Bay Space Assemblymember’s invoice would regulate booming debt settlement business – East Bay Occasions
By Erika Paz | CalMatters
Prior to the pandemic, Graciela Gomez relied on two jobs to keep up with her expenses. After losing her part-time job at Macy’s in March 2020, she had to decide whether to pay off her credit cards or pay her rent. She chose the latter.
“I didn’t know who to talk to or who to turn to. I was embarrassed, ”said Gomez.
An ad appeared on her social media feed for a debt settlement firm promising to reduce its debt. After following up, she says she received a lawsuit from one of her credit card companies in March. She’s still fighting today.
As California emerges from the pandemic, some residents face crippling personal debt, despite the fact that many of the state’s wealthiest residents have grown their fortunes. Economic winners include the booming debt settlement industry, made up mostly of online companies that promise to reduce personal debt by negotiating with banks and credit card companies on behalf of the customer. Consumer advocates point out, however, that these companies often draw from financial desperation and do not warn customers of the possible consequences – such as ending up in court.
Now, California lawmakers are considering laws that would regulate the industry more strictly after largely overlooking personal debts from credit cards and loans in pandemic-era legislation that focuses on relieving rental and utility debt. The bill reinvigorates a multi-year debate in the Capitol about whether alternative financial services – like payday loans, debt settlement, and credit repair – are financial predators or a necessary lifeline for Californians with poor or poor creditworthiness.
Rep. Buffy Wicks, an Oakland Democrat who drafted the bill, claims that existing federal regulations don’t go far enough to protect Californians.
“When they work with these companies, we make sure that the consumer is transparent and empowered in the process,” said Wicks.
This is how debt settlement works
After Gomez’s first phone call with ClearOne Advantage, the debt settlement firm, she said she felt that the company would settle all of her debts and that she would only have to make one monthly payment to the company until they hit the balance.
“She just made it sound like, ‘We’re here to help … your life is going to change. It’s getting so much easier. ‘ And I believed it, ”said Gomez.
ClearOne Advantage declined to comment on Gomez’s experience. The company allegedly supplied a testimony from a satisfied customer but refused to provide contact information for CalMatters to interview the customer.
Desiree Nguyen Orth, director of the Consumer Justice Clinic at the East Bay Community Law Center, explained how most debt settlement firms work.
Customers who sign up for a debt settlement plan make a monthly payment to a debt settlement fund. According to Nguyen Orth, debt settlement companies wait until the customer is default on their debt – which can sometimes take up to six months – before negotiating with creditors.
The defaults have to come before the negotiation process can begin, but the debt settlement firms avoid saying so explicitly, Nguyen Orth said. Debt settlement companies like ClearOne Advantage make money by charging their customers a percentage of the total debt owed.
At best, willing creditors agree to pay off the debt for less than the amount owed. After the customer agrees to the new terms, the debt settlement fund is used to pay off the debt.
The result is worse if a creditor refuses to cooperate with the debt regulator. As part of the program, customers sign a cease and desist letter prohibiting creditors from contacting them directly. To collect the debt, creditors sue customers, which often results in a judge ordering that the money be withdrawn from the customer’s bank account or paycheck.
“They come to me when they’re sued and ask, ‘Why am I being sued? I signed up for a debt settlement plan. I don’t get it, ‘”said Nguyen Orth.
She added that most customers do not know that they can negotiate with creditors on their own. Free.
“I think (debt settlement) is one of the options that needs to be there,” said Tomas Gordon, CEO of ClearOne Advantage and president of the Consumer Debt Relief Initiative, an advocacy group for the debt settlement industry. “We educate people the right way and make sure we monitor the industry ourselves to make sure consumers get the best results possible.”
Graciela Gomez stands for a portrait outside her boyfriend’s house in South Gate on June 28, 2021. Gomez lost her part-time job due to the pandemic last year and her debts piled up. Gomez had five credit cards and her part-time job helped make monthly credit card payments. Pablo Unzueta for CalMatters
As part of the enrollment process, Gomez made her income, expenses, and debts available to help establish a monthly budget. But she said she left the impression she could afford to put a $ 250 monthly deposit into her settlement fund when she really couldn’t.
The ClearOne Advantage representative also told her that if she did not write at least $ 10,000 in debt, she could not help her.
The agreement signed by Gomez, which CalMatters has reviewed, makes no mention of minimum requirements for participation in the program, but does charge a fee of 25% of the total debt. That means the company ultimately plans to bill her a little more than $ 2,500. In June 2021, Gomez deposited $ 2,259 into their benchmark fund, of which $ 1,053 was charged as service and transaction fees.
It wasn’t until Gomez was sued by Bank of America that she learned that she had defaulted on all of her credit cards and was now facing a court ruling.
“If I had known from day one that I could have been sued, I would have stopped and tried to do more research to understand what the point of the payment was (ClearOne Advantage),” Gomez said.
What the bill would do
Assembly Bill 1405 wouldn’t change the way debt regulators work, but it would add more regulation. Existing state regulation is limited to companies that serve customers across state lines.
The state bill would mimic some of these federal regulations and apply them to California businesses as well as add new rules such as: B. a three-day “cool-off” period for customers before the contract comes into force.
The bill is moving forward despite almost unanimous Republican opposition. Several lobbies have withdrawn their opposition after successfully pushing for changes, including one that would remove regulations on referral fees, a major source of income for the industry.
But before the recent changes, the debt settlement industry had banded together against the bill. The Consumer Debt Relief Initiative, made up of members of the debt settlement industry, claimed that new regulations would harm the very consumer the law is designed to protect by driving debt settlement companies out of California and leaving consumers with few options.
“Why would any state take debt settlement as an option for these families during this pandemic?” Willie Brown, former congregation spokesman and mayor of San Francisco, said in a video for the Consumer Debt Relief Initiative. “It is a vital service for those who need it most.”
The alternative for many families, Brown and the industry argue, is bankruptcy or worse.
“It’s just bad actors – it’s almost a black market,” said Gordon, the group’s president.
Congregation member Wicks disagreed. “If the bad actors feel like they can’t operate in California, they can go elsewhere,” she said. “And the good actors can stay here and help our working families who need help.”
Gordon said he believes the law is more about helping banks and credit card companies that don’t like having to reduce customer debt.
OneMain Financial, the only creditor backing the bill, declined to comment but wrote in a letter of support for the bill that their main goal is to work directly with their customers who are not paying their debts.
Prepared for debt settlement
Despite federal CARES Act loan waivers and a statewide eviction moratorium to protect Californians, personal debts such as credit cards and medical bills have been largely overlooked by lawmakers, exposing consumers to potential predatory practices from alternative financial services.
“This is a huge bubble of people prepared for debt settlement,” said Nguyen Orth.
The debt settlement industry expects it will do very well. In a February meeting of the Consumer Debt Relief Initiative, an Accenture market analysis said the industry is forecasting a 75% increase in the number of accounts enrolled with debt settlement services in 2021.
California’s new Consumer Finance Protection Act, which went into effect Jan. 1, gave the State Department of Financial Protection and Innovation new powers to regulate the industry. The agency says it won’t start tracking debt settlement companies until 2023.
Does the calculation go far enough?
According to Nguyen Orth, everything ClearOne Advantage has done on this case is legal, so it is unlikely that AB 1405 would have changed much for Gomez. But the bill would address some of the more egregious practices Nguyen Orth has seen, such as promising unrealistic results without informing customers of the possible risks or offering robbery loans that could lead to further debt.
Gomez ended her contract with ClearOne Advantage in late June, but continues to work with Bank of America to resolve the lawsuit and outstanding balance. Your advice to others? Avoid debt settlement companies at all costs.
“This is an absolute fraud. They hunt down people like me, ”said Gomez. “Call the credit cards or debt collection agencies yourself … It’s easier, and the money goes straight to the person you owe.”
This article is part of The California Divide, a collaboration of newsrooms researching income inequality and economic survival in California.