Although credit counseling can provide financially distressed consumers with valuable assistance, according to the Federal Trade Commission, some firms may be misleading consumers about who they are, what they do, or how much they charge. In Commission testimony submitted today before the Senate Committee on Governmental Affairs, the Permanent Subcommittee on Investigations, FTC Commissioner Thomas Leary cautioned that some companies use their non-profit status as a badge of trustworthiness to attract customers, who are then duped into paying large fees. Those fees are sometimes funneled to for-profit companies.
Leary explained that instead of teaching consumers about their finances and how to manage debt as it promised, some credit counseling agencies (CCAs) indiscriminately enroll their clients in “debt management plans” (DMPs) without regard to their particular financial situation. This kind of debt management – under which consumers pay debt managers who then pay their creditors – can be beneficial for some consumers, but not for all. “Along with these changes in the industry have come complaints about troubling practices, including possible deception about the services offered, poor administration of DMPs, and undisclosed fees associated with DMPs,” Leary said.
Leary stated that the FTC’s greatest concern is deception by CCAs about the nature and costs of their services, including the following practices:
“The Commission has pursued a vigorous program to halt fraud and deception by those who purport to be able to solve consumers’ financial difficulties,” Leary stated. The testimony listed several Commission actions, including a November 2003 lawsuit against AmeriDebt – a large, Maryland-based credit counseling firm that, according to the FTC’s complaint, aggressively advertises itself as a non-profit dedicated to assisting consumers with their finances. The FTC complaint further alleges that AmeriDebt advertises its services as “free,” when in fact the company retains a consumer’s entire first payment as a “contribution.”
In addition to the AmeriDebt litigation, Leary explained that the FTC’s law enforcement efforts currently include several non-public investigations of credit counseling agencies. The Commission’s testimony also mentions a February 2004 lawsuit against two debt negotiation companies (Innovative Systems Technology, Inc., and Debt Resolution Specialists, Inc.), a September 2002 lawsuit against another debt negotiation company (Jubilee Financial Services, Inc.), and numerous cases under the Credit Repair Organizations Act (CROA), including sweeps like Operation Eraser and Operation New ID-Bad IDea.
Leary explained that the FTC has engaged in extensive consumer education efforts to help protect consumers from credit counseling and credit repair scams. Most recently, the FTC and the Internal Revenue Service (IRS) jointly issued tips for choosing a credit counseling organization. Those tips advise consumers to:
The testimony stated that credit counseling can provide valuable assistance to consumers in financial distress, and that many, if not most, CCAs operate honestly and fairly. Consumers who fall victim to the types of practices discussed in the testimony, however, “may find themselves in even more dire financial straits than before,” Leary said. He concluded that the FTC remains committed to working with its law enforcement partners to protect consumers against financial fraud and deception.
The Commission vote to approve the testimony was 5-0.
Copies of the testimony are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to
help consumers spot, stop, and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1 877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.
(FTC File No. P034804)