Senate Investigative Subcommittee Releases Report Exposing Abusive Practices In the Credit Counseling Industry

WASHINGTON — Today, Senator Norm Coleman (R-Minn.) and Senator Carl Levin (D-Mich.), Chairman and Ranking Minority Member of the U.S. Senate Permanent Subcommittee on Investigations, released a bipartisan Subcommittee report that examines the credit counseling industry and exposes abusive practices committed by certain credit counseling agencies. “Over the past several years the credit counseling industry has seen the emergence of new and aggressive credit counseling agencies,” Coleman said. “The practices of these new agencies resulted in consumer complaints of excessive fees, pressure tactics, non-existent counseling and education, promised results that never come about, ruined credit ratings, poor service, and in many cases being left in worse debt than before they initiated their debt management plan. I am pleased to note that our investigation — in conjunction with the enforcement efforts of the IRS and the FTC — has resulted in a reversal of the situation and has greatly increased public awareness of the problems facing the credit counseling industry. The recommendations in this report are designed to effect real reform in the industry and will result in greater protection for indebted consumers from unscrupulous credit counseling agencies.” “Too many abusive credit counseling agencies continue to take advantage of average Americans trying to dig their way out of debt — charging excessive fees, taking for themselves payments intended for creditors, and acting under the guise of a non-profit charity when they are really for-profit operations,” said Levin. “Increased IRS and FTC enforcement is targeting some of the worst offenders, but more systematic reforms are needed to clean up this industry. This report not only lays out the abuses, but also recommends a range of reforms to stop the misconduct.” The Subcommittee held hearings in March 2004 and released a bipartisan staff report that related the history of credit counseling and detailed the questionable practices of three credit counseling “conglomerates” who have been the subject of consumer complaints. The bipartisan Subcommittee report released today incorporates the information learned at the Subcommittee’s hearing and outlines the changes that have occurred in the credit counseling industry since the time of the hearing. The subjects of the investigation — Cambridge Credit Counseling, The Ballenger Group, and Amerix — have each adopted more consumer-friendly practices as a result of the Subcommittee’s investigation. In addition, the Subcommittee’s investigation and the enforcement actions of the IRS and FTC have resulted in the closing of AmeriDebt, Inc., one of the most notorious credit counseling agencies investigated by the Subcommittee. The Subcommittee’s report makes the following bipartisan recommendations designed to protect indebted and vulnerable consumers and improve the credit counseling industry: 1. Complete Industry Cleanup. The IRS and FTC should complete their ongoing reviews of the credit counseling industry to eliminate abusive conduct by credit counseling agencies that have been operating in violation of restrictions on non-profit charities or using unfair or deceptive trade practices. 2. Establish Five-Year Review. In light of past industry abuses, the IRS should require each credit counseling agency to submit every five years, for IRS review, return information establishing its charitable activities and a certification that the agency is not providing a private benefit to any individual or entity. Congress should consider enacting legislation conditioning a credit counseling agency’s tax exemption on the submission of this documentation and the IRS’s renewal of its tax-exempt status for five-year periods. 3. Provide Consumer Education. To address rising consumer debt and bankruptcy rates, each credit counseling agency should provide affirmative financial counseling and educational programs designed to reduce excessive indebtedness within the populations they serve, and should evaluate, improve, and document the effectiveness of these programs. 4. Continue Creditor Support and Standards. Major creditor banks should continue to provide financial support to non-profit credit counseling agencies, conditioned upon the agencies’ achieving specified standards that contribute to the public good, including standards requiring agencies to maintain accreditation within the industry, assess reasonable fees based upon actual costs, provide individualized debt counseling, and avoid conduct or transactions that generate a private benefit for any individual or entity. Creditors should carefully screen credit counseling agencies to ensure they provide funds only to reputable agencies that comply with their standards. 5. Clarify Federal Standards. The IRS and FTC should work together to clarify the standards that credit counseling agencies must meet to maintain tax exempt status under Section 501(c)(3) and avoid deceptive or unfair trade practices, including by making it clear that a non-profit credit counseling agency must meet certain standards. (a) Accreditation — maintain good standing and accreditation status within the credit counseling industry, such as by meeting the accreditation standards of the Council on Accreditation for Children and Family Services; (b) Independent Board — maintain an independent Board of Directors that includes representatives of the community served by the agency and that includes no more than a minority of directors who are employed by the agency, a related entity, or any other person who stands to gain direct or indirect financial benefit from the agency’s activities; (c) Public, Not Private Benefit — avoid conduct or transactions that generate or create the appearance of generating a private benefit for any individual or entity; (d) Full Disclosure — disclose to each client the existence and nature of any financial relationship that the agency has with a creditor of the consumer or with a for-profit entity that provides data processing, marketing, or financial services to the agency or the client; (e) Reasonable Fees — if fees are to be charged, they should be reasonable fees that are based upon the agency’s actual costs and charged as services are provided, rather than substantially in advance of such services; and (f) No Improper Incentives — refrain from accepting compensation for referring clients to any service or organization, and refrain from paying compensation to any employee based upon the number of clients enrolled in debt management plans or the amount of debt managed by the agency. Contacts: Tom Steward (Coleman) 202-224-5641 Kathleen Long (Levin) 202-228-3685