Debt relief and debt collection companies could be part of six non-banking areas subject to the supervision of the Consumer Financial Protection Bureau, the new federal consumer-finance agency, according to an announcement by the agency last week.

The announcement, and subsequent call for public comment, was the first step in the agency’s effort to police non-banking firms that have largely avoided scrutiny by the federal government. The agency was set up by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 to improve accountability and transparency in the financial system and protect consumers from abusive financial services practices, among other protections.

The number of debt relief and debt collection companies have grown in recent years as financially troubled consumers look for debt help and firms buy up consumer debt for pennies on the dollar and then try to collect the debts at face value. Both debt relief and debt collection firms have come under fire for deceptive or fraudulent business practices that, in the case of debt relief firms, often leave consumers worse off financially.

Elizabeth Warren, a special adviser to President Barack Obama who is helping set up the agency, said that “companies providing consumer-financial services have grown significantly [in recent years] and they have not been subject to the same oversight” as banks. “Consumers deserve the peace of mind that financial companies, banks and nonbanks, are following the rules” (“Agency Outlines Role,” The Wall Street Journal, June 24, 2011).

Not surprisingly, support for the new agency is split down party lines. Pro-business Republicans are fighting the establishment and funding of the agency and vowing to block anyone that President Obama nominates to run it. Pro-consumer Democrats are fighting to help Warren get the agency up and running, declaring the call for public comment an example of the open and transparent process consumers can expect from the agency.

The Dodd-Frank law gives the agency the authority to regulate practically any company engaging in consumer finance, including large banks, nonbank financial firms, debt relief companies, debt collection companies, payday lenders, mortgage brokers, and companies that originate and service student loans.

According to Scott Talbot, senior vice president of government affairs at the Financial Services Roundtable, a business lobbying group, the consumer protection agency could actually help businesses. “If done properly, these six areas could benefit from increased transparency and uniform standards,” Talbot said.

Further Reading

Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

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Tax debt settlement services have sprung up everywhere as more and more consumers seek tax debt help. Caught by the Internal Revenue Service for unpaid taxes, unlucky tax evaders are often left in desperate need for debt relief, facing thousands of dollars in interest and penalties on top of their original tax debt.

But maybe the IRS should be keeping its watchful eye on its own house. As it turns out, an audit by the agency’s government watchdog found an additional 133 IRS employees who weren’t in compliance with tax laws and may not have filed tax returns.

The Treasury Inspector General for Tax Administration released its findings last Tuesday in a report softly titled “Employees Are Provided Sufficient Information on Their Tax Responsibilities, but Additional Actions Are Needed to Detect All Noncompliant Employees.”

The audit found that since 2004, the IRS has identified more than 8,000 potential noncompliance cases each year within the agency, and that, after further review, about 3,200 IRS employees annually are actually noncompliant. The IRS employs about 107,000 people.

IRS Decisions on Reducing Internal Oversight and Debt Collection Flawed

The annual noncompliance numbers dwarf the 133 employees found in this case, but the difference is that these 133 employees weren’t being watched. They weren’t even in the agency’s computer systems. Instead, they were accidentally found during the audit.

The IRS has an internal program in place to monitor the tax compliance of employees, but the audit concluded that the system was not robust enough to detect all noncompliance cases. The conclusion isn’t surprising since the agency itself decided to significantly reduce the focus of the program because of an internal study that showed IRS employees were more compliant that the general public (“IRS Having Trouble Keeping its Own Employees Compliant,” InsideArm.com, June 23, 2011).

The IRS also decided in 2009 to end its private debt collection program, which contracted with two outside firms to help collect back taxes for the government. The agency said at the time that it could perform debt collection functions better and more efficiently than the outside firms, but a 2010 report by the Government Accountability Office found that the agency used flawed methodology when it decided to stop outsourcing delinquent tax collection work.

The Inspector General audit was performed after legislation was introduced that called for firing 97,000 federal employees who were in default on their taxes. The IRS has agreed to review the 133 outstanding cases but would not agree to implement additional measures in order to locate missed cases. An IRS spokeswoman said that half of the 133 cases concerned employees who filed late returns and who were owed refunds by the government.

Further Reading

Treasury Inspector General for Tax Administration report, “Employees Are Provided Sufficient Information on Their Tax Responsibilities, but Additional Actions Are Needed to Detect All Noncompliant Employees,” May 5, 2011.

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Third party debt collection firms operating in West Virginia can be sued by consumers under the state’s Consumer Credit and Protection Act (WVCCPA), according to a ruling by the state’s Supreme Court of Appeals.

The WVCCPA allows for greater punitive damages against violators than the federal Fair Debt Collection Practices Act (FDCPA). The court’s decision will leave third part debt collection companies more vulnerable to lawsuits, increase firms’ costs and risk of operating in the state, and negatively impact consumer lending, according to the attorney for Pennsylvania-based NCB Management Services Inc., a third party debt collection firm and the defendant in a lawsuit by a West Virginia consumer that resulted in the court’s decision (“Court Rules Debtors Can Sue Collectors Under More Onerous State Laws,” InsideARM, June 22, 2011).

Linda Barr sued NCB Management and HSBC Bank of Nevada for allegedly violating the state act by intentionally inflicting emotional stress on her. Over a two month period, representatives from NCB Management allegedly used repeated phone calls to “annoy, abuse, oppress, and threaten” Barr in an attempt to collect $7,900 in unpaid debt.

When NCB Management asked District Court Judge John Preston Bailey to dismiss the lawsuit on grounds that the WVCCPA only gives consumers the right to sue creditors, Bailey, citing conflicting language in the statute, asked the state Supreme Court to decide.

The Supreme Court decided on June 14 that, since the term creditor hadn’t been clearly defined in the statute, the intent of the legislatures that drafted and passed the law included debt collector as part of the definition of creditor, whether the agent is acting directly on behalf of a creditor or is a third party owner of the debt.

“We are happy that the court recognized this interpretation of the statute, which is consistent with way everyone always has interpreted the law and as the intent of the drafters back in the 1970s,” said Barr’s attorney Anthony Majestro. “We don’t believe anything will change. There should be no additional burden on the [debt collection] industry that should have been following this law and the parallel provisions of the FDCPA.”

The Supreme Court sent the case back to Bailey. Majestro resubmitted an expanded complaint on June 15.

Read the Supreme Court’s decision:
The Supreme Court of Appeals of West Virginia, Certified Question Answered: Linda Barr v. NCB Management Services Inc. Filed June 14, 2011.

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A federal court last month banned three men and their debt relief business from offering mortgage loan modification services and ordered them to pay nearly $19 million in consumer refunds under terms of a settlement agreement with the Federal Trade Commission.

Florida-based First Universal Lending and owners Sean Zausner, David Zausner, and David J. Feingold, were sued by the FTC in November 2009 as part of Project Stolen Hope, an ongoing federal and state crackdown on debt relief firms that offer fraudulent loan modification and mortgage foreclosure rescue services.

In its lawsuit, the FTC alleged that First Universal falsely promised consumers that it would negotiate loan modifications on their behalf in exchange for advance fees up to $7,000. The firm was also accused of telling consumers that it couldn’t negotiate with lenders unless consumers stopped making mortgage payments. However, once consumers paid advance fees and stopped making mortgage payments, First Universal allegedly did little or nothing to help consumers, often leaving them in worse financial shape (“FTC Stops Bogus Mortgage Loan Modification Business,” FTC press release, June 21, 2011).

The court halted the defendants’ operation, froze their assets, and ordered them to take down the company’s websites and disable its computers. The settlement agreement imposes a judgment of over $18.8 million and bans the defendants from the mortgage debt relief business. The defendants are also permanently prohibited from misrepresenting material facts about goods and services; violating the federal Telemarketing Sales Rule; selling or using consumers’ personal information; failing to properly dispose of customer information; and collecting payments from customers.

The FTC encourages people to report mortgage loan modification, foreclosure rescue, and other debt relief scams by calling 1-877-FTC-HELP or by filing a complaint online at www.FTCComplaintAssistant.gov.

Read the FTC’s settlement agreement with First Universal:
Stipulated Permanent Injunction and Final Order: Federal Trade Commission v. First Universal Lending Inc., et al. Filed May 25, 2011.

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The Arkansas Attorney General filed a lawsuit Monday against a debt collection agency after it refused to cooperate fully with two Civil Investigative Demands concerning the agency’s payday loan collection practices.

Attorney General Dustin McDaniel’s lawsuit against Kansas-based National Credit Adjusters LLC asks the Pulaski County Circuit Court to compel the debt collection agency to respond fully to the Attorney General’s investigative requests. The requests are seeking to determine the extent to which the agency is attempting to collect old debts on payday loans, which are illegal in Arkansas (“McDaniel Sues Collection Agency Over Data on Payday Loan Debt Collections,” Office of the Attorney General of Arkansas press release, June 20, 2011).

According to the lawsuit, National Credit Adjusters buys the right to collect delinquent consumer debts from original creditors and third-party debt owners. The agency claims to own accounts purchased from several payday lenders, including Ace Cash Express, Advance America, BMG Accounts, Cash Central, Cash Net, Check into Cash, Check N’ Go, FNS Payday Loans, Global Payday, Internet Payday, Internet Payday Loans, Rapid Cash for You, and Sonic Cash Payday Loans.

The Attorney General’s lawsuit maintains that debts from these payday lenders are not enforceable under Arkansas law and that collecting those debts is unlawful since the loans themselves were illegal to begin with.

“We have successfully stopped usurious storefront payday lending in this state, and to date we have also shut down more than 30 online payday lenders, yet the ripple effects from this illegal business continue to harm Arkansas consumers,” McDaniel said in a statement.

“Our office will continue its effort to prohibit activities related to payday lending, whether it’s by pursuing online payday lenders or a company like this, which is trying to collect on debts that were illegal in the first place.”

McDaniel’s lawsuit also asks the court to prohibit National Credit Adjusters from collecting debts in Arkansas until it fully complies with the investigative demands, answers all questions, and provides all documentary evidence.

Arkansas consumers who are having problems with debt collection companies that are trying to collect on a payday loan are encouraged to file a complaint by calling the Attorney General’s Consumer Hotline at (501) 682-2341 or (800) 482-8982 or by visiting www.arkansasag.gov/contact_us_consumer_complaint_form.html.

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Debt collection companies are paying close attention to the newly-created Consumer Financial Protection Bureau (CFPB) because the debt relief and debt collection industries are expected to be targets of the bureau when it officially launches July 21.

The CFPB, which has been under constant attack from Republican lawmakers for everything from the way it’s funded to the choice of consumer advocate Elizabeth Warren as its head, is tasked with cleaning up consumer abuses, enforcing laws over financial institutions, and educating consumers.

“I can promise you that the debt collection agencies and industry are very, very nervous right now,” said Andrew Stoltmann, a Chicago-based securities attorney.

“We, of course, don’t know what will happen in July … and what the bureau will do to curb some of the abuses in the last 10 to 15 years,” Stoltmann said. “But [debt collection is] going to be one of the areas that they attack once the bureau comes into existence.”

Complaints against debt collection companies have exploded in recent years. In Illinois, the state attorney general’s office said that consumer-debt complaints ranked first out of all consumer complaints in 2010. The office said consumer-debt complaints accounted for 1,200 of the 7,035 consumer complaints it received. The Better Business Bureau of Chicago and Northern Illinois said complaints against debt collection companies were up 50 percent, from 19,384 to 29,075, during the previous 12 months (“New Government Bureau to Attack Debt Collection Abuses,” Medill Reports, June 2, 2011).

New Bureau to Fill Holes in Old Debt Collection Law

Debra Speyer, principal of Debra G. Speyer Law Offices, said that debt collection companies have been skirting rules established by the Fair Debt Collection Practices Act of 1977 by using new technologies, like so-called robo-callers, that weren’t in existence with the decades-old law was enacted.

Additionally, the Federal Trade Commission doesn’t have jurisdiction over many industries, including some, like non-profit organizations, that may provide debt collection services, said Mike Croxson, president of CareOne Services Inc., a Maryland-based debt relief company. However, under the CFPB, “everyone providing the service would have to follow the rules,” Croxson said.

Bill Bartmann, chief executive officer of Commercial Financial Services II Inc., a debt collection company in Tulsa, Okla., said that he expects CFPB to act aggressively. “Consumers are going to see and feel the effect very quickly, and changes will take effect immediately,” Bartmann said. “The CFPB has the impact and force of law immediately. Therefore, anybody in violation of the new regulations is going to be prosecuted.”

Republicans in Congress, who have assaulted the CFPB in full force, argue the bureau is an overextension of government power that threatens banks and the financial market. Republicans are attempting to strip funding from the bureau, or have it transferred to Congressional oversight, and have sworn to block the confirmation of Warren as the bureau’s first director.

“I think this is a clear sign how much business interests are fearing what will happen in July,” Stoltmann said.

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The Delaware Court of Common Pleas has issued a new administrative directive to ensure that more of the state’s residents are able to recognize notices of credit card debt collection lawsuits.

The directive, set to go into effect on July 1, was issued in response to record numbers of debt collection lawsuits filed against Delawareans, many of whom failed to respond to the lawsuits and, therefore, automatically lost.

According to a national survey, Delaware residents carry more consumer debt than residents of any other state. But when consumers get into trouble, and a debt collection lawsuit arrives, consumers often don’t recognize the name of the company demanding money due to the industry practice of packaging and selling debt to other companies. And, because of fees and interest, they also don’t recognize the amount owed.

As a result, when companies show up to the Court of Common Pleas, debtors are often absent, and default judgments are handed down in favor of creditors. And that’s not such a good thing, especially when consumer debt lawsuits and default judgments are on such a sharp rise, fueled by a bad economy and the introduction of electronic filing, according to Court of Common Pleas Judge Andrea L. Rocanelli.

Rocanelli said that about 8,060 civil lawsuits — 90 percent of which were debt collection actions — were filed in the Court of Common Pleas in 2001. By 2008, there were 12,500 lawsuits. By 2010, that number had grown to 15,191.

Meanwhile, according to Court of Common Pleas Administrator Carole Kirshner, between 2009 and 2010, default judgments in New Castle County were up 42 percent, from 2,804 to 3,988, 90 percent of which were awarded in debt collection actions.

“That high percentage of default judgments is an indication that something is not right,” Rocanelli said. “That is why we wanted to address this” (“New Rules Aim to Assist Del. Debtors,” Delaware Online, June 5, 2011).

Attorneys: Debt Collection Directive Unfair to Creditors

The directive requires that debt collection actions be more transparent, and for those filing debt collection lawsuits to more clearly explain who they are, who they represent, who originally made the loan, and to provide details about how much is owed and why. Rocanelli and others hope the directive will help more consumers realize what is going on and take action rather than letting the case go into default against them.

However, some in the legal community, including attorneys who represent creditors, are resisting the directive and hoping to have changes instituted before it becomes law.

Jeffrey P. Wasserman, an attorney who specializes in representing creditors, said that he and others were put off by the directive because it implied that Delaware attorneys were somehow unethical. Critics also say the directive places an unfair burden on creditors, making them detail the entire history of the debt upfront and prove their case at the outset when, in most cases, there is no dispute about the money owed.

Rocanelli agreed with Wasserman that there are no “bad actors” in the system and has said the court is considering issues raised by Wasserman and others. “We’re interested in being fair to everyone,” Rocanelli said.

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A coalition of attorneys general from 38 states are opposing a proposed class action settlement with a credit card debt collection company accused of using robo-signers to bring false affidavits to debt collection lawsuits.

The proposed settlement with Midland Funding LLC., a unit of Encore Capital Group Inc., a San Diego-based debt collection company, would provide up to $5.7 million for 1.4 million class members while providing named plaintiffs with $8,000 payments and allowing plaintiffs counsel to collect $1.5 million in fees.

“Under any interpretation, the ten-dollar-per-class-member settlement is not fair, reasonable, or adequate to address the harm incurred,” the coalition of attorneys general said in a brief, filed in federal court in Ohio (“State AGs Oppose Settlement With Encore Unit,” Reuters, June 3, 2011).

The coalition, led by New York Attorney General Eric Schneiderman and including attorneys general from California, Ohio, and Massachusetts, also rejected the terms of the agreement, which it says unfairly forces class members to release any claims against Midland, thereby allowing Midland to turn around and pursue claims against class members.

“The settlement strips class members of their right to defend against existing lawsuits and to seek to vacate judgments obtained through defendants’ use of false and misleading affidavits,” the coalition said.

David Katz, the U.S. District Judge in Toledo, Ohio, preliminarily approved the settlement with Midland in March. A fairness hearing will be held on July 11.

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The nation is awash with stories of state Attorneys General suing debt relief companies that promise they can reduce consumers’ debt in exchange for hefty fees. If the number of cases are any indication, many debt settlement companies are little more than scams that prey on vulnerable, financially-troubled consumers desperately looking for a way out from under debilitating credit card debt, income tax debt, and other types of debt.

That’s why lawmakers in Massachusetts are considering legislation to regulate debt settlement companies in the state. The bill would give the State Commissioner of Banks the authority to regulate debt settlement companies.

Debt settlement companies advertise that they can negotiate lower principal debts for consumers, usually by charging consumers fees and setting up savings accounts that consumers pay into until the amount of money gets to a level the debt settlement company says is necessary to negotiate with creditors. Ultimately, the companies say, creditors will settle for less than what is owed. But often that isn’t the case, and consumers end up defaulting on their debts or are otherwise left in worse financial shape than when they started.

Although the bill may go a long way to providing consumer protections with regard to debt relief company’s business practices in Massachusetts, it does nothing to cap fees the companies are allowed to charge consumers. For Martin Lynch, a credit counselor from Agawam, the lack of a fee cap and other protections are egregious oversights on the part of regulators.

“This bill would leave it wide open at the end. A settlement company could charge any percentage of the debt that they wanted,” Lynch said. “There are a number of other provisions that need to be there to protect consumers, because at the time they choose a debt relief agency they’re very vulnerable” (“Debt Settlers May be Regulated by State,” WWLP-TV, May 31, 2011).

Lynch recommended that fees be capped at 20 percent to 25 percent of the debt that consumers enroll in debt relief programs.

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