From the U.S. Government Accountability Office, www.gao.gov Transcript for: Watchdog Report #15: Undercover Investigation of Debt Settlement Companies Audio interview by GAO staff with Greg Kutz, Managing Director, Forensic Audits and Special Investigations Associated Publication Number: GAO-10-593T Released on: April 22, 2010 [ Background Music ] [ Narrator: ] Welcome to GAO's Watchdog Report, your source for news and information from the Government Accountability Office. It's April 22, 2010. As American consumers struggle with historic levels of credit card and other unsecured debt, a growing number of for-profit debt settlement companies have emerged. Debt settlement companies claim they will negotiate with creditors to settle debts but there have been widespread allegations that these companies engage in deceptive, abusive, or otherwise questionable practices. A group led by Greg Kutz, Managing Director of GAO's Forensic Audits and Special Investigations team, recently investigated these allegations. GAO analyst Jeremy Cluchey sat down with Greg to learn more. [ Jeremy Cluchey: ] What are for-profit debt settlement companies and what service do they claim to provide for consumers? [ Greg Kutz: ] It's an industry that's designed to help consumers with significant unsecured credit card or other types of debt. It could be medical bills that they’re having trouble paying -- they’re either delinquent or they just have so much debt that they don't believe they can pay it. So most of them set a threshold of 10 thousand dollars or so and it's an alternative to bankruptcy for these people. [ Jeremy Cluchey: ] What do the companies offer the consumers, what do they offer to do for them? [ Greg Kutz: ] They offer, on behalf of the consumers, to actually negotiate with banks or collection agencies or whoever's holding the debt to try to settle it for pennies on the dollar. For example, if you owe 30 thousand dollars to your credit card company they would try to settle that for 15 thousand or perhaps less if possible. [ Jeremy Cluchey: ] GAO investigators recently studied this industry at the request of Congress. Can you talk a little bit about how that investigation was conducted? [ Greg Kutz: ] We were asked to go in, in an undercover capacity, to test the marketing and business practices of companies in the debt settlement industry. So we went in and identified 20 companies to contact by phone and we picked them. Some appeared on the surface to be credible, other ones appeared to be egregious in their marketing tactics and so from there we made phone calls, calling in as consumers would, let's say 30 thousand dollars of credit card debt and we just asked a lot of questions to find out exactly what kind of marketing they would do for consumers. [ Jeremy Cluchey: ] We're going to listen to a few clips of those conversations and then I'll ask you to explain them a little bit further. In the first clip a debt settlement agent responds to a GAO investigator's question about whether they should stop paying their creditors. [ Agent: ] “I don't tell anybody not to pay their bills. I say 100 percent of the clients who have been successful have stopped paying their bills.” [ Investigator: ] “Okay, allright, so now I'm caught between a rock and a hard place, do I put money away in my savings account or do I use that money to pay my bills, if I'm in your program?” [ Agent: ] “If you are in our program, put the money into your savings account.” [ Jeremy Cluchey: ] Did GAO find that recommending consumers stop paying their creditors was a common practice among debt settlement companies? [ Greg Kutz: ] For the 20 we contacted, 17 either directly or they would go out and say “Okay I'm not telling you to do it but 100 percent of the people that are successful stop paying their creditors.” So they effectively -- 17 of the 20 -- told us to stop paying creditors, which according to the Fair Isaac Corporation or FICO, especially if you're current on your credit cards, which we were in some cases according to what we said, stopping paying your credit card bills at that point is severely has negative consequences on your credit score. [ Jeremy Cluchey: ] In this clip, the investigator inquires about the companies claim they service is quote ''government approved.'' Let's listen. [ Investigator: ] “With the government the way it is, is this government-approved thing--does that have anything to do with the stimulus package?” [ Agent: ] “No, no. It's just, it's just government approved. They allow for us to do this. [ Investigator ] "Okay." [ Agent ] You know the banks received you know bailout money last year, I'm sure you saw it on the news. There has to be some type of assistance for people on a consumer level also.” [ Jeremy Cluchey: ] Can you talk about what happened in this and similar conversations? [ Greg Kutz: ] Yes, several of the companies did make it appear as if they were tied to a government agency and that their programs were tied to the stimulus or some sort of federal debt- relief program and of course that's not true. And, so what they would do is say they were part of, for example, a national debt-relief stimulus plan. And, you know we believe and I believe certainly that is a ridiculous statement but real consumers out there I'm sure, in some cases, fall prey to that fraudulent marketing tactic. [ Jeremy Cluchey: ] This clip has to do with The Association of Settlement Companies or TASC and its role relative to the debt settlement industry. [ Agent ] “And there's actually 12,000 companies in the U.S. that do what we do. Only 200 of 'em are licensed and regulated. They're regulated by TASC, which is The Association of Settlement Companies. [Investigator] "So TASC..." ] [ Agent ] "They are the regulating body for this industry. They are like the FCC for stock traders, TASC.” [ Jeremy Cluchey: ] What is TASC and what role does it play in regulating the debt settlement industry? [ Greg Kutz: ] TASC is a not-for-profit trade organization that represents 150 or so debt settlement companies across the country and they play the same kind of role most not-for-profits play that are trade associations--they represent their constituents. Most of the expenditures for TASC are lobbying expenses and in no way do they license, regulate, or truly oversee this industry. That is not the role of a trade association--so that was clearly a misleading, at a minimum, statement made to our fictitious consumer. [ Jeremy Cluchey: ] Given the findings of this investigation what should consumers be aware of as they consider possibly using debt settlement services? [ Greg Kutz: ] Well certainly there's a lot of false information out there. There appears to be a lot of rotten apples in the basket if you will. There were some companies that provided us with credible information and so it seems very hard for them to wade through this information. But I would just say to consumers across the country, buyer beware. [ Background Music ] [Narrator:] To learn more, visit GAO's Web site at gao.gov, and be sure to tune in to the next edition of GAO's Watchdog Report for more from the congressional watchdog, the Government Accountability Office.