Some homeowners in Massachusetts will be gaining a measure of mortgage debt relief resulting from a $52 million settlement of a lawsuit against the Royal Bank of Scotland.

Massachusetts Attorney General Martha Coakley announced Monday that the Royal Bank of Scotland agreed to settle the state’s lawsuit against its subsidiary, formerly known as Greenwich Capital Financial Products Inc., that alleged the subsidiary traded more than 700 “presumptively unfair” subprime mortgages doled out to residents during the housing boom.

According to the lawsuit, the subsidiary traded subprime mortgages that were securitized by the Royal Bank of Scotland that contained features such as introductory “teaser periods” of three years or less, introductory “teaser rates” at least 2 percent lower than the fully-indexed rate, a debt-to-income ratio of greater than 50 percent, and substantial prepayment penalties or loan-to-value ratios over 97 percent. The features are illegal under state law.

Under the terms of the $52 million settlement, the Royal Bank of Scotland will pay more than $40.2 million for principal reduction and related mortgage debt relief for more than 700 Massachusetts subprime borrowers, pay fees of more than $8.9 million to the Commonwealth, and pay more than $2.6 million as compensation to sub-entities, including municipalities most affected by the foreclosure of RBS securitized loans.

“The securitization of subprime loans by investment banks is a major cause of the economic crisis,” Coakley said in a statement. “Investment banks profited handsomely from those securitizations at the expense of homeowners. The only way we are going to return to a healthy economy is to hold these banks accountable in order to achieve real relief for homeowners.Today is another important step in those efforts for Massachusetts” (“Royal Bank of Scotland to Pay $52 Million,” Office of the Attorney General of Massachusetts press release, Nov. 28, 2011).

The settlement with the Royal Bank of Scotland marks the third such settlement with financial institutions resulting from a multi-year, ongoing, industry-wide investigation by Coakley’s office that has recovered more than $200 million in connection with subprime mortgage securitization claims. In May 2009, Coakley’s office settled with Goldman Sachs for $60 million over similar claims. In June 2010, Coakley’s office settled with Morgan Stanley for $102 million.

Coakley said that borrowers receiving benefits under the settlement with the Royal Bank of Scotland will receive a notice from the Office of the Attorney General in the coming months. Borrowers with questions about the settlement with can call the Attorney General’s Insurance and Financial Services Hotline at (888) 830-6277.

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The Federal Trade Commission (FTC) announced today that it was mailing refund checks this week to more than 2,900 consumers nationwide who were victims of a debt management scam.

The refunds are the result of a February 2009 contempt ruling against Express Consolidation Inc., a Florida-based debt management services company, and owner Randall L. Leshin, a Florida attorney. The court found in its contempt ruling that Express Consolidation and Leshin violated a 2008 final order that resulted from an FTC lawsuit failed against Leshin and his company in 2007.

The 2007 FTC lawsuit alleged that the defendants fraudulently misrepresented their non-profit status, charged hidden fees, and misled consumers about the benefits they would gain be enrolling in Express Consolidation’s debt management plan. Under the 2008 final order, the defendants were prohibited from participating in further illegal activity and from operating in states where they weren’t qualified to conduct business.

The 2009 contempt ruling found that the defendants were still conducting business in states in which they weren’t qualified and that they were collecting fees from consumers who had cancelled their debt management plans with the company (“FTC Sending Refunds to Victims of Debt Management Services Company,” FTC press release, Nov. 29, 2011).

In all, the FTC will mail checks totaling $90,000. The average refund will be $31.16. The refund checks will be mailed by a redress administrator and are valid for 60 days from the date they are issued. The FTC urges consumers to cash the checks upon receipt.

Consumers with questions about the refund can contact the FTC’s redress administrator, Rust Consulting Inc., at (866) 458-3187 or visit www.ftc.gov/refunds.

The FTC cautioned consumers that it never requires an advance payment or additional information before cash redress checks are issued.

Consumers who believe they have been the victim of fraudulent, deceptive, or unfair business practices can file a complaint by calling (877) 382-4357 or by visiting the FTC’s online Complain Assistant at www.ftccomplaintassistant.gov.

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The Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) announced Wednesday that it had shut down 85 alleged online debt relief scams that advertised fraudulent mortgage modification services on Google.

The mortgage debt relief operations, which used Web banners and other Web advertisements, allegedly charged struggling homeowners illegal advance fees in exchange for false promises of mortgage principal reductions through the federal government’s Home Affordable Modification Program (HAMP), which is operated under the Troubled Asset Relief Program.

In addition to asking homeowners for advance fees, the most common scams allegedly included telling homeowners to stop making mortgage payments and cease all contact with lenders, diverting mortgage payments to the scammers, transferring property deeds, releasing sensitive personal information. In some cases, associated websites claimed to be affiliated with the U.S. government by using a government seal or a name similar to a federal agency.

Google has cooperated with SIGTARP’s ongoing criminal investigation of online mortgage debt relief scams and has suspended advertising relationships with 500 Internet advertisers and agents associated with the 85 alleged online mortgage modification scams.

“The first place many homeowners turn for help in lowering their mortgage is the Internet through online search engines, and that’s precisely where they are being taken advantage of and targeted,” said Christy Romero, Deputy Special Inspector General for the Troubled Asset Relief Program. “Web ads that offer a false sense of hope may not be legitimate and can end up costing homeowners their home. SIGTARP is diligently working on every level to stop these frauds, to protect homeowners from being victimized, and to hold accountable criminals who defraud homeowners in connection with HAMP and other TARP programs” (“SIGTARP Shuts Down 85 Online Mortgage Modification Scams Advertised on Google,” SIGTARP press release, Nov. 16, 2011).

According to SIGTARP, Google’s suspension of the advertising relationships “will have a dramatic and immediate impact on the ability of scam artists to seek out and victimize unwitting homeowners.”

SIGTARP said its investigation is ongoing.

Consumers who feel they have been the victim of a mortgage modification scam or who would like to report suspicious activity involving TARP can report concerns by calling the SIGTARP Hotline at (877) SIG-2009.

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Georgia announced it has reached a $4.3 million settlement with an abusive debt collection company. The state said it hoped the settlement would send a message to other debt collection companies looking to skirt the law when it comes to dealing with residents burdened with credit card debt and other types of consumer debt.

According to the Georgia Governor’s Office of Consumer Protection (OCP), Nelson, Hirsch & Associates Inc., used abusive practices that are illegal under state and federal law to collect on 5,809 consumer accounts, most of which consisted of zombie debt, or debt that has long been written off by the original creditors.

To collect debts from its accounts, the state said that employees of the Fairburn-based debt collection company routinely failed to disclose their true identity as debt collectors, falsely represented themselves as fraud investigators or as affiliated with a law firm, refused to send consumers written proof of alleged debts, harassed people at work, made debt collection calls after 9 p.m., called some people up to 50 times a day, threatened debtors with arrest and imprisonment, and threatened family members.

“The main thing is you don’t threaten people in terms of their debt,” said Bill Cloud, a spokesman for the OCP. “You don’t threaten them physically. You don’t threaten them with arrest. You don’t act like a law firm if you’re not. These people were just doing everything in the book that was wrong” (“Georgia Reaches $4 Million Settlement With Over-Aggressive Debt Collector,” WABE, Nov. 10, 2011).

Under terms of the settlement, Nelson, Hirsch & Associates and its owner, Tanya Santiago, are required to cease business operations and refrain from engaging in debt collection activities in the state or in connection with Georgia consumers for at least five years. The company is also required to forego collection on its accounts, which total $4,307,658, pay a $26,000 civil penalty, and reimburse the OCP for investigative and legal expenses totaling $24,000.

“We are sending a strong and clear message that this kind of abuse and harassment of consumers, and the egregious disregard for the law that these practices typify will not be tolerated,” John Sours, Administrator of the OCP, said in a statement (“Debt Collector Nelson, Hirsch & Associates Enters into $4.3 Million Settlement,” Georgia Governor’s Office of Consumer Protection press release, Nov. 8, 2011).

Cloud said that if consumers are in trouble because of debt, they should contact a reputable consumer counseling service and develop a payment installment plan that they can afford.

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If you were a customer of a debt relief service this year — including mortgage debt relief, credit card debt relief, or debt settlement services — and had some of your debt forgiven as a result, you’ll probably receive form 1099-C from the Internal Revenue Service (IRS) and may owe federal income taxes on the forgiven debt when you file your taxes in April. Here’s four tax liability tips to help you familiarize yourself with what and how much you owe.

1. What the IRS considers when it comes to debt cancellation

Generally speaking, the IRS considers any type of forgiven debt from a commercial lender or creditor, including but not limited to home mortgage loans and credit cards, to be subject to federal income tax in the year the debt was cancelled, as long as the amount cancelled is $600 or more. For example, say you borrow $10,000 and default on the loan after paying back $2,000. If the lender forgives the remaining $8,000, then that $8,000 is considered income for purposes of federal income tax and should be reported on Line 21 of the 1040 tax form.

2. Debt cancellation amounts are not always taxable

Although the amount of debt cancelled through things like mortgage principal reduction and credit card debt negotiation is generally considered taxable, not all debt cancellation amounts are taxable. There are several categories of nontaxable forgiven debt:

• Bankruptcy — Debts discharged as the result of bankruptcy proceedings are not counted as taxable income.
• Insolvency — If you are insolvent (your total debts are more than the fair market value of your total assets) some or all of your forgiven debt may not be taxable.
• Certain farm debts — If you had any debt forgiven that was incurred directly in the operation of a farm, more than half your income from the previous three years was from farming, and the loan was from a regular commercial lender or and individual who regularly lends, your cancelled debt is generally not considered taxable income.
• Non-recourse loans — If your debt was incurred through a loan for which the lender’s only recourse in case of default is to repossess the property being financed or used as collateral — and the lender can’t pursue you personally — doesn’t result in taxable income from the cancelled debt but may result in other tax consequences.

3. Homes lost through foreclosure

If you lost your home through foreclosure, there are two possible tax consequences. In the first possibility, for recourse loans, the amount of cancelled debt (called cancellation of debt income) is considered taxable if the total amount of debt owed prior to the foreclosure is greater than the fair market value of the property. You may also be taxed if you received gain from the foreclosure, which means the fair market value of the foreclosed property is greater than your adjusted basis in the property (usually your purchase price plus the cost of improvements).

In the second possibility, for non-recourse loans, the cancellation of debt income is considered taxable if you received gain from the foreclosure (in this case, the amount of debt immediately prior to foreclosure is greater than your adjusted basis in the property).

For both recourse and non-recourse loans, gain from foreclosure is subject to certain exclusions. For more information, visit www.irs.gov or contact a tax professional.

4. Losses on foreclosed homes

While you may be taxed on gains from foreclosures, you unfortunately can’t deduct losses from the sale or foreclosure of personal property.

As with any tax issue, it is advisable to contact a tax professional if you have any questions. We strongly recommend contacting a tax professional if you have been the customer of a debt relief service of have had any debt cancelled or forgiven this year.

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The holidays are supposed to be a fun time for everyone, a time for family and friends to be together and spend time with one another. Unfortunately, the holidays are also a time of rampant commercialism where marketing and advertising efforts are ramped up to try and get you to spend even more money. The pressure to spend more than you can afford is higher during the holiday season and leads many people to use their credit cards to finance gifts for others.

However, using credit cards for holiday shopping can result in big credit card bills that take a while to pay off and which quickly tarnish the fond memories you just created. Here are six tips for setting your credit cards aside and avoiding credit card debt this holiday season.

1. Start saving now

The first step to avoiding credit card debt this holiday season is to start saving for purchases now. Whether you open up a savings account at your bank or grab an envelope or shoebox that can serve as your own personal savings account, start setting aside money each week or each paycheck. It may not sound like a lot, but saving $20, $50, or $100 a week can turn into big bucks quickly.

2. Make a budget and stick to it

After you open your savings account or grab that envelope or shoebox you’ll need to make a budget for gifts. Count the number of weeks you have to shop and multiply that by how much you can save every week. The resulting number will equal your gift budget. For example, if there are six weeks of shopping left and you can save $40 a week for gifts, your total gift budget will be $240. Once you have your budget, stick to it. Wandering off the budget path is the most surefire way to find yourself dipping into your credit cards to finance gifts.

3. Make a list — and check it twice

Now that you have a budget, the best way to stick to it is to come up with a gift list for friends and family. Make a list of gift recipients and divide your gift budget by the number of people on your list. The resulting number is how much money you can spend on each recipient without going over your budget. For example, if there are 10 people on your list and your gift budget is $240, your budget per person is $24. Think that’s a low number? Remember, your role this holiday season is not to go into debt in order to finance gifts for your friends and family. If you can afford more, great, if not, so be it. If someone’s upset you didn’t spend more on them, the problem is theirs, not yours, and you might want to reconsider them for next year’s list.

4. Make purchases only with cash

The most direct way to avoid going into credit card debt this holiday season is simply avoid using your credit cards by paying cash for your purchases. Although perhaps easier said than done for some people, if you start saving money now, make a budget, and make a gift list, using only cash to buy gifts will become an easy goal to accomplish. The holidays are great, but again, the pressure to spend more than you can afford often comes from retail stores and — you guessed it — credit card companies. Your friends and family don’t really care. Live within your means, shop within your means, and don’t finance gifts with credit cards.

5. Shop online first

Want to get the most out of your money? Try shopping online first. Websites like Amazon.com and others often have lower prices for items on your gift list and, if you order far enough beforehand, you’ll have the time to take advantage of free shipping on your order, which will usually take from seven to 10 business days. Of course, it’s hard to use cash online, but you can use your debit card instead. For better security, make sure not to save the debit card information into a user account. That way, it’s more difficult for online thieves to get a hold of your information.

6. Leave your credit cards at home

It might seem obvious, but leaving your credit cards at home while you shop for holiday gifts is especially important when it comes to avoiding credit card debt. There’s simply too much temptation to pull them out and use them on gifts not on your list that go beyond your budget or on gifts for yourself. People who carry credit card debt typically live beyond their means and buy stuff they can’t afford by carrying their credit cards with them wherever they go. If you have a problem sticking to your gift budget, or think you might be tempted to use your credit cards, simply leave them at home. You can’t use them if you don’t have them with you.

The holidays are supposed to be a fun time for family and friends to spend some time together and create lasting memories. But too often the holidays result in lasting credit card debt that takes months or even years to pay off. Do the smart thing and use these six tips to avoid credit card debt this holiday season.

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The California attorney general has called on Fannie Mae and Freddie Mac to offer mortgage debt relief to homeowners in the state by cutting the principal amounts they owe on their home loans, a suggestion the federally-backed companies have long resisted.

Attorney general Kamala Harris faces pressure to get a better deal for California homeowners than proposals discussed in long-running multi-state talks between state and federal officials and top banks to settle alleged mortgage abuses committed by the banks. Harris pulled out of those talks in September, claiming that the proposed $25 billion settlement with five banks to resolve allegations of improper foreclosures and other misconduct released the banks from too many claims and failed to provide enough debt relief for California homeowners.

Although the proposal included $15 billion in principal reductions and other loan modifications for distressed borrowers, none of the relief applied to mortgage loans owned by Fannie Mae or Freddie Mac, even though the majority of the estimated 11 million underwater mortgages in the United States are owned by the companies. Since Harris left the talks, negotiators have added from $2 billion to $5 billion to the settlement to help underwater borrowers who are current on their payments to refinance loans not held by Fannie Mae or Freddie Mac.

“It has become clear to me that the only way to keep distressed California homeowners in their homes is through meaningful principal reduction,” Harris said in a statement last week (“Calif. Asks Fannie, Freddie To Cut Mortgage Debt,” Thomson Reuters, Nov. 3, 2011).

Harris said that the regulator of Fannie Mae and Freddie Mac, Edward DeMarco, should resign if he failed to support principal reductions on underwater mortgages owned by the agencies. DeMarco said that offering mortgage debt relief to homeowners through principal reductions would reduce the value of taxpayer assets. At a U.S. House of Representatives financial services subcommittee hearing last week, DeMarco said that if Congress wants to use taxpayer funds to reduce principal mortgage debt, it must change the law.

Since being seized by the government and placed into conservatorship in Sept. 2008, Fannie Mae and Freddie Mac have been propped up with about $145 billion in taxpayer money.

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An Arizona man who was found guilty of taking advantage of consumers in dire financial straits by falsely promising that he could reduce and settle their debts for a fraction of what was owed was sentenced Tuesday to more than 13 years in prison.

Before sentencing Gary Kent Allan, 62, Pima County Superior Court Judge Clark Munger told Allan that he didn’t buy the defendant’s portrayal of himself as a “good guy” whose businesses practices simply didn’t work. Allan pled guilty to a debt relief scheme in which he convinced financially distressed consumers to pay him enormous fees for debt settlement and mortgage debt relief services that would result in reduced credit card debts and refinanced mortgages.

Allan, operating as Christian Credit Consultants, advertised his debt relief, debt settlement, and mortgage relies services at churches and in Christian business directories. According to Allan’s advertising, “Stress and worry take the place of peace and contentment, which hinders our walk with the Lord and His will and destiny for our lives.”

Under the scam, Allan charged victims thousands of dollars and told them not to speak to their creditors, but made no effort to negotiate with creditors or help refinance mortgages. Instead, Allan siphoned more than $267,000 for himself from customers’ accounts, causing several customers to lose their homes and their life savings, according to Assistant Attorney General Michael Jette.

Allan was first indicted in April 2010 on separate fraud charges pertaining to two couples, but, according to Jette, “without pause, the defendant continued his business, advertised more prominently, and began to withdraw funds from victims’ bank accounts more aggressively” (“Debt-Reduction Scam Gets Tucson Man 13 Years in Prison,” Arizona Daily Star, Nov. 8, 2011).

Tuesday’s sentencing resolved both charges.

Munger imposed the highest possible sentence allowable under Allan’s plea agreement, including 12 1/2 years in prison for fraud plus seven years of probation, the first of which will be served in the Pima County jail.

Munger cited Allan’s lengthy criminal history, the fact that their were multiple victims, some of which were elderly or vulnerable, and that Allan operated the scheme under the guise of religious fellowship, as reasons for handing down the maximum sentence.

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Many military servicemembers deployed in the Middle East or elsewhere are experiencing trouble with credit card debt, mortgage debt, or other forms of consumer debt. Whether it’s just you or you have a family back home struggling to pay the bills in your absence, there are several debt help and debt management resources available.

Military OneSource

The first debt help resource you should consider using is Military OneSource, a free service provided by the U.S. Department of Defense (DOD). Military OneSource helps service members and their families with a broad range of issues, including money and debt management. Services are available 24 hours a day by telephone or over the internet. Many of the professional consultants have military experiences and all receive training on military matters and military lifestyle to better help you.

Military OneSouce: (800) 342-9647, including via Voice Over Internet Protocol (VOIP), or online at www.militaryonesource.mil

Credit Counseling

Credit counseling is available in person or over the phone through a DOD partnership with the National Foundation for Credit Counseling (NFCC). You can also contact the Association of Independent Consumer Credit Counseling Agencies (AICCCA) directly for assistance. Make sure to spend time with the person you end up contacting so they can better assist you and your family.

NFCC: (800) 388-2227 or online at www.nfcc.org

AICCCA: (866) 703-8787 or online at www.aiccca.org

Servicemembers Civil Relief Act

The Servicemembers Civil Relief Act (formerly called the Soldiers’ and Sailors’ Civil Relief Act) provided a wide range of protections for servicemembers, including helping you and your family postpone or suspend certain obligations, such as financial obligations, while you’re serving. Financial protections include deferring credit card debt, mortgage payments, and tax payments. For example, interest rates on credit card accounts that you had prior to beginning active duty can be reduced to 6 percent while you’re deployed, but you have to ask your credit card company for the protection.

For more information, contact Military OneSource or visit www.military.com/benefits.

Other Debt Help Resources

Depending on your service branch, you may be able to also receive debt help and money management advice and assistance through the Army Emergency Relief, Air Force Aid Society, Coast Guard Mutual Assistance, and Navy-Marine Corps Relief Society.

Army Emergency Relief: (866) 878-6378 or www.aerhq.org

Air Force Aid Society: (800) 769-8951 or www.afas.org

Coast Guard Mutual Assistance: (800) 881-2462 or www.cgmahq.org

Navy-Marine Corps Relief Society: (703) 696-4904 or www.nmcrs.org

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A West Virginia Circuit Court has granted a request by Attorney General Darrell McGraw to prevent several debt collection companies from operating in the state without a license.

The court issued a temporary injunction against three New York–based Calvary Company debt-buying businesses — Cavalry SPV I, Cavalry SPV II, and Cavalry Investments — and Cavalry Portfolio Services, an affiliated debt collection company, after they were sued by McGraw’s office for allegedly collecting debts without a license.

The injunction halts the companies’ pending lawsuits against West Virginia consumers, stops all wage garnishments, and releases all liens filed against West Virginia consumers’ property as a result of judgments obtained by the companies before they became licensed to operate in the state.

The court also agreed to McGraw’s request that Cavalry Company be ordered to send written notices to all consumers affected by the injunction. Under terms of the temporary order, Cavalry Company may accept voluntary payments by consumers, which must first be placed into escrow and reported to McGraw’s office. The temporary injunction remains in effect until a final hearing (“Court Enjoins Cavalry Debt Buyers From Collecting Debts,” Office of the Attorney General of West Virginia press release, Oct. 27, 2011).

According to testimony from McGraw’s staff, the defendants filed at least 1,300 debt collection lawsuits prior to becoming licensed in Oct. 2010. A total of 743 of those lawsuits resulted in more than $3 million in judgments against West Virginia consumers, 369 of which were entered by default when consumers failed to appear to contest the lawsuits.

McGraw’s office first subpoenaed Cavalry Company’s West Virginia account record in Jan. 2010. Cavalry objected to the records request and asserted that the investigative subpoena couldn’t be enforced once the Attorney General’s office filed a lawsuit against the companies. The court disagreed and issued the order.

West Virginians who believe they have been a victim of a scam or wish to file a complaint can call the Attorney General’s Consumer Protection Hotline at (800) 368-8808 or visit www.wvago.gov/takeaction.

Further Reading

Order Granting Temporary Injunction: State of West Virginia v. Cavalry SPV I LLC, et al. Filed October 17, 2011.

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