Banks are cracking down on credit counseling agencies, refusing to work with those that do not meet certain standards when working out repayment programs for debtors.

The banks are concerned that some agencies-particularly ones that operate for profit-are rubber-stamping relaxed payment plans for delinquent borrowers who could afford to pay more.

Banks willingly pay fees to forthright companies that help struggling consumers, preferring to work with members of the National Foundation for Consumer Credit, the largest trade group for this industry. But banks' expenses for consumer credit counseling are rising, along with the number of questionable come-ons from firms that are not members of this trade group. As a result, banks are stepping up efforts to police shady operators.

Counseling companies have proliferated along with consumer debt, and some are advertising sweet deals-and apparently negotiating them for people who earn high salaries but would prefer to make low monthly payments.

The rising number of debtors has meant that the fees lenders pay to these companies-once negligible-are now a major expense. The number of people in credit counseling is expected to rise further, especially if Congress passes a pending financial reform bill that would require consumers to undergo credit counseling before filing for bankruptcy.

This year the fees banks pay counseling agencies-known as "fair share"- and the amount of interest charges waived for consumers in debt management programs became banks' second-largest cost in collections, said Durant Abernethy, president and chief executive officer of the National Foundation for Consumer Credit.

"I'm confident that a number of (counseling agencies) are offering a product to people who want to cheat the system," said Mr. Abernethy, whose organization, in Silver Spring, Md., represents 1,500 nonprofit counseling agencies nationwide.

Some lenders-including Bank of America Corp., KeyCorp, and Bank One Corp.'s First USA division-have grown suspicious of some agencies they work with, and have made policy changes or begun systematic reviews of counselors' practices.

Bank of America, for example, is planning several changes beginning Aug. 1. Instead of making a blanket 10% fair-share contribution, the bank will pay a 9% fee to agencies that remit consumers' payments electronically, and 6% to agencies that send paper checks.

Last year Bank of America paid $9.2 million to credit counseling agencies that were working with its customers, said Dennis Wyss, a spokesman for Bank of America. The number of Bank of America customers in these programs has risen 50% in the last year, to 142,000. The bank links the phenomenon to record filings for personal bankruptcy, which hit 1.4 million nationally last year.

The bank says it is also planning changes that will benefit consumers. It will lower the interest rate paid by customers in counseling from 12% to zero, a move Mr. Abernethy said will give those counseling agencies a "much stronger product."

Bank of America said it will no longer work with agencies that have for- profit charters.

"We don't think that it's appropriate to charge a financially troubled customer a fee, especially when high-quality credit counseling is available at no fee," Mr. Wyss said.

Some experts say the line between nonprofits and for-profits is murky, but at least it is a starting point for banks judging agencies.

Last year First USA created a job with the sole responsibility of managing relationships with credit counseling agencies. The credit card issuer is getting ready to send out surveys to the agencies it works with, requesting information about practices and fees, said Bill Herberger, first vice president in charge of First USA's relationships with credit counseling agencies.

At First USA "there is a lot of focus right now on credit counseling agencies," Mr. Herberger said. "It's very important that the agencies we work with truly help our customers."

First USA has crafted a list of operating principles for credit counseling agencies, and plans to send it to associations that represent these firms. Mr. Herberger would not name specific principles.

KeyBank USA, a KeyCorp subsidiary, is sifting through a voluminous pile of surveys that credit counseling agencies have remitted in past weeks. KeyBank asked the agencies to submit tax returns which disclose revenues, compensation of board members, and affiliations with other organizations, along with other documents. Some nonprofits have contracts with for-profit organizations that handle consumer calls.

"We don't want someone who makes $100,000 a year and thinks he can make these small payments on his debt," because he is enrolled in a debt management program, said Robert Wade, who runs KeyBank USA's collections for the Northeast region.

Other banks are putting similar controls in place. Mr. Abernethy said Citigroup and MBNA Corp. told him they are developing "quality scoring programs" to evaluate credit counseling agencies.

"The gist (of these initiatives) is that the banks are saying 'Meet these criteria or we won't work with you,'" said John Waskin, president of American Credit Counselors' Corp. in Charlotte, N.C.

Mr. Waskin's two-year-old nonprofit organization recently issued a press release saying Bank of America refers a lot of business to ACCC and considers it one of the bank's "lead" counseling agencies.

Mr. Wyss of Bank of America said that the North Carolina agency is "good" but only one of many agencies with which it does business.

Mr. Waskin said banks are responding to "less than credible agencies getting into this business."

One banker-who asked that his name not be used-said he conducted an anonymous shopping test, posing as a consumer with a substantial salary and high credit card debt. He called 12 agencies and said he could pay his debts but wanted to lower his payments by enrolling in a debt management program.

Six of the dozen companies encouraged him to sign up for their services, he said.

"They are advertising their services almost as if they are offering a consolidation loan, or a nifty way to reduce interest rates," the banker said.

He said his experiment was prompted by a credit counseling agency whose practices had raised eyebrows at the bank. That agency had installed a hot line in the bank's collections department to make it simple to refer troubled customers; after 10 days, 150 customers had enrolled, leading the bank to conclude that the company was signing up anyone who called.

The banker said some counseling companies "brag that they can get someone to sign up for a repayment program in 35 minutes." None of the companies he identified are members of Mr. Abernethy's trade group.

Among the credit counseling companies that have raised concern-and that did not perform well in the banker's mystery shopping test-are AmeriDebt, which advertises on Yahoo's Web site, and Amerix Corp. Amerix, based in Columbia, Md., was founded by Bernie Dancel, who also founded Genus Credit Management, the largest counseling agency, according to Mr. Abernethy. Genus is a nonprofit, and Amerix, which handles back-office functions such as customer calls for Genus and other counseling agencies, is not. Mr. Dancel is the chief executive of Amerix.

One Web site says: "To get the benefits of lowered monthly payments, lower interest rates, stopped late charges, and waived over-the-limit fees, you need AmeriDebt. As a nonprofit organization, AmeriDebt credit counselors can secure you these benefits not usually available to credit consumers."

Edward J. Johnson, president of the Better Business Bureau of Washington, D.C. said he is concerned about "the number and nature of the complaints," against AmeriDebt. AmeriDebt is the second most inquired about company in the Washington-metro area this year, Mr. Johnson said.

AmeriDebt does not charge consumers a fee, but does ask them for a $25 monthly contribution for its services.

A spokeswoman for Amerix said the company is simply acting on behalf of its credit counseling clients, following "the criteria they set for Amerix."

Congress seems to share the concern of banks about for-profit organizations offering credit counseling. The Senate's version of the pending financial reform bill stipulates that only nonprofits may qualify consumers for bankruptcy.

The counseling agencies that raise questions, Mr. Abernethy said, are those with nonprofit status that seem to be making a lot of money and paying senior executives high salaries.

"The whole credit counseling industry is in transition," said Mr. Herberger of First USA. "They are in the process of reshaping what their services are and should be. We are looking to help give them guidance."

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