TIFFANY L. PARKS
Daily Reporter
The Ohio Council of Churches, credit counseling agency Apprisen and United Way of Greater Cincinnati have each criticized a bipartisan bill designed to regulate debt settlement service providers.
House Bill 173, sponsored by Reps. Louis Terhar, R-Cincinnati, and Dale Mallory, D-Cincinnati, would require that debt settlement companies disclose an estimated amount of time needed to achieve debt relief for the consumer.
Companies would have to estimate, in writing, the amount of money or percentage of debt the consumer may save by entering into a debt settlement agreement, the effect of the service on both a debtor’s creditworthiness and the collection efforts of the debtors’ creditors and the fact that a debtor would be permitted to withdraw from a debt settlement services agreement at any time without penalty.
The measure also would require that debt settlement companies provide the Ohio Department of Commerce evidence they have an agent in Ohio authorized under state law to conduct business and file a $50,000 surety bond with the department.
Tom Smith, the public policy director for the Ohio Council of Churches, offered testimony against the bill last week before the House Financial Institutions, Housing and Urban Development committee.
“The major oversight in the legislation is the elimination of caps that are presently protecting consumers in the current debt adjusters law passed in 2004 by Rep. Thomas Patton,” he said.
Smith said the legislation has been “very effective” at prohibiting exorbitant up-front fees on debt settlement services.
“HB 173 would completely eliminate those caps: either 8.5 percent of the amount of debt payments by the consumer each month or $30, whichever is greater,” he said.
Smith said the Federal Trade Commission found that up-front fees charged by the industry — as high as 20 percent of the actual debt — were an unfair practice.
“We ask that you look closely at the debt adjuster law that was passed in 2004 by your Republican colleagues and insist that caps be included in any new law adopted by the current legislature, otherwise don’t let those who are least among us become the victims of future debt settlement,” he said.
Like Smith, Margaret Hulbert of the United Way of Greater Cincinnati also took issue with the bill’s elimination of fee caps.
“We believe the legislation as it is currently proposed will not help the clients in meaningful ways,” she said, adding that United Way officials share the same goal as Terhar and Mallory of helping struggling families.
“It is our experience that the nonprofits that we fund truly provide debt management services in a way that benefits their clients and that the debt settlement industry, under the proposed regulations, will not benefit these same clients.”
Hulbert said the distinction between debt management and debt settlement is an important one.
“Nonprofit debt management companies do just what the name implies. They educate their clients, help them manage their finances in a way to get them back on track, help rehabilitate or re-establish their credit and encourage them to take charge of their finances in a responsible way,” she said.
“The critical part of the service is that they help a family understand what went wrong and what they can do to fix it if it is fixable.”
Hulbert said debt management company fees are on a sliding scale and capped at $35 per month.
“Debt settlement is not the same. Debt settlement companies encourage clients to stop paying on their accounts, thus destroying any credit worthiness they may have left,” she said.
“They instruct clients to escrow their payments and these families incur fees for both the escrow accounts and the agency services.”
Hulbert noted that settling a debt does not remove it from an individual’s credit score.
“It is still recorded as an unpaid obligation. Thus we believe that debt settlement is a business model that does not benefit the consumer in the short or long term,” she said.
“It does not help clients establish better credit or have a greater understanding of what went wrong and how to avoid it in the future. The fee caps currently in place mean that only those companies who are focused on the best interest of the consumer are likely to do business in Ohio.”
Michael Kappas, president and CEO of Apprisen, the oldest nonprofit credit counseling agency in the country, said HB 173 is unnecessary.
“Ohio’s current set of consumer laws are working and are being used successfully by the Ohio Attorney General to protect constituents from predatory and potentially harmful debt relief practices, including debt settlement companies,” he said.
“HB 173 moves away from the specifics around fees and broad consumer protections that are currently contained in the debt adjusters act. There are no new protections contained in HB 173.”
Kappas said while the FTC has declined to set a fee cap, its officials have stated they believe that any decision to set fees is made more appropriately by legislative bodies.
“Vague definitions of fees as ‘reasonable’ and a lack of a stated fee cap leave open the possibility that vulnerable consumers who are desperate to find a way out of debt could be taken advantage of,” he said.
“Debt problems create severe stress levels that impact family relationships, employment and health. People are desperate to find a way out and often respond to the first offer of help. Consumers do not shop for debt relief services the way they shop for cars or refrigerators.”
While Kappas said enacting the bill would put “vulnerable Ohio families at risk,” Terhar and Mallory said in joint sponsor testimony that the measure was crafted to aid those in debt.
“Ohioans who utilize the services of a debt settlement company will have assurances that their interests are protected in state law,” the pair testified. “The superintendent of financial institutions in the Ohio Department of Commerce will be authorized under this bill to investigate possible violations under the state debt settlement statue created in this legislation.”
The bill has not been scheduled for additional hearings.