One of the new credit card law's lesser-known provisions is funneling distressed borrowers to credit counselors, an industry once tarred as predatory. In an ironic twist, that outcome pleases consumer advocates more than it does some bankers.
The provision, which took effect last month, requires credit card issuers to refer cardholders to federally sanctioned counseling agencies. Such firms provide advice and workout plans to consumers falling behind on their loans.
Bankers had protested this provision, citing reputational as well as operational concerns. The American Bankers Association, for example, has repeatedly warned that following the law will give the appearance that banks are "endorsing" certain credit counselors.
Now that issuers have to comply, many are doing what they can to avoid creating the impression of favoritism.
"I don't think any issuer will want to take the chance of being seen as being biased in directing their customers to a particular credit counseling agency, particularly if they could ever be tarred with a brush of trying to direct customers to a credit counseling agency that results in better outcomes for the issuer," said Duncan Douglass, a partner in the law firm Alston & Bird LLP. "This information would be too available and there would be too much risk in trying to steer customers one way or another. I can't imagine that issuers would want to get into that game."
Consumer advocates, who long cast a skeptical eye on the credit counseling industry, nevertheless hailed the provision, especially the rules ensuring that only government-vetted counseling firms are eligible for issuer referrals.
"We've done a fair amount of work over the years in terms of evaluating credit counseling. There were some scandals in the credit counseling industry years ago, but I think this requirement takes care of that problem," said Travis Plunkett, the legislative director at the Consumer Federation of America. "Our general view is that credit counseling can be helpful for some people who encounter debt problems, especially if those people get help early."
And for the credit counseling industry itself — or at least some of its nonprofit members — the law's provision offers both more clients and a chance to burnish their profession's reputation.
"We hope that this clears up any reservations consumers may have about reaching out for legitimate help," said Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling, a trade group for nonprofit credit counselors. "I don't blame them for being confused. The unscrupulous among us have done a good job of blurring the lines. … That's why we really applaud the government for including this."
All of her group's members are nonprofits, and most are eligible for issuer referrals under the law. Cunningham said some issuers are simply printing the Foundation's toll-free customer service number on their monthly statements.
The credit counseling industry came under increased scrutiny in the last decade over reports that some firms were using their nonprofit status to gouge consumers and funnel those fees over to for-profit sister companies. The Internal Revenue Service and the Federal Trade Commission launched investigations into the industry; in 2004 and 2005 the FTC shut down some firms and fined three firms a combined $6 million for consumer redress and required them to return more than $24 million to those customers.
But Plunkett and other industry observers said the process by which the government currently vets credit counseling firms is sufficient to keep bad actors off the approved list. Among other conditions, the Executive Office for U.S. Trustees requires agencies to have a governing body that "will not directly or indirectly benefit financially from the outcome of the counseling services provided." Counseling agencies, the office has said, "should avoid any conduct or transactions that generate or create the appearance of generating a private benefit" to affiliates.
The U.S. Trustee currently lists 158 approved counseling firms on its Web site. Under the Credit Card Accountability, Responsibility and Disclosure Act, issuers can refer cardholders only to those firms or to credit counseling agencies that have been approved by a bankruptcy administrator.
Those restrictions have not fully alleviated the ABA's concerns. When contacted for this story, the trade group reiterated the concerns raised in its November comment letter to the Federal Reserve about proposed rules to implement the CARD Act.
"Customers may easily and erroneously assume that by providing the names of the credit counseling organizations, the credit card issuer is endorsing or recommending them," the ABA's letter said. Also, "the requirement will require customized periodic statements based on the customers' address, a more expensive and complicated effort."
If the Fed's final rules governing the CARD Act's Feb. 22 compliance deadline did not fully alleviate the ABA's reputational concerns, they addressed the operational ones. The Fed said card issuers must provide in their monthly statements a toll-free telephone number specifically for customers who want counseling. When cardholders call that line, the issuer must provide a name, address, phone number, and Web site for "at least three organizations that have been approved by the United States Trustee or a bankruptcy administrator." The agencies must be either in the same state as the account billing address or a state specified by the customer. The issuer must also verify and update the contact information they have on file on an annual basis.
Some issuers, including Discover Financial Services, are offering their customers the option of all 158 U.S. Trustee-approved agencies.
When Discover cardholders call the toll-free number on their statement, they can provide their ZIP code or get the Web site address for the U.S. Trustee that lists all the approved counseling agencies. Those who enter their ZIP code "are given three credit counseling agencies that service their area," Matthew Towson, a Discover spokesman, said by e-mail.
Capital One Financial Corp. also said it was referring customers to agencies that have been approved either by the U.S. Trustee or, in North Carolina and Alabama, approved by a bankruptcy administrator, according to Pam Girardo, a spokeswoman. It presents contact information for three agencies serving the cardholder's ZIP code "in random order," she said. It's up to the customer which one to contact.
Bank of America Corp. also said it refers cardholders to agencies that have been approved by the U.S. Trustee, though it would not specify which such agencies it chose. A spokeswoman for American Express Co. said its list includes all 158 approved agencies, but she would not be more specific. JPMorgan Chase & Co. did not respond to queries.
Roberta G. Torian, a counsel at Reed Smith LLP and a veteran of Advanta Corp., PNC Financial Services Group Inc. and Mellon Bank, said some banks may choose to refer customers to credit counseling agencies that the lenders have worked with in the past.
"I don't know that they're going to go through anything particularly onerous, because this [requirement] is onerous as it is," she said. "The only thing that they might do, if they have a choice, they might pick among the three some that they know have been successful with their own customers."
Citigroup Inc. is doing just that. Samuel Wang, a Citi spokesman, said its toll-free line is referring customers to Money Management International, Take Charge America and GreenPath Debt Solutions. All three operate nationwide and have been approved by the U.S. Trustee. All three belong to Cunningham's trade group and to the Association of Independent Consumer Credit Counseling Agencies. And all three "have strong existing relationships with us," Wang said. Citi is also providing callers with information about how to find additional agencies on the U.S. Trustee's Web site.
Despite industry wariness of credit counselors, some issuers relied on them even before the law was enacted. Discover, Amex and B of A all said they have referred customers to credit counselors in the past; Wang said Citi has previously suggested credit counseling as an option to some customers. Discover, Towson said, "makes a concerted effort to work with the cardmember on an affordable payment plan before we would consider referring them to a credit counselor."
Betty Riess, a B of A spokeswoman, likewise said that last year the company modified more than 1 million credit card and unsecured loans totaling more than $10 billion. "If customers have issues with multiple creditors, we would refer to nonprofit credit counselors for a more holistic solution."