Shady debt-management practices earn black eye

The Washington Supreme Court stripped away more of the camouflage the debt management and debt adjustment industry uses to conceal its predatory activity.

With no dissenting vote, and one blistering assent, the justices ruled that a pair of Oklahoma companies is not a mere facilitator and banker for the distribution of money from borrower to debt resolution company to lender, a service provided by many profit and nonprofit entities like Consumer Credit Counseling of the Inland Northwest.

The Oklahoma companies, Global Client Services LLC and parent Global Holdings LLC are, in fact, debt adjusters themselves, the court ruled Thursday.

And, as best they can, adjusting the debt ever upward.

In theory, consumer counselors help clients by educating them about the proper use of credit, collecting a portion of their income for debt repayment, and possibly negotiating discounts with flexible creditors. The business can be a lifeline for some consumers ready to change their ways, but who are in need of someone else to help impose financial discipline.

But there have always been bad actors, and more so since the recession exposed how over-extended many individuals and families had become. According to a lawsuit filed two years ago in U.S. District Court for Eastern Washington, and more litigation in other states, Global has been among the companies abusing consumers, but in a way that put it beyond the reach of state consumer protection laws.

It hoped.

Global’s modus operandi comes down to this: It created so-called “special-purpose” bank accounts to hold consumer money until there was enough for distribution to creditors. The distribution was handled by another entity. It was all allegedly arms-length.

What a strong arm it was, though.

Washington law limits to $25 the initial fee adjustment companies may charge. The couples who filed the class-action lawsuit in Spokane paid $2,053.20 and $6,944.48.

Moreover, says the complaint filed by attorneys Darrell Scott and Tim Durkop, additional fees were structured in such a way that extracted a lot of money from clients before creditors saw any.

Among the more alarming aspects of this case is the role of defendant Rocky Mountain Bank & Trust in Colorado. The bank allowed Global to create 600,000 special-purpose accounts, on which it paid no interest to the depositors. By 2009, the funds in those accounts represented more than half the deposits at the bank.

The Federal Deposit Insurance Corp. issued a cease-and-desist order that put a stop to that, but Global simply moved the money to Oklahoma, telling its clients, “This change is part of Global’s ongoing process of expanding our banking relationships, improving our services and efficiencies, and continuing to protect the interests of our customers.”

Nonsense. And, by law, none of that money should ever have been moved outside Washington.

The Supreme Court was not confused by Global’s subterfuge. At the request of U.S. District Court Judge Lonny Suko, the justices found the company’s activity clearly falls within the purview of state law.

One justice, Tom Chambers, went further.

Noting that almost two-thirds of consumers who sign up for debt adjustment services end up dropping out of the programs, and the inability of authorities to stamp out abuses, Chambers said the time has come to write the industry’s epitaph.

“Until the Washington legislature prohibits debt adjusting for profit, consumers will continue to suffer,” he wrote.

Then-Attorney General Slade Gorton’s staff told lawmakers the same thing in 1967.

Yet the Globals of the world are still with us.