Seal of the Board of Governors of the Federal Reserve System
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
WASHINGTON, D. C.  20551
DIVISION OF BANKING
SUPERVISION AND REGULATION
SR 04-3
January 28, 2004

TO THE OFFICER IN CHARGE OF SUPERVISION AND APPROPRIATE SUPERVISORY AND EXAMINATION STAFF AT EACH FEDERAL RESERVE BANK AND DOMESTIC AND FOREIGN BANKING ORGANIZATIONS SUPERVISED BY THE FEDERAL RESERVE
SUBJECT:  Debt Elimination Scams

Board staff has become aware of various illegal schemes being offered to the public that purport to eliminate outstanding debt through the use of specially prepared documents. The organizers of these schemes concoct specious legal documents based on the borrower's debt, which are then presented to the borrower's bank, mortgage company, finance company, or other lending institution in an attempt to satisfy the debt.1 The scams are reminiscent of the tax protesters' tax evasion schemes seen throughout the 1990s.

The purported legal documents used in the current scams include fake financial instruments that claim to eliminate the borrower's debt obligation.2 The instruments usually question the authenticity of financial obligations, and often refer to a specific government agency (such as the Federal Reserve) in an attempt to support their claims. Some of the literature seen by Board staff questions the legitimacy of the Federal Reserve and the validity of United States currency. The literature may selectively cite from passages of government publications, statements by politicians, constitutional provisions, court decisions, various statutes, and private newsletters to support claims and to ultimately conclude that a specific government agency sanctions these debt elimination programs. For example, some of the documents specifically refer to the elimination of debt through the use of a "Federal Reserve approved" procedure.

Debt elimination programs that claim Federal Reserve approval or acquiescence and the satisfaction of legitimate debts through the presentation of suspicious documents are totally bogus. The Federal Reserve does not approve and is in no way involved in any program aimed at eliminating anyone's debt obligations.

These schemes are proliferating on the Internet, and the organizers are charging borrowers substantial up-front fees and commissions based on the total amount of debt that can be forgiven.3 Members of the public are being harmed as borrowers generally pay significant amounts of money without eliminating or reducing their overall debt obligations - which of course is not in fact possible through any of these programs. Also, the cessation of legitimate loan payments increases the risk of a foreclosure or other legal action being taken against the borrower, and in addition could negatively affect a borrower's credit rating. Financial institutions may find that the use of the specious documents complicates the collection process, and may at least temporarily prevent any final action against the consumer.

Examiners and banking organizations should be cognizant of these scams, and the public should avoid becoming involved with them. Bank holding companies and state member banks should modify their policies and procedures as needed to ensure that staff involved in any way in a lending function is able to identify and respond appropriately to these current schemes. If an institution supervised by the Federal Reserve is presented with fraudulent documents as described in this SR letter, the institution is expected to file a Suspicious Activity Report (SAR) in accordance with the Board's suspicious activity reporting rules. The banking organization must also retain the written materials associated with the purported debt elimination scheme as supporting documentation to the SAR, as required by the Board's SAR rules.4 

Reserve Banks are asked to distribute this SR letter to domestic and foreign banking organizations supervised by the Federal Reserve in their districts. Questions regarding apparent fraudulent debt elimination schemes can be directed to Leonard Zawistowski, Senior Special Investigator, at (202) 452-6488.

Richard Spillenkothen
Director



Notes:
  1. Lending institutions and insurance companies offer various products or include various terms in loan documents that have the effect of paying off loans (or deferring loan payments for certain periods of time) in the event, for example, of a borrower's death, loss of employment, or other significant personal life changes. These are legitimate products and should not be confused with the false promises to eliminate a borrower's debt upon the presentation of fraudulent documents that are the subject of this alert.  Return to text
  2. The documents have variously been titled:  Declaration of Voidance, Bond for Discharge of Debt, and Redemption Certificate.  Return to text
  3. Federal Reserve staff has seen advertised up-front fees as high as $2,500. Some programs also require the up-front payment of an amount equal to 15 percent of a borrower's total debt obligations.  Return to text
  4. Refer to 12 CFR 208.62. The SAR rules can be found on the web at: http://edocket.access.gpo.gov/cfr_2003/pdf/12cfr208.62.pdf.  Return to text
SR letters | 2004
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