FTC looks into debt-aid firms
The telemarketer at the other end of Orlando Castelblanco's line promised to reduce the consumer's credit card debt by at least $2,500 and get his 20 percent -- and growing -- interest rates down to single digits.
But the service would cost $499.
"So I said to him, 'Gee, that's quite a lot of money,' " Castelblanco recalled. "Then he said, 'Well, you won't really be paying that. We're going to put that on your credit card, and you really won't have to pay because we're going to negotiate a new rate for you.' And they were going to help me cut years off my debt."
The company, DSI Financial, and its affiliates in Kent and Spokane, didn't deliver for Castelblanco. Company executives agreed in court last week to refund him and hundreds of other Washington consumers who felt duped by telemarketers' failed promises to help them out of debt.
The company begins mailing letters today explaining to customers how to receive a refund. According to a consent decree between the companies and the state Attorney General's Office, the refunds could total more than $300,000.
American consumer debt and the financial industry that feeds it have grown exponentially over the last two decades. With it, though, has come the growth of an industry offering to get those consumers out from under.
Federal investigators have been looking into a variety of so- called credit-counseling, debt-reduction and debt negotiation companies recently.
In November, the Federal Trade Commission filed a lawsuit against AmeriDebt, a large, heavily advertised national credit counseling firm. The FTC accused AmeriDebt of misleading consumers into believing its credit counseling services were free, though the non-profit organization would keep a client's entire first payment as a contribution and not forward it to creditors.
In February, the FTC filed charges and settled with two California companies that promised to negotiate substantially lower interest rates for consumers but rarely delivered.
The FTC and the IRS have subsequently been looking at other such firms, often groups that have claimed non-profit status but are clearly pocketing money with no real social welfare purpose.
Regulators and local law enforcement are careful in this arena, though, because they do not want to scare consumers away from seeking help from legitimate counselors.
"There are a lot of people out there these days who are knee-deep in debt, and they really need to seek help," said Lori Takahashi, of the state Attorney General's Office's consumer protection division.
The FTC is concerned, however, that some firms "may be deceiving consumers about who they are, what they do and how much they charge," Federal Trade Commissioner Thomas Leary testified before a Senate subcommittee earlier this year. "The victims of the deception may find themselves in even more dire financial straits than before."
Jennifer Whalen, president of Pacific Consolidation Services, a DSI affiliate in Spokane, said she believes that most of her clients are and have been satisfied with her company's services. The companies prioritize a client's debts and ask creditors to lower their interest rates.
DSI has thousands of clients nationwide and operates out of call centers in Washington state.
Whalen said that her company is not and does not claim to be a credit counseling group but does provide financial advice.
DSI officials disagree with state investigators' allegations that they misled and pressured consumers into buying the service.
"If the company can't explain something to you in terms that you can understand, walk away," said Assistant Attorney General Jack Zurlini, who filed the state's case against DSI.
But Castelblanco thought he did understand. The problem, he said, was that the telemarketer lied to him. The Bothell man, who had $12,000 in credit card debt among three MasterCard and two Visa cards, was eager for help.
"He said he had the power to negotiate with the credit card companies," Castelblanco said of the salesman. But later, Castelblanco said he had a three-way telephone call during which a DSI representative called a customer service representative from Castelblanco's creditors and asked if the company would lower his interest rate.
The customer service rep declined and the conversation ended there.
"What kind of negotiation power is that?" Castelblanco said. "That's when I knew I was taken."
Zurlini said Castelblanco's experience was common
He said these outfits and the telemarketers who work for them consistently seek out vulnerable people and exploit them.
According to state investigators, DSI telemarketers pressured consumers over the phone, misrepresented the company's services and told people they could not cancel after the company charged their credit cards.
Washington law allows consumers to cancel a purchase made through a telemarketing call within three days of written confirmation of the sale.
People were sold a lifetime membership for which DSI, upon request, would prioritize their bills through a software program into a schedule that would eliminate debts in the fastest time.
For example, Castelblanco was given a chart that told him to continue paying his debts the way he was paying, but when he made his final payment on his car, to apply that money each month to one of his credit cards. "I thought, are you kidding me? I don't need to pay anybody $500 to tell me that," he said.
Consumers can call creditors themselves and ask them to lower their interest rates. Often companies will help because it's easier to retain customers than to get new ones, said Jim Tehan of Myvesta, a debt advice organization that offers free tips online.
"That's the easiest and one of the first things we tell people to do," he said.
Whalen said clients who use her service are people who don't have the time or don't want to spend the time calling their creditors or assessing their debts.
State and federal authorities warn consumers about people or businesses that offer to help you get out of debt but allow you to go further into debt -- that is, charge your credit card hundreds of dollars for their services.
Guarantee they can remove your unsecured debt.
Claim that their system will help you avoid bankruptcy.
Require substantial monthly fees.
Demand payment of a percentage of savings.
Tell you to stop making payments or talking to your creditors.
Claim that they can remove accurate negative information from your credit report.
This is not a commitment for a loan or an ad for credit as defined by paragraph 226.24 of regulation Z.