The American Financial Services Association (AFSA) has called on Congress to introduce legislation aimed at updating national standards for debt settlement companies (DSCs). In a letter sent to the Senate Commerce and House Energy and Commerce committees, AFSA highlighted the need for greater transparency for both consumers and financial institutions.
Debt settlement companies often target individuals with significant debt, promising to negotiate with creditors to reduce the amount owed. As part of their process, DSCs instruct consumers to stop making payments to creditors and to sever all contact, while directing payments into a special account. This approach, known as strategic default, can have long-term negative effects on consumers’ credit scores and financial stability.
Regulatory bodies such as the Federal Trade Commission and various state agencies have issued warnings about the practices of DSCs. These organizations note that consumers can be misled, end up with worse credit, face high fees, and encounter unexpected tax liabilities.
The AFSA letter described the current regulatory environment for DSCs as lacking sufficient federal oversight, which has allowed the industry to expand. The association also noted that DSCs are increasingly marketing their services to financially stable consumers, not just those in vulnerable situations.
"AFSA encourages Congress to shed light on DSCs and their questionable practices and enact basic regulations for the industry, which is currently taking advantage of consumers and financial institutions at an alarming rate," the association stated in its letter.