Under fire, ‘debt settlement firms’ turn to K Street

A small but controversial part of the financial industry that claims to lower consumers’ debt is hiring its first Washington lobbyists just as some of its biggest firms come under fire from state officials and members of Congress.

As household budgets fell further into the red over the last decade, hundreds of debt-settlement firms sprang up, enticing consumers with offers to negotiate lower payments with banks and card issuers.

But over the past few months, state officials and federal lawmakers have zeroed in on the industry, alleging that the firms do little to help consumers and sometimes engage in false and deceptive business practices.

New York State Attorney General Andrew Cuomo, the most critical of the state officials, has called the firms part of a “rogue industry” and has launched a nationwide investigation with subpoenas issued to 14 companies and lawsuits filed against two. Meanwhile, the Federal Trade Commission has sought greater power over the industry. A handful of House members are already on record as supporting new federal regulations.

As Congress and President Obama work to remake the financial system and aim to set up a new agency to regulate consumer financial products, the debt-settlement industry is taking steps to have a greater say at the federal level.

“We understand that there are bad players in the industry. That’s why we support regulation,” said Wesley Young, a board member of one of the main industry groups, The Association of Settlement Companies (TASC). “We would like to make sure that any kind of regulation wouldn’t put us out of business.”

The industry, which has lobbied extensively at the state level, is now hiring Washington lobbyists to shape pending legislation. Young’s association, which has 200 members and is based out of the offices of a Wisconsin lobby shop, hired Patton Boggs in April and spent $60,000 on federal lobbying in the first quarter. The United States Organizations for Bankruptcy Alternatives (USOBA), the other main industry association, closely tracks legislation at the state and federal level and may register a Washington lobbyist as early as next week.

“USOBA has not up to this point had any counsel or representation on the Hill, but that will likely change, and we will be much more active in the coming weeks and months,” said John Ansbach, head of legislative affairs at USOBA.

Meanwhile, Credit Solutions of America, a Texas-based debt-settlement firm, has registered three outside lobbyists just since mid-June and has registered to lobby on its own behalf, according to congressional records. The firm has spent at least $37,500 so far.

“Given these tough economic times, Credit Solutions strives to stay keenly aware of legislation that could affect the interests of our clients and their families,” said Heather Carmichael, vice president of legislative affairs at the firm. “As proponents of strong legislation protecting consumers, we retained lobbyists when we became aware of federal legislation that could affect our industry.”

Credit Solutions, founded in 2003, has $2.25 billion in debt under management, and says it has settled $900 million over all. In March, Texas Attorney General Greg Abbott sued the firm for false and deceptive business practices. In May, Cuomo filed a similar suit, arguing that 18,000 New Yorkers had signed up with Credit Solutions between 2003 and 2008 but that the firm did little to help its clients.

Cuomo alleged that the firm promised consumers a 60 percent reduction in outstanding debt, but that only 1 percent of clients actually saw such high savings.

“We’re cooperating fully,” said Bronwen Walsh, a spokeswoman for the firm.

The debt-settlement industry argues that it is a beneficial option for consumers seeking a third party to help them climb out of a financial hole. The industry is an alternative for debtors wishing to avoid bankruptcy or who do not or cannot seek credit counseling.

In recent years, as consumer debt skyrocketed, the debt-settlement industry developed rapidly. Outstanding revolving consumer credit, basically a measure of credit card debt, jumped more than 20 percent from 2004 to a peak of $977 billion in the third quarter of 2008, according to the Federal Reserve. At the end of 2008, the average household with at least one credit card had roughly $10,700 in card debt, according to the Nilson Report, an industry publication.

Young said the business “really exploded” after Congress passed a bill in 2005 that made it more difficult to file for personal bankruptcy. Young estimated that there are as many as 1,000 debt-settlement firms that managed $15 billion in client debt in 2008.

Settlement firms typically charge an upfront fee, tell consumers to stop payment on their outstanding balances and put money into a holding account. After several months, the firms take the saved-up money to the issuer as a bargaining tool to negotiate a lump-sum payoff.

But consumer advocates and lawmakers critical of the industry say that firms sometimes do more harm than good.

“The debt-settlement industry will typically require fees paid up front before any services are rendered,” said Robert Manning, author of Credit Card Nation. “That’s obviously a no-no.”

Manning and other critics say that consumers’ credit histories are often hurt and their legal right to the saved-up money may be compromised during the settlement process. Consumers may also continue to face creditor lawsuits.

Rep. Bobby Rush (D-Ill.) introduced a bill in May that would rein in the debt-settlement industry by giving the Federal Trade Commission (FTC) expedited rulemaking authority. The bill would also direct the commission to consider rules that prohibit the settlement firms from collecting upfront fees and require greater disclosure of business practices. The bill has four co-sponsors, and Rush’s office expects the House Energy and Commerce Committee to take up the bill soon.

“I think the trend is clear in that the debt-settlement industry is going to be increasingly regulated in the future both at the federal and at the state level,” said Jeffrey Tenenbaum, head of the credit-counseling and debt-settlement practice at Venable law firm.

The FTC, which has filed 15 enforcement actions against debt-settlement firms and other credit-counseling firms since 2001, held a workshop in September on possible regulation of the industry. In May, Eileen Harrington, deputy director of the FTC’s consumer protection bureau, testified that the commission “strongly supports proposed legislation” making it easier to regulate the industry.

Young said the association is opposed to several parts of the Rush bill.

“What we’re concerned about are some fee provisions that are inconsistent with what we’ve done on a state level,” Young said. “We’ve worked very hard to get those consumer protections in place.”

Across the country in 2009, 41 bills have been introduced at the state level on debt settlement, credit counseling and debt management programs, according to the National Conference of State Legislatures. Young said that The Association of Settlement Companies has been active in 25 states, and state lobbying records show that the association has lobbied in 2009 in at least Nevada, Indiana, Wisconsin, Ohio, Iowa, Illinois, Utah, Montana and Missouri.