consumers through false advertising and deceptive solicitations in violation of New Jersey’s Consumer Fraud Act, and engaged in debt adjustment activity without a license in violation of the state’s Debt Adjustment and Credit Counseling Act and the federal Credit Repair Organizations Act.

“This case is another example of our commitment to fighting deceptive practices in the mortgage business and related industries, such as loan modification, and to holding accountable those who mislead vulnerable homeowners,” Dow said in a statement announcing the settlement (“Attorney General Announces Settlement of Fraud Case With Mortgage Rescue Firms,” New Jersey Attorney General’s Office press release, Oct. 18, 2010).

“Simply put, these companies exploited people who looked to them for hope and paid them for help. This type of activity is reprehensible anytime, but particularly during tough economic times,” Dow said.

The defendants’ civil settlements will be used to provide restitution to consumers for any upfront fees that were paid.

The New Jersey Division of Consumer Affairs has contacted homeowners who filed complaints about Pasch and Uzor to provide information about the restitution fund and how claims will be processed.

Read the settlement agreement:
Consent Judgment, N.J. Attorney General v. New Day Financial Solutions et al.

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A California bank settled with federal banking regulators last week and will pay over $3 million in restitution, penalties, and other fees for deceptively marketing debit and credit card programs that promised debt relief to consumers.

Monterey County Bank reached an agreement with the Federal Deposit Insurance Corp. for failing to “disclose information necessary for consumers to make an informed decision” regarding its debit card and balance-transfer credit card programs, including failing to “adequately disclose all fees and charges.”

The programs were marketed through e-mail and online advertisements to debt-laden consumers with defaulted accounts as opportunities “to pay down old debts and obtain credit cards,” according to the FDIC’s 21-page consent order (“FDIC Announces Settlement With Monterey County Bank for Deceptive Practices,” FDIC press release, Oct. 5, 2010).

Under terms of the settlement, MCB will pay $2 million in restitution to 15,500 balance transfer customers in the form of credit or cash refunds and $250,000 in cash restitution to customers of its debit card program. The bank will also pay a civil penalty of $500,000 and donate $30,000 to help fund consumer financial education and counseling.

MCB has five branches in Monterey, Pacific Grove, Carmel-by-the-Sea, Salinas, and Carmel Rancho. According to regulatory findings, the bank has 54 employees and $292 million in assets.

Read the FDIC order:
FDIC Consent Order, Order for Restitution, and Order to Pay Civil Money Penalty, In Re. Monterey County Bank

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There were 1,165,172 bankruptcy filings by U.S. consumers during the first nine months of 2010, an 11-percent increase from the 1,046,449 consumer filings during the same period a year ago, according to the American Bankruptcy Institute.

The ABI, which relied on data from the National Bankruptcy Research Center, said the total number of consumer bankruptcies from Jan. 1 to Sept. 30 represents the highest three-quarter total since 2005, when Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in order to try and mitigate the flow of personal bankruptcy filings.

“While the 2005 bankruptcy overhaul law aimed to reduce filings, overall consumer debt and continued financial stress have led to consumer bankruptcies climbing back to pre-BAPCPA levels,” said ABI Executive Director Samuel J. Gerdano (“Consumer Bankruptcy Filings Up 11 Percent Through Nine Months of 2010,” ABI press release, Oct. 4, 2010).

Figures showed that consumers seeking debt relief through bankruptcy submitted 130,329 filings in September, 4.4 percent more than the 124,790 filings recorded in September 2009, and 3.3 percent more than the 127,028 filings recorded in August.

In south Florida, one of the regions hit hardest by the recession, the rate at which consumers filed for bankruptcy in September surged from last year, although the month’s numbers were down 1.6 percent from August.

In Miami-Dade, Broward, and Palm Beach counties, consumer bankruptcies were up an average of 49 percent from September 2009.

Palm Beach County suffered the least, with only a 13-percent increase, followed by Broward County, at 33 percent. But in Miami-Dade County, personal bankruptcy filings rose a staggering 74 percent year-over-year (“S. Fla. Bankruptcies Up 49% in September,” South Florida Business Journal, Oct. 5, 2010).

Gerdano said the poor economy could make things even worse for consumers the last three months of the year, and estimated that total consumer bankruptcy filings would increase by over 430,000, or 37 percent, from current numbers, as even more recession-stung consumers seek debt relief during the holiday season.

“We expect that there will be nearly 1.6 million new bankruptcy filings by year-end,” Gerdano said.

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Homeowners seeking mortgage debt relief through Bank of America are being left unaided in spectacular numbers, receiving mortgage modifications at only a fraction of the rate these loan modifications are being granted by other large mortgage servicers, according to recently released government data (“Bank of America Stands Out for Poor HAMP Performance,“ The Huffington Post, Sept. 27, 2010).

The Obama administration’s Home Affordable Modification Program was originally conceived to help a projected 3 million to 4 million homeowners modify the terms of their mortgages so they might avoid foreclosure and hold on to their homes in tough economic times.

HAMP gives mortgage servicers $1,000 incentive payments to provide eligible homeowners with a five-year mortgage loan modification, called a permanent modification, after a three-month trial loan modification.

The program has underperformed generally, enrolling only a fraction of the homeowners it was designed to handle and offering permanent loan modifications to only a small percentage of those.

But at Bank of America, the level of underperformance has been particularly woeful.

The bank, says Alan White, a Valparaiso University Law School professor, has “mastered the art of false hopes.”

“[Bank of America] has converted only 26 percent of trial modifications to permanent ones, while servicers as a whole have achieved a rate of over 50 percent,” White noted.

Meanwhile, more than half of the bank’s trial loan modifications are over six months old, “despite the fact that they are supposed to convert to permanent or be cancelled after three months,” he continued.

And even though home loan servicers are offering their own mortgage modifications to homeowners who either failed to qualify for HAMP or had their trial HAMP modifications cancelled, “Bank of America seems to be stubbornly refusing to go along with the program,” White said.

Overall, among the pool of delinquent home loans being administrated by the nation’s eight largest home mortgage servicers, 44.5 percent of homeowners whose trial HAMP mortgage modifications were cancelled ended up receiving alternative modifications from the servicers. At Bank of America, on the other hand, customers in the same situation received alternative loan modifications just 24 percent of the time.

For homeowners who were denied trial HAMP mortgage modifications from the start, the eight largest servicers, collectively, offered their own alternative modifications to 31.3 percent of those homeowners. At Bank of America, that number was only 11 percent.

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