The American Bankers Association today joined six financial sector associations in alerting members of Congress to the practices of the debt settlement industry, “which typically misleads millions of Americans into financial jeopardy with false promises of a quick way to negotiate existing debt at a fraction of the cost.”
In a letter to the leaders of the Senate and House commerce committees, the associations said that while some debt settlement companies, or DSCs, operate in compliance with the Federal Trade Commission’s Telemarketing Sales Rule, enforcement actions and consumer complaints demonstrate that certain DSCs continue to engage in deceptive and harmful practices.
“In many cases, DSCs require consumers to have a minimum debt of $7,500 or more to enter a debt relief program and charge fees of 15% to 25% of the total enrolled debt,” the associations said. “Consumers who enter a debt relief program generally seek to settle multiple debts from various lenders (the median amount of enrolled debt was $27,500 across seven accounts), which can take years to complete, if at all.”
The associations said that in the most concerning cases, consumers are instructed to stop paying their monthly credit card bills and personal loans, and to end all contact with their financial institutions. They urged the committees to examine the debt settlement industry and consider enacting legislation to modernize federal oversight, such as establishing additional safeguards to ensure that consumers receive accurate information, understand the risks involved, and are protected from practices that may exacerbate their financial hardship.
“While FTC enforcement and consumer education are critical, they cannot substitute for a comprehensive and modern statutory framework,” the associations said. “Enforcement is inherently reactive and is resource dependent. As a result, it does not address structural gaps in the [Telemarketing Sales Rule] or prevent problematic practices before they take root. Proactive legislation is needed to fill those gaps and prevent consumer harm before it occurs.”
