The debt that seniors leave behind when they pass away is becoming big business for debt collectors, who sometimes use questionable tactics to go after family members and pressure them into debt settlement agreements even though spouses and other survivors may not be legally required to pay.

When people die, debts usually die with them, unless there is a co-signer, a typical arrangement with many home mortgages and some credit cards, or the debts are entered into probate, in which case debt collectors can file a claim to recover the money. As seniors take on more debt faster than ever before — an average of $40,130 in 2007, the latest year for which figures are available — creditors face greater burdens from unpaid accounts left behind by deceased borrowers that nobody is legally required to pay. Creditors can either write off the accounts as losses or hire a death-debt collector to attempt to recover some of the money.

More creditors are opting for the death-debt collection route because of its advantages. Death-debt collectors act as a shield for creditors from the dirty work of going after grieving survivors who may not be legally required to pay the debts and prevent the creditors from possible public relations problems. And, although death-debt collectors in many cases extend debt settlement offers for less than the amount owed, the roughly 40 percent cut that the debt collectors take of the collected payments still leaves creditors with 60 percent of whatever is collected. Death-debt collectors also have a stake, as a 40 percent cut represents about twice the normal collection rate for other kinds of delinquent consumer debt.

However, while the death-debt collection business may be booming, the tactics some collectors use to pressure survivors to pay debts they don’t owe have come under the scrutiny of the Federal Trade Commission (FTC), which has yet to provide firm regulations for the way death-debt collectors contact survivors. Some death-debt collectors have been accused — and sued — for making harassing phone calls. Others have come under fire for the way they go after grieving spouses and other relatives by preying on their emotional state and claiming they have a moral obligation to pay, a practice often codified in debt collectors’ training materials and carefully calibrated scripts, a tactic one debt collector refers to as “empathetic active recovery.” Other collectors have been sued for falsely telling survivors that they are legally required to pay the debts of the deceased (“For the Families of Some Debtors, Death Offers No Respite,” The Wall Street Journal, Dec. 3, 2011).

Trade Group: Death-Debt Settlement Offers Ensure Credit for Older Americans

Still, the FTC allows death-debt collectors to contact family members to find out who is managing the estate so that collectors have an opportunity to collect debts that are legally owed. It’s a problem for the industry because many debtors are failing to formally designate someone to handle their affairs after death, leaving debt collection firms unable to determine who to contact. The FTC has declined requests by lawyers to ban collection calls to surviving family members and to impose a cooling-off period during which relatives can’t be contacted by debt collectors.

“While people might think it is horrible for collectors to speak with surviving spouses, we have no power to change that,” said J. Reilly Dolan, acting director of the FTC’s financial-practices division.

In all cases, FTC rules and regulations that apply to the debt collection industry also apply to death-debt collectors.

ACA International, the death-debt collection industry’s main trade group, defended the practice of collecting the debts of deceased consumers. The group said that death-debt collection helps other seniors by ensuring that lenders will continue to extend credit at competitive interest rates to older Americans.

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A Texas woman who sought mortgage debt relief from Bank of America has sued the bank after it approved her request for a loan modification for her Austin home but then rescinded the approval and eventually began foreclosure proceedings against her.

The lawsuit by Maria Gonzales alleges that the bank wrongly invalidated the loan modification agreement it had approved for Gonzales, and fraudulently sought to foreclose on her home, because the agreement wasn’t signed by her husband, Albert Gonzalez. However, Albert Gonzalez died of a heart attack in 2007, three years before Gonzales sought the loan modification. In fact, it was Albert Gonzales’ death that led to the request for mortgage debt relief in the first place.

According to the lawsuit, Gonzales and her husband bought their home in August 2006 with an adjustable rate mortgage from Countrywide Financial Corp., the former $500 billion home loan giant that eventually collapsed into bankruptcy. Countrywide Financial was bought by Bank of America in 2008 and cost the bank $108 million to settle federal charges that Countrywide Financial overcharged customers who were struggling to keep their homes.

Bank of America became the servicer of Gonzales’ loan when it bought Countrywide Financial. When Gonzales fell behind on her mortgage payments in 2010, she sought a loan modification from the bank, which was approved in January. In June, Bank of America notified Gonzales that the loan modification had been canceled because it had not be signed by her husband, who was listed as co-borrower on the original loan.

According to the lawsuit, the bank notified Gonzales of its decision to cancel the loan modification after she had sent the company a copy of her husband’s death certificate.

Bank of America then notified Gonzales of its intention to list her home for foreclosure auction (“Austin Woman Sues Bank of America Over Foreclosure Procedures,” The Austin-American Statesman, Dec. 1, 2011).

Visiting District Court Judge Gus Strauss granted an injunction preventing Bank of America from proceeding with the foreclosure process against Gonzalez until Dec. 15, when another hearing on the case was scheduled.

Gonzales’ lawsuit against Bank of America was filed on the same day that a Massachusetts lawsuit was filed accusing five of the nation’s largest banks, including Bank of America, of deceptive and fraudulent foreclosure practices.

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The U.S. Department of the Treasury will be part of a new federal task force charged with shutting down illegal mortgage debt relief scams posing as government assistance plans.

The Treasury Department will team up with the Office of the Special Inspector General for the Troubled Asset Relief Program and the Consumer Financial Protection Bureau to investigate and shutter mortgage modification scams that trick struggling homeowners into thinking the scams are debt relief programs associated with the federal government (“Task Force Set Up to Investigate Mortgage Scams,” Reuters, Dec. 1, 2011).

According to regulators, troubled homeowners who try to apply for the federal Home Affordable Modification Program (HAMP) have been defrauded by companies that collect fees for false promises of lower mortgage principals or lower monthly mortgage payments. Applying for HAMP is free through the federal government.

The Treasury Department said that it will issue a “fraud alert” to homeowners who are eligible for mortgage modifications through HAMP that will advise how to contact the task force if they suspect a scam.

The announcement of the task force comes at a time when government efforts to provide help to consumers facing the risk of foreclosure have received significant criticism, banks are being investigated for foreclosure-related malfeasance, and the housing industry remains depressed from falling prices and high unemployment.

Regulators released several consumer tips for struggling homeowners:

• Homeowners can apply for HAMP for free at (888) 995-4673 or online at www.makinghomeaffordable.gov
• It’s illegal for a company to charge advance fees to modify a mortgage
• Outside companies can neither modify mortgage loans or “pre-approve” HAMP applications; only the mortgage company that services a mortgage can modify it
• Outside companies offering HAMP application services can’t increase a homeowner’s chance of getting a mortgage modification, no matter what the companies say
• Watch out for companies using fake U.S. seals or logos that illegally promote a false connection with the federal government
• Companies that advise homeowners to stop paying their mortgages are scams and should be avoided at all costs (“Feds Target Mortgage Modification Scams,” The Baltimore Sun, Dec. 2, 2011)

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The Federal Trade Commission and the Attorney General of Florida have launched an investigation into a Florida debt relief business that received more than 300 consumer complaints in just over a year.

United Financial Systems, based in Margate, allegedly signed customers up to a debt relief plan and charged them fees for debt help services that were never provided. According to complaints from consumers, United Financial Systems promised consumers that it would negotiate with creditors on their behalf to consolidate unsecured debt, such as credit card debt, into one monthly payment. The company would take a portion of the monthly payment of the top as a servicing fee and use the remaining portion of the monthly payment to pay off creditors.

However, the more than 300 consumer complaints failed with the Florida attorney general’s office about United Financial Systems alleged that the debt relief company didn’t use the money given them to pay down customers’ debts. Instead, the complaints allege, United Financial Systems kept the money for themselves, leaving customers thousands of dollars in the hole and often in worse financial shape than when they enrolled (“Florida Consumers Bilked in Debt-Relief Scam,” Alan J. Fisher press release, Dec. 1, 2011).

In 2010, one United Financial Systems customer, Carolyn Greene, said that the company actually made payments on her behalf for three years but then suddenly stopped making them on time. As a result, Greene’s bank kicked her out of a debt help program that reduced her credit card interest rate from 29.99 percent to 6 percent. United Financial Systems claimed they made the payments on time but Greene’s bank statements showed otherwise. Greene reportedly could not reach someone at United Financial Systems for help. She was reportedly repeatedly placed on hold or her phone calls would simply not be answered. When Greene was able to get through and mentioned she would turn to the state attorney general’s office for help, she said she “could hear a difference in their tones. They couldn’t get through to me enough that they were taking care of all of this” (“Debt Management Firm Mismanages Debt,” The Morning Call, Aug. 11, 2010).

The Florida attorney general’s office has given United Financial Systems until the end of August to issue refunds to customers. The company has denied any wrongdoing.

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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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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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