California Credit Law Blog

Some 250 "debt settlement companies" pray on consumers who are overwhelmed by debts. Consumers are lured by Internet and TV ads promising consumers their debt problems will cease if they just sign up. Typically, the companies require the consumer to make payments to the company while not making payments on their debts. The companies promise that once a pot of money accumulates in the consumer's account, the company will settle the debts with the creditors by paying a percentage of the debt.

In their sales pitches, the companies omit over the fact that they deduct outrageously high fees, that the accounts rarely get to the point there is enough money to settle any debts in large part because of their fees, and that creditors often sue the consumer while all this is going on. The net result is the consumer ends up worse than when he or she started.

At an industry convention in Palm Beach, FL, those present were warned the new federal Consumer Financial Protection Agency may put them all out of business. Here's hoping.

The NY Times front page article includes comments from state and federal officials and representatives of consumer organizations who agree the industry is a scam. For example, Andrew Pizor of the National Consumer Law Center said that when consumers top paying on their bills collectors start calling the creditors file lawsuits. Another observer, the industry is akin to a Ponzi scheme with consumers paying thousands of dollars with no positive results.

Prof Elizabeth Warren has been the leading advocate for creation of a Consumer Financial Protection Agency. The proposed new agency is part of the financial reform bill currently being debated in a Senate House conference committee.

Writing on Politico.com, she points out that when lobbyists for the banks announced last year that they would kill the consumer financial protection agency, observers predicted they would succeed given their money and lobbying. But the dire predictions were wrong and the agency is part of the versions of the bill passed by both houses. Of course, the lobbyists have not given up. They are currently trying to convince the conferees to weaken the agency before it is born.

Prof Warren explains that the reason the lobbyists have not undercut the basic sense behind consolidating seven different consumer protection bureaucracies into one streamlined agency that would be accountable to consumers. Everyone can understand there is a crying need for regulation aimed at making credit card agreements and mortgage documents short and readable.