The Federal Trade Commission’s shutdown last week of a credit counseling agency threw harsh light on an industry that claims to help debt-ridden consumers but may in fact send them into worse financial straits — for a profit.
Critics say nonprofit status helps dupe consumers into handing over money that the agencies use to pay themselves ahead of creditors. In fact, critics say, the agencies funnel business into for-profit sister companies that charge predatory fees.
Rather than help consumers reduce debts, these agencies may significantly increase their clients’ burdens and ruin their credit histories, critics say.
The FTC said that National Consumer Council of Santa Ana, Calif., which was closed down last week, deceived consumers with promises of helping them become debt-free.
Travis Plunkett, the legislative director for the Consumer Federation of America in Washington, said the counseling agencies imply in their literature they can help consumers settle their debts at a much lower cost and improve their credit scores and reports. “In fact,” he said, using such agencies “will hurt their credit rating.”
But Nilou Salimpour, a spokeswoman for National Consumer Council, said it does not claim that it will improve credit scores. The agency “says it will help you pay back your debt and help you remain debt-free in the future,” she said.
National Consumer Council has settled 40,000 credit card accounts, Ms. Salimpour said.
Though her agency is the latest to receive bad press, the whole industry is under scrutiny, and many participants face lawsuits from regulators and former clients.
The FTC and five attorneys general offices have joined multiple private class actions against AmeriDebt Inc. of Germantown, Md. Jessica Rich, an assistant director in the FTC’s division of financial practices, said AmeriDebt did not disclose its high up-front fees to consumers.
The credit counseling agency, which the FTC sued in November, has been working with the commission to restructure its business, she said.
Cambridge Credit Counseling Corp., of Agawam, Mass., was sued in April by the Massachusetts and North Carolina attorneys general offices. The charges include unfair and deceptive practices and charging consumers high fees for negotiating with creditors. The legitimacy of its nonprofit status is being questioned, since for-profit sister companies get control of the consumers’ money.
Montieth M. Illingworth, a spokesman for Cambridge, says it is the only credit counseling agency that rebates fees if clients stay in the program for at least six months. He said regulators are attacking the industry without understanding it.
“The old model will fail, and five years from now they’ll see all these people in bankruptcy and wonder why.”
Easy access to credit cards may have been a factor in recent abuses. According to a March 24 report by the Senate’s permanent subcommittee on investigations, “aggressive entrants into the credit counseling industry” proliferated because of the sharp rise in credit card debt in the 1990s. Since 1994 over 1,200 such organizations have applied to the Internal Revenue Service for tax-exempt status, including more than 810 in 2000-03.
According to the report, few of these agencies resemble the traditional community-based, face-to-face counseling services.
The traditional services cost consumers little or nothing; most have contracts with creditors and receive a percentage of the recovered debt. These services can often negotiate a lower rate and waiver of late fees. Consumers are expected to pay off the debt in three to five years.
The new wave of credit counseling agencies operate nationwide, through the Internet and the telephone, and often lack contractual relationships with creditors, the subcommittee reported. Some creditors do not even recognize the agencies and continue to deal directly with the customer.
Many of the complaints about National Consumer Council were fielded by the Better Business Bureau of the Southland in Los Angeles. Bill Mitchell, its president, said lenders opened the door to more aggressive agencies by reducing their payment to the older counseling services.
Creditors are “shooting themselves in the foot,” Mr. Mitchell said.
In the past year the IRS has instituted a program for reviewing the applications of credit counseling agencies for nonprofit status and has initiated audits of 50 such agencies, the report said.
