The Houston Better Business Bureau is warning consumers about the owner of two local debt collection agencies who has a record with the BBB of regularly harassing, threatening, and intimidating consumers.

Susan Schade of the Houston BBB told KPRC-TV, the local NBC affiliate, that consumers should be wary of Gerald Wright, the owner of Cole, Tanner and Wright, a debt collection agency that allegedly harassed and intimidated consumers, in one case telling debtor Charisma Anderson that an affidavit was being filed against her and that she could lose her job or go to jail if she didn’t pay $1,400 to cover an old debt that she no longer legally owed.

Such statements are in violation of the Federal Trade Commission’s Fair Debt Collection Practices Act (FDCPA), according to Schade. “They’re told that their driver’s license could be taken away,” Schade said, recalling some of the complaints against the collection company. “The person calling has said they’re from the sheriff’s dept or they’re a federal officer of some sort. Those are totally against the rules. The law says you can’t harass people and you can’t misrepresent who you are” (“Local 2 Investigates Abusive Debt Collectors,” KPRC-TV, March 23, 2012).

Consumer attorney Dana Karni sued Cole, Tanner and Wright on behalf of Anderson. The debt collection agency has since closed its doors. However, the BBB is warning Houston-area consumers that Wright is now affiliated with another debt collector called Goldman, Schwartz, Lieberman and Stein. “Unfortunately this company tends to move so much that we’ve gotten returned mail from the company,” said Schade.

The most recent address for Goldman, Schwartz, Lieberman and Stein is a post office box at a UPS Store. KPRC-TV said that the woman listed as the Operations Manager at Cole, Tanner and Wright and the Director at Goldman, Schwartz, Lieberman and Stein is a convicted thief who served five years’ probation for welfare fraud. In Texas, debt collectors aren’t required to pass a criminal background check, KPRC-TV added.

According to the FDCPA, collectors must send consumers something in writing within five days of their first call explaining what you owe and the details of the debt. Karni advises consumers to not pay debt collectors unless they’re certain they legally owe the debt. “Paying somebody over the phone when you don’t know what you’re paying and what you’re paying for, and you have no confirmation in writing, you might as well take your money and throw it in the trash,” Karni said.

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Homeowners who have reached a debt settlement agreement with their lenders and have had a portion of their mortgage debt forgiven may get some extended tax relief from new legislation winding its way through Congress.

The Mortgage Cancellation Relief Act of 2012 (H.R. 4202), introduced last week by U.S. Rep. Charles Rangel, D-NY, extends the federal income tax relief provision that exempts struggling homeowners from having to pay taxes on the portion of mortgage debt forgiven by a financial institution. In 2007, Rangel authored the current Mortgage Cancellation Relief Act, which expires at the end of 2012. The proposed bill would extend the tax debt relief act until 2014.

Over the last five years, American homes have lost $7 trillion in value. The declining values have caused many families facing foreclosure to “short sell” their homes for less that what they paid for them and sometimes for less than the outstanding mortgage debt. Prior to the 2007 law, the amount of any loan forgiven after a short sell or foreclosure was considered taxable federal income. Rangel’s proposal would ensure that struggling homeowners would be able to avoid for another two years the double-whammy of having to pay federal income taxes after losing their homes.

“The sanctity of our homes is at the heart of the American Dream,” Rangel said in a statement. “The collapse of the American housing market that began in late 2006 has brought our economy to its knees and left Americans from all walks of life without a home or struggling to keep a roof over their head. While the law cannot repair the borrowers’ credit or punish those who misled them into taking out inappropriate loans, it addresses a fundamental unfairness in the lives of those who find themselves in these dire circumstances” (“Rangel Introduces Bill To Extend Relief To Americans Losing Their Homes,” Office of U.S. Rep. Charles Rangel press release, March 21, 2012).

There are currently 12 million Americans in danger of losing their homes because they are underwater and owe more on their mortgages than their homes are worth. An estimated 4 million Americans have lost their homes to foreclosure since the Mortgage Cancellation Relief Act was signed into law in 2007.

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Fannie Mae and Freddie Mac should provide immediate debt relief to underwater homeowners by implementing appropriate principal reductions, Illinois Attorney General Lisa Madigan said on Friday.

In a letter to Edward J. DeMarco, the acting director of the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, Madigan demanded that the agency reassess its unilateral rejection of debt relief for troubled homeowners who have loans with Fannie Mae and Freddie Mac. DeMarco has steadfastly refused to provide principal debt reductions, even in the face of criticism from Congress and consumer advocates, and reports of an internal analysis conducted by the FHFA itself, that claim principal mortgage reductions are beneficial and will ultimately save taxpayers money (“Madigan Calls for Debt Reduction for Fannie, Freddie Borrowers,” The Rock River Times, March 23, 2012).

Some of the country’s largest banks have begun offering mortgage principal reductions for borrowers who owe more on their homes than they are worth in an effort to stabilize the housing market, but Fannie Mae and Freddie Mac — which own 60 percent of the nation’s home mortgages — have not. In her letter to DeMarco, Madigan said that the FHFA’s refusal to follow suit is troubling, considering the share of home mortgages the federally-backed agencies own.

“Principal reductions for borrowers can prevent the likelihood of defaulting and, in turn, prevent unnecessary foreclosures,” Madigan said. “This is a critical step to repair the widespread destruction caused by the housing market’s crash that has reverberated in communities across Illinois.”

DeMarco has said that a debt relief program for underwater homeowners would create a “moral dilemma” because it would reward borrowers who have made poor decisions. In February, a Fannie Mae debt relief pilot program was killed just two weeks before its launch over “philosophical differences.” Contrary to DeMarco’s report to Congress, Fannie Mae’s own analysis of the pilot program found that it would have saved taxpayers billions of dollars while obtaining mortgage debt relief for millions of troubled homeowners.

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Advocates representing homeowners frustrated with a lack of mortgage debt relief from government-controlled lenders Fannie Mae and Freddie Mac, which have refused to adjust borrowers’ mortgages to reflect true home values, even in the face of evidence that suggests doing so would save taxpayers money, have delivered their message straight to the top.

Local members of progressive advocacy group MoveOn.org delivered a letter and petition with 48 pages of signatures to President Obama’s Ashville, NC, campaign headquarters on Thursday, demanding the dismissal of acting director of the Federal Housing Finance Agency, Ed DeMarco, for refusing adjust the mortgages of underwater homeowners whose houses, as a result of the recession and housing crisis, are worth less now than when they bought them.

DeMarco, contrary to repeated calls by some members of Congress and officials in the Obama administration, has steadfastly refused to offer mortgage debt relief to borrowers with Fannie Mae and Freddie Mac home loans, which together make up 60 percent of all mortgages, because doing so would create a “moral dilemma.”

The petition also calls for Fannie Mae and Freddie Mac to provide debt relief via mortgage adjustments to approximately 10 million underwater homeowners who have mortgages with the agencies.

“Americans are sinking in underwater mortgages. It’s far past time that government-controlled mortgage lenders Fannie Mae and Freddie Mac provide some needed relief,” Randy Bernard, an Asheville MoveOn member, said in a statement. “Clearly, Ed DeMarco doesn’t care about homeowners. If he did, he would allow them to adjust their mortgages to reflect the true value of their homes. To help get our economy back on track, President Obama should replace DeMarco and make sure Fannie and Freddie provide relief to the millions of Americans struggling with mortgage debt” (“MoveOn.org Demands Mortgage Relief at Pres. Obama’s Campaign Headquarters,” Mountain Xpress, March 16, 2012).

The Ashville event coincided with similar MoveOn.org events throughout North Carolina and across the country as part of a national day of action that the advocacy group called “Save Our Homes.” Nationally, MoveOn.org collected over 60,000 signatures for the mortgage debt relief petition.

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A shuttered debt collection firm that had touted itself as an elite collection agency in the aviation industry has reached a settlement agreement with the Federal Trade Commission over alleged consumer abuses including harassment and threats of physical harm.

California-based Debt collection firm Rumson, Bolling & Associates claimed in 2010 that it was in the “top 5 percent of collection agencies for the aviation industry.” However, the firm’s operation was halted last fall by a U.S. district court at the request of the FTC, which had filed a complaint against the firm over allegations of illegal business practices. The company’s assets were frozen, a receiver was appointed to run the company, and four people and three companies were charged with multiple violations of the Federal Trade Commission Act and the Fair Debt Collection Practices Act.

The defendants allegedly “harassed and abused consumers by threatening physical harm and death to them and their pets, threatening to desecrate the bodies of deceased relatives, and using obscene and profane language. The defendants also allegedly improperly revealed consumers’ debts to third parties, such as the consumers’ employers, co-workers, neighbors, and family members; falsely threatened consumers with lawsuits, arrest, seizure of their assets, or wage garnishment; and falsely claimed that consumers would be liable for legal fees incurred in the collection of the debt” (“Two Defendants in Abusive Debt Collection Case Are Banned from the Industry,” FTC press release, March 15, 2012).

Although the defendants used the slogan “no recovery, no fee” when soliciting small business and other clients, claiming that they would collect a fee only after successfully collecting a debt, the defendants in reality allegedly deceived clients by collecting money from consumers and keeping more than they were entitled to — sometimes all of it — instead of forwarding collected debts to clients. The defendants also allegedly asked for additional fees to file debt collection lawsuits that would “guarantee” the successful collection of a debt, but many times failed to file such lawsuits on behalf of clients, who in such cases never received any collected debts.

Under terms of the settlement agreement, Frank E. Lindstrom Jr., a manager in the operation, has agreed to pay $673,000, suspended except for $29,500 due to an inability to pay. A second manager in the operation, Kevin Medley, has agreed to pay $390,000, suspended except for $17,500 due to an inability to pay. Both managers are also barred from the debt collection business and are prohibited from misrepresenting any claim, including those related to debt relief, mortgage modification, and credit repair services. They are also barred from disclosing consumer information they may have obtained and are ordered to destroy it.

Further Reading

Final Judgment and Order for Permanent Injunction and Monetary Relief as to Defendant Kevin Medley: Federal Trade Commission v. Forensic Case Management Services Inc., et al. Filed March 14, 2012.

Final Judgment and Order for Permanent Injunction and Monetary Relief as to Defendant Frank E. Lindstrom, Jr.: Federal Trade Commission v. Forensic Case Management Services Inc., et al. Filed March 13, 2012.

Complaint for Preliminary and Permanent Injunction: Federal Trade Commission v. Forensic Case Management Services Inc., et al. Filed September 12, 2011.

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The controversial proposed settlement of a class-action lawsuit against an alleged debt relief scam that awards hundreds of thousands of dollars in legal fees to class-action attorneys but gives nothing to victims was approved by a federal judge last week.

According to the lawsuit, Maryland law firm Persels & Associates allegedly scammed 125,000 consumers nationwide by charging them thousands of dollars in 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.”

The approved settlement, which was characterized as a “joke” by one victim, pays class-action attorneys up to $300,000 and $5,000 for lead plaintiff Miranda Day of St. Petersburg, Fla., but provides no relief for the tens of thousands of remaining clients. However, U.S. District Court Judge Thomas Wilson approved the settlement, calling it “fair, reasonable, and adequate.”

Wilson said that the problem with awarding relief for victims who lost thousands of dollars in the scam is that the debt relief company is broke. According to Persels & Associates, the law firm lost nearly $6 million in 2012 and 2011 and owes $14 million to settle an unrelated Maryland lawsuit. “Unfortunately, there just weren’t funds available to distribute,” said Tampa attorney Katherine Earle Yanes, one of several attorneys who filed the lawsuit (“Class-Action Debt-Relief Settlement Approved,” Tampa Bay Times, March 15, 2012).

Judge, Attorneys: Settlement, Without Compensation for Victims, Is a Good Thing

Yanes said that the lawsuit was ultimately a good thing for consumers because it forced Persels & Associates to reform its behavior toward clients, a stance also taken by Wilson. However, Michael Kirkpatrick, an attorney for consumer advocacy group Public Citizen, said when the settlement was first proposed that the class-action attorneys capitulated without launching an adequate investigation of Persels & Associates’ financial condition. The lawyers, Kirkpatrick said, simply accepted on faith the firm’s representations of its ability to pay.

At the time, Wilson said that even partial relief for scam victims was “impractical” and something “that ain’t going to happen” since it would cost the broke defendants tens of millions of dollars. In his settlement approval ruling, Wislon reaffirmed that Parsels & Associates was unable to pay even a relatively small award to the 125,000 victims of its scam. “These circumstances … demonstrate the futility of the plaintiff taking this case to trial since any judgment would be uncollectable,” the ruling said.

Wilson also said that the settlement was fair because class members had the option of withdrawing, which would allow them to file suit separately. When the proposed settlement was announced in February, 325 consumer had opted out of the settlement. The settlement was opposed by the attorney generals of five states because it didn’t compensate consumers.

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Americans with government-insured loans and members of the military caught up in the housing crisis are eligible for a measure of mortgage debt relief under two housing initiatives unveiled by President Obama on Tuesday.

The first initiative cuts refinancing fees for home mortgage loans insured by the Federal Housing Administration (FHA). Currently, the federal government offers a program that allows borrowers with home loans backed by the FHA to refinance their loans at a lower interest rate. However, the fees charged by the program have kept a lot of borrowers from signing up. Under the new initiative, which slashes those fees, the government expects that an additional 2 million to 3 million borrowers will end up getting some mortgage debt relief by refinancing their home loans under the program.

A homeowner who owes $175,000 on an FHA mortgage, for example, could refinance the loan under the old program at 4 percent interest and get monthly payments to around $1,010. Under the new program, with the lower fees, the same homeowner could get monthly payments down even further, to about $915.

The second initiative involved an agreement with various banks an lenders to conduct reviews of foreclosures on military members. Many military members have had their homes wrongfully foreclosed and the agreement would provide, for any service member or veteran whose home was wrongfully foreclosed on since 2006, compensation equal to a minimum of $116,785 plus any home equity lost since the foreclosure. Additionally, any service member who was wrongfully denied refinancing will receive a refund equal to the amount of money lost (“Obama Unveils Housing Initiatives for Military, FHA Families,” The Washington Post, March 6, 2012).

The compensation for the foreclosure relief initiative will come from the mortgage services who wrongfully foreclosed and comes on top of the $25 billion settlement that the federal government and 49 state attorneys general reached with the nation’s largest banks over their roles in fraudulent home foreclosures. The administration will also provide $10 million to the Veterans Affairs fund that helps support loans for veterans.

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The new Consumer Financial Protection Bureau is planning to crack down on illegal debt collection practices more aggressively than any government watchdog has ever before, according to bureau Director Richard Cordray.

At a conference of state attorneys general on Tuesday, Cordray said that the CFPB is developing a rule that would allow for formal federal supervision of debt collectors, a first in the industry. Under the rule, the bureau would be able to send examiners on-site to debt collection firms to take a look at their operations and determine if the firm is complying with the law. The proposed rule comes on the heels of the CFPB’s February announcement that it plans to supervise all debt collection firms in the U.S. with more than $10 million in annual receipts.

Cordray characterized some debt collectors’ methods as “just unconscionable” and that “the worst practices undermine our basic humanity, turning people into mere account-ledger entries and spawning treatment that flatly disregards all common courtesy on the way to violating the law.” Cordray noted that the supervisory efforts under the new rule would cover more than 60 percent of debt collection market activities.

“We will set forth our expectations through public examination procedures, encourage robust compliance programs, communicate expectations confidentially to the entity throughout the examination and rating process and ensure appropriate corrective action where necessary,” Cordray said. “By comprehensively assessing large collectors, as well as many of the bank creditors who originate the debt, supervision would allow us to understand and address the systemic problems posing risks to consumers” (“New Consumer Watchdog Agency Targets Debt-Collection Practices,” The Wall Street Journal, March 6, 2012).

Debt collection remains a top source of consumer complaints, despite action over the years by the Federal Trade Commission and state officials, as the number of Americans with debt under collection has increased dramatically over the past decade to 30 million. Cordray said that the CFPB would bring a new tool to the fight against illegal activity and fraud in the debt collection industry and that the bureau would rely on cooperation with federal and state agencies, including the FTC and state attorney’s general, to “transform this situation” and affect change in the debt collection industry in a more lasting way.

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Some of the billions of dollars in credit card debt that was charged-off during the Great Recession is coming back to bite consumers who benefitted from forms of credit card debt relief, such as debt cancellation, debt forgiveness, and debt settlement services.

Many debtors don’t realize that as soon as they breathe a sigh of relief after their creditors agree to cancel, forgive, or settle some of their credit card debts for less than what was owed — often gained with the help of a professional debt relief service — they need to switch gears and prepare to pay taxes on the portion of forgiven debt.

The IRS, which counts cancelled and forgiven debts as income in most cases, requires that creditors send 1099-C tax forms to debtors who have had a portion of their debts forgiven. The IRS projected that creditors will send taxpayers 6.4 million 1099-C forms in 2012, up from 3.9 million in 2010.

Gerri Detweiler, a personal finance expert for Credit.com, said that the increase in 1099-C forms is due to the rise in credit card defaults during the recession, which, according to Moody’s Investor Service, resulted in $75 billion in write-offs among the nation’s six largest credit card companies in 2009 and 2010.

The only way to avoid liability for a tax bill associated with cancelled debt is to prove that the debt was discharged in bankruptcy or that the taxpayer was insolvent when the debt was written off, according to Jennifer MacMillan, an enrolled agent in Santa Barbara, Calif (“Canceled Credit Card Debts Come Back to Haunt Taxpayers,” Detroit Free Press, March 5, 2012).

Because some of the cancelled debts that the IRS is collecting taxes on can be decades old, it’s important to keep written records of cancelled, forgiven, or settled debts for extended periods of time. Additionally, many 1099-C forms contain errors, sometimes due to recordkeeping issues that can frequently arise from old debts. According to Nina Olson, an IRS Taxpayer Advocate, Treasury Department regulations encourage creditors to file 1099-Cs for debts they haven’t tried to collect on in 36 months or more, even if the debts haven’t been forgiven. And sometimes, taxpayers will receive duplicate forms for the same debt.

The number of 1099-Cs will rise even more if a tax debt relief law that gives homeowners an exemption to avoid the income tax burden on cancelled mortgage debt is allowed to expire this summer. The law was enacted in 2007 to help homeowners caught in the mortgage crisis avoid an income tax penalty for homes that received mortgage debt relief or ended up in a short sale or foreclosure.

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The Oregon Department of Consumer and Business Services is warning Oregonians to be careful when responding to tax season advertisements promising free debt management help.

In a recent news release, the DCBS said that some of the companies making such debt management promises are nothing more than scams. The agency said that it had noticed recent fliers and websites offering “free” help with the 2007 Mortgage Debt Relief Act and that, in at least one case, the deceptive advertisements used symbols to make it appear that the service came from a government agency.

“We recognize many people are struggling financially but consumers need to be cautious,” said David Tatman, administrator of the department’s Division of Finance and Corporate Securities. “Oregon has strong protections in place for debt management companies. Don’t be duped by a tax season scheme.”

To help consumers protect themselves from potential tax debt management scams, the DCBS released a summary of basic consumer protections provided under Oregon law:

• Companies offering debt relief or debt management services, including foreclosure avoidance, short sales, mortgage modifications, or that offer to negotiate with creditors to reduce monthly payments, must be registered with the state
• The maximum advance fee that debt management companies can change is $50
• The maximum monthly fee that debt management companies can charge is $65

“Particularly during this time of year, consumers may be solicited for debt services in relation to tax assistance. The department is encouraging consumers to obtain information about tax questions from the IRS or by consulting a licensed tax preparer,” the DCBS said (“State Urges Consumers to Beware of Tax Season Scams,” DCBS press release, Feb. 23, 2012).

Consumers who are interested in debt management services are encouraged to search for registered companies online at www.dfcs.oregon.gov or call the department toll-free at (866) 814-9710. Consumers may also use the website to report companies who are illegally advertising debt relief or debt management services in the state.

For more information about the Mortgage Forgiveness Relief Act, consumers can visit the IRS website at www.irs.gov.

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