Consumers and Credit Counseling

The United States is awash in consumer debt. Credit card debt alone now exceeds $730 billion, a figure even larger than this country’s entire annual deficit. Much of this consumer debt is owed by working families of modest means trying to make ends meet. For many middle-class households, substantial debt is a fact of life and debt management is an urgent and painful necessity.

People struggling with debt often turn to a credit counselor for help. Traditionally, credit counseling agencies have been community-based, non-profit entities seeking to educate consumers about their finances and help them get back on their feet. For nominal fees, reputable agencies set up formal “debt management plans” for consumers to consolidate and reduce their debts. Such agencies will contact creditors, such as a bank or credit card company, arrange for a waiver of late fees and penalties, and negotiate a reduction in debt in return for a debtor’s promise to begin a regular repayment schedule. When done right, this work can save individuals and families from bankruptcy and financial ruin, while helping creditors obtain some of the monies owed to them.

In recent years, a less benign type of credit counseling agency has infiltrated the credit counseling industry. These newcomers generally claim to operate as non-profits, but are, in fact, organized to squeeze as much cash as possible from debt-laden consumers and then funnel the bulk of that money to insiders or for-profit affiliates.

The Permanent Subcommittee on Investigations, on which I serve as the senior Democrat, recently completed a six-month investigation of three of the largest credit counseling conglomerates in operation today. The investigation documented a host of disturbing and abusive practices including: charging debtors excessive start-up and monthly fees; misleading consumers about their initial fee so that they believed their payment would go to their creditors when, instead, the money was kept by the agency; and providing little or no individualized counseling to their clients, instead simply directing them to standardized debt management plans.

In addition to excessive fees and poor counseling, the investigation found a pattern of non-profits funneling substantial amounts of cash to affiliated for-profit entities, under the guise of paying “processing” costs or other charges. While reputable credit counseling agencies pay monthly processing costs of $1 to $2 per debt management plan, the monthly processing costs in the three case studies involved $25 to $30 or more. In this way, significant sums are transferred from the non-profits to an affiliated profit making entity.

Two federal agencies are charged with key responsibilities for stopping credit counseling abuses: the Internal Revenue Service and the Federal Trade Commission. The IRS has the power to determine whether a tax-exempt credit counseling agency is acting as a front for a profit-making enterprise, while the Federal Trade Commission is authorized to determine whether particular businesses are engaged in deceptive or unfair trade practices. Both agencies have begun to tackle the mounting problems in the credit counseling industry, but much more enforcement is needed.

As creditors, major banks and credit card companies also play an important role in stopping credit counseling abuses. Creditors often support credit counseling agencies by providing them with a percentage of the payments made by the debtors they counsel. These so-called fair share payments are a key source of revenue for credit counseling agencies. Creditors can and should do a better job in screening credit counseling agencies in order to stop abusive practices. Creditors have powerful tools to help clean up the industry if they choose to use them.

Consumers who are interested in using a credit counseling agency would be wise to check with a reputable source for recommendations, such as their bank or credit union. They can also check out the websites for the Internal Revenue Service [http://www.irs.gov] and the Federal Trade Commission [http://www.ftc.gov] for more information on credit counseling agencies. Consumers need to protect themselves and finding solid information is a good place to start.