Consumer financial regulators have opened a new front on the war against debt settlement companies that charge illegal upfront fees, going after a "chokepoint" payment processor that worked for several debt settlers.
The Consumer Financial Protection Bureau on Oct. 3 announced a $1.4 million penalty against a payment processing company called Meracord LLC in Washington state and its owner, Linda Remsberg.
"Remsberg should have known that Meracord provided substantial assistance to its (debt settlement) partners by processing payments on their behalf, and that its ... partners were charging and collecting unlawful advance fees," the agency said in court documents .
Meracord isn't a debt settlement company itself, but it took payments from consumers and held them on behalf of a number of settlement companies, the CFPB said in its court complaint. Meracord turned fees over to the settlement companies before people's debts were settled.
Going after middlemen like Meracord could help deprive scammers of the business support network they need to survive, experts said. "When one company gets stung, they close up shop and move on," said Edward Boltz, president of the National Association of Consumer Bankruptcy Attorneys. "This will make the lenders think twice ... and the support network."
Under the Telemarketing Sales Rule, debt settlers are generally prohibited from taking fees before they succeed in settling consumers' debts, but upfront fees continue to drain the pockets of debt-burdened consumers.
CFPB Deputy Director Steven Antonakes said targeting Meracord puts other service providers on notice when they're dealing with potential violators.
"If a business is enabling bad actions that hurt consumers, then we will use our authority to stop them," Antonakes said in a press call. "We are making the point here and it applies to all companies that do business with consumer financial providers." He also called Meracord a "centralized chokepoint" whose absence will be felt by multiple debt settlement companies.
In fact, the consumer bureau isn't the only financial watchdog that is starting to go after third-party helpers that deal with scammers. On Sept. 23, a trio of agencies announced a combined $52.5 million in penalties against TD Bank for failing to red-flag suspicious financial transactions by a Florida Ponzi scheme.
Middleman barred from helping debt settlers
Since October 2010, Meracord processed payments for 11,000 consumers who were charged fees before their debts were settled, the consumer bureau said in court papers. For 4,922 of those consumers, their accounts were closed before any of their debts were settled.
In a statement, Meracord said it halted doing business with all debt relief companies in January, as well as mortgage relief service providers. The proposed settlement order filed with the court makes that a condition of the CFPB settlement.
"We are pleased to have this matter concluded so we can focus our resources on providing compliant payment services in the emerging payments and financial technology space," Remsberg said in the Meracord statement . The settlement does not include an admission of wrongdoing.
Debt settlement companies promise to eliminate your debts at a fraction of their face amount without resorting to bankruptcy. They counsel their clients to stop paying creditors and pay into a settlement fund instead, a risky strategy that can lead to collection lawsuits and trashed credit.
In a 2012 study, the bankruptcy attorneys association said that more than 500,000 Americans with a combined $15 billion in debt are enrolled in debt settlement programs, but the promises of debt freedom rarely pan out. Only one in 10 programs results in repayment as planned, according to NACBA. Although debt settlement itself isn't illegal, critics charge that it is so rarely successful that it amounts to a "last-dollar" type of scam, taking advantage of the desperation of consumers who are already struggling to meet their basic expenses.
The CFPB is trying to close loopholes and give violators little room to maneuver, but fee-collecting debt settlers have shown resilience, popping up with new tactics designed to get around restrictions. The agency filed a lawsuit against Nevada-based Morgan-Drexen in August for running a debt-settlement operation under the guise of providing support for bankruptcy attorneys. It previously obtained judgments against two companies that used Meracord as their payment processor; Payday Loan Debt Solution Inc. and American Debt Settlement Solutions Inc.
The CFPB's move to cut off a support network for such operators "shows a lot of promise and sophistication that we haven't seen in consumer enforcement actions up till now," Boltz said.
See related: FTC bans upfront fees for debt settlement firms