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California bill would regulate booming debt settlement industry

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By Erika Paz | CalMatters

Before the pandemic, Graciela Gomez relied on two jobs to keep up with her expenses. After losing her part-time job at Macy’s in March 2020, she had to choose between paying off her credit cards or paying her rent. She chose the latter.

“I didn’t know who to talk to, who to contact. I was embarrassed,” Gomez said.

An ad for a debt settlement company appeared on her social media feed promising to lower her debt. After following up, she says what she got was a lawsuit from one of her credit card companies in March. She’s still fighting today.

As California emerges from the pandemic, some residents face crippling personal debt, even as many of the state’s richest residents have seen their wealth grow. Among the economic winners is the booming debt settlement industry, composed largely of online companies that promise to reduce personal debt by negotiating with banks and credit card companies on the customer’s behalf. But consumer advocates point out that these companies often prey on financial desperation and fail to warn customers of the potential consequences — like ending up in court.

Now California lawmakers are considering legislation that would more tightly regulate the industry after largely overlooking personal debt from credit cards and loans in pandemic-era legislation focused on relieving rental and utility debt. The bill is reviving a perennial debate in the Capitol over whether alternative financial services — like payday loans, debt settlement, and credit repair — are financial predators or a needed lifeline for Californians with little or poor credit.

Assemblymember Buffy Wicks, a Democrat from Oakland who authored the bill, contends that existing federal regulations don’t go far enough to protect Californians.

“Let’s make sure that if they are working with these companies, that there’s transparency and empowerment for the consumer in that process,” Wicks said.

How debt settlement works

After Gomez’s first phone call with ClearOne Advantage, the debt settlement company, she said she was under the impression that the company would pay off all her debts, and that she would only need to make one monthly payment to the company until she paid off the balance.

“She made it sound easy, like ‘We’re here to help….Your life is going to change. It’s going to be so much easier.’ And I believed it,” Gomez said.

ClearOne Advantage declined to comment on Gomez’s experience. The company provided what it said was testimony from a satisfied customer, but refused to provide contact information so CalMatters could interview the customer.

Desiree Nguyen Orth, director of the Consumer Justice Clinic at the East Bay Community Law Center, explained how most debt settlement companies work.

Customers who enroll in a debt settlement plan make a monthly payment to a debt settlement fund. According to Nguyen Orth, debt settlement companies wait until the customer has defaulted on their debts — which can sometimes take up to six months — before they begin to negotiate with creditors.

The defaults must occur before the negotiation process can begin, but the debt settlement companies avoid explicitly saying this, Nguyen Orth said. Debt settlement companies like ClearOne Advantage make money by charging customers a percentage of the total debt owed.

In a best-case scenario, willing creditors agree to settle the debt for less than the amount owed. After the customer agrees to the new terms, the debt settlement fund will be used to pay the debt.

The outcome is worse if a creditor refuses to work with the debt settlement company. As part of the program, customers sign a cease-and-desist letter that prohibits creditors from contacting them directly. In an effort to collect the debt, creditors will sue customers, often resulting in a judge ordering that the money be taken out of the customer’s bank account or paychecks.

“They come to me when they get sued and they’re like, ‘Why am I being sued? I enrolled in a debt settlement plan. I don’t get it,’” Nguyen Orth said.

She added that most customers don’t realize they can negotiate with creditors themselves. For free.

“I think (debt settlement) is one of the options that need to be there,” said Tomas Gordon, CEO of ClearOne Advantage and president of the Consumer Debt Relief Initiative, a debt settlement industry advocacy organization. “We educate people the right way, and make sure that we self-police the industry to make sure that consumers are getting the best possible outcomes.”

Graciela Gomez stands for a portrait outside of her boyfriend’s home in South Gate, on June 28, 2021. Gomez lost her part-time job due to the pandemic last year, so her debt began to accumulate. Gomez had five credit cards and her part-time job helped her make the monthly credit card payments. Pablo Unzueta for CalMatters 

As part of the enrollment process, Gomez provided her income, expenses, and debts to establish a monthly budget. But she said she was left with the impression she could afford to pay a monthly $250 deposit into her settlement fund when she really couldn’t.

The ClearOne Advantage representative also told her that they could not help her if she was not enrolling at least $10,000 in debt, she said — prompting her to enroll in a credit card on which she had been making regular payments so she could participate in the program.

The agreement Gomez signed, which CalMatters reviewed, has no mention of minimum requirements to enroll in the program but does charge a fee assessed at 25% of the total debt. That means the company ultimately plans to charge her just over $2,500. As of June 2021, Gomez deposited $2,259 into her settlement fund, of which $1,053 has been debited as service and transaction fees.

It wasn’t until Gomez was sued by Bank of America, she said, that she learned she had defaulted on all her credit cards and she was now facing a court judgment.

“If I had known since day one that I could have been sued, I think right there, I would have stopped and I would have tried to get more research to try to understand what was the point of paying (ClearOne Advantage),” Gomez said.

What the bill would do

Assembly Bill 1405 wouldn’t change how debt settlement companies work, but it would add more regulation. Existing federal regulation is limited to companies servicing customers across state lines.

The state bill would mimic some of those federal rules, applying them to California-based companies, as well as adding new rules like giving customers a three-day “cooling off period” before the contract takes effect.

The bill is advancing despite almost unanimous opposition from Republicans. Several lobbies have removed their opposition after successfully pushing for amendments, including one that would remove regulations around referral fees, a major source of income for the industry.

But before the most recent amendments, the debt settlement industry had coalesced in opposition to the bill. The Consumer Debt Relief Initiative, composed of members of the debt settlement industry, maintained that new regulations would harm the very consumers that the bill is trying to protect by driving debt settlement companies out of California, leaving consumers with few options.

“Why would any state take away debt settlement as an option to these families during this pandemic?” said Willie Brown, former Assembly Speaker and mayor of San Francisco, in a Consumer Debt Relief Initiative video. “It’s a vital service to those who need it most.”

The alternative for many families, Brown and the industry argue, is bankruptcy or worse.

“You’re left with nothing but bad actors — it creates almost a black market,” said Gordon, the group’s president.

Assemblymember Wicks disagreed.  “For the bad actors, if they feel like they can’t operate in California, then they can go somewhere else,” she said. “And for the good actors, they can stay here and they can help our working families that do need help.”

Gordon said he believes the bill is more about benefiting banks and credit card companies who don’t like having to negotiate customer debts down.

OneMain Financial, the only creditor backing the bill, declined to comment but wrote in a letter of support for the bill that their main goal is to work directly with their customers who default on their debts.

Primed for debt settlement

Despite loan forbearance from the federal CARES Act and a statewide eviction moratorium that aims to protect Californians, personal debt such as credit cards and medical bills have been largely overlooked by lawmakers, leaving consumers exposed to potential predatory practices by alternative financial services.

“That is a huge bubble of people who are primed for debt settlement,” Nguyen Orth said.

The debt settlement industry expects to do very well. In a February meeting of the Consumer Debt Relief Initiative, an Accenture market analysis said that the industry projects a 75% increase in the number of accounts enrolled in debt settlement services in 2021.

The new California Consumer Financial Protection Law, which took effect Jan. 1, gave the state Department of Financial Protection and Innovation new authority to regulate the industry. The agency says it won’t start tracking debt settlement companies until 2023.

Does the bill go far enough?

According to Nguyen Orth, everything ClearOne Advantage did in this case is legal, so it’s unlikely that AB 1405 would have changed much for Gomez. But the bill would address some of the more egregious practices that Nguyen Orth has seen, she said, like promising unrealistic outcomes without advising customers of the possible risks or offering predatory loans that can lead to further debt.

Gomez ended her contract with ClearOne Advantage at the end of June, but she is still working with Bank of America to settle the lawsuit and outstanding balance. Her advice for others? Avoid debt settlement companies at all costs.

“It’s an absolute scam. They prey on people like me,” Gomez said. “Call the credit cards or collection agencies yourself….It’s easier, and the money will go directly to who you owe.”

This article is part of The California Divide, a collaboration among newsrooms examining income inequity and economic survival in California.

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Are Sallie Mae Student Loans Federal or Private?

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When you hear the name Sallie Mae, you probably think of student loans. There’s a good reason for that; Sallie Mae has a long history, during which time it has provided both federal and private student loans.

However, as of 2014, all of Sallie Mae’s student loans are private, and its federal loans have been sold to another servicer. Here’s what to know if you have a Sallie Mae loan or are considering taking one out.

What is Sallie Mae?

Sallie Mae is a company that currently offers private student loans. But it has taken a few forms over the years.

In 1972, Congress first created the Student Loan Marketing Association (SLMA) as a private, for-profit corporation. Congress gave SLMA, commonly called “Sallie Mae,” the status of a government-sponsored enterprise (GSE) to support the company in its mission to provide stability and liquidity to the student loan market as a warehouse for student loans.

However, in 2004, the structure and purpose of the company began to change. SLMA dissolved in late December of that year, and the SLM Corporation, or “Sallie Mae,” was formed in its place as a fully private-sector company without GSE status.

In 2014, the company underwent another big adjustment when Sallie Mae split to form Navient and Sallie Mae. Navient is a federal student loan servicer that manages existing student loan accounts. Meanwhile, Sallie Mae continues to offer private student loans and other financial products to consumers. If you took out a student loan with Sallie Mae prior to 2014, there’s a chance that it was a federal student loan under the now-defunct Federal Family Education Loan Program (FFELP).

At present, Sallie Mae owns 1.4 percent of student loans in the United States. In addition to private student loans, the bank also offers credit cards, personal loans and savings accounts to its customers, many of whom are college students.

What is the difference between private and federal student loans?

When you’re seeking financing to pay for college, you’ll have a big choice to make: federal versus private student loans. Both types of loans offer some benefits and drawbacks.

Federal student loans are educational loans that come from the U.S. government. Under the William D. Ford Federal Direct Loan Program, there are four types of federal student loans available to qualified borrowers.

With federal student loans, you typically do not need a co-signer or even a credit check. The loans also come with numerous benefits, such as the ability to adjust your repayment plan based on your income. You may also be able to pause payments with a forbearance or deferment and perhaps even qualify for some level of student loan forgiveness.

On the negative side, most federal student loans feature borrowing limits, so you might need to find supplemental funding or scholarships if your educational costs exceed federal loan maximums.

Private student loans are educational loans you can access from private lenders, such as banks, credit unions and online lenders. On the plus side, private student loans often feature higher loan amounts than you can access through federal funding. And if you or your co-signer has excellent credit, you may be able to secure a competitive interest rate as well.

As for drawbacks, private student loans don’t offer the valuable benefits that federal student borrowers can enjoy. You may also face higher interest rates or have a harder time qualifying for financing if you have bad credit.

Are Sallie Mae loans better than federal student loans?

In general, federal loans are the best first choice for student borrowers. Federal student loans offer numerous benefits that private loans do not. You’ll generally want to complete the Free Application for Federal Student Aid (FAFSA) and review federal funding options before applying for any type of private student loan — Sallie Mae loans included.

However, private student loans, like those offered by Sallie Mae, do have their place. In some cases, federal student aid, grants, scholarships, work-study programs and savings might not be enough to cover educational expenses. In these situations, private student loans may provide you with another way to pay for college.

If you do need to take out private student loans, Sallie Mae is a lender worth considering. It offers loans for a variety of needs, including undergrad, MBA school, medical school, dental school and law school. Its loans also feature 100 percent coverage, so you can find funding for all of your certified school expenses.

With that said, it’s always best to compare a few lenders before committing. All lenders evaluate income and credit score differently, so it’s possible that another lender could give you lower interest rates or more favorable terms.

The bottom line

Sallie Mae may be a good choice if you’re in the market for private student loans and other financial products. Just be sure to do your research upfront, as you should before you take out any form of financing. Comparing multiple offers always gives you the best chance of saving money.

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Tips to do some fall cleaning on your finances

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Wealth manager, Harry Abrahamsen, has five simple ways to stay on top of the big financial picture.

PORTLAND, Maine — Keeping track of our financial stability is something we can all do, whether we have IRAs or 401ks or just a checking account. Harry J. Abrahamsen is the Founder of Abrahamsen Financial Group. He works with clients to create and grow their own wealth. Abrahamsen shares five financial tips, starting with knowing what you have. 

1. Analyze Your Finances Quarterly or Biannually

You want to make sure that your long-term strategy is congruent with your short-term strategy. If the short-term is not working out, you may need to adjust what you are doing to make sure your outcome produces the desired results you are looking to accomplish. It is just like setting sail on a voyage across the Atlantic Ocean. You know where you want to go and plot your course, but there are many factors that need to be considered to actually get you across and across safely. Your finances behave the exact same way. Check your current situation and make sure you are taking into consideration all of the various wealth-eroding factors that can take you completely off course.

With interest rates very low, now might be a good time to consider refinancing student loans or mortgages, or consolidating credit card debt. However, do so only if you need to or if you can create a positive cash flow. To ensure that you are saving the most by doing so, you must look at current payments, excluding taxes and insurance costs. This way you can do an apples-to-apples comparison.

The most important things to look for when reviewing your credit report is accuracy. Make sure the reporting agencies are reporting things actuary. If it doesn’t appear to be reporting correct and accurate information, you should consult with a reputable credit repair company to help you fix the incorrect information.

4. Savings and Retirement Accounts

The most important thing to consider when reviewing your savings and retirement accounts is to make sure the strategies match your short-term and long-term investment objectives. All too often people end up making decisions one at a time, at different times in their lives, with different people, under different circumstances. Having a sound strategy in place will allow you to view your finances with a macro-economic lens vs a micro-economic view. Stay the course and adjust accordingly from a risk and tax standpoint.

RELATED: Financial lessons learned through the pandemic

A great tip for lowering utility bills or car insurance premiums: Simply ask! There may be things you are not aware of that could save you hundreds of dollars every month. You just need to call all of the companies that you do business with to find out about cost-cutting strategies. 

RELATED: Overcome your fear of finances

To learn more about Abrahamsen Financial, click here

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How to Get a Loan Even with Bad Credit

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Sana pwedeng mabura ang bad credit history as quickly and easily as paying off your utility bills, ‘no? Unfortunately, it takes time. And bago mo pa maayos ang bad credit mo, more often than not, kailangan mo na namang mag-avail ng panibagong loan. 

Good thing you can still get a loan even with bad credit, kahit na medyo limited ang options. How do you get a loan if you have bad credit? Alamin sa short guide na ito. 

For more finance tips, visit Moneymax.

 

 

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