A bill that would license and regulate for-profit debt settlement companies doing business in Massachusetts is gaining momentum in the Legislature, yet some consumer groups say much tougher restrictions are needed for the industry.
With television, radio, and online advertising, debt settlement companies are already attracting business from residents overwhelmed by credit card bills. Unlike debt collection companies, these businesses negotiate with credit card companies to settle a client’s account for a reduced lump sum payment instead of the full balance.
But their success rates are lower than advertised and their promises sometimes come with a hefty price tag to consumers — including deeper debt, because of the fees involved, and deteriorated credit ratings, according to state regulators and a 2010 report from the federal Government Accountability Office.
Governor Deval Patrick’s administration has proposed regulating debt settlement companies twice before. A new version of the bill, filed this summer, won initial approval from two House committees last month and has the support of the debt companies. The bill is also being pushed by the state’s Office of Consumer Affairs and Business Regulation.
“The longer Massachusetts waits, choosing not to oversee this industry, the more consumers will be taken advantage of by these companies,” said Barbara Anthony, undersecretary of the Office of Consumer Affairs and Business Regulation, in a statement earlier this summer to a legislative committee. Anthony was unavailable to comment for this story.
Under the latest proposal, debt settlement companies would be licensed and regulated by the state banking commissioner. They would be required to disclose their fees to customers, create a budget analysis for clients before signing an agreement, and send consumers an account statement every month.
Companies would also be required to post a bond to do business in Massachusetts. Violations of the proposed law could result in up to a $100,000 fine and prison sentence.
Debt settlement companies would be required to disclose their fees to customers, create a budget analysis for clients before signing an agreement, and send consumers an account statement every month.
Critics of the debt settlement industry, including the National Consumer Law Center, believe the companies should be banned — not licensed — in Massachusetts.
The state already allows nonprofit credit counseling services and Massachusetts laws permit regulators to go after these companies for fraudulent practices, said Andrew Pizor, a staff attorney with the law center.
And unlike a previous proposal, which failed to gain the support of the Legislature, the current bill does not require any caps on fees that debt settlement companies can charge their clients, Pizor said.
“At a minimum this bill should have good fee caps,” he said.
Angela Bailey, 51-year-old Dorchester grandmother, said she discovered what can happen without stricter rules.
Bailey turned to a debt settlement company out of California in 2009 after running up more than $90,000 in credit card bills. After paying more than $22,000 over 16 months into an account the company had set up, she found that only one credit card debt for less than $10,000 was settled. Other creditors took her to court because she had stopped paying those bills on the advice of the settlement firm, she said.
Bailey said she is not sure what happened to the rest of her money, since the company stopped communicating with her. She eventually declared bankruptcy.
“It’s ugly all the way around,” Bailey said as she sat in her attorney’s office earlier this month.
In 2010, Massachusetts Attorney General Martha Coakley was among 20 attorneys general who reached a $4.5 million settlement with AscendOne Corporation, a Maryland-based parent company of several for-profit debt settlement companies including CareOne.
The complaint alleged that the company charged consumers but provided little benefit and misled them by suggesting the services were performed by a nonprofit credit counseling agency.
Staffers from Coakley’s office are still reviewing the proposed legislation to regulate debt settlement businesses, said spokesman Brad Puffer.
The agency would like to see tough licensing standards, fee limits, and mandatory cost disclosures included in any proposal, Puffer said.
Still, some oversight is better than none, said Jon Skarin, a senior vice president at Massachusetts Bankers Association.
Several banks have complained that customers who use these companies sometimes get even further behind on other bills, such as their mortgage payments, Skarin said.
“I think this is a good step in trying to stop the most abusive practices,” Skarin said.
The legislation is also supported by the American Fair Credit Council, the industry group that represents debt settlement companies, and CareOne, the company that settled a complaint with Coakley’s office in 2010.
Neither responded to calls and e-mails for comment.
The council and CareOne have spent $162,000 combined in the past three and half years lobbying legislators, according to state records.