Regulating the Counselors

  In an environment of soaring consumer debt loads, credit-counseling services are booming. But the questionable practices of some upstart organizations are prompting lawmakers to impose restrictions on what has been an unregulated market.
  The first national credit-counseling agency started in 1951 as a means of offering debt-ridden consumers an alternative to bankruptcy and lenders a way to recoup at least a part of the money owed by financially strapped consumers. And for years, consumer credit-counseling services achieved those goals.
  But over the past decade, there's been what a recent report from the National Consumer Law Center and the Consumer Federation of America termed an "alarming transformation," the emergence of new players that appear more interested in charging high fees and marketing debt-consolidation loans than in helping consumers return to financial stability. The report, "Credit Counseling in Crisis" details abuses by some of the new-age services, including deceptive practices and price-gouging of consumers. And it calls for legislation to address those problems.
  The report reflects the growing public dissatisfaction with credit-counseling services, a fact not lost on lawmakers. Laws to regulate credit-counseling services already have been passed in Maryland and Georgia. And there are several bills pending in other states, sources say.
  What's more, regulators are stepping in to block what they view as illegal activities of many of the companies. Illinois Attorney General Lisa Madigan in February filed suit against AmeriDebt Inc., a Germantown, Md.-based debt-management company that markets it services nationally via broadcast and print media and the Internet. AmeriDebt is one of the largest such companies in the U.S.
  In the suit, Madigan alleges AmeriDebt violated state consumer fraud laws by failing to disclose hidden fees, failing to tell consumers their first payment under a debt-management plan is kept by the company instead of being sent to creditors; and failing to make timely payments to creditors.
  And this is not the first time that a regulator has taken AmeriDebt to task. The District of Columbia in November 1999 filed suit against Washington, D.C.-based lender Infinity Resources Group Inc., saying it misled consumers by saying they would probably be able to get a consolidation loan from Infinity if they made six monthly payments on time to AmeriDebt's program. In fact, most of the consumers, who paid an up-front fee to Infinity, never got the loans, the suit alleged.
  The lawsuit also questioned AmeriDebt's non-profit claim, alleging that one of the primary purposes of its operations was to generate business for Infinity. In May 2000, the District of Columbia reached a settlement in the suit, with AmeriDebt agreeing not to make false representations to consumers.
  AmeriDebt was unavailable for comment for this story.
  Such practices show the need for regulation of consumer credit-counseling services, observers say. That's because there is a growing demand for such services. By one industry estimate, nearly nine million people contact credit-counseling services each year.
  "I think all issuers are seeing a growing percentage of their portfolio being put on (counseling)-type programs," says Jon Hoffmann, managing director of collections for Atlanta-based subprime card marketer CompuCredit Corp. CompuCredit has several thousand contacts a month with agencies, he says.
  Industrywide, accounts in a consumer credit-counseling plan typically represent between 2% and 3% of an issuer's portfolio, says Ron Robine, chief credit officer at Bank One Corp.
  Complaints
  Fueling the demand for counseling services is bankruptcy reform legislation pending in Congress. That legislation would require consumers to go to credit counseling before filing for bankruptcy.
  As the number of debtors in debt-management plans increases, so do complaints. The Better Business Bureau reported that in 2002 such complaints rose to 1,480, up from 261 in 1998.
  Legislators are watching.
  "We had a number of complaints from our constituents over the last couple of years about some of the services that were alleging they were providing credit-counseling services but never really did," says Maryland State Sen. Patrick J. Hogan, who co-sponsored legislation regulating counseling services.
  Under the new Maryland Debt Management Services Act, credit-counseling services must obtain a license from the state Commissioner of Financial Regulation.
  In addition, applicants must have a net worth of at least $50,000 plus an additional $10,000 for each location, up to a maximum of $500,000. The law also establishes application procedures and requires applicants to provide fingerprints for criminal background checks. Applicants must post a surety bond of at least $10,000, and up to $350,000.
  Violators of the act are subject to a fine of up to $1,000 for the first violation and $5,000 for each subsequent violation and/or a five-year prison term.
  Georgia, too, enacted similar legislation to regulate consumer-counseling services. That law, which took effect July 1, limits fees to 7.5% of monthly payments, requires counseling firms to pay a client's creditors within 30 days of receiving the money, and provides other protection for consumers.
  Many issuers welcome regulation of credit-counseling services. "Whether it's internal through (industry) accreditation or whether there is some other type of oversight ... it would make things much more above-board for the whole industry," CompuCredit's Hoffmann says.
  Issuer Initiatives
  Issuers, meanwhile, are tightening their own criteria for dealing with credit-counseling services, says Linus Campbell, director of education for CCCS of Maryland, an affiliate of the National Foundation for Credit Counseling.
  "There are major creditors that are starting to get involved ... in putting down some requirements before they will actually deal with some of these counseling agencies," Campbell says.
  For example, some issuers-including MBNA Corp. and Sears, Roebuck and Co.-are paying the counseling services based on performance, Campbell says. They're also insisting that services be accredited and counselors be certified.
  Among those vetting out counseling services is Bank One, which reviews agencies' fee schedules to ensure they don't make excessive payment demands on customers, Robine says. Some of these agencies, although ostensibly not-for profit, "are operating in a for-profit mode," he says.
  Bank One also tracks the performance of various agencies. The Chicago-based issuer won't work with counseling services that enroll people who are in good financial shape, but merely seeking to get lower monthly payments or lower interest rates, Robine says. Bank One also avoids agencies that continually enroll people who don't successfully complete the payment plans.
  There is no question that a reputable credit-counseling service can be a godsend for both issuer and debtor. "When we look at the performance of people we work with individually versus the performance of the people that work with consumer credit counseling ... we do better with the people who work with consumer credit counseling," says Robine.
  In contrast, a poorly run counseling service can take a chunk out of an issuer's bottom line in the form of higher chargeoffs. That's because consumers faced with exorbitant fees, missed payments or inadequate counseling usually drop out of debt-management programs.
  "A lot of (those dropouts) are likely to end up filing for bankruptcy," says Deanne Loonin, staff attorney for the National Consumer Law Center. "And maybe that could have been avoided."