How Authorities Investigate Unlawful Debt Relief Companies

How Authorities Investigate Unlawful Debt Relief Companies

Debt relief companies that operate unlawfully can really take advantage of folks struggling with debt. But have no fear – there are consumer protection laws and agencies working hard to investigate bad actors in this industry. Let’s take a look at how the authorities go after unlawful debt relief outfits.

What is Debt Relief Anyway?

Generally speaking, debt relief involves any program or service that offers to change the terms of a debt between a person and their creditors or debt collectors. This can include reducing the total loan balance, interest rate, or fees owed. Companies may offer relief for different types of debt like mortgages, student loans, payday loans, credit cards, auto loans, or taxes.

There are a few main types of debt relief services:

• Debt settlement – Negotiating with creditors to settle debts for less than the full amount
• Debt consolidation – Combining multiple debts into a single new loan with lower monthly payments
• Debt management – Working with creditors to reduce interest rates and create a repayment plan
• Debt negotiation – Working with creditors to reduce the total debt owed

Other services like foreclosure prevention and loan modifications also fall under the debt relief umbrella.

Why Do Authorities Investigate These Companies?

There are lots of sketchy debt relief companies out there taking advantage of vulnerable consumers. Here are some of the common problems that cause investigators to take action:

• Charging illegal upfront fees before providing any services
• Misrepresenting their services or success rates
• Failing to actually negotiate with creditors as promised
• Charging unlawful interest rates or penalties
• Scamming people into paying for debt relief that never happens
• Abusing or harassing consumers who fall behind on payments
• Violating state licensing requirements for debt relief providers

When companies break consumer protection laws like these, federal and state agencies step in to shut them down and prevent further harm.

Key Agencies That Investigate

Several major government agencies are responsible for investigating and enforcing laws against shady debt relief outfits. Here are a few of the big players:

Federal Trade Commission (FTC)

The FTC is one of the most important agencies policing the debt relief industry at the federal level. Under the Fair Debt Collection Practices Act, the FTC has authority to investigate debt collectors and debt relief companies engaging in illegal practices. For example, in 2020 the FTC shut down a Georgia debt collector that posed as attorneys and threatened consumers with arrest.

Consumer Financial Protection Bureau (CFPB)

The CFPB is focused on protecting consumers in the financial sector. They enforce federal consumer financial protection laws and have supervisory and examination powers over large banks, payday lenders, debt collectors, and other financial companies. The CFPB can pursue enforcement actions against debt relief providers for unfair, deceptive, or abusive acts.

State Attorneys General

Attorneys General in each state have authority to enforce state consumer protection laws against unlawful debt relief companies located or operating within their borders. They often partner with federal agencies on joint investigations and legal actions. For example, in 2021 the New York Attorney General shut down a nationwide student debt relief scam working with the CFPB and FTC.

Investigation Tools & Tactics

Authorities have a wide range of tools at their disposal to investigate bad actors in the debt relief industry. Here are some of the main tactics they use:

• Undercover operations – Investigators pose as consumers to collect evidence of illegal practices firsthand.
• Subpoenas – Compel companies to provide documents, records, communications, and other evidence.
• Consumer complaints – Complaints submitted by consumers serve as vital leads.
• Surveillance – Physical and electronic surveillance can reveal shady conduct.
• Whistleblowers – Insider tips from employees often expose unlawful schemes.
• Public records – Checking licensing, corporate registrations, and court records.
• Industry monitoring – Proactively monitoring advertising and services for red flags.

By leveraging these techniques, investigators build their case and establish solid evidence of illegal activity.

Taking Legal Action

Once unlawful conduct is identified, agencies can take legal action through administrative, civil, or criminal proceedings. Common outcomes include:

• Cease and desist orders – Order company to stop illegal activity.
• Fines – Monetary penalties for violations.
• Restitution – Require company to refund consumers.
• Injunctions – Legally prohibit company from industry participation.
• Criminal charges – Prosecute individuals criminally for offenses.

For example, the FTC maintains an ongoing list of hundreds of companies and individuals banned from debt relief based on enforcement actions against them.

What About Student Loan Debt Relief?

Student loan debt relief is a major focus for investigators and regulators right now. There are lots of student loan scams out there, so authorities are being especially vigilant.

In particular, government agencies are targeting companies that pretend to be affiliated with the Department of Education or try to charge illegal upfront fees. For instance, in 2019 the FTC sued a student debt relief scheme that charged over $23 million in illegal upfront fees.

State laws also often have special requirements for student loan relief companies, like licensing and disclosures. So state investigators monitor for violations of those specific laws too.

What About Credit Repair Companies?

Similar to debt relief services, credit repair companies that make false promises or use shady tactics also attract a lot of scrutiny from regulators and law enforcement.

Under the federal Credit Repair Organizations Act, credit repair companies cannot charge upfront fees or make misleading claims about their services. But many companies break these laws.

Common violations that investigators look for with credit repair outfits include:

• Charging upfront fees before services are fully performed
• Misrepresenting their ability to remove negative items from credit reports
• Advising consumers to dispute accurate negative information
• Failing to provide mandatory disclosures and contracts

When investigators uncover violations, they once again have a variety of administrative, civil, and criminal remedies at their disposal to hold credit repair companies accountable.

What About Foreclosure Rescue Schemes?

Foreclosure rescue scams were rampant in the aftermath of the 2008 housing crash, promising false hope to homeowners facing foreclosure. State and federal authorities cracked down hard on these schemes and remain vigilant today.

Some common foreclosure rescue scams that investigators still keep their eyes peeled for include:

• “Rent-to-buy” schemes that falsely promise to let owners repurchase the home later
• Companies that take the title or keys and then evict the homeowner
• Foreclosure “consultants” that charge illegal upfront fees
• Deed or title transfer scams to steal equity from the home

Investigators use their usual toolkit of undercover operations, document requests, surveillance, and consumer complaints to uncover illegal foreclosure rescue activities. They then coordinate with state and federal prosecutors to hold scammers accountable.

What Defenses Do Companies Use?

When authorities come knocking, unlawful debt relief companies will often try to defend themselves. Here are some of the common defenses they attempt to mount:

• Denying misconduct – Claiming consumers consented or misconstruing the evidence.
• Blaming rogue employees – Arguing illegal activity was done without company knowledge.
• Citing compliance programs – Pointing to internal compliance policies and training.
• Attacking investigators – Accusing investigators of misconduct or bias.
• Questioning jurisdiction – Challenging regulator’s authority.

However, skilled investigators and prosecutors can usually overcome these defense tactics by sticking to the evidence and applying the law. For instance, companies are still liable for employees acting within the scope of employment. And compliance programs clearly failed if violations occurred. So these defenses rarely succeed when authorities have done their homework.

What About Bankruptcy-Related Schemes?

The bankruptcy process unfortunately attracts its fair share of scammers hoping to take advantage of debtors. Some common bankruptcy schemes that arise on investigators’ radar include:

• Filing bankruptcy without permission using stolen client information
• Untrustworthy or unqualified petition preparers
• Mortgage companies forcing debtors to reaffirm debts
• Lawyers charging more than legally allowed
• Debt relief companies falsely promising to file bankruptcy

These types of bankruptcy scams can violate federal law as well as specialized rules for bankruptcy professionals. Investigators use court records, document requests, interviews with debtors, and other sources to uncover illegal conduct. They then work with federal prosecutors or disciplinary bodies to hold scammers accountable.

The Bottom Line

Consumers should remember that help is available if you run into problems with a debt relief company. Report shady practices to your state Attorney General’s office and the FTC to trigger an investigation. Debt relief companies are regulated for good reason – to protect vulnerable consumers from harm. So don’t hesitate to speak up if you encounter unlawful conduct or outright scams.