Monday, August 25, 2008

Credit con game

Credit con game

Debt settlement outfit falsely promised relief as clients’ woes grew; regulator acts

Aaron Elstein

For thousands of people far behind on their credit card payments and other bills, Robert Lovinger’s “Debt Meltdown Program” sounded awfully alluring.

He offered to help them reduce the amount of their bills by as much as 60% and, in some instances, to free them of debt altogether within 30 months. About 2,000 people joined, and they often ended up paying thousands of dollars for the Long Island-based service—which was marketed under several names, including The Debt Elimination Center and Edge Solutions.

What many customers got, in fact, was little or nothing. In some cases, Mr. Lovinger and his staff failed to contact creditors to settle customers’ delinquent bills; in others, they drove people deeper into debt by refusing to accept settlement offers from lenders, even after clients asked them to do so.

Federal regulators say that Mr. Lovinger and his wife, who was his business partner, even used customers’ money for personal expenses, including credit card bills, car payments and an employee party at a country club.

With complaints pouring in, the Manhattan-based Better Business Bureau of Metropolitan New York referred the matter to the Federal Trade Commission.

“The company took advantage of people who were in desperate situations,” says BBB Senior Vice President Susan McMillan, who led the bureau’s investigation.

Last fall, the FTC sued Mr. Lovinger and his wife for deceptive marketing. The couple settled the charges two weeks ago and agreed to pay the agency $7 million. They also agreed to sell their vacation home in Delray Beach, Fla. It was auctioned off for $307,400, according to Zillow.com.

Feeling his way

Mr. Lovinger denies that he did anything wrong intentionally and instead blames the company's woes on his own ignorance of the relatively new business of debt settlement. In a written response to questions, he said: “There was no prototype to follow. This led to growing pains and, in some cases, steep learning curves.”

Unfortunately, there are lots of people like Mr. Lovinger in the fast-growing and largely unregulated field of debt settlement. In the past few years, the FTC has sued a dozen operators for deceiving customers. The commission will host hearings next month to look into the business more closely.

The Association of Settlement Companies estimates that there are now 1,000 debt settlement outfits, double the number from three years ago. There is no federal oversight of the firms, many of which are legitimate businesses; policing them is the responsibility of overworked state regulators.

In New York state, the situation is clear: Debt settlement firms are barred from practicing. Many do so anyway, because they figure they're unlikely to be caught.

“Enforcement is extremely lax,” says Deanne Loonin, a staff attorney at the National Consumer Law Center in Boston.

New arrivals

Debt settlement firms emerged about a decade ago. They differ dramatically from traditional credit counselors, which typically advise clients on how to rethink and reduce their spending as they pay off their creditors.

Debt settlement companies, however, begin by telling clients to stop even trying to pay their bills. Instead, customers send cash each month to the debt settlement outfits, which pledge to negotiate with creditors once enough money has built up in the kitty. Meanwhile, interest continues to mount on the debts, and customers may face legal action from creditors.

Mr. Lovinger, who was trained as an electrical engineer, got into debt settlement in 1995. He entered the business after a New York state court shut down a company of his which falsely claimed that it could clean up people's tarnished credit reports, the state attorney general said.

He and his wife ran their debt settlement operation out of offices in Medford and Coram, L.I., attracting customers through online ads. At its peak, the company employed 45 people and generated $6 million in annual revenues, according to court documents.

Ven Letter, a worker at a northern California creamery, contributed to that revenue stream. He racked up $35,000 in credit card debt when his wife had medical problems after giving birth to their second child. In desperation, he turned to Edge Solutions for help. It only drove him deeper in the hole.

Blocked exits

He says, for example, that Edge rejected a settlement offer from a credit card company, which he wanted to accept. When Mr. Letter tried to exit the Edge program, the company would not return his $2,000 security deposit, he claims. On top of that, he says he paid $1,500 for credit counseling that he never received.

“They didn't do anything for me but screw up my credit for a long time,” Mr. Letter says.

In response, Mr. Lovinger insists that his company discouraged settlements only if they were not in a client's best interest. He adds, “We never charged money for credit counseling.”

Ms. McMillan of the Better Business Bureau says that her office received 45 complaints about Edge. She notes that after looking into them, the BBB assigned Edge a rating of “unsatisfactory.” Mr. Lovinger says he argued that his company was dealing with the complaints, and he threatened to sue the BBB. Shortly thereafter, the bureau alerted the FTC.

Mr. Lovinger, who is 47 years old, now finds himself in a state that his former clients would recognize: broke, and wondering what to do with the rest of his life. He says he has no money because he spent all of his debt settlement profits, and even borrowed heavily against his house, in order to develop a personal budgeting software program that failed to catch on.

In the meantime, he occasionally posts on his Web site, called The Finance Rebel Blog. The blog's mission: “shouting out against consumer financial injustice.”

Copyright (c) 2008 Crain Communications Inc. All rights reserved.

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