CFPB Report: Debt Settlement on the Rise


August 24, 2020

In July, 2020, the Consumer Financial Protection Bureau published a quarterly report on Recent Trends in Debt Settlement and Credit Counseling.  The report comes from work undertaken by the Bureau to highlight developments for customers who are no longer able to handle their unsecured loans.

Debt settlements rose dramatically during the Great Recession into a peak of $11.4 billion. Over half of those settlements occurred within a year of the accounts becoming delinquent.  Debt settlement and credit counseling became less common after that recession, but recently settlements have been rising after changes in delinquencies and charge hindrance.

Nearly one in thirteen customers with a credit report needed at least one account reported by the creditor as depended or with obligations handled by a credit counseling agency (CCA) from 2007 through 2019.

Since 2017, there has been an uptick in documented settlement activity and balances depended alongside an increase in delinquency, but no corresponding increase in credit counselling. The report states the changes could reflect evolving bank account direction, CCA and debt settlement company (DSC) policies, as well as evident increases in DSCs’ market presence.

CCA actions may not find corresponding increases if current trends hold along with the menu of debt relief choices for customers will not change.

The Background

Debt relief services have long been one of the most highly regulated businesses in the USA, dependent on the role the providers play in assisting consumers who are in financial distress. Debt aid services are supplied for their creditors to repay amounts owed against a backdrop of contractual obligations of customers. Debt relief services’ immediate regulation happens including supervisory examination that is possibly under state laws that require licensure and open the company up to state. The Telemarketing Sales Rule (TSR) was amended in 2010 to tackle the telemarketing of debt relief services. The amendments to the TSR instituted various disclosure requirements and other consumer protections such as fees in the debt settlement industry’s prohibition. The Federal Trade Commission and CFPB discuss jurisdiction to enforce the consumer protection laws with regard to non-bank financial institutions, including the TSR with respect to debt relief services.

The report utilizes data from the Consumer Credit Panel of the CFPB, a sample of about five million de-identified credit records. The CFPB notes that the analysis only includes settlements furnished by the lender and never accounts furnished by means of a debt buyer; debt purchaser reporting practices varied over this period analyzed; and also, not all accounts handled by a CCA are necessarily reported as such by the furnisher, so the number of accounts is under-reported in that information. This record is part of a string of quarterly reports on consumer credit trends.

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