Dr. Robert D. Manning Testimony
In May 2004, the Federal Trade Commission (FTC) filed a complaint against a group of companies and individual defendants fronted by the “National Consumer Council” (NCC), an alleged non-profit organization. Dr. Robert Manning testified at the hearing to combat these allegations.
Excerpts of Robert D. Manning’s Sworn Testimony
Robert D. Manning, PhD, has conducted academic research on the “consumer lending revolution,” its social consequences, and related public police implications for approximately 12 years. He has testified as an expert witness at hearings before the U.S. Senate Judiciary Committee, U.S. Senate Banking Committee, various subcommittees before investigative commissions, and numerous state legislative hearings. His book, Credit Card Nation, was personally selected by Ralph Nader as one of the most important investigative studies of consumer finance from the last decade.
Origin of Debt Crisis
The emergence of consumer debt began in the late 1980’s and early 1990’s due to:
- Institutional actions of banks that began to aggressively market unsecured loans to increasingly less credit worthy clients due to the industry’s profitability crisis in the late 1970’s and late 1980’s
- De-regulation of financial services industry that led to increasing pressure to shift lending focus from low-cost, secured, consumer installment loans to high cost, unsecured revolving loans
- Increasing demand for household borrowing due to declining wages, greater job insecurity/interruption, and fewer medical benefits
- Enormous expansion of mass marketing of consumerism which emphasizes that middle class Americans deserve an elevated standard of living and thus the shift from consumer credit from an “earned privilege” to a social “entitlement”
- Consolidation and conglomeration of the financial services industry leads to institutional pressure to increase its most profitable consumer lending products (credit cards) by increasing debt burdens and recruiting high risk clients
Rise of Debt Settlement Alternatives
Sharp decline in household savings to cope with unexpected family crises (e.g. medical expenses, job/income loss, divorce, lifecycle expenses (children’s college expenses) and unprecedented dependence on expensive revolving loans has nearly tripled since deregulation of industry in early 1980’s.
Emergence of Private Debt Settlement Companies
The nonprofit CCS system is fraught with conflicts of interest where the consumer is working with ostensibly nonprofit organizations (many executives of large CCCSs earn $200,00 to $400,00 annual salaries (but whose future funding is contingent on serving the interests of the creditors rather than debtors
The increasing important role of legitimate debt settlement companies is that they provide an independent debt negotiation program that is not beholden to the financial donations of the banking industry. By functioning to maximize the benefits to consumers, i.e. negotiate the lowest possible settlement of the consumers’ outstanding debt, this new industry increases the negotiating leverage to consumers offered by Chapter 7 bankruptcy
Debt Settlement Programs
The key features of debt settlement are:
- Effective screening of clients who would otherwise most likely file for bankruptcy
- Counseling program for assisting clients with understanding why they are in debt, how to avoid future debt, and develop financial education skills for improving household budgetary planning/accounting
- Clearly explain “disclosure” protocol of the mechanics of debt settlement
- Negotiating process that seeks to maximize the consumers financial interest
- A cost structure that rewards negotiating monthly maintenance fee for establishing escrow accounts, negotiations with creditors, and payoff of debt settlements
- Legal advise advise/assistance with potential litigation arising from debt collections actions by creditors
The problem with debt settlement programs is that the pool of clients is highly stressed, financially strained, and often searching for quick and easy fixes for their problems. Like new recruits to an athletic club it is often a lack of discipline and resolve that contributed to their initial problems, which leads to a rather low attrition rate during the first three months. On the one hand, a moderate start-up free is psychologically necessary in order to ensure a commitment to the program. On the other hand, many clients are not prepared for the sacrifices and duress required of the program that takes from 36 to 42 months to complete; my understanding is that clients did not realize a financial gain until after the first settlement or first year in the program.
FTC Action Against NCC
“Overall based on my experiences with other debt settlement companies, I personally believe that NCC and its associated for-profit debt settlement companies were providing a cost effective and useful service for clients that remained committed to the program for over one-year. (On the other hand, clients that dropped out of the system within a year experienced a financial loss (like an unused, prepaid, one-year membership to an athletic club) and some would eventually find themselves with no other option but to file for bankruptcy.
To read Dr. Manning’s full sworn testimony, click here.
* The previous excerpts were taken from the official Sworn Testimony of Dr. Robert D. Manning
