Should consumer credit counselors be regulated?
Consumer advocates, who accuse these firms of putting their own interests ahead of borrowers’, say yes. And a trade association for the companies, acknowledging that the accusations have damaged the industry’s image, says it is inclined to agree.
Some major lenders are overhauling the way they deal with such agencies, which offer debt-distressed consumers a way to avoid bankruptcy. Some lenders are instituting their own standards to winnow out the unscrupulous.
Susan Keating, the chief executive officer of the trade group, the National Foundation for Credit Counseling Inc., said “there are organizations out there that are abusing the system and preying on” consumers.
Ms. Keating, who joined the Silver Spring, Md., group in March, was herself in the headlines in 2002 when she lost her job as chief executive and president of Allfirst Financial Inc. in a management shakeup following fraudulent currency trades that cost the company nearly $700 million. (Allied Irish Banks PLC sold Allfirst to M&T Bancorp in March 2003.)
Ms. Keating says she favors legislation to support the credit counseling industry “in a way that protects consumers.” Efforts to reform and “to legislate reform” are just beginning, she said. “On the federal and state levels, we need to consider what legislative action is appropriate to protect consumers from these sorts of predatory practices.”
That support may be an acceptance of the inevitable.
This month the Federal Trade Commission shut down the National Consumer Council of Santa Ana, Calif., for multiple counts of bad behavior, including deception and excessive fees. Other debt management agencies have faced similar allegations, and several lawsuits are pending throughout the country.
A federal crackdown may not be too far off. The FTC has said it is taking a closer look at the industry, and the Internal Revenue Service says it has been reviewing the nonprofit status of about 50 agencies for the past year. In those cases the agencies were run by individuals who operated for-profit providers of debt management. Clients of the agencies were referred to the for-profit companies, which charged customers high fees.
A national agency, Cambridge Credit Counseling Corp. of Agawam, Mass., announced Tuesday that is was drastically overhauling its structure. The nonprofit, which was criticized on Capitol Hill for high fees and affiliations with for-profit companies, said it would dramatically lower its fees and institute a sliding scale.
Cambridge’s acting president and CEO, Chris Viale, conceded that the agency was changing because of pressure from “different driving forces,” though he said the changes were voluntary.
“We hope, in turn, that the banks will recognize the change in the model, and pay fair share that’s equal to what creditors pay to the rest of the industry,” Mr. Viale said.
Many lenders that work with counseling agencies are making changes.
Bank One Corp., MBNA Corp., and Citigroup Inc. were interviewed earlier this year by the Senate's Permanent Subcommittee on Investigations that they had implemented new performance-based standards for the agencies.
Bank One, of Chicago, has fee guidelines and accreditation requirements. Agencies that qualify at a minimum level receive 2% of debts recovered. An additional 7% may be paid out based on how much the agency is able to recoup. MBNA, of Wilmington, Del., has similar criteria. It refuses to deal with agencies affiliated with a for-profit company, sets caps on the fees consumers are charged, and prohibits termination fees.
Citi spokeswoman Maria Mendler said the bank changed its funding methods at the beginning of April to avoid the “unscrupulous credit counseling agencies.”
In place of the percentage-based fair-share funding model, Citi has developed a voluntary grant program intended “to reward the credit counseling agencies that provide the best service, which we believe includes credit education,” Ms. Mendler said.
Some consumer advocates argue that cutbacks in the amounts lenders pay to agencies — known as fair share in the industry — have created a system that hurts consumers. Since the late 1990s fair-share rates have fallen from roughly 15% of the amount recovered to below 10%, in some cases well below 10%.
“They’ve hurt the good agencies as well as slowed funding to the bad,” said Travis Plunkett, the legislative director for the Consumer Federation of America. But they have also fostered the growth of debt management plan “mills” that “don’t do real counseling,” he said.
American Bankers Association spokeswoman Tracey Mills said she sees no connection between lower fair share rates and predatory behavior by debt management companies, which she said are in “a marketplace ripe for these unscrupulous counselors.” In reducing their fair share payments to these agencies, “there’s also been an opportunity for the banks to reach out directly to the consumers and cut out the middle man.”
Alan Elias, a spokesman for the subprime credit card issuer Providian Financial Corp., said the San Francisco company encourages distressed cardholders to work out a plan with Providian before considering going to a debt management agency.
If cardholders still opt for credit counseling, “We encourage them to do their homework, and make sure they choose a reputable service,” Mr. Elias said. Those customers should “have a full understanding of all the services that are provided, and any fees that will be charged,” he said. Consumers should be “skeptical of any get-out-of-debt” promises or other pitches that sound “too good to be true.”
