CFPB Back in Action Against Credit Card Settlement Firms

13. November 2017.

You cannot miss the commercials promising to settle credit card debt, where third for profit (and some not-for-profit) firms promise to knock 75% to 100% off your credit card debt. Problem is that credit card firms want their balances back to protect their balance sheets. The credit card industry has a long history of supporting non-profit debt counselors, typically alligned to the National Foundation for Credit Counseling (NFCC). The industry, however, views for-profit firms with a different lens.

  • CFPB Director Richard Cordray says Freedom Debt Relief misled consumers about its clout with lenders, all the while knowing it would not actually negotiate with creditors. The government’s lawsuit seeks compensation for customers, civil penalties, and an injunction to prevent future “unlawful conduct.” “I don’t think it’s specific to alternative lenders at all, but I think the regimes do need to tighten up elsewhere in the market,” said Farnish.

The the business models vary, the profit motives diverge.

  • Generally, debt relief or debt settlement companies offer a service to debt-burdened consumers to intervene with creditors–in most cases credit card companies–and secure a lower payoff amount. Often, desperate consumers enter into these agreements without fully understanding how they work.

  • Credit card companies will eventually accept a lower amount than what you owe, but consumers must stop making payments on the credit card bill for an extended period of time.

  • A debt relief firm offers to be the broker between the credit card company and the consumer to negotiate a settlement. Only after it secures a settlement is it legally allowed to collect a fee from the consumer.

As many markets indicate, consumer credit risk is starting to bubble, and there will be plenty of business for fringe companies that promise to repair credit reports or restructure debt. The credit card industry view on repair centers on executing your rights by working through the credit bureau dispute process, goverened under the Fair Credit Reporting Act. For renegotiating debt, consumers will often find a kind ear at their lender, who can adjust interest to make the debt more paletable, of if there is a true capacity issue, to fall back at a non-profit, objective credit counseling service, rather than a for profit negotiator.

Overview by Brian Riley, Credit Advisory Group at Mercator Advisory Group

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