A Georgia-based debt collection company has entered into a $15.5 million settlement agreement with the state’s Governor’s Office of Consumer Protection (OCP) to resolve allegations that the firm deceived and harassed thousands of consumers.

The OCP charged Dorsey Thornton & Associates LLC and its principal owners Wyteria Dorsey and Michael Thornton with multiple violations of the federal Fair Debt Collection Practices Act and the Georgia Fair Business Practices Act after the agency received a series of complaints from consumers that described the firm allegedly engaging in deceptive, harassing, and unlawful business practices.

According to the OCP, Dorsey Thornton & Associates threatened consumers with arrest or imprisonment if they didn’t pay their supposed debts, refused to provide consumers with written proof of supposed debts, identified themselves as “investigators” rather than debt collectors, pressured debtors by contacting third parties and divulging information about debtors’ accounts, unlawfully called consumers before 8 a.m. and after 9 p.m., and continued to contact consumers after consumers told the firm to stop calling them (“Debt Collector Dorsey Thornton & Associates Enters into $15.5 Million Settlement,” OCP press release, Feb. 29, 2012).

“Debt collectors who engage in this kind of harassment, deception and other illegal behavior in the state of Georgia must and will pay a steep price,” John Sours, Administrator of the Governor’s Office of Consumer Protection, said in a statement.

Under the terms of the Assurance of Voluntary Compliance, Dorsey Thornton & Associates agreed to forego the collection of 31,433 consumer accounts, totaling $15.5 million in debt. The company will also pay an undisclosed civil penalty and undisclosed reimbursement for investigative and legal expenses incurred by the OCP.

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This year, Americans are planning on being more frugal with their tax refunds, according to a recent survey by the National Retail Federation.

The NRF’s Tax Returns Consumer Survey found that more Americans plan to save their tax refunds than spend them, while nearly four in ten Americans who expect a tax refund plan to use some of the money for debt relief.

The survey found that among the two-thirds of tax payers who are expecting a refund this year, 48.3 percent will put away some of their refund in savings, an increase from 42.1 percent last year and the most in the survey’s nine-year history. At the other end of the spectrum, a smaller percentage said they would use their tax refunds for a major purchase such as a new car or television (12.3 percent) or a vacation (11.3 percent).

Between saving and spending, 39.4 percent of Americans expecting a tax refund said that they would use the money to pay down consumer debts, such as credit card debt. Nearly three in ten respondents said they would use the money to pay for everyday expenses (“More Americans Serious About Saving Tax Returns This Year,” NRF press release, Feb. 22, 2012).

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The Consumer Financial Protection Bureau, the federal government’s new consumer-finance cop, announced earlier this month that it wants to add debt collection firms to the list of industries that agency officials have the authority to supervise.

Debt collection firms buy delinquent accounts from creditors at pennies on the dollar and many have been accused of using deceptive or even downright illegal tactics to collect on the accounts. About 30 million Americans have debts in collection and debt collectors receive more complaints that any other industry, said CFPB Director Richard Cordray, who cited a database of complaints maintained by the Federal Trade Commission.

Last month, after President Barak Obama installed Cordray as agency director, the CFPB gained the power to supervise payday lenders, mortgage companies, and lenders of private student loans. Cordray said that the housing bust and recession has transformed debt collection companies — as well as credit-reporting companies, which the agency is also targeting — and made them a much bigger part of consumers’ lives, making oversight necessary. The announcement, which also targeted big companies in other industries, was a first step toward defining which industries the CFPB wants to oversee.

As a result of oversight, the CFPB will be able to help companies follow the rules by clarifying enforcement, according to industry executive Tim Smith, senior vice president of banking and financial services at Firstsource Solutions. “Agencies like ourselves are really hoping that the CFPB, if they’re going to have increased regulation of the collection world, they’ll provide clarity on what you can and can’t do,” Smith said (“Consumer-Finance Watchdog Targets Debt Collectors,” Bloomberg Businessweek, Feb. 1, 2012).

According to Smith, debt collection companies expect the CFPB to enact major changes over the next year, and many companies in the industry are already increasing internal controls and expanding audits to prepare for the new oversight.

Until now, the federal government had to address heavy-handed debt collection firms that broke consumer protection laws one lawsuit at a time. But the new bank-style supervision allowed by the CFPB allows officials to look at the practices of healthy companies that aren’t accused of any wrongdoing. As a result, debt collection firms with more than $10 million in annual receipts and consumer credit reporting agencies with more than $7 million in consumer-data revenue would be subject to supervision.

According to an estimate from the CFPB, the agency would be able to supervise companies that perform 63 percent of the nation’s debt collection and 94 percent of the consumer credit revenue.

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The National Endowment for Financial Education (NEFE), a Denver-based non-profit organization, is warning consumers about the pitfalls of debt relief loans. Although debt consolidation loans may be beneficial to some consumers, the group says, they’re not right for everyone who needs debt help.

The group’s warning comes in the heels of a recent online poll, commissioned by NEFE, which found that 75 percent of U.S. adults reported having debt and 51 percent said they were concerned about the amount they owed. The group said that the poll demonstrated the number of adults with multiple debts or who have difficulty making monthly debt payments and that while some consumers might continue their current debt reduction strategies, others may look into debt consolidation loans as a way to lower monthly payments.

However, the NEFE warned consumers that debt relief loans aren’t the “quick fix” they’re often advertised as because they require the borrower to pay significantly more in interest over the long term. Furthermore, the group said, debt consolidation loans aren’t right for everyone. Consumers thinking of applying for a consolidation loan should be aware that ads for such loans don’t disclose the total costs of the loan, provide information on hidden costs and fees, or advise consumers that the loan might make the consumer’s financial situation even worse.

“Much of the focus [in consolidation loan advertising] is placed on the ‘lower’ amount of monthly payments, without regard to impacts like total interest paid,” explained NEFE CEO Ted Beck. Debt consolidation loans combine multiple debts into a dingle loan with a longer loan term, Beck said, which results in a lower monthly payment but leaves the consumer with a greater debt burden over a longer period of time. For some consumers, consolidation loans may be helpful, but for other consumers, Beck cautioned, the loans can be damaging (“What Lenders Won’t Tell You About Debt Relief Loans,” Business Insider, Feb. 21, 2012).

In an example provided by the NEFE, a five-year loan for $20,000 at 10 percent interest would have a monthly payment of $425 and total interest payments of $5,496, for a total pay-off amount of $25,496. However, the same loan extended to a 15-year repayment term would reduce the monthly payment to $215 but increase total interest payments to $18,685, for a total pay-off amount of $38,685.

“People who are burdened with debt need to carefully consider what is best for their financial situation,” Beck said. “For some, debt consolidation loans may be a good option. But it’s important that consumers fully understand the consequences.”

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A U.S. district court has agreed to a request by the Federal Trade Commission to halt and freeze the assets of a fake debt collection operation that allegedly scammed consumers out of more than $5 million by posing as law enforcement and threatening consumers with arrest if they didn’t make immediate payments.

The defendants listed in the FTC complaint include American Credit Crunchers LLC, a business based in Villa Park, Calif.; an affiliated company called Ebeeze LLC; and Varang K. Thaker, the companies’ owner.

According to the FTC’s complaint, Thaker was able to obtain sensitive personal information, including Social Security numbers and bank account numbers, from consumers who had inquired about, applied for, or obtained online payday loans. Payday loans are high-interest, short-term loans that consumers increasingly turn to in tough economic times to make ends meet between paychecks.

Armed with this sensitive information, Thaker employed callers in India to make millions of fake debt collection phone calls to U.S. consumers. The callers pretended to be attorneys or members of law enforcement or government agencies — identifying themselves variously as members of local police departments, the “Federal Department of Crime and Prevention,” and “federal investigators” — who were collecting on supposedly delinquent payday loans. Callers demanded that consumers make immediate payments between $300 and $2,000 to avoid one of several punishments, which included large lawsuits, loss of jobs, and imprisonment.

Consumers who were targeted by the operation had either never taken out a payday loan or, in the case of debts that were actually owed, the defendants had no authority to collect the debts because they were owed to someone else. However, many consumers who were targeted by the scam made payments out of fear of reprisal by the callers.

“This is a brazen operation based on pure fraud, and the FTC is committed to shutting it down,” David Vladeck, Director of the FTC’s Bureau of Consumer Protection, said in a statement. “Consumers should not be pressured into paying debt they don’t remember owing. Legitimate debt collectors must provide consumers with both written information about the debt, and instructions for protecting themselves if they don’t think they owe the debt” (“Court Halts Alleged Fake Debt Collector Calls from India,” FTC press release, Feb. 21, 2012).

The FTC’s complaint charges the defendants with violations of the Federal Trade Commission Act and the Fair Debt Collection Practices Act.

Consumers who believe they have been the victim of fraudulent, deceptive, or unfair business practices can file a complaint in English or Spanish online using the FTC’s Complaint Assistant or by calling toll-free (877) 382-4357.

Further Reading

Complaint for Permanent Injunction and Other Equitable Relief: Federal Trade Commission v. Varank K. Thaker, et al. Filed February 13, 2012.

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This is the time of year when people start thinking about their taxes. It’s also the time of year when people who are burdened with substantial tax debt start to look for help. But, according to the Better Business Bureau (BBB), folks should be wary of tax debt relief firms that promise to settle or negotiate debts with the IRS for a hefty up-front fee.

These types of businesses, the BBB warns, are often scams that do nothing more than rake in consumers’ money as “service fees” while failing to provide any real debt settlement service at all, frequently leaving consumers in worse financial shape and with more debt to pay.

“Typically these companies advertise they can settle tax related obligations for less than the amount owed,” states a Los Angeles BBB report on such a company. “Many represent they have attorneys or certified public accountants on staff who can work on your behalf to resolve these issues,” but the reality is they don’t.

“Our complaint experience on many of these firms indicates they exaggerate or misrepresent their ability and expertise in effecting settlements and often promise much more than they can deliver,” the report continues. “They generally attribute their inability to obtain settlements to the fact customers provided inaccurate or incomplete information. None of these firms guarantee anyone will be able to obtain settlements of their tax debts” (“TV Tax-Reduction Ads Can Leave IRS Debtors Worse Off,” Tulsa World, Feb. 16, 2012).

The biggest problem with tax debt relief companies that charge advance fees in exchange for promises that they can settle debts with the IRS for a fraction of what’s owed is that they often cite special access to IRS hardship programs or a special ability to secure “offers in compromise” from the IRS, which allows, in exceptional cases, consumers to settle their tax debts with the IRS for less than the outstanding balance. However, very few consumers actually qualify for such programs, which can be accessed just as well for free by dealing with the IRS directly. No third-party company can increase the chances of qualifying for debt relief with the IRS, no matter what a company may claim.

The IRS urges caution when seeking tax debt help from a third party, as many taxpayers who do so are left with their original tax debt, along with additional interest and penalties owed to the U.S. Department of the Treasury. The IRS recommends that consumers who need tax debt help first seek the advice of an IRS enrolled agent, a CPA, or a tax attorney.

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A mortgage debt relief business and several associated individuals who allegedly scammed thousands of consumers out of thousands of dollars each in exchange for false promises to provide home loan modifications and prevent foreclosures have been banned by the Federal Trade Commission and ordered to pay more than $57 million in combined judgments.

According to the FTC, U.S. Mortgage Funding Inc. used direct mail, the Internet, and telemarketing to target troubled homeowners who were behind on their mortgage payments or facing foreclosure, even homeowners who had already been denied loan modifications or had been sent foreclosure notices. The company allegedly charged consumers advance fees of up to $2,600 each for bogus home mortgage debt relief services that the company said would result in home mortgage modifications and foreclosure preventions, often falsely claiming success rates of up to 100 percent. In all, the scam resulted in consumer losses of nearly $19 million.

The FTC said that U.S. Mortgage Funding and related defendants “deceptively claimed they could prevent foreclosure, that they were affiliated with or approved by consumers’ lenders, and that they would refund consumers’ money if they failed to deliver promised services, according to the FTC. They told consumers not to contact their lenders and to stop making mortgage payments, claiming that falling behind on payments would demonstrate the consumers’ hardship to lenders” (“FTC Action Leads to Ban on Alleged Mortgage Relief Scammers Who Harmed Thousands of Consumers,” FTC press release, Feb. 14, 2012).

The complaint charged U.S. Mortgage Funding Inc., Debt Remedy Partners Inc., LowerMyDebts.com LLC, David Mahler, Jamen Lachs, John Incandela, Jr., and Louis Gendason with violations of the Federal Trade Commission Act and the FTC’s Telemarketing Sales Rule.

Under terms of the final judgment, the defendants are banned from providing mortgage debt relief services; U.S. Mortgage Funding and LowerMyDEbts.com are banned from engaging in any telemarketing; the remaining defendants are prohibited from violating the Telemarketing Sales Rule and from misrepresenting facts related to the marketing or sale of any product or service.

Additionally, Mahler and Debt Remedy Partners were ordered to pay more than $17 million (suspended due to inability to pay, except for $588,212) and Mahler must turn over a 1971 Hatteras yacht, a 2007 Cadillac DTC, and a Rolex watch for liquidation; Lachs was ordered to pay $3.5 million (suspended due to inability to pay, except for $409,766); Incandela and Gendanson were ordered to pay judgments totaling more than $18 million; U.S. Mortgage Funding and LowerMyDebts.com were ordered to pay judgments totaling more than $19 million. Incandela and Gendason have also pled guilty to unrelated criminal charges and both face prison terms.

Consumers who believe they have been the victim of fraudulent, deceptive, or unfair business practices can file a complaint in English or Spanish online using the FTC’s Complaint Assistant or by calling toll-free (877) 382-4357.

Further Reading

Stipulated Final Judgment and Order: Federal Trade Commission vs. Debt Remedy Partners Inc. and David Mahler. Filed February 3, 2012.

Stipulated Final Judgment and Order: Federal Trade Commission vs. John Incandela, Jr. Filed February 3, 2012.

Stipulated Final Judgment and Order: Federal Trade Commission vs. Jamen Lachs. Filed February 3, 2012.

Stipulated Final Judgment and Order: Federal Trade Commission vs. Louis Gendason. Filed February 3, 2012.

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The proposed settlement of a class action lawsuit against a Maryland law firm that allegedly scammed 125,000 consumers nationwide out of thousands of dollars in exchange for false debt relief promises will award class-action attorneys $300,000 in legal fees but won’t give a single penny to the victims.

Persels & Associates allegedly charged tens of thousands of consumers hefty fees for credit card debt relief and debt settlement services that were never provided. Instead, Persels & Associates reportedly ignored customers’ debts and kept customer payments for itself, leaving many customers in worse financial shape than when they first hired the company. In fact, the lawsuit alleged, the settlement plans “were designed to fail.”

But when it came time to settle customers’ allegations, Persels & Associates told class-action lawyers that the company was broke, losing $5.8 million in 2010 and 2011 and owing $14 million to settle an unrelated Maryland lawsuit. The attorneys capitulated, according to Michael Kirkpatrick, an attorney for consumer advocacy group Public Citizen, without launching an adequate investigation of Persels & Associates’ financial condition. Lawyers, Kirkpatrick said, are simply accepting on faith the firm’s representations of its ability to pay.

Not only does the proposed settlement fail to provide even partial relief for scam victims — something that presiding U.S. District Court Judge Thomas Wilson cited as “impractical” and something “that ain’t going to happen” since it would cost the broke defendants tens of millions of dollars — it requires that class participants forfeit their right to take further legal action against the company.

The terms of the proposed settlement are so egregious that it’s drawn criticism from the attorney generals of five states, including the attorney general of New York, who said that the provisions “are so qualified and limited as to provide to meaningful benefits to class members.” Additionally, 325 consumers have already opted out of the settlement, which would allow them to file lawsuits individually (“Settlement of Class-Action Debt-Relief Suit Criticized,” Tampa Bay Times, Feb. 14, 2012).

However, Tampa attorney James Felman, one of the class-action lawyers who filed the lawsuit against Persels & Associates, said that the proposed settlement, while perhaps not ideal, wins important concessions from the company that will better safeguard consumers. Not only did Persels & Associates agree to collect fees only after settlements were negotiated, but the firm also agreed to respond more quickly to its customers and more clearly explain the basis for their substantial fees.

“We got them to stop what they were doing,” Felman said. “We fixed the problem nobody else stepped forward to fix…. What I haven’t heard is any better idea.”

But Michael Corini, a customer from New Rochelle, N.Y., isn’t satisfied with the proposed settlement. Corini said he paid Persels & Associates $3,000 for debt relief that was never provided and that the company left him in more debt.

“The settlement’s a joke,” Corini said in an interview. “It’s not right. We lost our money, and now Persels is walking away free and clear and we get nothing. What’s fair about that?”

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A Fannie Mae pilot program that would have saved taxpayers billions of dollars while obtaining mortgage debt relief for millions of troubled homeowners was approved internally by the federally-backed mortgage-finance company but killed by company executives just two weeks before its launch over “philosophical disagreements,” according to a former employee.

The disclosure was made Wednesday in a letter by Rep. Elijah Cummings, a Democrat from Maryland and the top Democrat on the House Oversight Committee, to the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac (“New Twist in Democrats’ Push for Mortgage Debt Relief,” The Wall Street Journal, Feb. 8, 2012).

Congressional Democrats have been engaged in an effort to prod Fannie Mae and Freddie Mac to provide mortgage debt relief in the form of principal write-downs to troubled homeowners who owe more on their homes than their homes are worth.

Last year, Cummings requested that the FHFA’s acting director, Edward DeMarco, provide a detailed financial analysis of principal write-downs and the effect they would have on Fannie Mae and Freddie Mac. When the FHFA presented its findings last month, DeMarco told Congress that funding for principal write-downs would ultimately have to come from taxpayers and that the FHFA’s analysis “does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs.”

DeMarco said that the FHFA’s analysis showed that a write-down for all three million borrowers with home loans backed by Fannie Mae and Freddie Mac who owed more on their homes than they were worth would cost taxpayers $100 billion.

Shortly afterwards, Cummings said his office was contacted by a former Fannie Mae employee who refuted DeMarco’s claims.

The former employee, whose name was not revealed, told Cummings’ staff that Fannie Mae had spent several months researching and working to develop a principal write-down pilot program in 2010. The program received a thorough analysis from officials at the FHFA and the Office of the Comptroller of the Currency, a key banking regulator, and was approved internally by the company’s legal and accounting departments. However, two weeks prior to its launch, the program was killed by Fannie Mae executives who were “philosophically opposed to writing down principal balances.”

According to Fannie Mae’s own analysis, the pilot program, contrary to DeMarco’s report to Congress, would have minimized losses and saved taxpayers billions of dollars.

Armed with the new information about the research and analysis for Fannie Mae’s pilot program, Cummings blasted DeMarco’s report on principal write-downs, calling DeMarco’s claim of $100 billion in taxpayer costs “a highly inflammatory assertion.”

“To the contrary, your own data show that principal reduction programs would save taxpayers billions of dollars,” Cummings said.

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When big banks were exposed for falsely attesting to the underlying paperwork in delinquent mortgage lawsuits in the fall of 2010, the resulting robo-signing scandal called into question the legitimacy of roughly two million foreclosures and eventually led to ongoing settlement talks between banks and the federal government now estimated at $25 billion.

But if you think banks have a problem with shoddy documentation when it comes to delinquent mortgages, you should hear how bad they’ve been with delinquent credit cards.

According to one source, tens of millions of credit card accounts are improperly documented, leading to a massive epidemic of robo-signing and falsely-attested statements in millions of credit card lawsuits filed in courtrooms across the country by banks seeking to win judgments against delinquent credit card debtors.

Lawsuits against delinquent borrowers require precise documentation, including original credit agreements and accurate payment histories. But it turns out that documentation isn’t being provided. Credit card lawsuits are being attested to by banks with what one judge referred to as “robo-testimony.” As a result, judgments already granted banks could be overturned and the banks could be sued by state attorneys general or the Consumer Financial Protection Bureau. It’s possible that those same banks could also be charged by the Justice Department under the Racketeer Influenced and Corrupt Organizations (RICO) Statutes for knowingly selling improperly documented accounts to third-party debt collection agencies, which could themselves sue the banks.

Of course, some third-party debt collection companies that buy credit card debt from banks for pennies on the dollar aren’t exactly innocent in all this. Since much of the debt sold to debt collectors is both improperly documented and not legally enforceable because the statute of limitations on the debt has expired, some firms routinely resort to deceptive and illegal tactics to collect the debts. Some of the tactics include failing to tell debtors they can’t be sued, tricking debtors into making a single payment on their expired debt (which restarts the clock on old debts), and seemingly offering debtors some debt relief by offering to forgive a portion of the debt and settle for less than what was owed even though, legally, the debtor owes nothing (“Robo-Signing is the Tip of the Iceberg for the Banks,” Money Morning, Feb. 3, 2012).

Slowing Lawsuits Could Be a Sign That Banks are Preparing for Legal Battle

The specter of legal action faced by the banks because of the extent of improper documentation and robo-signing in credit card debt lawsuits may already be having an effect on some of the larger lenders. For example, JPMorgan Chase & Co. abruptly abandoned over 1,000 debt collection lawsuits in April 2011. And Erik Kardatzke, a prominent debtor-rights defense attorney of the Florida-based law firm Debt Defense P.L., said in a recent interview that the banks had suddenly stopped filing credit card lawsuits.

“I don’t see any pending suits by JPMorgan Chase or any of the attorneys or law firms that usually work for them,” he said. “I mean, not a single one. This is highly unusual.”

Big banks are already facing stiff legal challenges over the way they robo-signed foreclosure documents. And it’s possible that they’re slowing credit card lawsuits in preparation for a huge legal battle over using similar tactics in credit card debt cases. If that’s so, with millions more lawsuits in question, the results could have enormous bottom-line consequences for banks and debt collectors alike.

Further Reading

The New York Times, “Foreclosures (Robosigning Scandal and Settlement Talks).”

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