As the level of consumer debt has exploded in the United States, tens of millions of consumers have become overwhelmed by credit card, automobile, household, and other consumer debt.  Each year millions of these debtors turn to credit counseling agencies to help them manage their debts. [1]   In response to the rising debt and greatly increased number of consumer bankruptcy filings, legislators in the U.S. Congress filed a bankruptcy reform bill that will require consumers to visit a credit counselor before being allowed to file for bankruptcy. [2]

 

As a result of the climbing debts and pending legislation, there has been a rapid increase in the number of credit counseling agencies operating in the United States.  Credit counseling is generally defined as the provision of budget planning and debt management services for consumers.  While some consumer credit counseling agencies are legitimate operations that provide a valuable service, many newer firms have earned a reputation for substandard work, questionable business practices and illegal operations. 

 

Although credit card debt is not the only type of debt handled by credit counseling agencies, it is a major factor in the growth of consumer overspending and increasing levels of personal debt.  Over the past two decades, the number of credit cards issued by banks and nonbanks (from retailers to universities) has exploded along with the type of payments that can now be made with credit cards. [3]   The first credit card company, Diners Club, appeared in 1950, and by 1958 Visa became the first bank credit card that was available to consumers. [4]   “In 1965, only 5 million cards were in circulation; by 1996, U.S. consumers had nearly 1.4 billion cards.” [5]   This mounting use of credit has had a major impact on the U.S. economy and has also led to concerns about the ever-increasing levels of personal debt.

 

The earliest credit counseling agencies came into existence in the 1950s.  Founded in 1951, the National Foundation for Credit Counseling (NFCC) is the oldest association in the United States dedicated to assisting people through financial and credit difficulties. [9]   Local offices affiliated with NFCC were established across the country to serve consumers.  Currently, NFCC has approximately 150 member agencies nationwide; many share the name of Consumer Credit Counseling Services. [10]  

 

In 1972 local Consumer Credit Counseling Services offices sprung up in Connecticut and Massachusetts, and then in Rhode Island approximately 20 years later. [11]   These three states merged their offices in 1999 to form Consumer Credit Counseling Services of Southern New England (CCCS/SNE). [12]   Every four years, CCCS/SNE undergoes an accreditation review by the Council on Accreditation for Children and Families, which conducts a detailed and stringent assessment of CCCS/SNE’s practices and standards that includes site visits and six to eight months of paperwork preparation. [13]

 

Credit Counseling Standard Procedures

Kevin Collins, Regional Team Leader and financial counselor for CCCS/SNE, gave an overview of the CCCS/SNE process for serving first-time clients:

 

1. A first-time client usually comes in for a one-on-one meeting with a counselor.  Initial counseling sessions typically last one hour.

 

2. The client is asked to sign a consent form prior to the initial client counseling session.  This form reviews the confidentiality of the session, lists the topics and options that will be discussed during the session, and discloses CCCS/SNE’s method of receiving from the creditor a percentage of the amount paid by the client.  Clients are also asked to sign a privacy release form.  (CCCS/SNE staff members encourage clients to sign these forms, although both are optional).

 

3. The counselor then completes a budget and financial planning worksheet with the client, reviews the client’s situation, and suggests best options using an “action plan.”  A debt management plan is one service offered by most credit counseling agencies.  With a debt management plan, the client submits money on a monthly basis to an agency, and after renegotiating some terms of the debt, the agency in turn submits the client’s payment to the proper creditors.  A client’s participation in the debt management plan continues until the client requests termination of the process or until the amount owed is paid off. [21]

 

4. If a client chooses to sign up for a debt management plan, a separate agreement is signed.  A debt management plan is utilized by approximately 30% of CCCS/SNE clients. [22]     

 

CCCS/SNE will address any issues that the client presents, including credit card debt, student loans, car payments, mortgage payments, and medical bills, regardless of the debt’s potential for being part of a debt management plan.  Counselors recognize that in some cases, referral to an outside agency or individual, such as a bankruptcy lawyer, is appropriate.

Agency Financing

Traditionally, all nonprofit credit counseling agencies have financed their operations by relying on three sources: [24]  

 

• Charity – The money the agency raises through outside contributions and grantwriting.

 

• Fees – Many agencies have instituted consumer fees, including initial counseling fees and fees that are associated with handling the consumer’s debt management plan.

 

• Fair share – Once a consumer has established a debt management plan, the credit counseling agency requests a donation from each creditor participating in the plan based on the amount distributed on behalf of the consumer.  Agencies received up to 15% from creditors, but in recent years their share has dropped to 6-8%. [25]  

 

Travis Plunkett, Legislative Director for the Consumer Federation of America, notes that “a good credit counseling service will be partially supported by grants and charitable donations and not depend on fair share for any more than 60 percent to 80 percent of its income.” [26]  

 

Debt Management Plans

In today’s industry, there are many agencies that provide little if any counseling, instead concentrating on the more lucrative debt management plans that they offer to consumers.  These plans consolidate all of the consumer’s payments into a single monthly payment to the credit counseling agency. [31]   Once the consumer signs the contract, it is the agency’s responsibility to pass the appropriate amount from the consumer’s monthly payment to the creditors.  Credit counseling agencies often can make deals with the creditors such as lowering the interest rates, or removing the consumer’s late fees, in return for the consumer’s participation in the debt management plan. [32]   The agency handling the plan receives a certain percentage of the debt collected by the creditor as one of its means of funding, although this financing is not always disclosed.  Currently, agencies receive 6-8% of the consumer’s debt from the creditor as payment for handling the debt management plan and retrieving the money owed to the creditor. [33]

 

Cambridge Credit Counseling Corp., based in Agawam, Massachusetts, requires consumers to pay high fees to participate in its debt management program.  This agency charges consumers a one-time mandatory fee equal to their monthly payment on their debts (which can be hundreds of dollars) and then a monthly maintenance fee equal to 10% of the debtor’s monthly payment. [34]   These consumer fees are in addition to the fair share contributions collected by the agency.  However, this agency also offers its clients an added incentive to stay with the debt management plan – the “Good Payer Program.”  Once a client has paid his or her monthly payments on time for six months, Cambridge Credit Counseling gives the client 50% of the fair share contributions collected by the agency from the client’s participating creditors. [35]

 

Massachusetts Law

The most recent Massachusetts law dealing with credit counseling was enacted in 1969. [36]   It states that credit counseling may only be provided by attorneys and nonprofits organized under M.G.L. Ch. 180, §4A, which requires credit counseling organizations to be incorporated as nonprofits in the Commonwealth with the Secretary of State’s office.  Although the Internal Revenue Service has certified a number of the credit counseling agencies operating in Massachusetts as nonprofit, many have not registered in the Commonwealth.  

 

Two bills were filed in the Massachusetts Legislature during the 2000-2002 legislative cycle that would change the credit counseling statute.  Massachusetts State Senators Frederick Berry (D-Peabody) and Therese Murray (D-Plymouth) filed Senate Bill 368, “An Act Establishing a Board of Registration of Credit Counselors.”  This bill would require credit counseling agencies to be licensed by a board of registration, while also establishing standards for individual credit counselors.  Senate Bill 368 is pending before the Senate Committee on Ways & Means.  State Representative Jarrett Barrios (D-Cambridge) filed House Bill 579, “An Act Relative to Credit Counseling Services,” which would allow all in-state and out-of-state nonprofit organizations to offer credit counseling services in the Commonwealth.  This bill passed the House and is in the Senate Committee on Bills in the Third Reading. 

 

Senate Post Audit and Oversight Bureau researchers discovered that of the 68 credit counseling agencies advertised as operating in Massachusetts, only 33 were registered with the Secretary of State’s office. [37]   Out of the 33 registered agencies, only 10 were registered in Massachusetts as nonprofits. [38]   Based on this research, at least 60 agencies, or 86%, are operating illegally.

 Source: Comparison of Secretary of State records with advertised credit counseling agencies

 

Not only are many of these credit counseling agencies not registered and for-profit, but even those that are nonprofit can sometimes have troubling and deceptive aspects to their business.

 

 

Federal Proposed Legislation

Interest in consumer credit counseling by state agencies and consumer groups has been partially fueled by a provision in the proposed new bankruptcy reform legislation currently before the U.S. Congress.  House 333 and Senate 420 are similar pieces of legislation; both include a condition that would require consumers to seek the aid of credit counselors before being allowed to file for bankruptcy protection. [43]   According to Samuel Gerdano, General Director of the American Bankruptcy Institute, the aim of this legislation “is to make bankruptcy less available, less debtor friendly, to try to reduce the number of bankruptcies and to reduce the scope of relief that’s available to individual debtors in bankruptcy cases.” [44]   The Conference Committee appointed to settle differences between the two bills has almost reached consensus. [45]

 

The Executive Office of U.S. Trustees, a division of the U.S. Department of Justice that oversees bankruptcy cases, has drafted regulations for the credit counseling industry, which will be proposed if this bankruptcy bill becomes law. [46]   These regulations, which will include an application process and bonding, will only apply to those agencies serving consumers required to seek credit counseling assistance before declaring bankruptcy.  According to Sue Ann Slates, an attorney with the U.S. Trustees, her office has been given little power to enforce these regulations, therefore she anticipates that states will strengthen their laws and enforcement to prevent rogue credit counseling agencies from operating. [47]    

 

 

Business Week journalists summarized the state of the consumer credit counseling industry:  “Born of people’s misfortunes, credit counseling was a sleepy cottage industry for a long time.  Now, larger and troubled, it may be more in need than its clients of being set back on the straight and narrow.” [48]

 

There are two major problems with consumer credit counseling in Massachusetts:

1. Massachusetts has an antiquated law that has not been enforced.  As a result, illegal agencies are operating with impunity.

 

2. Some aggressive new firms in the credit counseling industry are taking advantage of consumers by charging exorbitant fees, failing to follow through on payments to creditors and offering little disclosure of their financial dealings.  In addition, these firms lack accountability to consumers.

 

Antiquated Law

Massachusetts currently regulates the state’s consumer credit counseling industry with a 1969 law that is no longer adequate to control the aggressive credit counseling agencies that operate here. [49]   The world has changed, with the number of debtors and consumer credit counseling agencies increasing at a rapid pace.  Massachusetts’ current law lacks basic consumer protections and does not include:

·        Any regulations to keep credit counseling agencies accountable to their clients or the state;

·        A requirement for agencies to post a bond or carry insurance, which would allow the state or consumers to hold the agencies liable for shoddy or fraudulent business practices; or

·        A fee cap to protect consumers from exorbitant and unnecessary fees for service.

 

Concerns with the Newer Entrants

 

Aggressive Marketing

Credit counseling agencies use many aggressive marketing techniques to attract consumers to their agencies.  Television and radio advertisements, direct mail, unsolicited email, and persistent telemarketing are the most common ways for these agencies to advertise themselves as providing credit counseling, yet many of these agencies’ primary goal is to get consumers on debt management plans, regardless of other options a consumer might have.

 

Out-of-state credit counseling agencies routinely use telemarketing to reach Massachusetts consumers.  Massachusetts residents have repeatedly received phone calls from organizations like National Consumer Council, an agency based in Washington, D.C., and more recently, Integrated Credit Solutions of Florida.  Integrated Credit Solutions is one company that was telemarketing in Maine until it recently received a cease and desist letter from state officials because it was not licensed to operate in the state. [52]   The substance of the calls from both companies is virtually the same.  An example follows: 

 

“This is Jeffrey Colwell with the National Consumer Council at 1-800-555-3991.  I’m calling in regards to your consumer credit cards and the high interest rates that they carry.  Your record is now in our database and we would be happy to assist and recommend consolidation, cutting your monthly payments in half in most cases.  I encourage you to call us here at the NCC.  We are a non-profit organization formed to help homeowners(/students) just like yourself.  There will be absolutely no charge for any advice that we may give, yet we will show you how to be debt free in less than five years and you will be spending less, probably, than you are spending now.  So please call the Council at 1-800-555-3991.  Thank you.” [53]

 

 

High Fees and Lack of Disclosure

More recent entrants into the credit counseling industry have changed the focus from counseling to debt management.  Consumer advocates and legislators from California to Maine have been concerned with the proliferation of debt management companies that have engaged in practices that may be legal, but are also deceptive to consumers who are trying to make a decision about who to turn to for help in dealing with their debt. [54]   For example, many debt management companies pocket a consumer’s first month’s payment on the plan as the consumer’s advance payment to the company for setting up the debt management plan.  However, the company often takes this first payment without adequately informing the consumer, and the loss of the consumer’s first payment may cause them to be yet another month late with their creditors.  This advance payment, also known as a “voluntary contribution,” is in addition to a monthly fee charged by the agency for managing the plan. [55]       

 

 

Shady Backgrounds

Another important area of concern for regulators and consumer advocates is the background and work histories of agency leadership.  Advocates have called for greater disclosure of an agency’s officials’ past experiences with financial institutions since credit counseling agencies deal with sensitive personal financial information. [61]   According to an article in Business Week, “Customers who divulge some of their most private information to counseling agencies may be surprised who gets access to it.  It’s not unusual for top agency executives to have violated securities and other laws.” [62]  

 

 

In February 2002, National Public Radio’s program, “All Things Considered,” placed AmeriDebt, a Maryland based credit counseling agency that operates nationwide, in the spotlight.  This company has been receiving a great deal of public scrutiny for its aggressive marketing tactics, poor disclosure of its consumer charges, processing mistakes, and a questionable decision a couple of years ago to buy a for-profit payment processing company controlled by the husband of AmeriDebt’s founder. [69]

 

Difficult to Recoup Losses

It is difficult for a consumer to sue a company if it closes or is located out-of-state; therefore, the consumer currently has little to no recourse for a bad credit counseling experience that may include the loss of money and the development of a bad credit record.

 

 

As the Penallatores’ case indicates, a poorly executed credit counseling agreement can have long-term impacts on a consumer.  In addition to the short-term impacts of financial loss and the time spent dealing with the impact of unscrupulous service, a tarnished record of missed payments will show up on a consumer’s record for seven years. [72]   This can affect a consumer’s access to a variety of lenders for future financial needs.  Furthermore, a less favorable credit record will affect the amount of the loan offered as well as its interest rate. [73]  

 

There are serious concerns with how credit counseling services are being provided to Massachusetts consumers.  However, there are some relatively simple measures that the Commonwealth can take to improve the accountability of credit counseling agencies and reinforce the notion that credit counseling agencies exist to help consumers manage their debt and learn to better handle their finances.  

 

In a number of states, laws and regulations help protect consumers from being taken advantage of by unscrupulous agencies.  According to the Executive Office of U.S. Trustees, only five states have absolutely no laws regulating credit counseling, but many other states only affirm who can practice credit counseling without imposing any further regulations or restrictions. [74]  

 

 

Maine and New York are two Northeastern states that have put stronger laws in place to protect consumers from fraudulent credit counseling agencies.  Companies that do not pass Maine and New York’s requirements and are of concern to their reviewing agencies are not allowed to practice in these states, although with Internet and telephone solicitations this can be difficult to enforce.  Will Lund, Director of the Maine Office of Consumer Credit Regulation stated that “[c]ertain Internet companies are like JELL-O^®, you just can’t nail them to the wall.” [79]   Yet in many circumstances, educated consumers often provide the state with the extra eyes and ears needed to identify companies doing business in the state illegally.  

 

 

 

States have many mechanisms at their disposal to protect consumers from unscrupulous credit counseling agencies.  Massachusetts can learn from other states’ experiences and create regulations that encourage accountability, but also provide the necessary flexibility to allow reputable organizations from across the country to serve Massachusetts consumers.

 

 

Findings:

 

Ø      Aggressive credit counseling firms, usually operating illegally, are pitching debt reduction plans to Massachusetts’ consumers. 

 

Ø      Many of these credit counseling firms are seriously harming consumers by charging high initial costs, failing to make payments to creditors as promised, tarnishing credit records, and engaging in questionable business practices.  Consumers not only lose money on these plans, but can also suffer from a poor credit record that affects their financial future.

 

Ø      Massachusetts’ consumer credit counseling law is antiquated and no longer reflects the reality of today’s consumer credit counseling industry.  Other states have taken the lead in protecting consumers by regulating the operation of consumer credit counseling agencies.

 

Ø      On June 3, 2002, the Massachusetts Office of the Attorney General announced a crackdown on credit counseling agencies that are abusing consumers.

Recommendations:

 

• Massachusetts should pass a comprehensive law to regulate consumer credit counseling agencies.  Such a law should contain provisions that protect consumers, such as:

 

1. Credit counseling agencies should be required to register with the Division of Banks.  These applications should include basic background information on the agency’s principal officers, telephone numbers for compliance questions and consumer complaints, and a demonstration of a consumer education and services component.  The agencies should also be responsible for filing critical IRS documents with their application to prove their nonprofit status.

 

2. The Division of Banks should have the authority to determine if it is in the consumers’ interest for the agency to operate in Massachusetts.  The Division should reserve the right to examine an agency’s books and records.  In addition, the Division of Banks should have the right to refuse an application for erroneous or incomplete information. 

 

3. The Division of Banks should be authorized to set a fee cap for the services rendered by credit counseling agencies.  For example, Michigan includes a fee cap in its regulations governing the credit counseling industry.  The state allows a credit counseling agency to charge a fee of up to 15% of the amount of the consumer’s debt, as well as a $25 initial counseling session fee.  The up to 15% fee has to be returned to the consumer if 51% of the consumer’s creditors did not agree to enter into the consumer’s debt management plan.

 

4. Applicant consumer credit counseling agencies should be required to provide clearly written consent and full disclosure forms for their clients outlining all of the costs associated with their programs and the methods by which they handle their clients’ accounts.  These statements should indicate how much a consumer would pay with an agency’s debt management plan, including any start-up and handling fees.  In addition, consumers should receive regular updates on their accounts and should be aware of how they can cancel the plan if they desire.

 

5. All consumer credit counseling agencies should be required to carry liability insurance or to post a bond prior to being registered to handle consumer or state penalties.  This will ensure that money will be available to compensate consumers who file claims against an agency and to cover any financial penalties that the state may impose for violating regulations.   

 

6. If an unregistered agency is operating in the state, or a registered one is generating numerous consumer complaints, the Division of Banks should be empowered to take enforcement action against these companies by issuing cease and desist letters, requiring the forfeiture of the bond, imposing civil fines for operating illegally or violating regulations, or revoking the agency’s registration.

·        The Massachusetts Office of the Attorney General must continue to actively pursue credit counseling agencies that are defrauding consumers.