[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
NON-PROFIT CREDIT COUNSELING ORGANIZATIONS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
NOVEMBER 20, 2003
__________
Serial No. 108-27
__________
Printed for the use of the Committee on Ways and Means
91-629 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
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COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, JR., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana JIM MCDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona EARL POMEROY, North Dakota
JERRY WELLER, Illinois MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
Allison H. Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
------
SUBCOMMITTEE ON OVERSIGHT
AMO HOUGHTON, New York, Chairman
ROB PORTMAN, Ohio EARL POMEROY, North Dakota
JERRY WELLER, Illinois GERALD D. KLECZKA, Wisconsin
SCOTT MCINNIS, Colorado MICHAEL R. MCNULTY, New York
MARK FOLEY, Florida JOHN S. TANNER, Tennessee
SAM JOHNSON, Texas MAX SANDLIN, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
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Page
Advisory of November 13, 2003, announcing the hearing............ 2
WITNESSES
Internal Revenue Service, Hon. Mark Everson, Commissioner........ 9
Federal Trade Commission, Howard Beales, Director, Bureau of
Consumer Protection............................................ 15
______
Association of Independent Consumer Credit Counseling Agencies,
David C. Jones................................................. 47
Cambridge Credit Counseling Corp., Montieth M. Illingworth;
accompanied by Chris Viale..................................... 58
Consumer Federation of America, and National Consumer Law Center,
Deanne Loonin.................................................. 32
National Foundation for Credit Counseling, Inc., and Consumer
Credit Counseling Service of Middle Georgia, W. Patrick
Boisclair...................................................... 42
Take Charge America, Inc., Michael Hall.......................... 55
SUBMISSIONS FOR THE RECORD
Coalition for Responsible Credit Practices, Michael Barnhart,
statement and attachment....................................... 75
Consumer Credit Counseling Service, Inc., Gastonia, NC, Dewey T.
Matherly, statement............................................ 82
GreenPath Debt Solutions, Farmington Hills, MI, Jane E. McNamara,
statement...................................................... 82
Village Family Service Center, Consumer Credit Counseling Service
of the Village, Fargo, ND, Sheri Ekdom, statement.............. 6
NON-PROFIT CREDIT COUNSELING ORGANIZATIONS
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THURSDAY, NOVEMBER 20, 2003
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:38 p.m., in
room 1100, Longworth House Office Building, Hon. Amo Houghton
(Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT
CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE
May 06, 2003
OV-4
Houghton Announces Hearing on
the Use of Private Collection Agencies
To Improve IRS Debt Collection
Congressman Amo Houghton (R-NY), Chairman, Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on private collection agencies. The
hearing will take place on Tuesday, May 13, 2003, in the main Committee
hearing room, 1100 Longworth House Office Building, beginning at 2:00
p.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include the Honorable Mark Everson, Commissioner of the
Internal Revenue Service (IRS), and Nina Olson, the National Taxpayer
Advocate.
BACKGROUND:
Each year, the IRS collects over $2 trillion in tax revenue from
all sources. A small percentage of this amount is assessed, but not
collected. The IRS has 10 years to collect newly assessed taxes. Over
the past decade, the total inventory of unpaid tax assessments has more
than doubled. It has grown from $130 billion in 1992 to over $280
billion in March 2003.
Much of this amount represents tax debts that cannot be collected,
due to death or bankruptcy, but the IRS estimates that about $78
billion is collectible. The amount judged to be collectible has grown
by 12 percent during the past 2 years, and the inactive portion that
the IRS is not currently pursuing has grown by 38 percent. As of March,
the IRS had identified over $13 billion in tax debts that can only be
collected if the IRS has more resources.
The Bush Administration is highly concerned about the growth in the
inventory of uncollected taxes, and the IRS issued a Request for
Information that appeared in the Federal Register in January 2002 to
seek input from private collection agencies (PCAs) on how PCAs could
assist the IRS with its collection efforts, while preserving important
taxpayer protections in existing law. Using this information, the
Administration developed a proposal that appeared in the fiscal year
2004 budget request for the IRS. Chairman Houghton introduced
legislation (H.R. 1169) that would implement the Administration's
proposal.
In announcing the hearing, Chairman Houghton stated, ``We all know
that it is a duty of citizenship to abide by the rules and pay our
taxes. Yet, in the event that the rules are not followed, the IRS is
unfortunately not able to adequately enforce this obligation due to a
lack of funds. Enforcement is inconsistent at best. The Administration
is looking for innovative solutions to this problem, and I applaud them
for it.''
FOCUS OF THE HEARING:
The hearing will focus on the Administration's proposal to use
private collection agencies to support the IRS's collection efforts and
Chairman Houghton's bill to implement the proposal.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Please Note: Due to the change in House mail policy, any person or
organization wishing to submit a written statement for the printed
record of the hearing should send it electronically to
[email protected], along with a fax copy to
(202) 225-2610, by the close of business, Tuesday, May 27, 2003. Those
filing written statements who wish to have their statements distributed
to the press and interested public at the hearing should deliver their
200 copies to the Subcommittee on Oversight in room 1136 Longworth
House Office Building, in an open and searchable package 48 hours
before the hearing. The U.S. Capitol Police will refuse sealed-packaged
deliveries to all House Office Buildings.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
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comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
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1. Due to the change in House mail policy, all statements and any
accompanying exhibits for printing must be submitted electronically to
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Committee will rely on electronic submissions for printing the official
hearing record.
2. Copies of whole documents submitted as exhibit material will not
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3. Any statements must include a list of all clients, persons, or
organizations on whose behalf the witness appears. A supplemental sheet
must accompany each statement listing the name, company, address,
telephone and fax numbers of each witness.
Note: All Committee advisories and news releases are available on
the World Wide Web at http://waysandmeans.house.gov.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
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materials in alternative formats) may be directed to the Committee as
noted above.
Chairman HOUGHTON. Well, good afternoon, ladies and
gentlemen. I am terribly sorry for the delay. So, on behalf of
Mr. Pomeroy, Mr. Sandlin, and myself, we have been doing the
work of the Lord. We have been voting, but now we are yours. We
are delighted to be here. Thank you, Mr. Everson and Mr.
Beales, for being here. The hearing today, as most of you know,
will explore the activities of consumer credit counseling
agencies. While nonprofit consumer credit counseling
organizations provide an important and educational counseling
service to consumers who are experiencing financial
difficulties, I think I can speak for my associates here--and
Ms. Carson has just arrived. Julia, we are delighted to have
you here.
Ms. CARSON. Thank you, Mr. Chairman.
Chairman HOUGHTON. Thank you very much.
Ms. CARSON. I am glad you let me in here.
Chairman HOUGHTON. I think we are all concerned with
reports that they may be taking advantage of their tax-exempt
status. In recent months, Federal, State, and consumer watchdog
organizations have raised serious questions about the
activities of some of these consumer credit counseling
agencies. Today, we are going to hear from two Federal agencies
that oversee these groups, the Internal Revenue Service (IRS),
because most agencies have qualified as nonprofit
organizations, and also the Federal Trade Commission (FTC),
which regulates the consumer fairness side of their business.
In addition, we are going to hear from a major consumer
rights organization about the problems they see with the
current activities of credit counseling agencies. Finally, we
will hear testimony from two trade associations, and also two
of the consumer credit counseling companies themselves. I would
note for the record that the Subcommittee invited a number of
other individual companies to testify, but except for these
two, the others declined to appear.
Our mission here, today, is not to be a judge and a jury,
but to explore the evidence in a way that will help us
determine whether changes need to be made to existing law and
regulatory practices. Now, I am pleased to yield to my good
friend, our Ranking Member, Mr. Pomeroy.
[The opening statement of Chairman Houghton follows:]
Opening Statement of the Honorable Amo Houghton, Chairman, and a
Representative in Congress from the State of New York
Good afternoon. Our hearing today will explore the activities of
consumer credit counseling agencies. While non-profit consumer credit
counseling organizations provide an important educational and
counseling service to consumers who are experiencing financial
difficulties, I am concerned about reports that some groups may be
taking advantage of their tax-exempt status.
In recent months, federal, state and consumer watchdog
organizations have raised serious questions about the activities of
some consumer credit counseling agencies.
Today we will hear from the two federal agencies that oversee these
groups, the Internal Revenue Service--because most agencies have
qualified as ``non-profit'' organizations, and the Federal Trade
Commission, which regulates the consumer fairness side of their
business.
In addition, we will hear from a major consumer rights organization
about the problems they see with the current activities of credit
counseling agencies. Finally we will have testimony from two trade
associations and one of the consumer credit counseling companies. I
would note for the record that the Subcommittee invited a number of
other individual companies to testify, but except for two, each of them
declined to appear.
Our mission here today is not to be a judge and jury, but to
explore the evidence and weigh whether changes need to be made in
existing law and regulatory practices.
I am now pleased to yield to our ranking Democrat, Mr. Pomeroy.
Mr. POMEROY. I thank the Chairman. Thank you for holding
this important hearing. The issue before us is an important
one. Consumers, data will show us, are becoming increasingly
burdened with debt. Many will need help in terms of how to
handle their budgets in light of the debt. If done well, I
believe bankruptcy can be avoided--people can get back on their
feet, and we can help people in dealing with their debt burden.
Clearly, the credit counseling service activity can be very,
very important to any number of families in this country.
On the other hand, we are seeing more of an entrepreneurial
character in terms of the marketing of these credit counseling
services, and they certainly raise questions about what
activity is actually being delivered. I know that the IRS and
the FTC, our first panel, have urged consumers to seek caution
in dealing with credit counseling organizations. They report
that some organizations are using questionable practices--maybe
even using tax-exempt status to circumvent State and Federal
consumer protection laws. It is terribly disconcerting to think
that there would be an enterprise masquerading in tax-exempt
status, purporting to help consumers, but actually preying upon
some of the most vulnerable families in our country in their
time of need--facing financial crisis.
You are going to have some outfit parading about, telling
people they are helping them, and actually they are just
another rip-off. We certainly want to smoke out in this hearing
what is behind this kind of activity, who are the good ones,
who are the bad ones, and what we can do about it. I am very
pleased that you have held this hearing.
I would like to offer testimony, Mr. Chairman, on behalf of
a reputable credit counseling agency, the Village Family
Service Center of Fargo, North Dakota. The Village Family
Service Center is an organization that has provided credit
counseling for more than 2 decades. I know the people; I know
the operation; I know the reputation. I think they represent
perhaps some of the best practices that are out there in this
area. Their testimony, I think, is important to us. I would ask
unanimous consent that their testimony be included. I thank the
Chairman.
[The opening statement of Mr. Pomeroy and insertion
follow:]
Opening Statement of the Honorable Earl Pomeroy, a Representative in
Congress from the State of North Dakota
American consumers are becoming more and more in debt. This year,
Federal Reserve data indicates that credit card debt has reached nearly
$700 billion. Our current economic situation, high unemployment rates,
uninsured health costs, and lack of financial education have caused a
record number of Americans to seek credit counseling services.
Credit counseling services and the debt consolidation industry have
grown both in size and in marketing methods to meet this new demand.
Unfortunately, some bad actors have surfaced and taken advantage of a
largely unregulated system. This potentially gives a bad name to the
hundreds of long-standing local organizations that are truly helping
those in financial straits.
The Internal Revenue Service has responsibility for overseeing the
tax-exempt status of credit counseling organizations to insure that
educational and charitable services are provided to consumers. The
Federal Trade Commission is responsible for enforcing our consumer
protection laws, including the new telemarketing ``Do Not Call List.''
Together, the IRS and FTC have urged consumers to exercise caution
when seeking help from credit counseling organizations. The agencies
have reported that some organizations are ``using questionable
practices'' and ``using tax-exempt status to circumvent state and
federal consumer protection laws.'' This is just plain unacceptable.
The Subcommittee's hearing will help us distinguish between
``legitimate'' tax-exempt charitable and educational organizations and
``fraudulent'' entities that no longer deserve our continued federal
support.
The Village Family Service Center of Fargo, North Dakota is an
organization that has provided non-profit credit counseling services to
my constituents for over two decades. I suggest that they provide a
model for credit counseling ``best practices.'' I ask that their
written statement be included in the Subcommittee's official hearing
record.
Finally, I want to thank Chairman Houghton for holding this
important, bipartisan hearing. It is timely that we conduct oversight
review of this area of the tax-exempt laws and support the IRS and FTC
as they proceed.
______
Statement of Sheri Ekdom, The Village Family Service Center, Consumer
Credit Counseling Service of The Village, Fargo, North Dakota
The Village Family Service Center is a private, non-profit, multi-
program, human service agency founded in 1891 as The North Dakota
Children's Home. The Village is accredited by the Council on
Accreditation and serves people in need through 20 offices across North
Dakota and Minnesota. The mission of The Village Family Service Center
is to improve the quality of life through services designed to
strengthen individuals, families, and organizations.
Major programs offered include Pregnancy Counseling and Adoption
Services, Big Brother Big Sister Mentoring, Mental Health Counseling,
Intensive In-Home Family Based Services, Village Business Institute,
Youth Services and The Village Financial Resource Center. The major
programs are then tailored to the specific needs of the local community
and service area, and smaller unique programs developed.
The Village Family Service Center is governed by a diverse,
community-based, volunteer Board of Directors. Board members contribute
both their time and expertise to The Village and one hundred percent of
the Board of Directors makes charitable financial contributions to
support Village services.
The Financial Resource Center includes Consumer Credit Counseling
Service (CCCS) programming. The Village has been providing CCCS
services and has been a member of the National Foundation for Credit
Counseling since the early 70's when the community need for credit
counseling and services was first identified. Despite the current
changes in the industry, CCCS of The Village has continued to provide
confidential, comprehensive, quality financial advice, education and
counseling to the communities it serves.
CCCS of The Village encourages people seeking financial guidance to
know the difference between responsible and irresponsible agencies. Our
agency upholds the best practices in the industry. One hundred percent
of clients using our services receive a comprehensive counseling
session and a written action plan tailored specifically to their
individual situation.
Our goal is to help clients be financially responsible adults and
make positive choices to achieve their financial goals. Counselors take
clients through an in-depth financial analysis examining their income,
expenses, assets and debt--and then help develop a financial action
plan specifically suited to their situation.
Debt management programs are only set up only when appropriate for
the client. Currently, about 25% of the clients we counsel join the
DMP. It is our opinion that agencies whose main focus is debt
management rather than counseling and education are not operating in
the best interest of a client.
CCCS of The Village challenges people to change their lifestyles so
that their values and belief systems reflect in their money choices and
decisions. Client goals include improved financial condition, reduced
stress, decreased debt, improved credit reports and increased money
management skills. Through budget counseling and education, CCCS seeks
to assist families in restoring self-reliance, confidence, hope and
family well-being while strengthening the economic fabric of the
communities we serve.
About 75% of our financial counseling sessions are in-office face-
to-face meetings. Counseling is also offered over the telephone or
online. These methods have been especially beneficial for those living
in rural areas or with disabilities.
CCCS of The Village is diligent in its community outreach and
education. We provide financial education through workshops,
presentations in the workplace, and one-on-one sessions. We offer
several unique education programs designed to help clients make changes
in their spending habits and meet their financial goals. CCCS is known
in the communities it serves as a trustworthy, non-biased source of
financial information.
Clients hear about our services in a variety of ways, however, our
greatest referral source is word of mouth through friends and family
that have utilized our services. We do not run deceptive ads--promising
quick fixes in 20 minutes or less--nor do we rely on a telemarketer to
sell someone a program they may not need or fully understand. Our focus
is on doing what is best for a client.
Chairman HOUGHTON. Thank you very much. Now we have been
joined by Mr. Foley, distinguished Representative from Florida.
Would anybody like to make an opening statement? Mr. Foley,
would you like to make a statement?
Mr. FOLEY. No, thank you, sir.
Chairman HOUGHTON. All right. How about you, Mr. Sandlin?
Mr. SANDLIN. Mr. Chairman, I rarely get to sit up here this
high, so the altitude is affecting me. I can't find the button.
Chairman HOUGHTON. We have some oxygen over here that might
help you.
Mr. SANDLIN. I have an opening statement that I would like
to submit for the record. Let me just say very briefly that I
really appreciate you having this hearing today. Certainly
there are legitimate credit counseling groups and agencies in
the United States that offer a very valuable service to my
constituents, and the folks across the country, and I
appreciate that.
However, recently, as has been indicated by my friend Mr.
Pomeroy, there has been just a plethora of advertising on
television from groups that are little more than a sham, but
that indicate that they are there to help the consumers. In
fact, they do absolutely nothing for the consumers. They
collect funds and don't distribute them properly. They
adversely affect the credit ratings of my constituents. They
bother them with telephone calls, and I have grave concerns
about privacy issues and where some of these groups get the
information that they have to call people who are in financial
difficulty. I have been very disappointed in those groups, and
certainly we need to do something to regulate that, and make
sure that people who are in counseling are in counseling.
It is one thing to counsel people about their credit, and
talk to them about their budgets, incomes, and outgo. It is
another thing to prey upon people who are in difficult
situations, just to make sure the credit card companies get
paid first and only--and I think that is the point of those
groups that are on television. I am very disappointed with
that, and I appreciate you having the hearing today.
[The opening statement of Mr. Sandlin follows:]
Opening Statement of the Honorable Max Sandlin, a Representative in
Congress from the State of Texas
Mr. Chairman, I would like to thank you for holding today's hearing
to examine the operations of non-profit credit counseling
organizations.
According to the National Consumer Law Center, nearly nine million
people sought the help of credit counseling organizations last year,
and at least one million consumers have consolidated their debts with
these groups. As consumer debt in America continues to grow and exert
increasing pressure on struggling families, it is now more important
than ever to scrutinize the operations of non-profit credit counseling
organizations.
The Federal Reserve estimates that revolving consumer debt exceeded
$700 billion at the end of last year, and notes that household debt has
risen to approximately 14% of disposable income. Household debt as a
percentage of disposable income has never been higher in our country,
which helps explain why, according to the American Bankruptcy
Institute, personal bankruptcies in 2003 are projected to surpass last
year's record of 1.5 million.
While many credit counseling organizations have existed for decades
and provide valuable services to consumers who are having a tough time
managing their debts, a few bad apples may be abusing the tax code in
an effort to avoid consumer protection laws. Many of the organizations
that are now either under investigation or the subject of multiple
lawsuits are new participants in the credit counseling industry. In
fact, the estimated number of these groups has increased from
approximately 200 in 1990 to over 1,000 last year. It appears that
several of these groups have exceeded the original mission and intent
of credit counseling organizations, and the lack of federal and state
regulation of these groups makes congressional and regulatory oversight
vitally important.
As we know, non-profit credit counseling organizations qualify for
tax-exempt status under section 501(c)(3) of the Internal Revenue Code
because they are ostensibly ``educational organizations'' that
``educate consumers about better money management practices'' and
``promote debt reduction strategies.'' If a non-profit credit
counseling organization is abusing its non-profit status, the I.R.S.
needs to vigorously investigate that organization and examine the
group's tax-exempt designation. I look forward to Commissioner
Everson's testimony on this topic.
I applaud the joint advisory issued last month by the I.R.S., the
Federal Trade Commission, and several state regulators that warns
people to be wary about the costs of entering into debt management
plans. Consumers who are struggling financially need to be careful not
to lose even more money to someone offering a quick fix for their
credit problems. I look forward to Mr. Beales's testimony this
afternoon regarding the ways in which consumers can protect themselves
from those credit counseling groups that don't have consumers' best
interests at heart.
Paying bills is never easy and is never fun for any of us, but job
loss, divorce, or unexpected medical bills can be absolutely
devastating for some and force hard-working people to seek debt or
credit counseling. Taxpayers struggling with financial problems don't
deserve to be taken advantage of by debt counseling groups exploiting
gaps in the law, and I again would like to thank Chairman Houghton for
holding today's important hearing.
Chairman HOUGHTON. Thank you very much. Well, as I
indicated earlier, we are delighted to have Ms. Julia Carson.
She is a distinguished Representative from Indiana. I welcome
you, Julia, to this hearing. You are here representing your own
personal dedication to consumer protection awareness. Maybe you
would like to make a brief statement?
Ms. CARSON. I would, thank you very much, Mr. Chairman. I
will be very brief, because you have been gracious enough to
have the hearing, and to allow me to speak. I thank the Ranking
Member, Mr. Pomeroy, for his understanding of this--a major
problem in my estimation. I know that the economy essentially
caused a lot of financial hardships on Americans, and so, there
were people who took advantage of a situation and created--and
I noticed that the IRS and the FTC went after--we will call it
the unscrupulous kind of operation. It was the kind of issue,
and the kind of entity that brought my concern to the House
floor. People are creating not-for-profit organizations,
calling them ``debt counseling,'' and then having another shell
corporation, for-profit, sending the money over to that--while
people's bills are not getting paid.
You know the situation, Mr. Chairman, better than I do--I
won't make a long litany of it. Yet I would encourage the
Committee, its leadership especially, to join me in the bill
that I introduced. I don't think this could be any more timely.
I can never remember the number of the bill. I do know that it
affects a great deal of people. The bill is called the Debt
Counseling, Debt Consolidation, and Debt Settlement Practices
Improvement Act of 2003 (H.R. 3331). It provides a regulatory
framework for these culprits that do bad. We have got a lot of
good ones out there, Mr. Chairman. We don't want to do a broad
stroke on all of them. The bill just gets after the bad ones,
and I want to thank those who are already in the forefront of
taking care of this. I yield back, Mr. Chairman. Thank you so
much for allowing me to come.
[The opening statement of Ms. Carson follows:]
Opening Statement of the Honorable Julia Carson, a Representative in
Congress from the State of Indiana
I would like to thank Chairman Houghton and Ranking Member Pomeroy
for their graciousness in permitting me to participate in today's
hearing, which is on an issue very important to my constituents and
myself.
As my colleagues know, this economy has caused financial hardship
for many Americans, especially for people trying to manage piles of
debt. For a handful of scoundrels to take advantage of consumers
seeking financial counseling in their greatest time of need is
unconscionable. It is not just consumers who are hurt by the bad
apples; legitimate consumer credit counselors, who are trying to save
families and save lives, also bear the brunt in terms of business lost
and ruined reputation. This is why I introduced H.R. 3331, the Debt
Counseling, Debt Settlement, and Debt Consolidation Improvements Act, a
bill to provide a regulatory framework to the debt management industry.
As evidenced by the recent actions of the I.R.S. and the F.T.C., the
bill couldn't be timelier.
As household and credit card debt reach all-time highs, more and
more Americans are turning to credit counselors for assistance. Many
states are reacting to the trend by formulating a diverse array of
requirements. New York, Maryland, and California, for instance, have
instituted stringent laws regarding debt management organizations. I am
pleased the Chairman and this Committee have recognized the urgency of
this situation.
Mr. Chairman, hiding behind non-profit status to defraud consumers
is outrageous. This is a problem common to every District across the
nation. It is my hope that we can work together to protect consumers
and protect the good work of legitimate credit counseling
organizations. I urge my colleagues to consider my bill, H.R. 3331, as
a starting point.
Thank you, Mr. Chairman.
Chairman HOUGHTON. Well, thank you very much. Now I would
like to introduce Mr. Mark Everson, Commissioner of the IRS,
and J. Howard Beales III, Director of the Bureau of Consumer
Protection, FTC. Gentlemen, we appreciate your testimony, and
Mark, if you would begin.
STATEMENT OF THE HONORABLE MARK EVERSON, COMMISSIONER, INTERNAL
REVENUE SERVICE
Mr. EVERSON. Thank you, sir. Mr. Chairman, Mr. Pomeroy,
Members of the Subcommittee on Oversight, and other----
Chairman HOUGHTON. Do you want to turn your mike on?
Mr. EVERSON. Yes, thank you. Thank you, Mr. Chairman, Mr.
Pomeroy, Members of the Subcommittee, and other interested
Members of Congress. Thank you for the opportunity to provide
this Subcommittee with information concerning the role of the
IRS in regulating the credit counseling industry. I commend
this Subcommittee for your interest in this area. We, too, are
concerned, and take a dim view of the use of the Tax Code by
credit counseling groups to game the system. The potent
combination of exemption from income tax, and exemption from
consumer protection laws, has, in this instance, encouraged
some individuals who are motivated by profit rather than
charity.
Let me stress that many credit counseling organizations
continue to provide valuable services and meet the requirements
for tax exemption. Nevertheless, the operations of a growing
number of these organizations no longer reflect what has long
been required for tax exemption.
Some unscrupulous organizations now prey on those in
financial distress. I want to assure the Subcommittee that the
IRS is aggressively pursuing this matter. Currently, we have
over 30 organizations at various stages of the examination
process. Included in this group are 9 of the top 15 tax-exempt
credit counseling organizations, as measured by gross receipts.
Moreover, we have in the audit stream, organizations with over
40 percent of the total gross receipts of the tax-exempt
portion of this sector. Where warranted, we will revoke the
tax-exempt status of these organizations.
At its most basic, section 501(c)(3) provides for the
exemption from Federal income taxation of entities organized
and operated exclusively for charitable, educational, and
certain other purposes. While tax exemption confers significant
benefits to an organization, it also comes with
responsibilities. This means that an exempt organization must
engage primarily in activities that accomplish these charitable
purposes, and may not distribute net earnings to insiders, or
significantly operate, other than for the benefit of the
public.
The organization cannot be run for the benefit of a small
group of individuals or for other commercial interests. The IRS
and the courts have determined that certain credit counseling
organizations can qualify for 501(c)(3) status, provided the
organization limits its services to low income customers at low
costs, or provides education to the public on how to manage
personal finances as its primary activity. There are over 850
section 501(c)(3) credit counseling organizations. Beginning in
2000, we began to see a significant increase in credit
counseling applications. In the determination letter area, our
specialists traditionally work with applicants to perfect
applications, in order to obtain tax-exempt status. Most
applications are approved.
However, in the credit counseling area, as we have had to
put in place more rigorous procedures, our approval rate for
tax exemption status has declined since 2000. As you are aware,
there has been an increasing number of allegations of credit
counseling abuses, including questionable business
relationships, high fees, and little or no education or
counseling. The FTC and others have confirmed what we have seen
in the applications. Customers now served by the Internet,
which appears to be driving much of the growth in the industry,
are provided debt management services, not credit counseling.
Individual budget assistance and public education programs that
form the original basis for exemption, have been replaced by
promises to restore favorable credit ratings, or to provide
commercial debt consolidation services. So, how have we
reacted? As indicated in my opening, we are moving aggressively
to scrutinize applicants and existing organizations. Our
strategy begins by identifying new credit counseling
organizations as they seek exemption. At present, we are
considering over 40 applications. These applications are
identified and assigned to specially trained staff who use
their broad investigatory experience to delve deeply into the
complex structures and relationships of these organizations.
I have mentioned already that we have also increased the
number of examinations. More than 30 organizations and related
entities, including some of the largest firms, are at various
stages of the examination process. Again, 9 of the top 15
organizations by gross receipts are included in that group, as
are organizations with more than 40 percent of the total gross
receipts of the sector.
Mr. Chairman, this is an unprecedented effort by the IRS,
and one which is fully justified by the risk that continued
abuses in this area will broadly undermine our Nation's faith
in charitable organizations. The current workload is only the
beginning of our compliance effort in this area. By year's end,
we expect to follow up on all examination referrals, and
implement an approach to identify and classify other high-risk
organizations for examinations to commence in 2004. We expect
to see significant results in the coming months, and in accord
with taxpayer privacy rules, we will publicize the outcome of
our efforts. Again, we will revoke exemption where warranted.
Furthermore, because of the magnitude of the problems, we
are supporting and partnering with those agencies--like the
FTC--whose primary purposes include consumer protection. Let me
conclude by saying that I have designated our efforts in the
credit counseling area an IRS-wide priority. We will stay on
this until we see clear evidence of appropriate reforms within
the industry. Thank you.
[The prepared statement of Mr. Everson follows:]
Statement of the Honorable Mark Everson, Commissioner, Internal Revenue
Service
Thank you, Mr. Chairman, for the opportunity to provide this
Subcommittee with information concerning the role of the Internal
Revenue Service (the Service) in regulating the credit counseling
industry. I commend the Subcommittee for your interest in this area.
Many credit counseling organizations continue to provide valuable
services that meet the definitions and requirements of exemption from
taxation under section 501(c)(3) of the Internal Revenue Code. However,
the operations of a growing number of credit counseling organizations
no longer reflect what has long been required for tax exemption. We are
concerned that certain of these organizations are now preying on those
in financial distress.
I will review our role and the general law relating to charities,
the history of tax exemption for credit counseling organizations,
recent trends in the area, and our actions to combat what we see as
inappropriate activity by some in the sector. As you will see, we are
aggressively pursuing this issue with a broad approach that begins with
a more in depth determination letter process and includes an enhanced
examination program, as well as partnering efforts with the state
attorneys general and the Federal Trade Commission.
Background on the Requirements for Tax Exemption under section
501(c)(3)
Role of the Service with respect to tax-exempt organizations: The
Service regulates all tax-exempt organizations, of which a subset is
described in section 501(c)(3). An organization seeking to be tax
exempt under section 501(c)(3) generally is required to apply to the
Service for a determination of its status. The organization initiates
the process by filing a Form 1023, ``Application for Recognition of
Exemption Under Section 501(c)(3) of the Internal Revenue Code.'' The
application often is filed in advance of actual operations and can be
based on representations about what the organization will do in the
future. We review the application to determine whether the
organization's proposed activities satisfy the statutory requirements.
After we recognize an organization as tax exempt, generally the
organization is required to file an annual information return, the Form
990. The Form 990 is a self-reporting mechanism, whereby the
organization provides information concerning its current activities, as
well as its financial picture. Forms 990 are public documents and we
image the forms from section 501(3) organizations making them available
to various web sites for public scrutiny. The Service also uses the
Form 990 as part of our ongoing effort to ensure compliance with the
requirements for tax exemption. Our compliance efforts generally entail
additional educational contacts, the review of filed returns and, if
warranted, an examination based upon completed operations.
General requirements for tax exemption: In our review of the tax-
exempt status of an organization, the Service looks to both statutory
and regulatory requirements. At its most basic, section 501(c)(3)
provides for the exemption from federal income taxation of entities
organized and operated exclusively for charitable, educational,
scientific, religious, and certain other purposes. This means that an
exempt organization must engage primarily in activities that accomplish
charitable purposes. Relieving the poor and distressed generally is
considered a charitable purpose. Providing instruction and training for
the purpose of improving or developing an individual's capabilities, or
educating the public on subjects useful to the individual and
beneficial to the community also are considered charitable activities.
An exempt organization also must meet other requirements in order
to be described in section 501(c)(3). Chief among these for today's
discussion are that the organization must not distribute net earnings
to insiders (the prohibition on inurement) and it must operate for the
benefit of the public rather than for the benefit of private interests
(the prohibition on private benefit). With respect to the private
benefit rule, an organization must establish that it is not organized
or operated for the benefit of private interests such as designated
individuals, the creator or his family, shareholders of the
organization or persons controlled directly or indirectly by such
private interests.
History of Tax Exemption for Credit Counseling Organizations
The Service and judiciary have determined that certain credit
counseling organizations meet the requirements of section 501(c)(3).\1\
Credit counseling organizations may be exempt because of their
charitable or educational work. The Service first provided guidance on
this issue in 1969, when it addressed standards for credit counseling
organizations. In Rev. Rule 69-41, 1-969-2 C.B. 115, we held that the
organization cited in the ruling was charitable where it included the
following favorable factors: its primary activity was providing
educational information to the general public on budgeting, buying
practices, and the sound use of consumer credit through the use of
films, speakers, and publications; its counseling services were limited
to low income customers and individual counseling was provided; the
organization's board of directors was representative of the community;
and, the organization's work in establishing budget plans and paying
customer's bills was a minor portion of its overall activities.
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\1\ This hearing and the allegations of abuse in this area are
focused on section 501(c)(3) charitable organizations. We note,
however, that credit counseling organizations also can qualify for tax
exemption under section 501(c)(4), as social welfare organizations. See
Rev. Rul. 65-299, 1965-2 C.B. 165. Because contributions under that
section are not tax deductible and such organizations are not exempted
from consumer protection laws, few credit counseling organizations seek
501(c)(4) status. As a result, we have not seen any significant
increase in the number or activity of these organizations, and we have
not addressed them in this testimony.
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A credit counseling organization may be tax exempt even if it does
not limit its clientele to low income individuals where the services
provided by the organization are educational in nature. In the 1970's,
the courts reversed the Service in its revocation of the exempt status
of two organizations that provided credit counseling, but did not limit
their services to low-income individuals. See Consumer Counseling
Service of Alabama v. United States, 78-2 U.S.T.C. 9660 (D.D.C. 1978)
and Credit Counseling Centers of Oklahoma, Inc. v. United States, 79-2
U.S.T.C. 9468 (D.D.C. 1979). The courts in these cases held that
providing information regarding the sound use of consumer credit was
educational because it instructs the public on subjects useful to the
individual and beneficial to the community. The courts considered the
debt management services (the payment plan and creditor intercession)
an integral part of the organizations' counseling and education
function. Moreover, the debt management services were so minor that
even if they were not considered educational in themselves, they were
not significant enough to affect the organizations' exempt status. The
boards of these organizations were controlled by the public. Finally,
the fee structure was not a barrier to exemption because the fees were
nominal and were waived where payment would create a financial
hardship.
To recap, to be exempt under section 501(c)(3), existing rulings
and cases indicate that an organization that provides credit counseling
must limit its services to low income customers or must provide
education to the public on how to manage personal finances as its
primary activity.
Recent Trends and Profile of the Credit Counseling Area
Our information systems reflect over 850 credit counseling
organizations that have been recognized as tax exempt under section
501(c)(3). In recent years, the Service has seen an increase in
applications for tax-exempt status from organizations intending to
provide credit counseling services. Among the more recent applicants,
we are finding credit counseling organizations that vary from the model
approved in the earlier rulings and court cases. We are seeing
organizations whose principal activity is selling and administering
debt management plans. Often the board of directors is not
representative of the community and may be related by family or
business ties to the for-profit entities that service and market the
debt management plans. The organizations are supported by fees from
customers and from credit card companies, and the fees are much higher
than those in the rulings or court cases. Finally, it does not appear
that significant counseling or education is being provided. As we will
discuss, we have modified our application process to deal with this
change in circumstances.
In 2002, as we saw an increasing number of allegations of credit
counseling abuses, we contacted the Federal Trade Commission for
assistance in understanding the developments in the industry. Based on
the available information, it appears that customers, served solely by
the Internet, are provided debt management--not credit counseling. The
individual budget assistance and public education programs that formed
the original basis for exemption under section 501(c)(3) have changed.
In many cases, these services appear to have been replaced by promises
to restore favorable credit ratings or to provide commercial debt
consolidation services.
We also learned of the favorable treatment accorded to section
501(c)(3) consumer credit organizations under both federal and state
regulatory schemes. Organizations recognized by the Service as
described in section 501(c)(3) often are excluded from coverage under
FTC rules, as well as state and local consumer protection laws. This
exclusion appears to be one of the primary drivers for the increase in
the number of these organizations. For example, the Credit Repair
Organization Act of 1997 sought to further regulate the practice of
organizations involved in ``credit repair,'' a series of activities
aimed at improving a customer's credit history. The statute exempted
section 501(c)(3) organizations from the provisions of this law. Many
state consumer protection laws provide similar treatment for 501(c)(3)
organizations. In 1993, for example, the California legislature imposed
strict standards on credit service organizations and the credit repair
industry. The California statute aims to protect the public from unfair
or deceptive advertising and business practices. Most significantly, it
does not apply to nonprofit organizations that have received a final
determination from the Service that they are exempt under IRC 501(c)(3)
and are not private foundations.
Two more recent developments may encourage more credit counseling
organizations to seek tax-exempt status. The first is the proposal,
under pending bankruptcy legislation, to require credit counseling
prior to filing for bankruptcy. Although the Service takes no position
on the merits of this proposal, if this becomes law, we expect
applications from traditional credit counselors, as well as the new
internet based agencies to increase. The second development relates to
the recently activated Do Not Call List, with its exemption for
charitable solicitations. Again, our purpose here is not to opine on
the merits of the solicitation exemption other than to note for the
Subcommittee our belief that the additional benefit of exemption under
the Do Not Call rules may also motivate certain individuals and
organizations to seek section 501(c)(3) status. To the extent that we
are concerned about bad actors in the current market, both of these
developments will require even more diligence on our part.
Response of the Service
The Service is concerned that the potent combination of exemption
from income tax and exemption from consumer protection laws may
encourage activity by individuals who are motivated by profit rather
than charity. As a result, we are aggressively scrutinizing applicants
and existing organizations to ensure that organizations seeking or
having tax-exempt status as credit counseling organizations warrant
that status. We have designed a comprehensive multi-faceted strategy to
address alleged abuses, and commissioned a team to oversee the
strategic management of our compliance efforts. Members of this
coordinating team include individuals from all functions within the
exempt organizations office at the Service, as well as lawyers from the
Office of the Chief Counsel.
Determination Letter Process: Our goal is to identify new credit
counseling organizations as they seek exemption and ensure they meet
all requirements before tax-exempt status is approved. We have
established a process where all incoming applications are initially
reviewed to identify organizations that provide credit services. All
case files are then assigned to staff specially trained in credit
counseling, who use a uniform development inquiry letter to fully
develop the facts of the case. Where those facts indicate non-
compliance, cases are forwarded for additional development to higher
graded specialists. These specialists use their broad investigatory
experience to delve deeply into the complex structures and
relationships of these organizations in order to determine whether they
are charitable organizations. Once completed, either favorably or
unfavorably, all applications are subject to special review. In
addition to carefully scrutinizing individual applications, all credit
counseling organizations will be centrally tracked to enable us to
accurately determine the number and profile of these organizations, and
to better manage and ensure consistent quality treatment.
At present, EO is considering over 40 applications. As we process
these applications, we request additional information regarding whether
debt management is the organization's primary purpose and the extent to
which the organization engages in educational or counseling activities.
We also are exploring whether some of these applicants who have
contractual relationships with for-profit service providers operate in
a manner that improperly benefits private interests.
Examination Process: The Service has increased the number of
examinations targeted at tax-exempt credit counseling organizations. At
present, over 30 organizations and related entities, including some of
the largest firms, are at various stages of the examination process.
These organizations represent a significant percentage of the combined
gross receipts for the entire tax-exempt credit counseling market.
Moreover, the current workload is only the beginning of our compliance
effort in this area. By year's end, we expect to follow-up on all
examination referrals, and implement an approach to identify and
classify other high-risk organizations for examinations to commence in
2004.
As in the determination letter area, specialists have been
designated to provide immediate phone or e-mail assistance to
examination agents, and already have made visits to assist agents
conducting examinations. These examinations focus on specific issues,
including: whether the organization provides counseling; who the
customers are; the nature of the fee structure; who controls the board
and the contracts with the organization; and, whether there is
inurement or impermissible private benefit. We expect to see
significant results in the coming months, and within the constraints of
section 6103, will publicize the outcome of our efforts.
IRS Training: We have taken a number of steps to train our agents
and other law enforcement personnel. We published a 50-page Continuing
Professional Education text that reviewed the law in the area of credit
counseling and provided tools for reviewing applications from new
organizations. In addition to the CPE text, in 2002, we held training
classes on this issue for specialists who review exemption
applications. Several months later, we produced a live interactive
training exercise on credit counseling organizations. The presenters
included representatives from the Service, a representative from the
Federal Trade Commission, and a state charity official. The panel
discussed the law with respect to section 501(c)(3) organizations,
disclosure concerns, and consumer protection issues. In addition to our
employees, attendees included guests from state and local governments
and the FTC, who had the opportunity to watch the training and
participate in a question and answer session.
Outreach Efforts: The Service has been active in educating the
public and reaching out to other law enforcement agencies. We have
partnered with the Federal Trade Commission, the National Association
of State Charity Officials and other watchdog groups, who have well
established channels for disseminating information to consumers, to
send out a strong consumer protection message. That message, contained
in News Release 2003-120 and Fact Sheet 2003-117, informs the public
that credit counseling organizations using questionable practices may
seek tax-exempt status to circumvent state and federal consumer
protection laws. It advises consumers to guard against deceptive credit
counseling practices by following the tips outlined in the documents.
We have publicized these documents and our other credit counseling
training materials on the IRS Web site.
In addition to working with consumer protection organizations, we
contacted state enforcement officials from Maryland, California, and
New York, concerning the issues their states are facing in this area.
We also have met with the United States Bankruptcy Trustees Office
concerning the previously discussed pending bankruptcy reform
legislation.
In addition to working with our counterparts in law enforcement,
our outreach efforts include speaking at credit counseling trade
association conventions and at the annual meeting of the American Bar
Association to inform the credit counseling industry and its attorneys
of potential problems in this field and to open a dialog with industry
participants.
Conclusion
Because of the changes in the way the credit counseling industry
now operates, the Service anticipates the need for continued action to
ensure compliance. Let me assure you that we are committed to taking
any steps necessary to inform the public of the requirements for tax-
exempt status and to ensure that tax-exempt credit counseling
organizations comply with all applicable requirements. The public
deserves and will receive our protection in the area of credit
counseling services.
Chairman HOUGHTON. Thank you very much, and thank you for
the strong emphasis on enforcement that you put into effect in
the IRS. We have been joined by a very distinguished Member of
the Committee on Ways and Means, Mr. Kleczka of Wisconsin.
Thank you very much. Have you any statement that you would like
to make?
Mr. KLECZKA. No, Mr. Chairman. I am here to listen.
Chairman HOUGHTON. Fine. Now, what I would like to do is
turn it over to Mr. Beales, the Director of the Bureau of
Consumer Protection, FTC. Mr. Beales, thank you for being here.
STATEMENT OF HOWARD BEALES, DIRECTOR, BUREAU OF CONSUMER
PROTECTION, FEDERAL TRADE COMMISSION
Mr. BEALES. Thank you, Mr. Chairman, and Members of the
Subcommittee. I am pleased to have this opportunity to discuss
consumer protection issues in the credit counseling industry.
Although the FTC recognizes that credit counseling can provide
financially distressed consumers with valuable assistance in
managing their money and paying their debts, we are concerned
that some firms may be deceiving consumers about who they are,
what they do, and how much they charge. The FTC is fighting
deceptive credit counseling practices on many fronts, including
law enforcement and consumer education.
Today, I would like to focus on a lawsuit we filed in
Federal court yesterday against a national organization that
promotes itself as a nonprofit credit counseling agency. The
complaint names Maryland-based AmeriDebt, Inc., which
aggressively advertised itself as a nonprofit dedicated to
assisting consumers with their finances. The complaint also
names AmeriDebt's former for-profit service provider,
DebtWorks, and DebtWorks' owner, Andris Pukke. This case
illustrates some of the troubling practices in credit
counseling that are before this Subcommittee today. Despite
AmeriDebt's claim that it operates for charitable purposes with
regard to its 501(c)(3) status, we alleged that AmeriDebt was,
in fact, designed to generate profit for affiliated for-profit
companies and individuals, including DebtWorks and Mr. Pukke.
In addition, we alleged that the defendants misrepresent
the services that AmeriDebt provides to consumers. Instead of
teaching consumers about their finances and how to manage debt
as claimed, the defendants indiscriminately enroll all of their
clients in debt management plans without regard to their
particular financial situations.
Debt management plans are payment plans that enable
consumers to make one consolidated monthly payment to a credit
counselor, which then disburses the money to the consumers'
creditors. Many creditors are willing to reduce interest rates
or forgo late charges for consumers participating in such a
plan, but only if it is administered by a nonprofit credit
counseling agency. Depending on a consumer's financial
situation, debt management plans can be beneficial, but for
certain consumers, other options such as individualized
counseling, education, and even bankruptcy, may be better
choices.
The key source of consumer injury in the AmeriDebt case is
our allegation that the defendants charge consumers an up-front
fee for enrolling in a debt management plan, despite
advertising claims to the contrary. They collect the fee by
keeping consumers' first payment for themselves, instead of
disbursing the money to consumers' creditors. AmeriDebt's
contracts with consumers refer to this first payment as a
contribution. In our view, the fact that approximately 90
percent of AmeriDebt's consumers who are ostensibly on the
brink of bankruptcy, nonetheless make a voluntary contribution
of several hundred dollars to AmeriDebt, only underscores that
these purported contributions are obtained through deception.
The FTC also entered into a settlement with the Ballenger
Group, which has serviced AmeriDebt's debt management plan
since the beginning of this year. This settlement resolves the
FTC's allegations that Ballenger, which has close ties to the
other defendants, contributed to the deception in the AmeriDebt
case by repeating some of the misrepresentations in telephone
calls with consumers. According to the FTC's complaints,
Ballenger misrepresented that AmeriDebt is a nonprofit entity,
and failed to disclose that the consumers' first payment is
retained by AmeriDebt as a fee. The settlement contains strong
injunctive relief, and requires Ballenger to pay $750,000 in
consumer redress.
In addition to the alleged practices in the AmeriDebt case,
we are aware of other practices by some in the credit
counseling industry that may violate the FTC Act (1914, 38
Stat. 717, U.S.C. 41-51), or other statutes that we enforce.
These practices include failure to abide by telemarketing laws.
To the extent that some credit counseling agencies are not bona
fide nonprofit organizations, they should be complying with the
FTC's telemarketing sales rule, including the new National Do-
Not-Call Registry.
We also see failure to pay creditors in a timely manner, or
not at all, as a problem. Some credit counseling agencies that
offer debt management plans may fail to pay creditors in a
timely fashion, or at all. This can result in serious consumer
harm, such as late fees that the creditors impose. Others
promise results that cannot be delivered. They promise that
they will lower consumers' interest rates, monthly payments, or
overall debt, by unrealistic amounts. Some are also making
false promises to eliminate accurate but negative information
from consumers' credit reports.
We remain concerned about all of these practices, and
acting with our law enforcement partners, we will continue to
work to protect consumers in this critical area. I thank you
for the opportunity to appear today, and I will be happy to
respond to your questions.
[The prepared statement of Mr. Beales follows:]
Statement of Howard Beales, Director, Bureau of Consumer Protection,
Federal Trade Commission
I. INTRODUCTION
Mister Chairman and Members of the Committee: I am Howard Beales,
Director of the Bureau of Consumer Protection of the Federal Trade
Commission (``FTC'' or ``Commission.'').\1\ I appreciate the
opportunity to appear before you today on behalf of the Commission to
discuss consumer protection issues raised in the credit counseling
industry. This statement will describe the industry generally, discuss
various practices by some of its members that raise consumer protection
concerns, and summarize FTC law enforcement and educational efforts in
this area.
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\1\ The views expressed in this statement represent the views of
the Commission. My oral statement and responses to questions you may
have are my own and are not necessarily those of the Commission or any
Commissioner.
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As an initial matter, it is helpful to understand the Commission's
role in enforcing laws that bear on the credit counseling industry. As
part of its broad mandate to protect consumers, the Commission enforces
the Federal Trade Commission Act (``FTC Act''), which prohibits unfair
or deceptive acts or practices that are in or affect commerce.\2\ The
Commission also enforces a number of specific consumer protection
statutes, including several relevant to credit counseling, such as the
Telemarketing and Consumer Fraud and Abuse Prevention Act,\3\ the
Credit Repair Organizations Act,\4\ and the Gramm Leach Bliley Act.\5\
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\2\ 15 U.S.C. 45(a).
\3\ 15 U.S.C. 6101-6108.
\4\ 15 U.S.C. 1679 et seq.
\5\ 15 U.S.C. 6801 et seq.
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The FTC Act excludes from the Commission's authority entities that
are not organized to carry on business for their own profit or that of
their members.\6\ Therefore, the Commission does not have jurisdiction
under that Act over credit counseling agencies (``CCAs'') that are bona
fide non-profit organizations.\7\ The mere fact that a CCA has received
tax-exempt status under Section 501(c)(3) of the Internal Revenue Code,
however, does not by itself oust the Commission of jurisdiction. The
Commission may assert jurisdiction over such an entity if there is an
insufficient nexus between the organization's activities and its
alleged public purpose, for example, or if its proceeds inure to the
benefit of private individuals.\8\
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\6\ 15 U.S.C. 44 & 45(a).
\7\ Most creditors and some state laws require CCAs to be non-
profit entities before they can arrange payment plans for consumers.
\8\ See, e.g., College Football Association, 117 F.T.C. 971, 993
(1994).
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II. THE CREDIT COUNSELING INDUSTRY
The credit counseling industry has been in existence for about 50
years, providing valuable services to innumerable financially
distressed consumers. Typically, the work of CCAs on behalf of their
consumer clients is both present and future directed: to help debt-
strapped consumers to manage their existing financial problems and to
teach them better financial management skills for the future. CCAs
historically have been relatively small, community-based non-profit
organizations providing consumers with individualized advice and
assistance. For these services, most traditional CCAs either charge
nothing or solicit modest contributions from clients to help defray
their expenses. As explained below, CCAs also can be funded by
creditors through so-called ``Fair Share'' contributions.
CCAs have a number of options to offer their financially-distressed
clients, depending on the client's individual circumstances, which
range from simple advice and guidance on managing finances to (in
extreme cases) advising that consulting a bankruptcy attorney may be
the consumer's best option. In addition, CCAs, since the industry's
inception, have offered to put certain clients into a payment program
commonly termed a ``debt management plan'' (``DMP''). DMPs allow
consumers to pay off their unsecured debts, such as credit card
balances, by making a single, consolidated monthly payment to the CCA,
which then disburses those funds to the creditors of debts covered by
the DMP.
When administered properly, DMPs can benefit consumers because some
creditors will reduce interest rates and waive certain charges, such as
late and over-the-limit fees, for consumers on a plan. Most creditors
and some state laws require CCAs to be non-profit entities before they
can arrange payment plans for consumers, apparently for the purpose of
eliminating the incentive for CCAs to deceive consumers. However, we
are concerned that some CCAs may be evading these requirements by
setting up non-profit entities that funnel money to for-profit
affiliates.
DMPs can also benefit creditors by forestalling consumer
bankruptcy. Importantly, traditional CCAs evaluate each client's
individual circumstances and needs before deciding whether to enroll
that person in a DMP.
DMPs generate revenue for CCAs in two ways. First, creditors
voluntarily rebate to CCAs a small percentage of the funds that the
organizations disburse to them. These payments are called ``Fair
Share'' contributions. Second, some CCAs solicit ``contributions'' or
``donations'' from DMP enrollees, usually consisting of up-front and
monthly fees. As discussed later, some CCAs appear to have turned these
ostensibly voluntary contributions into de facto mandatory fees by
automatically deducting money from consumers' payments without adequate
disclosure.
In the last decade, the credit counseling industry has experienced
dramatic growth, attributable in large part to ballooning consumer debt
and the resulting demand for credit counseling to prevent default on
that debt. The nature of the industry has also changed. Whereas it was
once composed mainly of small, local credit counselors, the last decade
has seen the rise of large, high-tech organizations that aggressively
market their services to consumers via telemarketing, broadcast and
print advertising, and the Internet. These organizations, many of which
claim non-profit status, represent a new breed in this industry. Many
appear to offer little or no individualized credit counseling, but
rather urge all of their clients to enroll in a DMP without
consideration of their particular financial situation.
III. CONSUMER PROTECTION ISSUES
Along with these changes in the industry have come complaints about
troubling practices, including possible deception about the services
offered, poor administration of DMPs, and undisclosed fees associated
with DMPs.
The Commission is concerned about deceptive and other illegal
practices in which some CCAs may be engaging. Our greatest concern is
deception by CCAs about the nature and costs of the services they offer
to consumers. The following practices have come to our attention that
may violate the FTC Act or other statutes that we enforce:
Misrepresentations about fees or ``voluntary
contributions.'' Some CCAs may charge substantial fees (sometimes
denominated as ``donations'' or ``voluntary contributions'') that they
hide from consumers. For example, some CCAs may automatically retain
for themselves certain payments consumers make on their DMPs, unless
the consumer affirmatively objects. These CCAs may not adequately
disclose this fact.
Promising results that cannot be delivered. Some CCAs
appear to be marketing DMPs with promises that they will lower
consumers' interest rates, monthly payments, or overall debt by an
unrealistic or unattainable amount. Some organizations also appear to
be exaggerating the amount of money consumers will save by signing up
for a DMP, or are promising falsely to eliminate accurate negative
information from consumers' credit reports.\9\
---------------------------------------------------------------------------
\9\ Negative but accurate information cannot be removed from a
credit report until the time specified by the Fair Credit Reporting Act
has lapsed (generally, seven years after the event occurred). 15 U.S.C.
Sec. 1681c.
---------------------------------------------------------------------------
Abuse of non-profit status. As noted above, some
unscrupulous CCAs misrepresent that they are non-profit to comply with
state laws and creditor guidelines regarding the arrangement of payment
plans for consumers. In addition, some CCAs appear to use their
501(c)(3) status to convince consumers to enroll in their DMPs and pay
fees or make donations. These CCAs may, for example, claim that
consumers' ``donations'' will be used simply to defray the CCA's
expenses. Instead, the bulk of the money may be passed through to
individuals or for-profit entities with which the CCAs are closely
affiliated. Tax-exempt status also may tend to give these fraudulent
CCAs a veneer of respectability by implying that the CCA is serving a
charitable or public purpose. Finally, some consumers may believe that
a ``non-profit'' CCA will charge lower fees than a similar for-profit
entity.
False advertising regarding credit counseling services.
Some CCAs claim to provide advice and education to consumers on
handling their finances, when in fact they may merely enroll all
clients indiscriminately in DMPs without any actual counseling.
Failure to pay creditors in a timely manner or at all.
Some CCAs may fail to pay creditors in a timely fashion or at all. This
failure can result in serious consumer harm, such as from late fees
that the creditors impose.
Failure to abide by telemarketing laws. To the extent
CCAs are not bona fide non-profit organizations, they should be
complying with the FTC's Telemarketing Sales Rule, including the new
national Do-Not-Call registry.
Gramm-Leach-Bliley (``GLB'') Privacy and Safeguards. The
Commission is also concerned that some CCAs may not be complying with
the privacy and security requirements of the Gramm-Leach-Bliley Act,
which apply to financial institutions such as credit counseling
organizations.
IV. COMMISSION ACTIONS
The Commission has pursued a vigorous program to halt fraud and
deception by those who purport to be able to solve consumers' financial
difficulties. For example, last year the Commission filed a lawsuit
against Jubilee Financial Services, a debt negotiation company,
challenging misrepresentations about the services it offered.\10\ The
Commission alleged, among other things, that Jubilee made false
promises that consumers who enrolled in its debt negotiation program
would be able to pay off their debts at a substantially reduced rate;
misled consumers about the effects of the program on their credit
report; and failed to tell them that, as a result of the program,
negative information would likely appear on consumers' reports and stay
there for seven years. Instead of extricating themselves from debt,
many of Jubilee's victims were left with little alternative but to file
for bankruptcy.
---------------------------------------------------------------------------
\10\ See FTC Press Release, FTC, States Give ``No Credit'' to
Finance-Related Scams in Latest Joint Law Enforcement Sweep (Sept. 5,
2002), available at http://www.ftc.gov/opa/2002/09/opnocredit.htm. The
Commission subsequently settled this matter. The settlement, among
other things, banned defendants from advertising, marketing, or
providing debt negotiation services. See FTC Press Release, Jubilee
Financial Services Defendants Banned from Providing Debt Negotiation
Services (Aug. 29, 2003), available at http://www.ftc.gov/opa/2003/08/
jubilee.htm. Strictly speaking, Jubilee was not a CCA because it did
not offer credit counseling or DMPs; rather, it purported to negotiate
settlements of consumers' unsecured debts with the creditors.
---------------------------------------------------------------------------
Over the past several years, the Commission also has prosecuted
numerous cases under the Credit Repair Organizations Act
(``CROA''),\11\ which prohibits fraudulent practices by organizations
that promise to improve consumers' credit histories, such as falsely
promising to remove accurate credit information from consumers' credit
reports. The Commission has successfully conducted several sweeps of
entities allegedly violating CROA, including Operation Eraser\12\ and
Operation New ID-Bad IDea.\13\ Most recently, in August 2003, the
Commission reached a settlement with one of the largest credit repair
organizations in the United States, through which the defendants agreed
to pay more than $1.15 million in consumer redress.\14\
---------------------------------------------------------------------------
\11\ 15 U.S.C. 1679 et seq.
\12\ See FTC Press Release, Credit Repair? Buyer Beware! FTC,
States Announce Crackdown On Scams That Bilk Consumers (Mar. 5, 1998),
available at http://www.ftc.gov/opa/1998/03/
eraser.htm.
\13\ See FTC Press Release, Credit Identity Defendants Settle FTC
Charges: Promoting False Identification Numbers to Create a ``New
Credit Identity'' Is Illegal (Oct. 21, 1999), available at http://
www.ftc.gov/opa/1999/10/badidea.htm.
\14\ See FTC Press Release, Nationwide Credit Repair Operation to
Pay More than $1.15 Million in Consumer Redress (Aug. 11, 2003),
available at http://www.ftc.gov/opa/2003/08/
nationwide.htm.
---------------------------------------------------------------------------
The Commission also has engaged in extensive educational efforts to
help consumers spot and avoid credit counseling and credit repair
scams. Most recently, the Commission, in conjunction with the Internal
Revenue Service and state regulators, issued a joint press release
regarding CCAs, urging consumers to be cautious and providing tips for
choosing a credit counseling organization.\15\ The release advises
consumers to pay careful attention to what fees the agency charges, the
nature of the services it offers, and the terms of the contract.
Consumers should consider using agencies that offer actual counseling
and education and do not simply enroll all clients in DMPs.
---------------------------------------------------------------------------
\15\ See FTC Press Release, FTC, IRS, and State Regulators Urge
Care When Seeking Help from Credit Counseling Organizations (Oct. 14,
2003), available at http://www.ftc.gov/opa/2003/10/ftcirs.htm.
---------------------------------------------------------------------------
The IRS announced at the same time its intention to re-examine
certain CCAs with 501(c)(3) status to determine whether they are
operating in a manner that complies with the laws and regulations
governing tax-exempt status. The IRS also stated that in the future it
will examine more rigorously CCAs' 501(c)(3) applications.
Specifically, the IRS noted that organizations that place clients on
DMPs without significant education and counseling do not qualify for
tax-exempt status.\16\
---------------------------------------------------------------------------
\16\ See Press Release, IRS Takes Steps to Ensure Credit Counseling
Organizations Comply with Requirements for Tax-Exempt Status (Oct. 17,
2003), available at http://www/irs.gov/
newsroom/article?0,,id=114575,00.html.
---------------------------------------------------------------------------
V. CONCLUSION
The Commission recognizes that credit counseling can provide
financially distressed consumers with valuable assistance in managing
their money and paying their debts, and that many, if not most, CCAs
operate honestly and fairly. The Commission is concerned, however, that
some firms may be deceiving consumers about who they are, what they do,
and how much they charge. The victims of the deception may find
themselves in even more dire financial straits than before. The
Commission, acting with our law enforcement partners, will continue to
work to protect consumers in this critical area.
Chairman HOUGHTON. Thank you very much. I have a couple of
questions. Then, Earl, I will turn it over to you. Really, I
have questions for Mr. Everson and Mr. Beales. I have two
questions for you, Mr. Commissioner. I am interested in the
standards that the IRS is going to use to make these
evaluations. Maybe you can break that down a little bit. Also,
I have always worried about the excessive salaries that are
being paid. We have had a number of examples of this, which
have poisoned the well for a lot of good companies that have
tried to adhere to the level of good discretion.
At what point do these salaries become excessive? Then, Mr.
Beales, the question I would like to ask you is, if a voluntary
contribution is included in the contract service agreement,
isn't this a fee? So, maybe I could turn this over to you, Mr.
Everson, and then to Mr. Beales.
Mr. EVERSON. Sure. Mr. Chairman, there is no cookie-cutter
model to reach a judgment on these issues, as you can imagine.
There is a lot of judgment that needs to be brought to bear.
That having been said, there have been standards that have been
articulated by the IRS in rulings in the past, and also some
that have been validated in the courts that we will look to as
we conduct these examinations. What is the nature of the
customer base--are these low-income people, deserving people?
Are they receiving true counseling, or are they simply
receiving packaged products? One of the things that has been
happening here, is, as I indicated, an explosion through the
use of the Internet. Simple solutions are developed, and there
is no real education or exchange whatsoever with the individual
who needs the service.
We will look at the organizational structures of the
organization, and the relationships with for-profit groups.
There is nothing wrong with having a relationship with a for-
profit entity. It just needs to be on an arm's length basis,
where the price paid for services would be comparable to that
which would be normally expected of an organization that is
processing services, or whatever it might be. So, I would
suggest to you that we have a series of issues that we will
look at. They will all be carefully weighed. Before anything as
drastic as a pull-back of the exemption status is taken, we
will be very careful to make sure that we have considered all
the factors.
As to salaries, high salaries, in and of themselves, are
not a basis for withdrawing that exemption. Again, they must be
considered in the context of geography, comparable
organizations in terms of size or scope, and complexity of the
work. Yet they certainly are an indicator of a potential
problem, should there be a dramatic increase, or should they be
out of line for any of those reasons that I have mentioned. So,
as we engage in our examinations, those, too, will be
considered as indicators of potential problems.
Mr. BEALES. Mr. Chairman, I think the essence of what we
have alleged in the AmeriDebt case, is that if you say there is
no fee, but your contract has a voluntary contribution that is
very poorly disclosed in many instances, or not disclosed at
all--that that is, in fact, a fee, and it is deceptive to say
you don't charge fees. Restyling it as a contribution, unless
consumers clearly know that they are making the contribution,
and clearly know that they can choose not to make the
contribution and still get service--unless they know those
things, it is a fee. It doesn't matter what you call it.
Chairman HOUGHTON. Thank you. Mr. Pomeroy.
Mr. POMEROY. Thank you, Mr. Chairman. I note that your
testimony, Mr. Commissioner, says that to qualify under section
501(c)(3), the organization must not distribute net earnings to
insiders, must operate for the benefit of the public, not the
benefit of private interests, and must not organize for the
benefit of private interests such as designated individuals. To
the extent that the compensation issue comes into focus, I
would expect, at some point, that the compensation levels
actually create at least the impression that this is indeed
being run for private purpose--the purpose of providing this
dimension of compensation to given individuals. Is that
correct?
Mr. EVERSON. I agree with that entirely. It has to be very
carefully assessed, again, to demonstrate that it is not being
run for the benefit of individuals, other insiders, or related
parties.
Mr. POMEROY. This information is available for public
scrutiny in the Form 990 filed with the IRS. Is that correct?
Mr. EVERSON. The Form 990, yes, would be available.
Mr. POMEROY. So, I have a copy here, then, that is
appropriately in the public domain--Cambridge Credit Counseling
Corporation. I believe they will be testifying at a later
panel. Compensation listed for two individuals, a John Puccio
and Richard Puccio, is set at $624,000 each, per year. Now, at
$624,000, that looks like it is beyond generous compensation,
and indeed, looks like a distribution of earnings for private
interests in violation of the 501(c)(3) status. Is this the
type of thing that your organization audits, upon the filing of
the Form 990?
[The information is being retained in the Committee files.]
Mr. EVERSON. This would be the kind of issue that we would
look at. I don't want to comment on a particular case or
matter, but a high salary would be a red flag for us to look
at.
Mr. POMEROY. The $624,000 salary would, in your notion, be
generally deemed to be a fairly high salary?
Mr. EVERSON. Well, let me put it--perhaps I will answer
that indirectly. I am paid substantially less than that to do
my job.
Mr. POMEROY. Even Members of Congress are paid less than
that. Within the last 12 hours, I have been spammed by
purported credit companies--these advertising credit counseling
services. I would ask that copies of this be submitted into the
record, and be given to each witness on the panel. I would like
you to give me your evaluation, not necessarily immediately,
but as you have a chance to research the companies behind this
marketing material, as to their legitimacy under the 501(c)(3)
nonprofit credit corporation status. I think the record will
show that these materials, again, contain many of the things of
concern that you pointed out in your testimony. If they are
going to take the trouble to spam me, well, I am going to take
the trouble to have them investigated by you. I look forward to
getting more information.
[The information follows:]
----Original Message----
Sent: Thursday, November 20, 2003 9:31 am
Subject: Fwd: Take control of your debt Earlpomeroy
From: Linda Cox
To: earlpomeroy
Subject: Take control of your debt Earlpomero
Date: 20 Nov 2003 06:12:55 -0600
Reduce Monthly Payments Up To 70%!
Eliminate High Interest Rates!
Complete FREE Details Here:
[GRAPHIC] [TIFF OMITTED] T1629A.001
----Original Message----
From: Earl Pomeroy
Sent: Wednesday, November 19, 2003 12:19 PM To: Fremstad, Joel
Subject: Fwd: negotiating lower payments for you
From: Kristina
To: earlpomeroy
Subject: negotiating lower payments for you
Date: Wed, 19 Nov 2003 09:53--0600
Fellow Americans
Credit Problems?
How would you like to have PERFECT Credit?
Credit Reporting Act, You can Fight Back
And Get the Credit That You Deserve!
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[GRAPHIC] [TIFF OMITTED] T1629B.001
If you're not interested, mail this to a friend; they will thank you
later
WWW.CARDOFFERS.COM
You are being sent to Debt Saviors Inc.
An industry leader in assisting consumers for over 3 years to Non-
Profit Credit Counseling and Debt Management Companies.
[GRAPHIC] [TIFF OMITTED] T1629C.001
Category: Advertising/Deceptive Modified: 2/6/2003
1:11:15 PM
Express Consolidation rip-off Del Ray Beach Florida
Company
Express Consolidation
Address:
Nationwide, U.S.A.
Phone Number:
I am under contract with Express Consolidation. At first everything
was fine. I started getting phone calls from one of the creditors I am
trying to pay off. They advised they never received a proposal from
Express. I told Express & they asked for my account info with the
creditor & said they would resubmit. For a few months I heard nothing.
I starting receiving new calls from the same creditor. They stated
I was 79 days in arrears & a check that Express sent bounced. I had to
pay them $155.00 in lieu of $116 that I pd to Express.
I tried calling them, e-mailing, every way I could to contact them.
Customer Service had me online for 20 minutes everytime I called. When
I finally got through, they advised the bank they use had the wrong
acct. # on the checks that went out in Dec. of 2002.
Needless to say, I am very worried that all of this is going to
blow up in my face. I am trying to keep this from my husband as he was
very upset that I had all these bills to begin with.
Any suggestions? Would you consider them in Breach of contract
since their check bounced?I'll take all the advise I can get.
Eileen
Baltimore, Maryland
U.S.A.
[The information follows:]
Internal Revenue Service
January 29, 2004
Hon. Earl Pomeroy
U.S. House of Representatives
Washington, D.C. 20515
Dear Congressman Pomeroy:
This is in reply to your concern about e-mails you received from
two credit counseling organizations, Debt Solutions, Inc. and National
Debt Relievers, which you presented to Commissioner Everson at the
November 20, 2003 hearing on Credit Counseling. The Commissioner
appreciates your bringing this matter to our attention.
We maintain an ongoing examination program to ensure that exempt
organizations continue to meet the requirements for tax-exempt status.
Whenever we receive information about an organization that raises
questions about its continued exempt status, we forward the information
to our Exempt Organizations Examination Classification Office in Dallas
to determine whether it warrants an examination. Your information has
been forwarded to that office.
The Internal Revenue Code includes taxpayer privacy provisions to
protect the privacy of tax returns and tax return information of all
taxpayers. Accordingly, I cannot comment on what action, if any, we may
take regarding the e-mails.
I hope this information is helpful. If you have any questions, or
wish to submit any additional information regarding credit counseling
organizations please contact me at (202) 622-4725.
Sincerely,
Floyd L. Williams, III
Mr. EVERSON. They are not spamming me for some unknown
reason.
Mr. POMEROY. Now, specifically on some of the matters--to
get a better handle on what numbers of entities we are dealing
with, Commissioner Everson, how many credit counseling
organizations have been granted tax-exempt status in the last 6
months? Do you have any idea?
Mr. EVERSON. I don't have a track record in the last 6
months. As I indicated before, there are over 850 that have
exempt status now, and if you look at the last 4 years, through
2003, what has happened is, the numbers have gone up, as I
indicated. There are about 100 or so each year that we have
been granting for the last 4 years--higher than that in some
instances.
Mr. POMEROY. Mr. Beales, one would wonder why a credit card
company will cut its rate for a group that is obviously
handling, on a boilerplate basis, its clients, as opposed to an
individual debt management workout framework. Have you seen
instances where there is actually some revenues coming back to
the intermediary credit management companies--some kind of
kickback or rebate from the credit card companies themselves?
Mr. BEALES. Well, that is a fairly common arrangement--that
some of the money that the credit card company or other
creditor is willing to contribute in order to reduce the debt,
goes back to the credit counselor. That is true in the
legitimate parts of the industry. It is the way the industry
has always operated to some extent--and for some of the credit
counseling organizations.
Mr. POMEROY. Do you think that that has created a revenue
opportunity that is driving the creation of these sham
operations?
Mr. BEALES. Well, I think that is part of it, but I think
what drives the sham operations much more, is the money that
they can get from consumers.
Mr. POMEROY. Up-front fee payment?
Mr. BEALES. The up-front fee and monthly payments.
Particularly where they try to exploit the way the industry has
traditionally operated with little or no charge to consumers,
with most of the costs being borne by creditors through those
payments back to the credit counseling organizations.
Mr. POMEROY. So, you have seen a trend where costs are
being shifted to the debtors themselves--increased costs by
these entities on the individual seeking their help?
Mr. BEALES. Well, certainly in the case of AmeriDebt and
circumstances like that, there are substantial fees to
consumers that are not present in the traditional circumstance.
That is relatively new in the last couple of years, and in that
sense, it is certainly a trend--whether it is a continuing
trend is what we are trying to determine.
Mr. POMEROY. This is my last question, Mr. Chairman. You
have been generous on me going slightly over time. However, to
the extent that something is happening here, we are seeing the
creation and the marketing of credit counseling services,
beyond what we have ever seen before. We are seeing an increase
in questionable entities, it certainly raises at least the
appearance that they have figured out how to make some new
money in providing this kind of activity to the public. I am
just wondering if we have identified where the new fees--or
whatever activity is generating the new cash flow for them--are
going.
Mr. BEALES. Well, I think you are exactly right--they have
figured out a new way. However, I think certainly in the case
we just filed, where the new money is coming from the public,
it is the consumers who are deceived into participating in the
scheme.
Mr. POMEROY. Thank you. Thank you, Mr. Chairman.
Chairman HOUGHTON. Thank you. Mr. Foley.
Mr. FOLEY. Thank you very much, Mr. Chairman. Again, I
commend you for holding the hearing, and I think Mr. Pomeroy
hit on it in his opening statement. The most vulnerable are
being preyed upon, and I have noticed a proliferation of ads,
as was mentioned, for these services. We used to have consumer
credit counseling services in West Palm, Florida, which was
not-for-profit, and existed and worked so well helping people
pull out of their financial jams. However, now it seems like
there is an ad a day indicating how they can help relieve the
burden of debt for citizens, and it turns out to be a way in
which they relieve more money off the citizen, and never help
really get to the bottom of it.
How much of a credit counseling organizational operation
will be focused on education versus debt management, to be
considered not-for-profit? Is there a rule of thumb? For
example, is there an inappropriate amount of debt management
services that crosses the threshold and could put its tax-
exempt status at risk? Mr. Everson.
Mr. EVERSON. I would suggest to you that there is not,
again, a hard and fast rule, but there would be a presumption
that, what you are suggesting, the creation of a package to
work out the debt, would be a relatively small piece of the
activities. Traditionally, it has been very much in the
education area, working with a couple or a family, reviewing
their financial statements, trying to develop a long-term plan.
It is not credit repair, per se--credit repair being, taking a
look at someone's credit rating, trying to improve that, and
developing any specific package. So, it would be a small piece,
traditionally.
Mr. FOLEY. I mentioned this point in a hearing we had
before. I had a theft occur where somebody had created a credit
card and charged merchandise, and then I had the debt
collection agency calling me unmercifully, day and night,
telling me I owed all this money. What concerns me about some
of the credit counseling, is that they are merely substituting
those piranhas in my case. They were never civil, and never
nice, and as I explained that this was not my debt, they
continue to harass.
What concerns me, as I have seen some of these credit
counseling services, is that they appear to be changing hats
with the debt collectors and doing the same thing--only they
are aggregating the debt and now pursuing the borrower. Where
do you draw the line as to what is, and is not, an appropriate
activity between closely related nonprofits and for-profits? Is
there a way in which you separate those two?
Mr. EVERSON. Again, I think that the test here would be:
are the relationships between these two entities something that
would pass the test of being at arm's length on a commercial
basis? Nothing's wrong with having a relationship with a
profit-making entity. That is a supplier of services. Is the
price paid for that service a reasonable one? If you were to go
to another party and ask for the services, would they charge
you a lot less to do the same thing--run your computers, or
make telephone calls, or whatever the actual product that is
being provided might be?
Mr. FOLEY. You use a comparison based on the market
application.
Mr. EVERSON. I think that is really the only fair way to do
it, because if it gets out of line, it would clearly indicate
that the related party structure has had an impact that is, in
fact, not consistent with a charitable tax-exempt status.
Mr. FOLEY. Thank you. Thank you, Mr. Chairman.
Mr. KLECZKA. Mr. Chairman, I will try to be brief. First of
all, this is a great hearing. I have not received any
constituent complaints on this matter yet. However, I do
represent a large segment of the inner city of Milwaukee,
Wisconsin, and so, I am assuming some of these folks are
working their wares back home, and I will be hearing about it
shortly. Let me ask, Mr. Commissioner, how many of these
organizations currently exist? What is the----
Mr. EVERSON. It is north of 850, sir.
Mr. KLECZKA. Wow--850. How many do you have under audit at
this point?
Mr. EVERSON. Right now we have active audits on 30, and as
I indicated, this includes 9 of the top 15 organizations, as
measured by gross receipts. Actually, if you look at the total
gross receipts for the industry, which is about a billion
dollars, plus or minus, last year, we are actually attacking 40
percent of it. That is a very, very large number if you view it
against our normal audit rates.
Mr. KLECZKA. Now, we have had some discussion today about
fees versus this involuntary contribution. I am assuming that
if, in fact, it is an involuntary contribution, there is a fee.
At that point, it very possibly would be a taxable event, would
it not, Commissioner?
Mr. EVERSON. This is really no different than any other
exempt organization. People send their kids to private schools,
and they pay a fee for a service provided. A contribution is a
voluntary contribution beyond the value of the services
provided. So, looking at it in this context, as we have just
been discussing, it should not be an exchange for a service
provided. If it is, in essence--as Mr. Beales has been
indicating--an exchange for a service, then no, that wouldn't
constitute a contribution that a taxpayer would deem as tax
deductible. It would not be viewed as revenue generating for
the entity.
Mr. KLECZKA. If, in fact, it is, in reality, a fee, would
it be taxable for that organization?
Mr. EVERSON. Well, that is correct.
Mr. KLECZKA. So, that is----
Mr. EVERSON. So, it would be considered in that construct,
yes.
Mr. KLECZKA. So, that is what is going on here.
Mr. EVERSON. That is a portion of what is going on--that is
correct.
Mr. KLECZKA. Now, Mr. Beales, since the advent of the do-
not-call list, have we seen a whole bunch of these groups pop
up so they can come underneath the umbrella of the exemption
for charitable groups?
Mr. BEALES. I don't know that we have seen a growth in the
number of groups. Certainly the people who claim to be
nonprofits are a significant source of the complaints that are
coming to us about violations of do-not-call.
Mr. KLECZKA. So, you don't think they are just popping up
out of the woods now because of the exemption for charitables
under do-not-call?
Mr. BEALES. Well, I think the charitables stick out more,
because the background noise of for-profit telemarketing has
gotten considerably quieter.
Mr. KLECZKA. It sure has, thank you. I think all Americans
are appreciative of that. The last item, Mr. Chairman, is a
favor for the Commissioner. I have a constituent who was a
former IRS agent, who has a suggestion for saving some money as
far as issuing refund checks via the mail versus electronic
transfer. Let me ask you to identify it with staff so we can
share that and not burden the Committee.
Mr. EVERSON. Thank you. We will take a good look at it.
Mr. KLECZKA. Good. Thank you very much. Mr. Chairman, thank
you.
[The information follows:]
January 6, 2004
The Honorable Jerry Kleczka
U.S. House of Representatives
Washington, D.C. 20515
Dear Mr. Kleczka:
At the recent Ways and Means Oversight Subcommittee hearing on
consumer credit agencies, you asked me to consider your constituent's
suggestion for saving money on issuing tax refunds. Your constituent
suggested that for tax refunds of $25 or less, we either require direct
deposit or credit the amount against the next year's taxes. I have had
a chance to review this proposal and would like to share my thoughts
with you.
On the surface, this proposal appears to have the potential to save
the IRS and the Financial Management Service (FMS) money in printing
and postage costs. The FMS, which is responsible for printing and
mailing the checks, saves $.28 for each payment issued electronically
rather than as a paper check. However, it is the practice of the IRS to
notify taxpayers if we delay their refunds or otherwise take an action
which they did not request. The cost of this notice is similar to the
cost of mailing the check. If we were to apply the refund to the future
year's tax liability, assuming they did not request the action, we
would send the taxpayer a similar notice, and the savings would not
materialize. Furthermore, if the taxpayer has met his or her obligation
and submitted all required forms and documentation, it would be
inappropriate and illegal for the IRS to retain the refund without the
taxpayer's consent, even if the purpose is to apply it to future
liability.
Regarding a requirement for direct deposit, if a taxpayer does not
have a checking or savings account, or does not provide us with routing
information, we have no way of making an electronic refund deposit. The
IRS does not have the legal authority to require individual taxpayers
to maintain an account at a financial institution.
I certainly share your goal to reduce the costs and burdens of
paper processing at the IRS and thank you for passing along your
constituent's suggestion. If you would like to discuss this matter
further, please contact me or your staff may contact Floyd Williams,
Director of Legislative Affairs, at (202) 622-3720.
Sincerely,
Mark W. Everson
Chairman HOUGHTON. All right. Mr. Sandlin.
Mr. SANDLIN. Thank you, Mr. Chairman. Mr. Commissioner, you
had said, I believe, the law provides that for these groups to
get their tax-exempt status, the organization has to have an
educational, charitable, or some other listed purpose on the
Code; is that true?
Mr. EVERSON. That is correct.
Mr. SANDLIN. In these particular situations, they are
supposed to educate or counsel the consumer concerning the
management of their debt, correct?
Mr. EVERSON. That is correct, sir.
Mr. SANDLIN. The organization cannot run this organization
for commercial interests, or to benefit a particular individual
under the Code?
Mr. EVERSON. Absolutely.
Mr. SANDLIN. It appears to me--and I think we know what we
are talking about--that what these two television groups
actually do, is attempt to pool credit card debt, as opposed to
other types of debt. Is that correct? Would that be fair?
Mr. EVERSON. I will let Mr. Beales----
Mr. SANDLIN. Mr. Beales, it appears to me that the effort
by these groups is to take all the credit card debt. That is
what they advertise. They say your credit card is too high.
They pool that debt, and they work out a payment plan to pay
credit card debt, correct?
Mr. BEALES. That is clearly the focus. That is where most
consumers get in debt trouble.
Mr. SANDLIN. They don't offer that.
Mr. BEALES. I don't know that it is limited to credit card
debt.
Mr. SANDLIN. They don't offer, for example, to combine or
consolidate your car payment debt, or your house payment debt,
or your open account payment debt down at the dress shop,
correct?
Mr. BEALES. The focus is unsecured debt. Your open account
debt at the dress shop may be because that is unsecured----
Mr. SANDLIN. Here is my point. Yes, it is open debt, but
what they are really doing is, they are taking credit card debt
from credit card companies that is unsecured, they are pooling
that, and they are making sure you pay your credit card debt.
They really don't care if you pay your house payment. They
really don't care if you pay your car payment. They really
don't care if you pay the dress shop. What they are, is a tool
of the credit card companies to make sure that those credit
card companies get preferential treatment, that they are paid
first, and that they are paid in full to the exclusion of the
requirements that the consumer has to pay other unsecured or
secured debt. True?
Mr. BEALES. I think the consumer that is in financial
trouble should obviously worry about the home first.
Mr. SANDLIN. Right. That is a charming story, and I
appreciate that--and certainly they should. What I am saying is
that these groups--what they do is take credit card debt,
advertise about credit card debt, and pool credit card debt and
make sure that consumers use their money to pay credit card
debt. That is where the focus is--to make sure that credit card
debt payment is made at a reduced rate, at a reduced payment
over a certain period of time. They say, you pay this reduced
rate over this period of time and your credit cards will be
paid off in 60 months, for example. Is that correct?
Mr. BEALES. Yes, but----
Mr. SANDLIN. So, actually, what they are doing is operating
this for the benefit of an individual group. They are operating
this for the benefit of these individual groups, and, Mr.
Commissioner, they really shouldn't have, under that
circumstance, tax-exempt status; correct?
Mr. EVERSON. Well, if that is the primary purpose, as you
have outlined, I would suggest that they would have great
difficulty in sustaining that exemption. Yet, again, I want to
say that as we go forward with these examinations, we are going
to be very careful to fairly assess the whole picture, and
there is nothing wrong with helping people work out a specific
plan and helping organize that. It has to be measured against
the overall requirements of the education and the counseling.
Mr. SANDLIN. That is right, and that is a good point. That
is the whole point of being tax exempt--that they educate and
help with the payment of other debt. However, what they are
really doing is paying credit card debt. Isn't it true, Mr.
Beales, that the credit card companies pay the tax-exempt
companies money--they pay them fees and funds for their
service?
Mr. BEALES. They do pay them. I don't think you can infer
from the fact that it is focused on unsecured debt that it is
really a collection mechanism for that debt.
Mr. SANDLIN. Yes, sir, it is exactly a collection
mechanism. Now, let me ask you about this. Let me ask you about
these contributions. We are indicating that this is a
contribution to a charity or to a nonprofit. Now, that is just
a fraud, isn't it? This isn't any kind of contribution, is it?
Mr. BEALES. Well, it depends on the circumstances of the
particular case, but if that is what you say, then it is a
fraud, yes.
Mr. SANDLIN. Well, the check you send down to the church,
that is a contribution. The check to the library, that is a
contribution. The American Heart Association, American Cancer
Association--those are contributions. The check that you send
to AmeriDebt, as it advertises on television, that is not a
real contribution, is it?
Mr. BEALES. No. That is what we have alleged. That is a
fee.
Mr. SANDLIN. I believe I see my light is on. I am out of
time. I would like to say, I was shocked by the point, in
closing, that Mr. Pomeroy made regarding how the executives
here got over $600,000 in fees, and I would like to just point
out in closing, that that is even more money than the $430,000
a year Mr. Novelli gets from AARP to help seniors get
prescription drugs. With that, I will end my statement. Thank
you.
Chairman HOUGHTON. Thank you very much. Well, gentlemen, I
really appreciate your testimony here, and your being with us,
and we look forward to seeing you again. Thank you.
Mr. EVERSON. Nice to see you as always.
Chairman HOUGHTON. Thank you. Now I would like to call the
second panel. The second panel is Deanne Loonin, the staff
attorney of the National Consumer Law Center (NCLC) in Boston,
Massachusetts; Patrick Boisclair, Chairman of the Board of
Trustees, National Foundation for Credit Counseling (NFCC) in
Macon, Georgia; David Jones, President of the Association of
Independent Consumer Credit Counseling Agencies (AICCCA) in
Windermere, Florida; Michael Hall, Chief Executive Officer
(CEO), Take Charge America, Incorporated in Phoenix, Arizona;
and Montieth Illingworth, corporate spokesperson for the
Cambridge Credit Counseling Corporation in Agawam,
Massachusetts--who also, as I understand, is accompanied by
Chris Viale, Chief Operating Officer of Cambridge Credit
Counseling Corporation, also from Agawam, Massachusetts. So,
when everybody gets settled--we appreciate your being here.
Again, we are sorry we are late in starting. Ms. Loonin, if you
would like to start the testimony, we would appreciate it.
Thank you very much.
STATEMENT OF DEANNE LOONIN, STAFF ATTORNEY, NATIONAL CONSUMER
LAW CENTER, BOSTON, MASSACHUSETTS, AND CONSUMER FEDERATION OF
AMERICA
Ms. LOONIN. Thank you, Mr. Chairman. My name is Deanne
Loonin, and I am a staff attorney with NCLC in Boston. I thank
the Chairman and the Committee Members for inviting us to
testify today. I am also testifying on behalf of the Consumer
Federation of America, who we partnered with on this issue, and
on other issues as well.
We have been following this credit counseling industry for
some time, and in particular, we wrote a lot of our findings in
a report that we released in April, called Credit Counseling in
Crisis. We focused on credit counseling because of the
tremendous benefits counseling can provide for many consumers,
and because, unfortunately in the current environment, abusive
and deceptive practices have made it difficult for consumers to
reap these benefits.
When done well, credit counseling can help consumers in
financial distress understand their options, develop budgets,
and prioritize debt. When done well and properly, both secured
and unsecured debt is taken into account. Quality trained
credit counselors help those consumers with secured debt figure
out whether they can keep their homes and cars, and if not,
work with them to help resolve these problems, or make
appropriate referrals. They help consumers budget, and
determine whether they can afford to pay back unsecured credit
card debt, and in many cases, avoid bankruptcy.
Regardless of whether there are for-profits involved in
credit counseling, we believe that an ideal scenario is to have
a thriving nonprofit counseling sector that works on behalf of
consumers whenever possible, without regard to their ability to
pay--certainly serving the lowest income and the neediest
consumers, and also serving others in the communities through
education and outreach. Their work often benefits creditors as
well, but when done well and in keeping with nonprofit status,
their primary purpose is charitable and educational. When done
well and legitimately as a nonprofit, credit counseling is not
a product-driven industry. In other words, it is not about
selling debt management plans, but about serving consumers.
This is a picture of credit counseling done well, and there
are many agencies out there that fit this bill or that come
fairly close. Sadly, and this is what we are focusing on today,
there has also been rampant abuse, particularly in the last few
years. Since the industry is comprised almost exclusively of
tax-exempt nonprofit organizations, this abuse affects
taxpayers as well as consumers, many of whom go to credit
counselors seeking help, and end up in even greater financial
distress. We highlighted a number of these problems in our
report, including deceptive practices and excessive costs, but
the focus of my short testimony today, as well as my written
testimony, is the abuses of nonprofit status. These abuses
occur because of the many agencies out there that aggressively
advertise, sell debt management plans, and arrange the related
services. The multi-service counseling, education, and debt
management plan provider is becoming the exception rather than
the norm.
Nonprofit status has become, in practice, a requirement to
do business in the credit counseling world, and the industry is
comprised almost exclusively of 501(c)(3) tax-exempt
organizations. The agencies seek tax-exempt status for a
variety of reasons, many of which the IRS Commissioner spoke
about, including the possibility of exemptions from a number of
important consumer protection laws.
This was also mentioned in the October IRS-FTC advisory on
this issue. Perhaps most deceptively, agencies use their
nonprofit status as a marketing tool. They promote the
nonprofit label as a mark of credibility, appealing to consumer
trust that nonprofit organizations are above board, and about
more than just making money. We detail that in our report, and
in fact, in our survey where we spoke with counselors from a
wide range of organizations--credit counseling organizations
across the country. I was involved in a lot of the survey, and
more than once I was told, just in my initial call, that we are
a nonprofit organization--and to tell you what that is like,
that means we are just like a church. Using nonprofit status as
cover, many agencies characterize any fees charged as
donations. Similarly, agencies often claim that creditors work
with them because they too can write off contributions to the
agencies. All too often, this basic scheme is a charade
disguising what is, in reality, a business.
The reasons why these agencies really should not have
received tax-exempt status in the first place, are detailed
more in my written testimony, but just briefly, we focused on
two areas. One is what is known as the ban on private
inurement, and again, the IRS Commissioner spoke to this
particular issue. What we are talking about is agencies that
have arrangements with affiliated for-profits where they are
profiting from those arrangements inappropriately. There is
considerable evidence that this ban is violated by some credit
counseling agencies, and that was the focus of the FTC action
yesterday. There are other Attorney General lawsuits that are
currently going on--private class actions, and the IRS
investigations as well.
The second set of problems relates to the IRS threshold
requirements for tax-exempt status. That is, section 501(c)(3)
exempts from payment of Federal taxes, groups organized and
operated exclusively to accomplish permissible, charitable, or
educational purposes. Do credit counseling organizations meet
these purposes? Often the answer is no. The clearest problems
occur among agencies that do not offer a range of services,
have inappropriate ties to for-profit businesses, and
aggressively sell debt management plan products--debt
management plans. The key abuse in this area is that as they
call them, the companies that are selling debt management
plans, as opposed to providing multi-services, are steering
consumers into those plans regardless of whether they can
benefit from those plans or not. Some consumers can benefit
from a debt management plan, and this is something that would
be good and efficient for those consumers. Many others cannot.
I would just like to close by saying that as we work
together to address these problems, it is very important that
all of the various players in the industry be at the table. We
thank you for having many of them here today, such as consumers
and consumer groups like us. Also the creditors--I think it is
important to have them as a part of this dialog. They really
created this industry in a number of ways many years ago, and
can do a lot more to make it a more legitimate and honest
industry. In just a minute, you will hear from the agencies
themselves. We have already heard from a number of government
regulators. I think together we can help weed out the abuses in
the industry, and preserve credit counseling as a legitimate
option for consumers. Thank you.
[The prepared statement of Ms. Loonin follows:]
Statement of Deanne Loonin, Staff Attorney, National Consumer Law
Center, Boston, Massachusetts, and Consumer Federation of America
Mr. Chairman and Members of the Subcommittee, the National Consumer
Law Center and the Consumer Federation of America thank you for
inviting us to testify today regarding the non-profit credit counseling
industry. NCLC offers our testimony here on behalf of our low-income
clients and the Consumer Federation of America (CFA). The National
Consumer Law Center is a non-profit organization specializing in
consumer issues on behalf of low-income people. We work with thousands
of legal services, government and private attorneys, as well as
community groups and organizations nationwide that represent low-income
and elderly individuals on consumer issues. The Consumer Federation of
America is a non-profit association of almost 300 pro-consumer groups,
which was founded in 1968 to advance the consumer interest through
advocacy and education.
LEGITIMATE CREDIT COUNSELING AGENCIES PROVIDE MUCH-NEEDED SERVICES FOR
CONSUMERS IN FINANCIAL TROUBLE
Recent abuses by so-called non-profit credit counseling agencies
have raised serious questions about the quality and legitimacy of
credit counseling services. The National Consumer Law Center (NCLC) and
the Consumer Federation of America (CFA) highlighted many of these
problems in an April 2003 report, Credit Counseling in Crisis: The
Impact on Consumers of Funding Cuts, Higher Fees and Aggressive New
Market Entrants.\1\
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\1\ The executive summary is attached at the end of this testimony.
The full report is available for downloading from either the NCLC web
site (www.nclc.org) or the CFA web site (www.consumerfed.org ).
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The credit counseling industry is at a critical crossroads.
Consumer debt (all non-mortgage loans) and credit card debt continues
to grow, increasing consumer demand for debt relief. As of June of this
year, American consumers held about $700 billion in credit card
debt.\2\ The effects of the economic recession, especially the loss of
jobs and a sharp increase in the number of Americans with inadequate or
no health insurance, have combined with the growth in consumer debt to
cause a record number of Americans to seek bankruptcy protection.\3\
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\2\ Revolving debt, most of which is credit card debt, was $725.6
billion in June 2003, up from $712 billion at the beginning of the year
and $667.4 billion at the beginning of 2001. Non-revolving debt
(primarily auto and household loans) was $1.04 trillion in June, up
from $1.01 trillion at the beginning of the year. Federal Reserve
Bulletin, Table 1.55, October 2003.
\3\ There were 1,661,996 non-business bankruptcies filed in fiscal
year 2003, the highest level ever, and an increase of 7.4 percent from
the 1,547,669 filings in fiscal year 2002. American Bankruptcy
Institute, November 14, 2003.
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The need has never been greater to ensure that consumers who seek
credit counseling receive quality services. Yet, policymakers are
increasingly encouraging or requiring that consumers seek assistance
from credit counselors without first taking adequate steps to improve
the quality of credit counseling. This type of mandate is included in
pending federal bankruptcy reform legislation.\4\ States are also
increasing traffic at credit counseling agencies by imposing counseling
mandates or requiring the disclosure of credit counseling options to
consumers.\5\
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\4\ Section 106, H.R. 975.
\5\ For example, Georgia and North Carolina do not allow lenders to
make high cost mortgage loans unless the borrower has received
counseling from an approved agency. Ga. Code Ann. 7-6A-5(7); N.C.
Gen. Stat. 24-1.1E(c)(1). New York requires the lender to provide a
notice urging the potential borrower to consider consulting a
``qualified independent credit counselor or other experienced financial
adviser'' and a list of approved counseling agencies. N.Y. Banking Law
6-1(1). Florida law allows consumers who cannot repay a payday loan
to obtain a sixty day repayment grace period, but only if they
successfully complete credit counseling by an approved agency during
that period. Fla. Stat. Ann. 560.404.
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At the same time that these economic and political pressures have
pushed more consumers toward counseling, abuses in the industry have
led to serious deterioration in quality and an increase in deceptive
and abusive practices. Aggressive firms masquerading as non-profit
organizations have been among the credit counseling agencies that are
most likely to deceive or to gouge consumers. Massive cuts in creditor
funding for agencies has exacerbated this trend, and leaving many well-
intentioned organizations without sufficient funding to provide
appropriate services. Most creditors have also reduced the economic
concessions that they will offer to Americans who enter credit
counseling, making it less likely that consumers will successfully
complete credit counseling and more likely that they will have to
declare bankruptcy.
Despite these trends, we do not believe that the picture is
entirely dark. On the contrary, we believe that multi-service credit
counseling agencies can provide valuable services for consumers. We
also believe that there is a legitimate and important role for non-
profit agencies to provide these services.\6\ However, if current
abuses are allowed to persist, credit counseling services will all too
often seriously harm rather than help consumers, leading them deeper
into debt.
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\6\ Non-profit status is technically a state law concept, making an
organization eligible for certain benefits, such as state sales,
property and income tax exemptions. Although most federal tax-exempt
organizations are non-profit, organizing as a non-profit at the state
level does not automatically grant the organization exemption from
federal income tax. We are focusing on qualifications for federal tax-
exempt status, but use the terms ``tax-exempt'' and ``non-profit''
interchangeably.
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SUMMARY OF PROBLEMS WITH CREDIT COUNSELING \7\
It is important to note that the credit counseling industry
developed in the mid-1960's through the efforts of credit card
companies that saw a creative opportunity to recover overdue debts.
Creditors created the industry and provided the bulk of the funding
needed to keep the agencies in business. At first, most of the agencies
were affiliated with the National Foundation for Credit Counseling
(NFCC), a national trade organization that prescribes various standards
for member organizations.
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\7\ Although not the topic of this testimony, many agencies now
offer debt negotiation or settlement services in addition to or instead
of debt management plans (DMPs). Negotiation and settlement differ from
DMPs mainly because the agencies do not send regular monthly payments
to creditors. In fact, they encourage consumers to pay fees to the
negotiation firm and not pay their creditors. These agencies generally
maintain debtor funds in separate accounts, holding these funds until
the agency believes it can settle the entire debt. There are growing
concerns about abuses in settlement and negotiation practices.
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From the outset, debt management plans (DMPs) were the feature
service. Through these plans, a consumer sends the agency a lump sum,
which the agency then distributes to credit card companies that the
consumer owes money. In return, the consumer is supposed to get a break
in the form of creditor agreement to waive fees owed, to eliminate all
references to delinquent payments on the consumer's credit reports by
``re-aging'' the account, and, and in some cases, to lower interest
rates. Consumers also gain the convenience of making only one payment
to the agency rather than having to deal with multiple creditors on
their own. Through the ``Fair Share'' contribution, creditors
voluntarily return to the agency a set percentage of the funds that are
disbursed to them.
Debt management plans include unsecured debt only. This is a
critical issue because consumers with sparse resources should generally
prioritize secured debt, such as home and car loans, over unsecured
debt.\8\ In addition, DMPs may not even include all unsecured debt.
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\8\ See generally, National Consumer Law Center, Surviving Debt: A
Guide for Consumers (2002).
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NCLC and CFA have found that in the last decade, the credit
counseling industry has undergone an alarming transformation. Consumer
demand for credit counseling has grown, funding to agencies has been
sharply reduced, and an aggressive new class of credit counseling
agencies has emerged. This new generation has brought some advances,
such as flexible hours, electronic payments and easy access to
counselors by phone and the Internet. Unfortunately, however,
complaints about deceptive practices, improper advice, excessive fees
and abuse of non-profit status have grown significantly as this new
generation of credit counseling agencies has gained market share.
Key problems highlighted in the NCLC/CFA report include:
Deceptive and Misleading Practices: Among other problems,
we described agencies that do not pay consumers' DMP payments on time,
that deceptively claim that fees are voluntary, and that do not
adequately disclose fees. In many cases, agencies deceptively
exaggerate the types of concessions they can get from creditors to get
people out of debt.
Excessive Costs: As creditors have reduced funding, some
reasonable fee increases are to be expected. However, in an industry
that rarely charged for counseling and other services a decade ago, the
vast majority of agencies now charge fees for services. At least a few
agencies charge as much as a full month's consolidated payment simply
to establish an account. Monthly DMP fees and costs for non-DMP
services are also growing.
Abuses in Non-Profit Status. This is the focus of our
testimony today. The reality is that non-profit agencies are
increasingly performing like profit-making enterprises. Many agencies
aggressively advertise and sell debt management plans and a range of
related services. The multi-service counseling, education, and debt
management plan provider is becoming the exception rather than the
norm.
Decline in Consumer Education and Counseling Options:
Consumer educational services are rapidly declining. Many agencies that
claim to provide education and/or counseling merely sell slickly
produced, but unhelpful, CD ROMs, videos or internet information. For
example, our survey of agencies not affiliated with the National
Foundation for Credit Counseling (NFCC) found that only five of the
forty agencies surveyed offered services unrelated to DMPs. Among this
minority of agencies, four out of five charged for these other
services, including books and videos on debt problems.
Although all of these issues are important and in many ways
connected, I will focus mainly on issues related to non-profit status
since this is the focus of today's hearing.
ABUSES OF NON-PROFIT STATUS
Non-profit status has become, in practice, a requirement to do
business in the credit counseling world. The credit counseling industry
is comprised almost exclusively of 501(c)(3) tax-exempt organizations.
Credit counseling agencies seek (and get) tax-exempt status for a
variety of reasons. This status makes them eligible for exemptions from
federal and state corporate income taxes. Most states automatically
allow corporations that qualify for federal tax-exempt status to also
qualify for state tax exemptions. Non-profit status is also required to
get many public and private grants. In addition, creditors have
traditionally required non-profit status to initiate Fair Share
contributions.
Agencies also seek non-profit status in some cases to comply with
applicable state laws, some of which require non-profit status as a
condition for doing business in the state. In other cases, non-profit
status allows agencies to escape the reach of consumer protection laws.
Many of these laws, such as federal and state credit repair laws and
many state credit counseling laws specifically exempt non-profit
organizations. This concern was explicitly noted in the October 2003
joint I.R.S./F.T.C. advisory urging consumers to exercise caution when
seeking help from credit counseling organizations. The agencies stated
that, ``Federal and state regulators are concerned that some credit
counseling organizations using questionable practices may seek tax-
exempt status in order to circumvent state and federal consumer
protection laws.''\9\
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\9\ See ``IRS, FTC and State Regulators Urge Care When Seeking Help
from Credit Counseling Organizations'', IR-200-20, October 14, 2003.
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Perhaps most deceptively, agencies use non-profit status as a
marketing tool. They promote the non-profit label as a mark of
credibility, appealing to consumer trust that non-profit organizations
are ``above-board'' and about more than just making money. Agencies
take great pains to characterize themselves as charitable in 990 tax
forms, advertising and promotional materials. For example, many claim
to serve the community through education even though, as noted above,
they often charge for educational services or simply provide videos and
CD ROMs and no individual counseling. More than one agency we contacted
as part of our national survey told us that they are a non-profit
agency, ``just like a church.''
Using non-profit status as cover, many agencies characterize any
fees charged as ``donations.'' Similarly, agencies often claim that
creditors work with them because they too ``can write'' off
contributions to the agencies. All too often, the basic scheme is a
charade, disguising what is in reality a business arrangement between
creditors and agencies. The truth is that even if they are voluntary,
fees paid by consumers for services should not be classified as
charitable contributions. Instead, consumers are paying for services.
Similarly, the Fair Share arrangements between creditors and agencies
are often formal, written agreements that describe how creditors will
compensate agencies for helping the creditors collect money owed to
them.
Sadly and at great expense to taxpayers and to consumer clients,
many credit counseling agencies should never have been able to attain
the advantages of tax-exempt/non-profit status. There are two key areas
where I.R.S. (and corresponding state laws) are being violated. Each of
these is discussed in greater detail below.
1. Improper Ties to For-Profit Businesses
Agencies are not properly non-profit if they are organized or
operated to benefit individuals associated with the corporation
including directors, officers or members.\10\ No part of the net
earnings of a Sec. 501(c)(3) organization may inure to the benefit of
any private shareholder or individual. This is often called the ban on
private inurement and is a basic tenet of I.R.S. tax-exemption
requirements.
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\10\ 26 U.S.C. 501(c)(3).
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There is considerable evidence that the ban on private inurement is
violated by some credit counseling agencies. Beginning a few years ago,
the media began to uncover the extent of this problem, documenting
instances of lavish salaries for agency directors and self-dealing in
purchasing real estate and in creating close connections with for-
profit affiliated businesses such as lenders or payment services.\11\
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\11\ See, e.g., Eileen Ambrose, ``Debt Counseling Leads to Deeper
Credit Woes'', Baltimore Sun, November 14, 2003; Jennifer Bayot, ``Not-
for-Profit Credit Counselors Are Targets of an I.R.S. Inquiry'', New
York Times, October 14, 2003; Caroline E. Mayer, Easing the Credit
Crunch?, Washington Post, November 4, 2001 at H01. Also see
Massachusetts Senate Committee on Post Audit and Oversight, Losing
Credibility: Troubling Trends in the Consumer Credit Counseling
Industry in Massachusetts, July 2002.
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More recently, these abuses have been the target of public and
private lawsuits. For example, both the Missouri and Illinois Attorney
General Offices sued AmeriDebt, Debticated and related affiliates and
individuals.\12\ Among other claims, both suits allege that AmeriDebt
and Debticated falsely represent that they are ``not for profit''
companies. According to the Missouri complaint, the credit counselors
are thought of and even referred to as ``salesmen'' of DMPs and are
judged and evaluated in part upon their current week or month's sales
and revenues. The complaint further alleges that AmeriDebt and
Debticated transfer virtually all tasks and virtually all consumer fees
to the related for-profit company DebtWorks. DebtWorks, according to
the Missouri Attorney General, prepares proposals to creditors for
consumers, communicates proposals to creditors, obtains consumers'
approval for changes, and responds to consumer calls. The suit further
alleges that the agencies falsely represent that they provide consumer
credit counseling.
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\12\ The Illinois suit was filed in February 2003 and the Missouri
suit in September 2003. For a copy of the Missouri complaint, see
http://ago.missouri.gov/lawsuits2003/091103ameridebt.pdf. For a
detailed discussion of a private lawsuit with similar allegations
against Debticated, see Debra E. Blum, ``Checking Upon Credit
Charities'', The Chronicle of Philanthropy, August 21, 2003.
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Interestingly, AmeriDebt announced in October 2003 that it would
lay off most of its workers and stop seeking new customers because of
negative publicity.
A Massachusetts Attorney General action focuses on another way in
which ``non-profit'' agencies have linked up with for-profit businesses
to generate profits. In this case against Integrated Credit Solutions
and Flagship Capital Services Corporation, the Massachusetts Attorney
General alleges that Integrated, a for-profit telemarketer, solicits
business for the non-profit Lighthouse Foundation.\13\ According to the
complaint, Integrated induces consumers to pay exorbitant
``enrollment'' and ``education'' fees to Integrated, a for-profit
telemarketer, in order to receive credit counseling from Lighthouse,
which purports to be independent and non-profit.
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\13\ This lawsuit was filed in December 2002. See ``AG Reilly Sues
Telemarketer Accused of Using Deceptive and Misleading Tactics to Sell
Credit Counseling Services to Consumers'', Press Release, December 19,
2002. Available at: http://www.ago.state.ma.us/press--rel/
ics.asp?searchStr=1.
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To the extent the allegations discussed above are true, these
agencies should have their non-profit status revoked and/or should be
sanctioned appropriately.
Related abuses involve unreasonable compensation and other benefits
that are directed by the non-profit agencies to directors and officers.
In our report, we described non-profit agencies that were paying
directors salaries and related benefits worth over $400,000 annually.
These troubling practices raise serious warning signs that agencies may
be operating more to benefit themselves than the public. In addition,
this is an area where I.R.S. has the power to sanction offending
agencies.\14\
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\14\ 26 U.S.C. 4958 (I.R.S. ``intermediate sanctions'' rule).
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2. Many Credit Counseling Agencies Do Not Meet Threshold I.R.S. Tax-
Exempt Requirements
This second set of problems relates to the I.R.S. threshold
requirements for tax-exempt status. Section 501(c)(3) exempts from
payment of federal taxes groups organized and operated exclusively to
accomplish permissible charitable, educational, religions, literary or
scientific purposes. Organizations must limit their purposes to one or
more of these categories and must not engage, other than as an
insubstantial part of their activities, in activities that do not
further one or more of these purposes.
The clearest problems occur among agencies that do not offer a
range of services, have inappropriate ties to for-profit businesses as
noted above, and aggressively sell DMP products. However, the question
is relevant even beyond these most egregious offenders, primarily
because of the close ties between credit counseling agencies and
creditors. Credit counseling agencies can provide benefits for both
consumers and creditors. However, an agency's primary concern, in all
instances, should be providing the most appropriate services for
consumers.
It should be clear that an agency that primarily or exclusively
sells DMPs is not providing a charitable service or product. This
conclusion was affirmed in the October 2003 I.R.S/FTC statement that
organizations that offer only DMP services, without significant
education and counseling, ``. . . would not qualify for tax-exempt
status.'' \15\
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\15\ See ``IRS, FTC and State Regulators Urge Care When Seeking
Help from Credit Counseling Organizations'', IR-2003-120, October 14,
2003.
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A DMP is a structured way to help consumers pay back unsecured
debt. DMPs work well for some people, but not for everyone. In today's
climate, creditors offer fairly limited concessions for consumers on
DMPs. These limited concessions may be sufficient to allow some people
to avoid defaulting on debt and to restore good credit. For others, it
is just a dead end. It can prolong difficult financial circumstances,
ruin a consumer's credit record, create innumerable difficulties and
tensions at work and at home, and delay or stop a consumer from taking
actions that might be more beneficial, such as negotiating individually
with creditors or declaring bankruptcy. The exclusive focus on
unsecured debt may also lead consumers to fall farther behind on
secured priority debts such as mortgages or car loans. The consequences
are severe, including possible foreclosure or car repossession.
The key abuse that can occur when an agency with non-profits status
is operating as a for-profit is that it will steer consumers into DMPs
regardless of whether this is the best choice for them. The agencies do
this because it makes financial sense for them, although not
necessarily for consumers. DMPs bring in revenue and the agencies exist
to bring in revenue. This may be a legitimate business if done well and
honestly, but there is nothing ``non-profit'' or charitable about it.
Over the years, the close ties between creditors and credit
counselors have been questioned in a few court decisions, but for the
most part upheld.\16\ The problem is that these decisions derive from
earlier days when the vast majority of credit counselors provided a
wide range of services, rarely charged consumers, and were able to
receive sufficient funds from creditors to fund other aspects of their
services.
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\16\ For example, in a key 1979 decision, the U.S. Tax Court
disagreed with I.R.S revocation of tax-exempt status for a credit
counseling agency. Consumer Credit Counseling Service of Alabama, Inc.
v. U.S., 78-2 U.S.T.C. P 9660, 1978 WL 4548 (D.D.C. 1978). The court
was persuaded that the agency's DMP services were merely ``adjunct'' to
its counseling functions. The court also considered the fact that the
agency charged only a nominal fee and that the community education and
counseling assistance programs were the agency's primary activities.
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A more recent decision addresses the same issues in the context of
the current credit counseling environment. In deciding that an NFCC-
affiliated agency was not entitled to a charitable tax exemption, the
Supreme Judicial Court of Maine found that the agency provided benefits
to creditors that were not merely incidental to its charitable
purposes.\17\ The court noted the magnitude of the amounts collected
for creditors and that the creditors paid Fair Share.\18\
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\17\ Credit Counseling Centers, Inc. v. City of South Portland, 814
A. 2d 458 (Maine 2003).
\18\ A dissenting judge argued that any benefit provided to
creditors is incidental and that it is not clear in any case that
creditors receive a benefit since they receive only a portion of the
money already owed to them. See Id.
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The Maine Court recognized that the traditional model is no longer
the norm. For the most part, however, courts and regulatory agencies
have yet to catch up. The agencies have continued to get tax-exempt
status despite the huge transformation in the industry toward national,
aggressive agencies that often function as virtual for-profit business
and are in ``business'' to sell a particular product--a DMP.
Thus, the threshold requirement for tax-exempt status is in serious
doubt in many cases. It is not always clear whether an agency is
primarily charitable. The picture is clouded even further by
unscrupulous agencies' efforts to disguise themselves. There is a lot
of money at stake in the credit counseling industry. Disguised for-
profit agencies will go to great lengths to hide the true nature of
their businesses.
In many cases, the real picture can be uncovered simply by calling
agencies and asking about their services, particularly about any non-
DMP counseling and educational services. We did this as part of our
national survey and the results were often astounding. Nearly all of
the ``counselors'' at the non-NFCC agencies we contacted by phone were
surprised by inquires about courses or other consumer education
resources. When asked this question, one counselor simply said, ``We
consolidate credit cards. That's it.'' Another incorrectly said that no
agency in the country offers classes. It is important to note, in
contrast, that most agencies affiliated with the NFCC and some others
still strive to provide some type of educational services. However,
even among NFCC agencies, in-person presentations by counselors
declined by 16.2% from 2000 to 2001.\19\
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\19\ Statistics provided with permission from the National
Foundation for Credit Counseling. Data is derived from the 2001 Member
Activity Report.
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Regulatory agencies should also focus on the content and quality of
any education offerings. Does the agency simply sell cookie-cutter ``CD
ROMS,'' videos and other materials? Does the agency have evidence that
consumers have used these materials, have learned more about effective
debt management, and, most importantly, have changed their behavior? Do
they charge for these materials and, if so, how much?
WHERE DO WE GO FROM HERE? VISION FOR THE FUTURE
There have been many developments and responses, just in the past
year, that have addressed abuses in the industry. As noted above, the
I.R.S., F.T.C. and state regulators issued a joint October 2003
advisory warning consumers about potential problems with credit
counselors. The I.R.S. also issued a report earlier this year examining
abuses in the credit counseling and credit repair industries.\20\
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\20\ Debra Cowen and Debra Kawecki, ``Credit Counseling
Organizations'', CPE 2004-1 (January 9, 2003). As of November 2003,
available at www.irs.ustreas.gov/pub/irs-tege/eotopica04.pdf.
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Public and private lawsuits, some of which were described above,
have targeted key abuses. In addition several states have passed new
laws meant to address abuses. However, some of these new laws either
exclude ``non-profit'' agencies from regulation or confine the industry
to non-profits without doing additional investigation as to whether the
non-profit status of agencies that are operating is legitimate. In
addition, to date, most of these laws have been inadequately enforced.
Many sectors of the industry have also responded to the abuses that
exist. For example, two of the key trade associations, the National
Foundation for Credit Counseling and the Association of Independent
Consumer Credit Counseling Agencies (AICCCA) have developed joint best
practices standards. These standards are meant to foster self-policing
of the industry. Although important, it is unclear to what extent the
associations enforce these standards. In any case, the possible
penalties include revocation of association membership only, with no
effective recourse for consumers. In general, we believe that best
practices standards can be positive if rigorously enforced, but are not
a substitute for effective federal and state laws.
Creditors have also begun to respond to these problems, but in
contradictory ways that have had more of a negative than positive
effect so far. For example, instead of contributing a flat amount to
all agencies, several major creditors now link the amount of their
contribution to the fulfillment of multiple requirements by agencies.
In conjunction with lowering Fair Share contributions and making them
more conditional, creditors have begun imposing restrictive standards
that agencies must meet before they will accept proposed DMPs. Some of
these new creditor-imposed conditions and requirements could help limit
some of industry abuses. This is most likely to occur if these
requirements are focused on increasing the affordability and range of
options that are available to consumers and the quality of credit
counseling. For example, conditioning creditor contributions on
agencies' willingness to charge reasonable fees could lead some
agencies to lower their fees, benefiting both consumers and creditors.
However, until very recently, creditors have focused only on their
bottom line costs by making deep, across-the-board funding cuts.
Despite that fact that creditors have abandoned this unilateral
approach and say that they are trying to properly fund effective
agencies, the overall trend in the Fair Share has been down. This trend
hurts the good agencies and the consumers who need access to quality
credit counseling.
Moreover, creditor policies have increased administrative overhead
and reduced options at counseling agencies. In addition, creditor
requirements have tended to reward the agencies that provide a high
number of DMPs at low cost. This has helped to fuel the growth in high-
cost, low-quality ``mills'' that are focused only on getting as many
people as possible into DMPs.\21\
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\21\ This attitude is exemplified by the comments of Fritz
Elmendorf of the Consumer Bankers Association to the Chicago Tribune:
``There have been cutbacks by some banks, particularly related to
general budget tightening, but also because the services were not seen
as providing a direct return by lowering credit losses. At the same
time there are payment plan `mills' coming in with lower fees than the
traditional fair-share arrangements. They're trying to gain market
share. They help you rehabilitate the customer, and it costs you
less.'' Janet Kidd Stewart, ``Debt Management and Counseling Services
Are Multiplying as Consumer Loans Mount, But Not All Are Working in the
Clients' Best Interest'', Chicago Tribune, February 23, 2003.
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In addition to these existing responses, much more needs to be
done. It is particularly critical that the I.R.S. and state charitable
regulators follow up on the October 2003 advisory and take disciplinary
action against offending agencies, including, if necessary, revoking
agencies' non-profit status. Only through proper enforcement can a
legitimate non-profit credit counseling sector flourish.
We believe that credit counseling can be a viable choice for many
consumers. We also believe that scrupulous credit counseling agencies
can properly meet non-profit standards. However, these goals will not
be reached by federal and state regulatory enforcement alone. Agencies
and creditors must also work to preserve the credibility of credit
counseling and non-profit credit counseling in particular. Among other
changes, non-profit credit counseling agencies must avoid undue
reliance on creditor funding. Agencies can and are diversifying
funding. Many receive funding from HUD or from foundations to provide
housing counseling to first-time homebuyers and homeowners in
distress.\22\ Others receive local funding to help seniors, for
example, understand long-term care options and how to budget on a fixed
income.
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\22\ Housing counseling funding, in particular, is limited and
credit counseling agencies are in competition with non-profit HUD-
certified housing counselors. Traditional housing counseling agencies,
for the most part, do not receive Fair Share funding and generally do
not charge for services.
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The fact that agencies are funded by creditors is not intrinsically
a violation of I.R.S. rules. The key question is whether the agencies
are working primarily for the creditors or for the consumers. As one
way of addressing this very real conflict in the industry, we recommend
that new laws regulating credit counseling place an explicit fiduciary
duty on agencies to their consumer clients.
In addition, it is important to emphasize that legitimate non-
profit credit counselors can charge fees in some cases. However, these
fees must be reasonable and imposed without undermining the charitable
purposes of the agency. Whenever possible, agencies should strive to
charge fees on sliding scales so that the neediest consumers can still
receive assistance.
In order to restore consumer confidence in the industry, it is also
critical that the agencies and creditors operate more transparently.
Financial arrangements, including Fair Share, must be disclosed. Fee
scales should be honestly disclosed and not deceptively described as
voluntary or donative. Agencies should also disclose their client
retention rates annually--the proportion of consumers who do not
successfully complete DMPs. And finally, non-profit agencies must
counsel clients, provide education, and advise consumers on the full
range of options.
The creditor role in bringing about change is just as critical.
Creditors should immediately take steps to encourage the improvement
and expansion of effective credit counseling options for consumers who
would not benefit from a DMP. This step alone will insure that agencies
are meeting the educational requirements that non-profit status
demands. Creditors should also increase financial support to credit
counseling agencies, especially to improve credit counseling options
for consumers who are unlikely to benefit from a DMP.
Citigroup took a hopeful step in this regard when it notified
agencies on November 4th that it will be replacing its Fair Share
donation with lump sum charitable donations, which could be used for
counseling and client education.\23\ This could have the positive long-
term effect of decreasing a major incentive for agencies to
inappropriate enroll consumers in DMPs. However, this move could also
prove to be hollow and counterproductive if Citigroup doesn't increase
the actual amount it provides to effective agencies, allowing these
agencies to hire additional staff to assist in providing and increasing
counseling efforts. Otherwise, the agencies will be stuck simply trying
to process DMPs and maintain the status quo, especially over the short-
term.
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\23\ Letter from Citigroup, November 4, 2003. On file with the
Consumer Federation of America and the National Consumer Law Center.
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Creditors should also reverse the current trend toward reducing the
concessions they offer to consumers who enter a DMP, especially
regarding lower interest rates. This will help improve the retention
rates in credit counseling and decrease the number of former DMP
clients who end up in bankruptcy. Creditors should also work together
to develop consistent administrative and payment requirements, thus
reducing agency overhead and ensuring that more funds are used to
assist consumers. In addition, creditors should immediately stop
providing funding to agencies that charge high fees or are employing
deceptive or misleading marketing practices.
Finally, to promote these goals, there is a need for greater
regulation to ensure that consumer rights are protected and that
victims can seek redress in the courts. We are in the process of
developing detailed recommendations.
Among other provisions, we call for a limited registration system
requiring an agency to register as a debt management or debt settlement
provider in each state where it is doing business. Only agencies that
are properly registered should be allowed to perform services in that
state. At the time of filing for registration, all agencies should be
required to furnish a cash or surety bond.
We also recommend that the following written disclosures be given
to consumers before initial enrollment for any service with the agency:
Percentage and amount of funding the agency receives from
creditors (as defined).
Disclosure of any other financial arrangement the agency
has with any lender or other provider of financial services.
Disclosure of the various types of services offered by
the agency.
A statement that debt management and debt settlement
plans are not suitable for everyone and that consumers can request
information about other options, including bankruptcy. (This disclosure
must appear in all advertisements as well.)
A statement that debt management and debt settlement
plans do not include secured debt, including a brief description of the
most common types of secured debt such as mortgages and car loans.
Existence of the surety bond.
Statement that the agency cannot require donations. (This
statement must appear in all advertisements as well.)
We recommend that the following disclosures be given to all
consumers before initiating debt management or debt settlement
services:
Full disclosure of all services to be provided and any
up-front and ongoing fees to be charged for services (``fees'' includes
both mandatory and voluntary fees).
An estimate of the length of time required to complete
services, the types of concessions offered by major creditors, and
estimated amounts of concessions throughout the entire period of the
plan.
Agencies should be required to give consumers enrolling in debt
management plans copies of written contracts that include certain
critical information. Among other substantive provisions, we recommend
that all contracts contain a right to cancel without obligation within
a prescribed period of time after initial enrollment. A separate notice
of the right to cancel must be provided at the time the contract is
signed. In any case, either party should be allowed to cancel with
proper notice. In addition, we believe that all contracts must include
a full disclosure of services to be provided and all fees that will be
charged.
We believe the law should include strong standards to ensure that
only consumers that can benefit from a DMP are enrolled. In order to
make this assessment, agencies should be required to evaluate the
consumer's household budget, including types and amounts of debt.
New regulations should also specify minimum requirements for
counselor training and reasonable fee limits for services. It is
important to require agencies to maintain consumer funds in separate
trust accounts and not commingle these accounts with operating
accounts.
At a minimum, the recommended prohibition of the following
practices:
False and/or deceptive advertising.
Agencies should be prohibited from paying referrals to
customers who bring in new customers.
Agencies should be prohibited from purchasing debts from
consumers and other third parties.
Agencies should be prohibited from making loans to
consumers and from profiting in any way or receiving any compensation
from referring consumers to lenders and other creditors.
Agencies should be prohibited from compensating employees
or contractors based on any formula that provides commissions or
incentives tied to the numbers of consumers enrolled in debt settlement
or debt management plans.
In order to ensure that these laws are meaningful, we call for
strong remedy provisions including the voiding of contracts that are
not in compliance and a private right of action for consumers to
enforce the law, including provision for actual damages, treble or
appropriate statutory damages, attorney's fees, and injunctive relief.
Record keeping requirements are also critical to ensure that regulators
can track trends in the industry and address abuses.
In a time of economic uncertainty and growing debt, it is
increasingly important to preserve credit counseling as an option to
help consumers deal with debilitating debt problems. The services are
not appropriate for all consumers, but can provide a much-needed safety
net for many. This vision of a thriving credit counseling sector is
possible only as long as the services provided are quality services,
appropriate services, and to the extent offered by non-profit
organizations, truly charitable and educational in nature.
Thank you for the opportunity to testify today.
Chairman HOUGHTON. Thank you very much, Ms. Loonin. Mr.
Boisclair.
STATEMENT OF W. PATRICK BOISCLAIR, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, CONSUMER CREDIT COUNSELING SERVICE OF MIDDLE
GEORGIA, MACON, GEORGIA, AND CHAIRMAN, BOARD OF TRUSTEES,
NATIONAL FOUNDATION FOR CREDIT COUNSELING, INC., SILVER SPRING,
MARYLAND
Mr. BOISCLAIR. Good afternoon, Chairman Houghton and
distinguished Members of the Subcommittee. I am Pat Boisclair,
and I am pleased to speak to the Subcommittee today as Chairman
of the Board of Trustees for NFCC. The NFCC is the Nation's
longest serving and largest credit counseling organization,
with 135 nonprofit members who collectively operate more than
1,000 community-based offices nationwide, mostly known as
consumer credit counseling services.
Since 1977, I have also served as President and Chief
Executive Officer of Consumer Credit Counseling Service of
Middle Georgia, a nonprofit community-based agency which has
been a member of the NFCC since 1971--as the Nation's original
nonprofit credit counselors. We have witnessed a great deal of
undisciplined change in the credit counseling industry, some of
which has already been described today by the FTC, IRS, and
NCLC.
Some of these changes have brought service delivery
improvements to the industry. Other changes have paved the way
for unprecedented abuses of consumers by some of the new debt
service operators. Yet amidst the marketplace confusion and
current abuses within the service sector, the NFCC continues to
govern its members through rigorous certification and
accreditation standards that require our members to live up to
their nonprofit status, and serve the consumers professionally,
and with compassion. Members of NFCC offer free, low-cost
education and counseling services to help consumers learn
better money management and credit management skills.
Our community service model also allows for interaction and
cross-referrals with other local support services, such as
family counseling, crisis lines, and legal aid, to help our
clients with other underlying issues that may affect their
finances. Only consumers in need of intervention with creditors
are recommended for formal debt repayment plans, including
concessions such as reduced monthly payments, waived late fees,
and lowered interest rates. This has been, and continues to be,
the holistic approach to service that NFCC members offer
consumers who contact their offices.
Over the past decade, we have seen some unsavory results
from the unbridled changes in the credit counseling arena. Now,
consolidated telemarketing phone centers have led to
centralized, single-focus, debt prorating companies, some of
whom masquerade as nonprofit credit counseling agencies.
Instead of a holistic approach to counseling, these
organizations have focused only on the revenue-generating
aspects of our service sector--debt repayment plans.
What they offer is a simple 15-minute, quick-fix question
and answer session touted as a cure for consumers' ailing
fiscal health. Many consumers are talked into debt repayment
plans loaded with high fees. The more people these agencies
sign up in debt plans, the more money they make. In some cases,
basic budget counseling should have shown a consumer how to
solve their own problems, but they were not offered that
advice. These new providers play by their own rules not
governed by local and independent boards of directors. For
them, there are no checks and balances to ensure that their
practices are fair, consumer-focused, and untainted by improper
relationships, and shell transactions that enrich their
executives and related for-profit companies.
We are pleased that government officials and consumer
advocates are beginning to realize what we have witnessed for
sometime: that these unscrupulous players have declared open
season on consumers. Members of NFCC believe that it is
ethically and morally wrong to take advantage of vulnerable
consumers, and to violate an organization's nonprofit status by
failing to offer financial education and counseling. We are
committed to our mission of improving the financial knowledge
and money management skills of consumers.
We also believe that the creditor community should share in
the social responsibility, and should continue to provide
resources to help support financial rehabilitation of our
shared customer--the consumer. Yet given the current state of
the industry, we also need the intervention of consumer
advocates, government legislators, and regulators, to help
protect consumers and preserve reputable credit counseling
agencies.
Our members, who serve small and large communities across
the country, have for more than 50 years provided valuable
service that has held families together through job losses,
medical emergencies, domestic disputes, and other critical
times. With your support, we hope to be around for years to
come. Thank you once again for the opportunity to represent the
NFCC here today.
[The prepared statement of Mr. Boisclair follows:]
Statement of W. Patrick Boisclair, Chairman, Board of Trustees,
National Foundation for Credit Counseling, Inc., Silver Spring,
Maryland, and President, Chief Executive Officer, Consumer Credit
Counseling Service of Middle Georgia, Macon, Georgia
Good afternoon to the Honorable Chairman of the Committee on Ways &
Means Subcommittee on Oversight Congressman Amo Houghton and to all of
the distinguished Members of the US House of Representatives who are
represented on this Subcommittee. I, W. Patrick Boisclair, am pleased
to come before this Subcommittee today as Chairman of the Board of
Trustees for the National Foundation for Credit Counseling, Inc.,
which I will refer to as the NFCC throughout my testimony. I am also
pleased to join you as a practitioner, having served since 1977, as
President & CEO of Consumer Credit Counseling Service of Middle
Georgia, also known as CCCS of Middle Georgia, a nonprofit community-
based agency which has been a member of the NFCC since 1971.
I am pleased to represent the nation's original and largest credit
counseling organization, NFCC and its 135 nonprofit members who
collectively operate more than 1,000 community-based offices
nationwide. I am also here to represent the interests of the many
consumers in need of financial education and debt relief who live in
our communities and your congressional districts. Through my testimony
over the next five minutes, I hope to provide you with greater insight
on the undisciplined changes in the credit counseling industry. I also
hope to share with you the impact of these changes on consumers who are
seeking help to regain control of their financial situation and the
reputable nonprofit credit counseling agencies that provide them with
responsible, quality services.
As many of you know, consumer credit has been one of the major
fuels of our economy since the post World War II era, when it was
introduced as a means of addressing some of the financial and social
problems that existed for military families. But some of the
originators of this financial tool soon realized that many people did
not know how to properly use credit, and families and individuals began
to default on their debts. Their remedy was the creation of the NFCC,
which was established in the 1950's as the National Foundation for
Consumer Credit. For clarification purposes, the NFCC changed its name
in 2000 to the National Foundation for Credit Counseling.
The NFCC initially monitored legislative and regulatory activity
for its retail credit members, such as J.C. Penney and Sears. The NFCC
also conducted public awareness campaigns on credit and provided
children and families with educational classroom materials to help them
understand the proper use of credit as a family financial planning
tool.
During the early 1960's, the increasing use of credit resulted in
the establishment of NFCC's original nonprofit charter members, known
as Consumer Credit Counseling Service in their local communities. These
agencies began to offer educational programs and counseling to
consumers on managing and overcoming debt. They also ignited a growing
grassroots movement of agencies, all whom were NFCC members. These
agencies were also the early pioneers who fought the battles to get
creditors to help support financial rehabilitation of their clients
through nonprofit counseling services.
A decade later the credit industry began to experience radical
changes as more retailers and banks extended credit to more consumers.
Industry conditions were further impacted in the 1970's by revisions in
the Bankruptcy laws and the recession of the 1980's. Many creditors
responded to these market and legal changes by extending more
educational services and debt relief resources to their customers
through the credit counseling industry. For NFCC member agencies this
increased support brought the creditors and credit counseling agencies
together to serve the needs of their mutual customer, the consumer.
There was a shared commitment to customer service between the two
parties that formed a strong safety net for people who had lost control
of their financial situations.
During the 1980's, the strong show of support from creditors came
in many forms, including assistance to help NFCC agencies
professionalize, modernize and expand their services. More consumers
received free financial management advice and educational services to
help consumers learn better money management skills to get out of deep
debt on their own and stay of out debt trouble in the future. Consumers
experiencing issues that our members were not trained to address were
referred to other local support services to help with underlying issues
such as unemployment, abuse, addictions, medical issues and bankruptcy
advice. Only those in need of intervention with creditors were offered
formal debt repayment plans which sometimes included concessions
ranging from reduced monthly payments to waived late fees and lowered
interest rates.
This has been, and continues to be, the holistic approach to
service that NFCC members offer consumers who contact their offices.
These services are provided in-person, by telephone and in some cases
over the internet and by mail.
The early1990's ushered in another era of change for the credit
industry and the credit counseling industry. A decade later, we are
seeing the unsavory results of the new phenomenon that began to unfold
as executives from other industries moved into the nonprofit credit
counseling industry. The deregulation of the telecommunications
industry aided their cause and the creation of new phone counseling-
only centers.
Some of these new independent agencies sought to join the NFCC, but
chose not to live up to our membership standards and we said, thanks
but no thanks. Consequently several of these agencies sought legal
redress in the mid-1990's and challenged the relationship between
creditors and NFCC members--agencies that demonstrated high standards
and customer success. In the lawsuit, one agency alleged that the
creditors and the NFCC conspired together to create a monopoly for NFCC
members and to keep others out of the counseling business. While they
sued their way into the doors of creditors, they continue to choose not
to meet our governing standards and we continue to require adherence to
high standards as a condition for membership.
The onset of these consolidated telemarketing phone centers has led
to centralized, single-focused, debt prorating companies, some of whom
masquerade as nonprofit credit counseling services. Instead of a
holistic approach to counseling, some have become experts at skimming
off the most profitable aspect of counseling services; debt repayment
plans. Their claims: ``and you too can get help in just minutes.'' It
all starts with a 15-minute, one size fits all, quick-fix counseling
session touted as a cure for the consumer's ailing fiscal health. Many
consumers soon learn that they have been talked into a debt repayment
plan or consolidation loan, loaded with high fees, when in some cases
the consumer could have solved their own debt situation after receiving
budget counseling advice.
Some have abandoned true financial education and counseling
altogether. Others have changed the quality of service for the worse
and are driven by quantity, versus quality. The more people they sign
up on debt repayment plans, the more money they rake in from excessive
consumer fees and creditor contributions to fatten their bottom lines.
And since they don't have local offices, consumers who seek customer
service to resolve account issues are at the mercy of telemarketers and
telephone recordings. As a result, some consumers can't get through to
a person to find out why their payments have not been received by their
creditors.
This is becoming common practice with many of the new national
providers that only offer phone services. Many of these agencies are
not governed by local and independent Boards of Directors who ensure
that their practices are fair, consumer focused and untainted by
improper relationships and shell transactions that enrich their
executives and for-profit companies.
The abuses and excesses of these alleged nonprofit agencies have
resulted in the counseling industry's own figures like the Enron's,
WorldCom's and Tyco's of the for-profit sector, which are now turning
this industry on its head. Their deceptive practices injure consumers,
the NFCC and all other reputable credit counseling agencies that
provide excellent services and that are true to their nonprofit 501 (c)
(3) designations.
There are many factors that set NFCC members apart from other
organizations. To name a few, we believe it is ethically and morally
wrong to take advantage of vulnerable consumers and to violate one's
nonprofit status by failing to offer financial education and budget
counseling services to consumers. Secondly, we have safeguards that
govern our members' operations and services through membership
standards, consumer protection standards, third-party accreditation
services and trained and certified counselors. These protocols govern
how our members operate and must be followed by any agency that joins
the NFCC.
Many of the new debt service providers operate by their own rules
and don't see the need to practice high standards that protect
consumers. NFCC members see things differently, and it is our goal to
bring to the attention of government officials, consumer advocates,
creditors, and all affected parties, that these unscrupulous players
have declared open season on consumers. The assaults include multi-
million dollar advertising campaigns that bombard consumers 24-hours-a-
day, excessively high fees that add to a consumer's burden and affect
payments to creditors, poor or no customer service and no
accountability for the agencies' operations and services.
Many of the new players have contributed to marketplace confusion
and some have even attempted to trade on our NFCC and CCCS trademarks.
While this is problematic for us, unconscionable harm is being done to
uninformed consumers who ultimately become the victims of these new
players' deceptive and irresponsible practices.
As NFCC members, we are committed to our social responsibility to
improve the financial knowledge and money management skills of
consumers. We also believe that the creditor community shares in this
social responsibility, which can be accomplished through consumer
education at the point when their customers are facing financial and
debt problems. But given the current state of the counseling industry,
we also need the intervention of consumer advocates and government
legislators and regulators to help protect consumers and to help
preserve reputable credit counseling agencies.
We must protect our ability to maintain and grow our agencies. But
we need the help of government officials to attack the money trail of
some of these new players and take the excessive profitability out of
this industry. As a result, some of them will go away. Consumers need
to know that they can still turn to true nonprofit services for fair
and objective advice that is appropriate for their situation. We need
your help to restore the respect and trust of the credit counseling
industry that NFCC and its members have built over the past 50 plus
years. Without this help, the true community service agency model will
not survive and many consumers will suffer.
Our physical presence in local communities places our members in a
unique position that allows them to look across the landscape of
America to see the financial strain of ordinary and sometimes not so
ordinary people. We're also right there in the heart of your
congressional districts to see that many students and families get off
to a good financial start as they prepare to purchase their first
automobile or home.
In fact, our members, which serve small and large communities
across the country, have for more than 50 years, provided valuable
services that have held families together through job losses, medical
emergencies, domestic disputes and other critical times. With your
support, we hope to be around for years to come.
We look forward to working with Congress, federal and state
regulators, consumer advocates, creditors and others to help shape a
national dialogue and to establish policies and guidelines that will
protect consumers from predatory debt service providers and that will
sustain the long-standing, reputable credit counseling agencies in our
industry. Thank you once again for this opportunity to represent the
NFCC and the consumers we serve.
Chairman HOUGHTON. Thank you, Mr. Boisclair. Mr. Jones.
STATEMENT OF DAVID C. JONES, PRESIDENT, ASSOCIATION OF
INDEPENDENT CONSUMER CREDIT COUNSELING AGENCIES, FAIRFAX,
VIRGINIA
Mr. JONES. Chairman Houghton and Members of the
Subcommittee, my name is David Jones, and I am the President of
the AICCCA. I appreciate being asked to appear before you today
on behalf of the members of our organization. We share your
goal of assuring that consumers facing serious debt problems
can consult with a nonprofit credit counseling service with the
assurance that they will receive responsible and fair
assistance. The AICCCA provides for self-regulation of its
members through strict membership standards, and a code of
practice that is the basis for independent accreditation of
each agency.
Further, every counselor must be independently certified by
the Institute for Personal Finance. These standards, we
believe, are the most rigorous in the industry today. The
AICCCA and the NFCC have had effective self-regulation
standards in place for many years. It is even probable that the
U.S. Department of Justice's Office of the U.S. Trustee is
contemplating similar standards for credit counseling under the
provisions of the pending bankruptcy reform legislation.
As the availability of unsecured credit has grown over the
past decade, so have default rates and the demand for credit
counseling. To meet this demand, there have been many new
nonprofit credit counseling agencies entering the industry.
This growth in unsecured debt has led to the same growth in
consumers repaying their debt through debt management plans
through credit counseling agencies.
Credit card issuers have been inundated by delinquencies
and by debt management plan proposals made to help consumers
get back on track with their family finances. The numbers of
consumers seeking debt management plan help have resulted in
credit grantors being unwilling to continue to provide fair-
share contributions to the credit counseling agencies at the
level that were common only 10 years ago.
Fifteen percent fair-share, then, has declined to an
average of 6 percent today. Agencies could offer responsible
credit counseling, consumer education, and debt management
plans when they were needed to consumers, at no cost when they
received 15 percent from creditors. They find themselves today
unable to provide these services free at 6 percent. They have,
therefore, been forced to pass on the costs to the consumer, or
to reduce services--or both.
Today, debt management plans are very rarely free to the
consumer. Credit counseling and education remain largely free
services, but they are supported almost completely by revenues
generated by debt management plans. As the demand for credit
counseling grew, some saw the possibility of providing the
service largely to generate profit. Some have developed
services that have required substantial fees or voluntary
contributions from the consumer.
While these actions may be entirely legal, some have seen
them as predatory. As consumers and consumer advocates have
complained, some have introduced new laws designed to limit
fees and offer consumer protection. These laws today represent
a patchwork quilt of regulations across the country; sometimes
they are even conflicting.
Although well meaning, some of them are also so severe as
to actually prohibit the supply of responsible services to the
citizens that they were designed to protect. The bill, H.R.
3331, was introduced in the House recently, and the Senate may
be considering its own bill. The National Conference of
Commissioners on Uniform State Laws has undertaken the
development of a consumer debt management act designed to be
enacted by the States.
In addition, the bankruptcy reform legislation approved by
the House in March still awaits Senate action. All of these
legislative actions, combined with those from the States,
portend a staggering level of regulation for this industry. The
AICCCA recognizes the need for strong consumer protection. The
interests of vulnerable citizens must come first.
These protections should be considered carefully and
coordinated with State regulations so that relatively small but
essential credit counseling services are not driven out of
existence in the process. The AICCCA stands ready to assist the
Subcommittee on Oversight as this inquiry continues, and I want
to thank you very much for allowing me to speak today.
[The prepared statement of Mr. Jones follows:]
Statement of David C. Jones, President, Association of Independent
Consumer Credit Counseling Agencies, Fairfax, Virginia
Chairman Houghton and members of the Subcommittee, for the past
four years I have served as President of the Association of Independent
Consumer Credit Counseling Agencies (AICCCA). I am the retired
President of a prominent consumer credit counseling and education
services company. I have been associated with the credit counseling
industry for the past seven years. Prior to that, I was President and
CEO of a software development and consulting company. I spent much of
my career at Lockheed Corporation and ended my tenure there as Vice
President of Marketing. I currently dedicate my efforts to improving
credit counseling and consumer education throughout the industry. I
hold BS, MBA, and Ph.D. degrees and I am a graduate of the Brookings
Institution Center for Public Policy Education.
On behalf of AICCCA's members, I want to thank the Subcommittee for
inviting me to provide our views to you today. We share and support the
Subcommittee's goal of assuring that consumers facing substantial debt
problems can consult with a non-profit credit counseling agency with
the knowledge that they will receive assistance based on their own best
interests, and not the best interest of the agency.
AICCCA FOUNDING AND STANDARDS
The AICCCA was formed in May of 1993 to support independent credit
counseling agencies nationwide. It currently has 50 members serving
over 750,000 clients repaying their unsecured debts through legitimate
debt management plans. Together, these agencies annually return over
$3.2 billion in consumer payments to the nation's creditors. The AICCCA
has championed fair pricing, stringent ethical guidelines, and consumer
protection standards governing the activities of its members. Three
years ago, the AICCCA instituted independent agency accreditation
requirements through the International Standards Organization. That
accreditation to ISO-9001 includes thorough annual Code of Practice
audits and represents the most rigorous, independent, audit-based
accreditation and oversight in our industry today. Our current Code of
Practice is attached to this testimony as an Appendix.
The AICCCA provides for self-regulation of its member agencies
through strict membership standards and a Code of Practice that is the
basis for independent accreditation by the International Standards
Organization under ISO-9001. This independent third-party
accreditation, combined with an equally independent certification of
all agency counselors by the Institute for Personal Finance-AFCPE,
provides significant assurances for consumers needing counseling
services that they will be treated fairly and competently. The National
Foundation for Credit Counseling (NFCC) has similar requirements for
its members. However, the many agencies that do not belong to either of
these associations are not bound by such rigorous standards.
AN INDUSTRY FACING UNPRECEDENTED CHALLENGES
Traditionally, credit counseling has been supplied by non-profit
agencies that offer debt-burdened consumers family budget counseling
and personal finance education, as well as direct intervention with
creditors to obtain their consent to a workout plan to pay down debt on
an affordable schedule. Only those consumers who would benefit from a
debt management plan and who were likely to successfully complete it
were enrolled. This service was supplied largely free to consumers and
was supported in large part by creditors who routinely returned 15% of
the funds forwarded to them by the agency as a ``fair share''
contribution. As credit cards and other forms of unsecured consumer
credit proliferated, so did the number of borrowers experiencing
repayment difficulty. Greater demand for credit counseling spawned more
credit counseling companies. With a bigger marketplace, some of the new
agencies began to view the development of debt management plans as a
source of profit. Consequently, creditors began to see many more
proposals for debt management plans to the extent that the traditional
contribution amounts became quite large expenditures.
With large fair share expenditures beginning to become noticeable
on their income statements, and with many more questionable debt
management plans being received, creditors began to reduce the
percentages paid to the credit counseling agencies. All creditors
gradually adopted that practice. The result today is an average fair
share contribution of only about six percent, or about a sixty percent
reduction over the past seven years. In addition, creditors have cut
back significantly on interest rate reductions or other concessions to
borrowers enrolling in debt management plans, making these plans less
attractive and more difficult to fund for debtors in danger of
bankruptcy.
The effect of reduced fair share support has been twofold. To
survive, credit counseling agencies have had to reduce traditional
services or they have had to pass more of the costs for providing
services on to consumers, or both. More recently, creditors have
increasingly recognized that agencies which emphasize debt management
plans and charge excessive fees are not operating in the best interests
of either consumers or creditors and have terminated fair share
contributions for such agencies. However, these agencies can afford to
carry on without such creditor support and can stay in business so long
as they can get their debt management plans accepted. It is not clear
whether creditors could simply refuse to accept their plans, or whether
additional regulatory support is required to avoid antitrust issues.
Meanwhile, consumers who feel dissatisfied with or even exploited by a
particular credit counseling agency and who switch to another often
find that federal banking regulations bar them from receiving another
``re-age'' on their accounts, leaving them hopelessly past due on
payments and often triggering a bankruptcy filing.
Compounding the challenges for counseling agencies have been the
requirements imposed by creditors to use Electronic Funds Transfer,
electronic transmission of proposals, and a plethora of varying
creditor performance measurement systems that agencies have to respond
to so that they can continue to receive fair share contributions. While
these requirements make sense for individual creditors, they have
collectively placed a substantial administrative compliance burden on
counseling agencies; AICCCA is currently holding discussions with major
creditors regarding the extent to which such requirements can at least
be made uniform.
Add to this new set of requirements the legislative actions by
states that wish to protect their citizens from unscrupulous agencies,
and the industry is even more overwhelmed. Recent examples are New York
and Maryland, which have passed well-meaning laws requiring very high
bonding levels. In New York, a bond of $250,000 is prescribed and in
Maryland the required bond is $350,000, which can be reduced under some
circumstances. A medium-sized credit counseling agency usually can't
get a $250,000 bond, much less afford to pay for it. This is compounded
by the requirement to post similar bonds in multiple states. This means
that services from some responsible credit counseling agencies are
being denied to the very citizens that these laws were meant to
protect. The agencies that may abuse the trust of these citizens are
sometimes the only ones who can surmount these bonding hurdles and
therefore their services are the only ones available for many of those
consumers; some have become the largest agencies in the country.
These borderline agencies concentrate their efforts where they can
receive the most profit: enrolling consumers in debt management plans.
Some pay little attention to the need for effective credit counseling
and consumer education. Consumers who don't need or can't qualify for a
debt management plan may get little if any help in these cases--or
worse, they may be enrolled in a debt management plan that they cannot
complete. Some of these agencies have also established for-profit
entities that provide ``back office'' services to the non-profit. In
some cases, the principals of the non-profit may be principals of the
for-profit. Such agencies also usually have large advertising budgets
designed to provide an ample stream of prospects for their services. In
many cases, their fees or requested (but often required) voluntary
contributions are very large, sometimes equal to the client's total
first month's payment to all creditors. Continuing monthly maintenance
fees are also frequently high by industry standards. These initial and
monthly fees or contributions from consumers obviate the need for
support from creditors and are sufficient to fuel the advertising costs
as well as the services expense for the associated for-profit. While
these practices depart significantly from traditional ethical industry
practices, they may not be considered illegal in many jurisdictions.
They also may or may not violate IRS standards that govern their non-
profit status.
The reduction of fair share contributions from creditors combined
with increasing operational costs has led to the industry-wide need for
additional monetary support directly from consumers in order to
continue to offer credit counseling services. The need for the
availability of quality credit counseling to debt-burdened consumers
continues to increase as evidenced by unprecedented levels of personal
bankruptcy filings. Very low interest rates and the availability of
affordable second mortgages or home refinancing have allowed consumers
to take the equity from their homes to consolidate their other bills.
This situation, which appears to be advantageous for consumers today,
could bode ill for the future if many find themselves in difficulty
again due to poor spending and saving habits that result in even larger
levels of debt. Some of these consumers will not only be debt-burdened
yet again but will be at risk of losing their homes to foreclosure and
even more vulnerable to the practices of some predatory credit
counseling agencies.
REGULATION IN FLUX
The current regulatory landscape represents a patchwork quilt of
differing and sometimes conflicting laws in some states. The industry,
almost completely non-profit due to state law requirements, is subject
to FTC regulations and IRS scrutiny. AICCCA believes it is important to
maintain the industry's non-profit status. Allowing for-profit agencies
to operate would place even more emphasis on income-generating
activities while abandoning traditional education and counseling--
unless pervasive regulation and supervision were put in place to assure
that consumers' best interests were served.
The state regulations are not generally well administered, leaving
law-abiding agencies to strain for compliance while those who ignore
the law operate without penalty, and apparently sometimes even without
official notice or sanction. The IRS oversight may also be lax, as many
borderline agencies appear to be continuing practices that may be in
conflict with tax-exempt regulations. This situation has not escaped
the notice of the press, the U.S. Congress, and some state legislators.
New laws have been introduced in Maryland, California, and Maine, and
increased state administration efforts have been noted in other states.
However, many state laws seek to strictly and unrealistically limit
fees and impose unreasonable surety bonding requirements. These well-
meaning statutes often serve to reduce the ethical services available
to their citizens rather than protect them. As previously noted,
bonding levels are so high in some states that the majority of credit
counseling agencies cannot secure them. Large borderline agencies can
secure them and questionable practices such as selling useless add-ons
or referring the consumer to a loan company allow them to operate
within fee guidelines if they decide to comply with the statutes. Some
continue to operate outside of the statutes in defiance of them and go
undetected, or at least unpunished.
This situation has attracted the attention of the National
Conference of Commissioners on Uniform State Laws (NCCUSL). A new
committee to draft a uniform Consumer Debt Management Act was convened
last week in Chicago, and I attended that initial meeting. This
drafting effort is intended to erase the consumer abuses by some
agencies while not harming those agencies that seek to serve consumers
appropriately. At its base is a rigorous licensing requirement designed
to ensure consumer protection, and hopefully this process will produce
a uniform state law proposal that meets that goal without placing undue
burdens on ethical non-profit counseling agencies. This committee is
led by Judge William C. Hillman of the United States Bankruptcy Court
in Boston and is supported by prominent commissioners from across the
country. Such a uniform statute, if enacted by the states, could
provide the consumer protections that are badly needed. Thoughtful
federal legislation could very well accomplish the same end. This
Subcommittee may find discussions with Judge Hillman and the drafting
committee helpful. What would not be helpful to the credit counseling
industry would be to move from a situation of weak and inadequately
enforced state regulation to one of excessive, duplicative and
conflicting state and federal regulation.
The recent introduction of HR 3331 by Congresswoman Julia Carson is
an attempt to control counseling industry abuses. However as this
legislation is not pre-emptive, the burden of dual state and federal
regulation should this bill be enacted would be staggering. In
addition, rather than providing for regulatory control of industry
practices, HR 3331 specifies a variety of litigation causes of action
and penalties that could bankrupt the industry altogether. Federal
legislation may or may not be required depending upon state actions and
strict enforcement and oversight activity by the IRS. It must also be
remembered that the pending bankruptcy reform legislation, passed by
the House in March and awaiting Senate action, would have the
beneficial effect of empowering the Department of Justice's Executive
Office of U.S. Trustee to establish minimum standards for agencies
approved for bankruptcy pre-counseling for the Nation's most needy
consumers.
CONCLUSION
We recognize the need for strong consumer protections in the credit
counseling industry. The interests of these vulnerable citizens must
come first and must not be overshadowed by the for-profit interests of
a few who seek to take undue advantage of their personal financial
situations. But Congress should not rush to impose new federal
regulation until effective enforcement of existing law has been tried.
And any federal intervention must be carefully coordinated with the
rapidly evolving state regulatory regime to avoid driving small but
beneficial agencies out of existence.
The AICCCA stands ready to assist the Oversight Subcommittee as
this inquiry continues. Thank you again for this opportunity to testify
today.
______
Appendix--Current AICCCA Code of Practice
Code of Practice
Addendum to the ISO 9001:2000 Standard
for
Consumer Credit Counseling Agencies
October 8, 2003
CODE OF PRACTICE ADDENDUM TO ISO 900
Consumer Credit Counseling Code of Practice
1. INTRODUCTION
This document has been produced in cooperation with BVQi-NA and the
Association of Independent Consumer Credit Counseling Agencies
(AICCCA), with the knowledge and review of major creditors to provide a
universal Code of Practice for Consumer Credit Counseling Agencies.
This Code of Practice is viewed as a customer specific requirement and
shall be an integral part of the audit for those seeking ISO 9001
certification under its requirements. The document is intended to
comply with credit lenders certification requirements. Consumer credit
counseling agencies seeking this endorsement must achieve ISO 9001
certification and satisfy the requirements of this Code of Practice.
ISO Registration to this Code of Practice. Any ISO-certified
independent registrar must agree to audit all consumer credit
counseling agencies seeking their registration services to this Code of
Practice regardless of their affiliation to any association and will
refuse to issue certificates to such credit counseling agencies without
their compliance to this Code of Practice.
This Code of Practice document has been created by AICCCA in
conjunction with major creditors and an ISO registrar. The AICCCA Board
of Trustees maintains proprietary responsibility for the control,
ownership, and approval of this document and any subsequent revisions.
Where a service directly affecting the critical elements of the
counseling function and/or the Debt Management Program is to be
subcontracted, that subcontractor shall comply with this Code of
Practice. If non-counseling elements are subcontracted, those vendor
subcontracts will be audited to ensure that the contractual
relationship embodies adequate controls with respect to the
requirements of this Code of Practice. Critical credit counseling
elements must be performed by a non-profit entity and are defined as
all activities that are performed by qualified counselors and client
service activities that are not specifically related to payment
processing.
This Code of Practice does not apply to Debt Settlement activities
that may be performed by a credit counseling agency.
Compliance with the principles included within this Code of
Practice does not absolve the individual consumer credit counseling
organization from meeting and/or exceeding their legal responsibilities
and the requirements of all state and federal laws relevant to the
services or products offered.
2. REFERENCES
Reference shall be made to the following documents and all relevant
updates and amendments as applicable:
ISO9001--Quality Management System requirements.
IRC 501 (c)(3)--Internal Revenue Code of the United
States.
All state and local regulations, codes, and other legal
and customer requirements governing the conduct of business and
consumer credit counseling agencies' activities.
3. INDUSTRY DEFINITIONS
The following definitions apply to this Code of Practice In
addition to the definitions given in the ISO 9001 standard:
Industry
Consumer credit counseling agencies, clients, credit lending
organizations, trade associations, and subcontractors.
Agency
The entity seeking registration pursuant to this Code of Practice.
Business Day
Any day that the nation's banks are open for business.
Client
The customer for whom a consumer credit counseling agency provides
service.
Creditor
The credit lending entities.
Critical Credit Counseling Activities (performed by non-profit
entities)
All activities that are performed by qualified counselors and client
service activities that are not specifically related to payment
processing (see Non-Critical Credit Counseling Activities below). These
activities are subject to full ISO audit.
Non-Critical Credit Counseling Activities (may be performed by
subcontract)
Activities that need not be performed by qualified counselors or client
services personnel such as payment processing (i.e., proposal
processing, client payment receipt and distribution, changes to client
payments, creditor payment receipt, and answering creditor issues about
client payments) or other vendor relationships (e.g., telephone
service, software, payroll, etc.). These activities, if subcontracted,
are subject to ISO audit of the contract only. If not subcontracted,
these activities are subject to a full ISO audit.
Counselor
Certified consumer credit counseling agency personnel who provide
guidance and assistance to the client.
Education
Any service or product provided to improve the consumer's knowledge of
personal financial management that is provided over--and-above the
enrollment process, whether the benefiting consumer actually enrolls in
a debt management program or not.
Service
The counseling and coordination and other support provided by the
consumer credit counseling agency on behalf of the client and creditor.
Standard
Refers to the ISO 9001 Quality Standard
Subcontractor
A third party who has been contracted by a consumer credit counseling
agency to provide a service, product, or support to the agency.
4. CODE OF PRACTICE REQUIREMENTS
The sub-clause numbers of this Code of Practice are not related to
the sub-clause numbers of ISO 9001. Each sub-clause requirement is in
addition to the ISO 9001 standard shall be complied with and be
integral to the ISO 9001 Quality System and applies to all
organizations seeking compliance to the Code of Practice. Procedures
must be controlled and processes must be audited to demonstrate
conformance to this Code of Practice.
This Code of Practice requires that documentation of the
interaction and sequence of processes include those processes that are
subcontracted except for those defined as Non-Critical Credit
Counseling Activities. This documentation shall include a description
of services that are provided and the legal description of the company
providing those services.
5. ACCESS TO SERVICE
The consumer credit counseling agency's management shall define and
document its policy and procedures for a client's access to service.
There shall be objective evidence of conformance to demonstrate the
following:
A. The consumer credit counseling agency stands ready to serve all
clients who seek service regardless of:
1. A client's ability to pay
2. The creditors owed
3. The dollar amount owed.
B. The consumer credit counseling agency shall provide service, or
at minimum acknowledgement of the request for service, within two
business days of receipt of the request, service at times convenient to
the client, and service through means that are convenient to potential
and existing clients.
6. COMMUNITY EDUCATION
The consumer credit counseling agency shall establish and maintain
records of activities which address the support of or conduct of
community education on issues related to consumer credit and money
management. Records shall be maintained documenting the extent to which
community education has been delivered.
7. COUNSELOR TRAINING
The consumer credit counseling agency shall establish and maintain
documented records in accordance to ISO standards which address the
qualifications and training of counselors. The consumer credit
counseling agency shall be able to demonstrate that counselors are:
A. Adequately trained to meet the needs of the organization
B. Certified by a qualified independent authority as identified by
AICCCA or the National Foundation for Credit Counseling (NFCC)
C. Each counselor must begin the certification process within six
months of hire and complete it within 12 months of hire.
8. SERVICE RESOURCES
The consumer credit counseling agency shall determine and provide
the resources needed to:
A. Fulfill the client's service requirements
B. Fulfill the creditor's service requirements.
9. SERVICE REQUIREMENTS
The consumer credit counseling agency shall be able to demonstrate
that:
A. Counselors conduct comprehensive interviews, to include, at a
minimum:
1. The client's complete financial position (e.g.
assets, liabilities, income, and expenses)
2. Identify and explore the root cause of the client's
financial situation.
B. Counselors develop a solution which is optimum for both the
client and the creditors, to include:
1. Possible alternatives such as liquidation or
leveraging of assets
2. Financial counseling to clients who do not need
payment assistance
3. Providing a DMP to clients as an alternative to
bankruptcy
4. Advise client to close all credit lines with
consideration for business or employment related
purposes
5. Encouragement to avoid additional debt while the
client is improving their financial situation
6. Communicate the consequences that obtaining new
revolving debt has on the success of the DMP
7. Identification of additional relevant community
resources, which may include: family counseling, mental
health counseling, and/or addiction treatment and
counseling.
C. Provide the client with a documented evaluation of his/her
financial status to include a recommended plan of action which
addresses the identified issues.
D. Service shall be provided with documented disclosure to clients
regarding the:
1. Fee structure for services provided: if a fee is
not charged for the service, then any contribution
requested by the agency from the client must be clearly
identified and noted that it is voluntary
2. Creditors support of the consumer credit counseling
agency through fair share contributions
3. Potential impact on the client's personal credit
report
4. Client's responsibility to monitor financial
statements/reports from creditors and the consumer
credit counseling agency, to verify their accuracy, and
to detect and report discrepancies.
10. COMPENSATION AND FEES
The consumer credit counseling agency shall maintain documented
evidence that demonstrates its ability to maintain a low fee structure
for services, with specific focus upon:
A. Compensation is not paid to the counselor based upon the
outcome of the counseling process.
B. Fees, voluntary contributions, or requested donations from
clients for the enrollment into a Debt Management Plan (DMP) do not
exceed the lesser of $75 or the maximum fee allowed by law in the state
of residence of the client
C. Fees, voluntary contributions, or requested donations from
clients for the maintenance of a DMP do not exceed the lesser of $50 or
the maximum fee allowed by law in the state of residence of the client
D. Fairshare payments to the agency are voluntary contributions
directly from creditors and are not considered part of B. and C. above.
11. FISCAL INTEGRITY
The consumer credit counseling agency shall define, document and
demonstrate procedures regarding their policies on financial
disciplines and fiscal integrity to include, at a minimum:
A. An annual certified audit by an independent certified public
accountant is conducted of all trust and operational books and records
B. Accurate accounting and records of all clients' deposits and
debits to creditors are maintained throughout the life of the DMP
C. Funds received from clients for a DMP must be disbursed to the
creditors no later than 15 days from receipt of valid funds, or by
scheduled disbursement date, whichever is later.
12. LEGAL STATUS AND GOVERNANCE
The consumer credit counseling agency shall define and document
their legal status, such that:
A. The consumer credit counseling agency is a non-profit
organization which complies with Internal Revenue Code of the United
States, IRC 501(c)(3) requirements
B. The consumer credit counseling agency is licensed in all states
in which it conducts business as required by law
C. The consumer credit counseling agency has a diverse governing
Board, the composition of which represents the interests of all its
constituents
D. The consumer credit counseling agency shall have a majority of
members of their governance Board who are not employed by the agency;
will not benefit financially, directly or indirectly, from the outcomes
of counseling sessions with clients; and who are not related by blood
or marriage to other board members or employees of the consumer credit
counseling agency.
13. COMPLAINT/CONFLICT RESOLUTION
The consumer credit counseling agency shall respond to all consumer
complaints within five (5) business days and will take necessary action
to resolve the complaint in a timely manner. Records of the complaint
and disposition shall be maintained.
Chairman HOUGHTON. Thank you, Mr. Jones. Mr. Hall.
STATEMENT OF MICHAEL HALL, FOUNDER AND CHIEF EXECUTIVE OFFICER,
TAKE CHARGE AMERICA, INC., PHOENIX, ARIZONA
Mr. HALL. Thank you, Mr. Chairman, Members of the
Subcommittee. I appreciate very much the opportunity to appear
before you today, and I am honored to be here. My name is
Michael Hall. I am the founder and chief executive officer of
Take Charge America, Inc., one of the Nation's oldest and
largest nonprofit credit counseling agencies. It is a member in
good standing of the American Association of Debt Management
Organizations (AADMO), and the AICCCA. Take Charge America
provides credit counseling and/or debt management services and
educational programs to nearly 200 American households
annually. In addition, through the management of nearly 65,000
debt management programs, the company returns over $500 million
annually to the national economy.
The cornerstones of the company are consistent excellence
in customer service, unwavering integrity, and leading-edge
technology in educational programs. Our 428 employees are fully
dedicated to our charitable mission of helping consumers become
financially literate, financially stable, and ultimately
financially independent. Millions of dollars are committed to
our educational endeavors each year, and we believe that the
reach and depth of our program is unsurpassed in the industry.
Our offerings include a wealth of web-based articles and
materials, and our Take Charge America software, which we
believe is basically the best financial software available
anywhere.
We have established and endowed the Take Charge America
Institute for Consumer Financial Education and Research, at the
University of Arizona, for the purpose of developing research-
based financial education programs. Through a series of grants
to Montana State University, we have developed a model
financial literacy program for high school students and
teachers. We sponsored university-based credit counseling
centers for college students, a nationwide intercollegiate
competition, and personal financial management. Our own budget
doctor makes personal appearances at schools and before
community groups--and the list goes on.
My purpose in testifying here today is fourfold. First, I
hope to shed some light on the problem contributing to the
current state of our industry. Second, I am here to carry the
message to the Subcommittee that the nonprofit model is the
correct model for our industry. Third, I strongly encourage the
continuous, aggressive IRS oversight of the industry's
nonprofit charitable activities. Finally, I support the
strengthening of consumer protection laws that would provide
strong deterrence to agencies violating consumer trust.
The vast majority of nonprofit credit counseling agencies
are doing a good job. Undeniably, there are a number of
companies operating on the ethical fringes that do not share
our commitment to charitable service. These companies are
sometimes characterized by questionable advertising practices,
by initial fees that amount to hundreds or even thousands of
dollars, and by the practice of contracting customer service to
for-profit backend servicing organizations that leave nonprofit
entities as little more than a front for obtaining weary
customers.
Fortunately, recent actions by the FTC and the IRS have
forced several of the biggest offenders to consider their
practices. Yet offenders still exist, and their lack of ethics
has left consumers confused and distrustful of all credit
counseling agencies. Nonprofit credit counseling agencies
provide a low-cost opportunity for distressed consumers to keep
their promises to creditors, reduce their debt, and restore
their self-esteem and creditworthiness. More importantly,
however, nonprofit status of credit counseling agencies
provides the motivation and financial resources for the most
essential and long-lasting of our contributions: education and
financial literacy for all Americans who seek our assistance.
In the for-profit environment, the emphasis on education
would be lost, as most for-profit agencies would seek to
discontinue educational programs altogether or charge fees for
such services that are beyond what most financially stressed
households are able to bear. In contrast, Take Charge America
is able to provide budget planning advice, access to
educational materials on matters related to personal finance,
and a copy of our Take Charge America personal financial
management software to over 100,000 financially distressed
American households each year--totally free of charge.
We are also able to waive the normally modest fees charged
for debt management plans for consumers who are simply unable
to pay. We do these things to fulfill our nonprofit mission.
For-profit entities cannot be expected to view the needs of
consumers with the same charitable outlook.
In conclusion, we commend the inquiries of this
Subcommittee, the IRS, and other Federal agencies involved in
the effort to fix the shortcomings of the nonprofit credit
counseling industry. Continued recognition of the nonprofit
status of credit counseling agencies meeting the requirements
of 501(c)(3) is crucial for the millions of financially
distressed American households who turn to the credit
counseling agency to provide affordable assistance in finding
ways to avoid personal bankruptcy, restore financial stability,
and honor their financial commitments.
We encourage the IRS to expand its audit of the charitable
activities of credit counseling organizations, thereby
discouraging the uncharitable and predatory practices of some
industry members. Aggressive scrutiny by the IRS will
strengthen our industry and improve access of financially
troubled consumers to affordable and consistently reliable
financial literacy education, and other financial counseling
and debt management solutions. Thank you very much for allowing
me to be here today.
[The prepared statement of Mr. Hall follows:]
Statement of Michael Hall, Founder and Chief Executive Officer, Take
Charge America, Inc., Phoenix, Arizona
Mr. Chairman, Members of the Subcommittee:
Thank you very much for inviting me to appear before you today. I
am honored to be here.
My name is Michael Hall and I am the founder and CEO of Take Charge
America, Inc., (TCA) one of the nation's oldest and largest nonprofit
credit counseling agencies. Our 428 employees provide financial
counseling and financial literacy educational programs free of charge
to any consumer who seeks our assistance. Known until recently as
Credit Counselors of America, Inc., TCA provides credit counseling and/
or debt management and educational services to nearly 200,000 American
households annually. In addition, through the management of nearly
65,000 debt management programs, the company returns nearly $500
million annually to the national economy. The cornerstones of the
company are consistent excellence in customer service, unwavering
integrity, and leading edge technology and educational programs.
We are fully dedicated to our charitable mission of helping
consumers become financially literate, financially stable, and
ultimately, financially independent. Millions of dollars are committed
to our educational endeavors each year and we believe that the reach
and the depth of our programs is unsurpassed in the industry. Our
offerings include a wealth of web-based articles and materials and our
Take Charge America software, which we believe is simply the best
personal financial management software available anywhere.
In furtherance of our universal goal of financial literacy for all
consumers, we have established and endowed the Take Charge America
Institute for Consumer Financial Education and Research at the
University of Arizona, which we expect to become the preeminent center
in the nation for the development of research-based financial education
programs. Through a series of grants to Montana State University, we
have developed a model financial literacy program for high school
students and teachers. We sponsor a university-based credit counseling
center for college students and a nationwide intercollegiate
competition in personal financial management. Our own Budget Doctor
makes personal appearances at schools and before community groups. In
collaboration with a nationally known video production group, we are
developing a video series in personal financial management for high
school and college students, and the list goes on and on.
My purpose in testifying here today is four-fold:
First, I hope to shed some light on the problems
contributing to the current state of our industry;
Second, I am here to carry the message to the
subcommittee that the nonprofit model is the correct model for the
industry;
Third, in order to protect consumers as well as the
genuine nonprofit activities of the many credit counseling agencies
that are truly committed to the charitable purpose of improving
financial literacy for all Americans, I strongly encourage the
continuous aggressive IRS oversight of the industry's nonprofit
charitable activities; and
Finally, I support the strengthening of consumer
protection laws that would provide strong deterrents to agencies
violating the consumers' trust.
The Problems of the Nonprofit Credit Counseling Industry
The vast majority of nonprofit credit counseling agencies are doing
an admirable job. Undeniably, there are a number of companies operating
on the ethical fringes that do not share our commitment to charitable
service. These companies are sometimes characterized by questionable
advertising practices, by initial fees that amount to hundreds or even
thousands of dollars, and by the practice of contracting customer
service to for-profit servicing shops that leave the nonprofit entity
as little more than a front for obtaining unwary customers. The
existence of these practices has led to much of the public criticism of
our industry, which in many cases, is well deserved. Fortunately,
recent actions by the FTC and the IRS have forced several of the
biggest offenders to reconsider their practices. Yet, offenders still
exist and their lack of ethics has left consumers confused and
distrustful of all credit counseling agencies.
Preserve the Nonprofit Model for Qualifying and Conforming Credit
Counseling Agencies
I believe that the IRS initially granted nonprofit status to the
credit counseling industry with the following specific goals in mind:
1. To create a mechanism through which financially distressed
consumers could obtain affordable financial counseling, budget
counseling and debt management services;
2. To provide financially distressed consumers with an alternative
to bankruptcy and thereby facilitate the annual return of billions of
``at risk'' dollars to the national economy that translate into
substantial tax revenues for the U.S. Treasury; and
3. To provide a financial incentive to counseling agencies
qualifying for nonprofit status to invest in the development of
financial literacy programs and educational materials, and to
subsequently provide these programs and materials to financially
distressed consumers, students of all ages and the general public.
In light of the economic downturn over the past few years, these
goals are more appropriate than ever. Revolving consumer debt exceeded
$700 billion at the conclusion of 2002. Over the last 12 months,
consumer bankruptcy filings have increased by about 10% over the
record-setting pace of the prior year.
Nonprofit credit counseling agencies provide a low-cost opportunity
for distressed consumers to keep their promises to creditors, reduce
their debt and restore their self-esteem and credit worthiness. More
importantly, however, the nonprofit status of credit counseling
agencies provides the motivation and financial resources for the most
essential and long-lasting of our contributions--education and
financial literacy for all Americans who seek our assistance.
In a for-profit environment, the emphasis on education would be
lost as most for profit agencies would either seek to discontinue
educational programs altogether or would, in an attempt to turn
educational services into corporate profit centers, charge fees for
such services that are beyond what most financially distressed
households are able to bear. Indeed, in a for profit environment,
households most in need of educational opportunities are those who are
least likely to be able to pay for such services.
In contrast, because of the financial capacity enabled through its
tax-exempt status, TCA is able to provide budget planning advice,
access to educational materials on matters related to personal finance,
budgeting and the wise use of credit, along with a copy of the TCA
personal financial management software to over 100,000 financially
distressed American households each year, totally free of charge. We
are also able to waive the normally modest fees charged for debt
management plans for those consumers who are simply unable to pay. We
do these things to fulfill our non-profit mission. For profit entities
cannot be expected to view the needs of consumers with the same
charitable outlook.
Strengthen Consumer Protection Laws
As industry leaders, we are strong proponents of consumer friendly
federal legislation, directed specifically at protecting the interests
of vulnerable, financially distressed American households and
furthering the ability of the non-profit credit counseling community to
deliver meaningful, life-changing educational and counseling services
to those households.
Conclusion
We commend the inquiries of this subcommittee, the IRS and other
federal agencies involved in the effort to fix the shortcomings of the
non-profit credit counseling industry.
Continued recognition of the non-profit status of credit counseling
agencies meeting the requirements of Section 501 (c)(3) of the Internal
Revenue Code is crucial for the millions of financially distressed
American households who turn to credit counseling agencies to provide
education on matters related to personal financial management and
provide affordable assistance in finding ways to avoid personal
bankruptcy, restore financial stability and honor their financial
commitments.
We believe that the existing legislative and regulatory framework
is more than adequate for assessing the legitimacy of individual agency
501 (c)(3) status. We encourage the IRS to expand its audits of the
charitable activities of credit counseling organizations, thereby
discouraging the uncharitable and predatory practices of some industry
members.
Inasmuch as creditors typically require tax-exempt status as a
condition of accepting an agency's debt management proposals, the
revocation of this special status for the few abusive organizations
would permanently discourage unscrupulous industry practices.
Aggressive scrutiny of charitable status by the IRS will strengthen our
industry and improve access of financially troubled consumers to
affordable and consistently reliable financial literacy education and
other financial counseling and debt management solutions.
Thank you for allowing me to address you on this critically
important subject.
Chairman HOUGHTON. Thank you, Mr. Hall. Mr. Illingworth.
STATEMENT OF MONTIETH M. ILLINGWORTH, SPOKESMAN, CAMBRIDGE
CREDIT COUNSELING CORP., AGAWAM, MASSACHUSETTS; ACCOMPANIED BY
CHRIS VIALE, CHIEF OPERATING OFFICER, CAMBRIDGE CREDIT
COUNSELING CORP.
Mr. ILLINGWORTH. Thank you, Mr. Chairman. On behalf of
Cambridge Credit Counseling Corporation, I want to express my
appreciation to you, Mr. Chairman, and to the Subcommittee, for
this opportunity to appear before you today and offer our
insights on credit counseling industry reform. We have been
calling for this kind of open, balanced, and fair-minded dialog
for at least a year now, and, to be frank, it has sometimes
been a solitary mission.
We see ourselves as not only up against an
institutionalized monopoly with a firm grip on the industry,
but also against an old-style monopolistic thinking that seeks
to squash all competition, limit consumer choice, and exclude
new innovative solutions to the growing problem of
indebtedness. In that mindset, is the view that any company in
this business that has had financial and client success
providing education and credit counseling services must be
doing something wrong.
Hopefully, then, today's opportunity to share with you why
our success on behalf of our clients is in fact a best-
practices model for reform. Hopefully, we will be able to
demonstrate that because Cambridge Credit Counseling Corp. and
its families of companies are licensed, regulated, and annually
examined in four States--including the State of New York--our
best-practices model has repeatedly stood the test of both
time, and regulatory oversight. Hopefully, today we will mark
the beginning of the end of the monopoly.
It is what we call the ``credit counseling trust,'' and to
us that means it is a new future for consumers--to empower them
if we can achieve that. What we would like to do at this point,
is walk you through the life and times of a best-practices
credit counseling provider. We would also like to suggest that
we keep our eyes on the real prize here, which is empowering
consumers and serving the consumers. So, let's begin with our
mission to educate consumers. We have done that by advocating
on consumers' behalf, and we have done that through an ad
campaign, and our supporting documents. We have the first of
those ads, and we will be running another one next week on the
issue of the monopoly. In this advocacy, we have not always
been met with open minds.
There has been a focus on the bad apples in this industry,
and rightfully so. Those must be isolated, stopped, and, if
possible, brought into conformity with a new set of rigorous
laws to protect consumers. Yet there has also been wholesale
criticism of our organization, because we do not look, act,
think, or function like the monopoly that rules this industry;
and that monopoly is the NFCC, the AICCCA, the Consumers
Federation of America, and the NCLC. That criticism has fixed
on the salaries paid to our executives, on the relationship
between our nonprofit and for-profit businesses, and how we
market ourselves.
We are happy to answer any questions on any one of those
issues today, but in our advocacy program, we respectfully ask
you--do not let those issues distract you from the real issue
of achieving responsible reform. Our core mission is to educate
consumers, providing the guidance and tools they need to assess
their financial situation, and make the right decision for
themselves on how to become debt free. Since we began
operations in 1993 in a storefront, Mr. Puccio, a second or
third-generation Italian American, built that business by the
sweat of his brow--and we will come back to that later. He
began in a storefront and he provided educational assistance
and counsel to 2 million consumers. Of those, 1.8 million were
provided free--I repeat, free--counsel. Very often these were
people who did not qualify for the debt management program, and
Mr. Viale will explain to you why not.
Today, we continue to receive around 358,000 calls per
month--of which we help educate and counsel 31,000 people for
free, and enroll a mere 10 percent--a mere 10 percent. So,
today we have approximately 90,000 active clients. The success
of these programs is clearly demonstrated by the numbers.
Thirty-two percent of our clients succeed; they pay off their
debts. I defy any organization in this country to match that
number. Success is also in the fact that only 2.63 percent of
all the clients served have filed for bankruptcy. Our complaint
rate of 2 million people counseled is only 574--that is 0.0287
percent, which is probably lower than the local bank in the
corner of your town, sir. So, we also provide consumers with a
2.5-hour educational series, workbooks, and a quarterly
newsletter. The counseling continues every time the client
calls, and that goes on for many, many hours over the life of a
program. Mr. Viale can explain to you precisely what happens.
Before people enroll in the management program, we also fully
disclose our fees verbally and in writing. We provide an
example of a contract, and you can see how that is clearly
spelled out.
We also believe that if you provide people with incentives
for success, they will be more likely to succeed. Our program,
the only one of its kind in this country, not duplicated by
anyone in this industry, gives back half of all the money
received from creditors to our clients, who make six
consecutive payments. It is inspiration for them. It is
discipline. It works. This can significantly offset the fees
that are charged. We have given back $12 million to consumers--
$12 million. No one else has done this. Which brings us to the
issue of the monopoly. The NFCC, the consumer credit counseling
member companies, and the AICCCA control this industry. Their
core business rests on a conflict of interest that has taken
power from the consumer. The monopoly relies almost solely on
fair-share payments from the creditor banks to pay for the
services. When their paychecks come from the creditors and not
from the consumer, who do you think they are beholden to?
Our business model challenges that monopoly. Mr. Puccio,
who came up with this business model, challenges that and
shifts the power back to consumers. We empower consumers, not
the creditors, to decide for themselves what they are willing
to pay in order to achieve their debt management goals. So, we
would also like to say this: the choice before us today is not
just between understanding who are the good credit counselors
and who are the bad ones. In our mind, that is easy to do. The
hard part is deciding whether we are going to provide the
consumer with a real choice in providers, whether we believe in
competitive markets or not, and whether we are going to do
everything we can to empower the consumer to succeed with debt
management, or dictate to the consumer that all they deserve is
what amounts to a social service not much different from when
it was started 50 years ago. Our clients tell us that they are
tired of being treated like welfare cases. They want respect,
they want the tools to succeed, and they are willing to pay for
it.
Finally, we would like to call for a summit meeting on the
issue, the issue of reform, and bring together all the voices,
all the points of view. Frank, open, and fair discussion is far
better than the sniping that has been going on in the press,
and in the disguise of industry reports that are supposed to be
fair and objective. This is a higher public policy, calling to
all of us, than the specter of the witch hunt that we see
coming over the horizon. Thank you very much for your time and
attention.
[The prepared statement of Mr. Illingworth follows:]
Statement of Montieth M. Illingworth, Spokesman, Cambridge Credit
Counseling Corp., Agawam, Massachusetts; accompanied by Chris Viale,
Chief Operating Officer, Cambridge Credit Counseling Corp.
On behalf of Cambridge Credit Counseling Corp., I first want to
express my appreciation to Representative Houghton and to the
Subcommittee for this opportunity to appear before you today and share
with you our insights into the reform of the credit counseling
industry.
We have been calling for this kind of open, balanced and fair-
minded dialogue between the public and private sectors on the issue of
industry reform for over a year now. To be frank, it has sometimes been
a solitary mission. We see ourselves as not only up against an
institutionalized monopoly with a firm grip on this industry, but also
against old style monopolistic thinking that seeks to squash all
competition, to limit consumer choice and exclude new, innovative
solutions to the growing problem of consumer indebtedness--a problem
which today impacts around 35 million American households.
In that mindset is the view that any company in this business that
has had financial and client success providing education and credit
counseling services to consumers MUST be doing something illegal or
unethical.
Hopefully, then, today is our opportunity to share with you why
Cambridge Credit Counseling's success is, in fact, a best practices
model for industry reform.
Hopefully, we will be able to demonstrate to you that Cambridge and
its family of companies are licensed, regulated and annually examined
in four states--including New York which has the most stringent
regulations governing financial services in this country--our best
practices model has repeatedly stood the test of both time and
regulatory oversight.
Hopefully, we will show you that we have found the ``secret sauce''
for delivering consumer benefit at a fair and reasonable cost--proven
by the fact that to date over 200,000 consumers have chosen Cambridge
Credit Counseling to help them get out of debt and enjoyed some $12
million in funds that we rebate back to them through our unique Good
Payer program.
And hopefully, today will mark the beginning of the end of the
monopoly--what we call the ``Credit Counseling Trust''--and a new
future for consumers desperate for empowerment to become debt free.
What we would like to do at this point is walk you through the life
and times of a best practices credit counseling provider. We also want
to suggest keeping our eyes on the real prize here--how we can all best
serve consumers. The success of our organization should therefore not
be the issue today. The success and empowerment of our clients and how
we helped enable that is the issue.
Let's begin with the commitment to our mission to educate
consumers. Most recently that has meant advocating on consumers'
behalf. For over a year now we have called for responsible reform by
reaching out to government and to consumer and public interest groups
and in a series of ads placed in The New York Times, The Washington
Post, American Banker and USA Today.
In our advocacy we have not always been met with open minds. There
has been a focus on the ``bad apples'' of this industry, and rightfully
so. Those ``worst of class'' providers must be isolated, stopped and if
possible brought into conformity with a newly formed set of rigorous
laws and regulations protecting the consumer. But there has also been
wholesale criticism of our organization because we don't look, act,
think or function like the dominant providers controlled by the
``Credit Counseling Trust'', namely, the National Foundation for Credit
Counseling, the Association of Independent Credit Counseling Companies
Agencies, Consumer Federation of America and the National Consumer Law
Center.
That criticism has fixed on the salaries paid to our executives, on
the relationship between our non-profit and for profit businesses, and
how we market our services. We are happy to answer any questions on
those subjects. But our advocacy program, and our appearance here,
respectfully asks that you not let that distract you from the real
issues of achieving responsible reform. We think they are ``best
practices'' for the future of this industry. And it's these best
practices we want to focus on next.
Cambridge Credit Counseling's Best Practices
Our core mission is to educate consumers with the guidance and
tools they need to assess their financial situation and make the right
decision on how to become debt free.
Since we began operations in 1993 in a storefront we have provided
educational assistance and counsel to some 2 million consumers. Of
those, 1.8 million were provided FREE--I repeat FREE--counsel. Very
often these are people who didn't qualify for a debt management
program.
Today, we continue to receive around 35,000 calls per month of
which we help educate and counsel around 31,000 people for free and
enroll a mere 10 percent. And so, today we have approximately 90,000
active clients in debt management programs.
The success of those programs is clearly demonstrated by the
numbers:
The success is also in the fact that only 2.63 percent of
all the clients served have filed for bankruptcy. And do know that we
do everything we can to prevent people from falling into bankruptcy,
which includes a special ``Hardship Program'' that helps when clients
can't pay on time or afford the monthly amount due.
And the success is in the fact that out of the close to 2
million people counseled there have only been 574 complaints--a rate
of.0287 percent--lower than your average commercial bank we would
venture.
The education and counseling doesn't end at the point of
enrollment. We provide consumers with a two and one half hour
educational series, with workbooks along with a quarterly newsletter.
And the counseling continues every time a client has a question or
concern, of which there are many, and our trained and certified
counselors are there to help them. We invite any and all of you to walk
through our Agawam, Massachusetts office any day of the week and listen
to the counselors and you'll see what we mean--often it is a problem
with a creditor or a bill collector.
Before people enroll in a debt management program we fully disclose
all fees and charges, verbally and in writing.
We also believe that if you provide people incentives for
succeeding they'll be more motivated to succeed. Our Good Payer
program, the only one of its kind in the country, gives back fully half
of all the monies we collect from creditors to our qualified clients
when they make six consecutive payments. These rebates also can
significantly offset the fees we charge--a subject that we know is of
likely concern to you today.
Cambridge Credit Counseling charges a program design fee equal to
one month's payment. Much of that is offset by the Good Payer rebate.
As such, in an industry study we commissioned with Economists Inc. of
Washington DC, our fees were found to ``fall within the range'' of
other credit counseling companies and in several cases were lower. The
report went on the say that because of the ``many additional services''
we provide consumers Cambridge Credit will ``increase competition''
which may lead to ``lower prices and/or higher quality services for
consumers.''
Which brings us to how we acquire our clients. On average, 1,500
consumers a month call us looking to switch from other credit
counseling agencies. Their number one compliant is poor service.
Referrals from current clients, very happy ones, result in 30% of new
clients most months. Another 25% come from our extensive educational
outreach programs and debt management seminars we hold with groups as
the Basketball Hall of Fame and College Bowling USA and with numerous
high schools, community centers and colleges such as Amherst and the
University of Massachusetts all at a cost of over one million dollars
this year. The remaining 50% come from our own marketing
communications.
There is a lot of aggressive marketing going on and we're sure you
want to ask us about that today. First, please know that we don't
telemarket. We have an awareness campaign on television and in print
that leaves it up to the consumer to call us. Second, and most
importantly, please know that not one creditor bank or government
agency refers business to us. We mention this because dozens upon
dozens of banks and government entities refer consumers to the Credit
Counseling Trust who monopolize this industry.
Which brings us to the issue of that monopoly. The NFCC, their
Consumer Credit Counseling member companies and the AICCCA, together
control this industry. But their core business model rests on a
conflict of interest that has taken power from the consumer. The
monopoly relies almost solely on fair share payments from the creditor
banks to pay for their services. When their paychecks come from the
creditors, and not the consumer, to whom do you think they are
beholden? Our business model challenges that monopoly and shifts power
back to consumers. We empower consumers--not the creditors--to decide
themselves what they are willing to pay for in order to achieve their
debt management goals. For the many thousands of consumers who have
chosen Cambridge Credit it is clear that they are voting for freedom
both from their debts and from the monopoly.
We have provided the Subcommittee an accompanying document that
provides far more detail on all of these points and on the best
practices they represent. We hope you will find that of interest.
We would like to say this: the choice before us today is not just
between understanding who are the good credit counselors and the bad
ones. In our mind that's easy to do. The hard part is deciding if we're
going to provide the consumer a real choice in providers, whether we
believe in competitive markets or not. And it's whether we're going to
do everything we can to empower the consumer to succeed with debt
management or dictate to the consumer that all they deserve is what
amounts to a social service not much different in form or content than
it was when it started 50 years ago. What our clients tell us is that
they are tired of being treated like welfare cases. They want respect,
they want the tools to succeed, and they are willing to pay for it.
Finally, we would like to call for a summit meeting on the issue of
reform and bring together all voices, all points of view, to air and
debate the issues. Frank open and fair discussion is far better than
the sniping that has been going on in the press and in the disguise of
``industry reports.'' This is a higher public policy calling for all of
us than the specter of the witch-hunt we see coming over the horizon.
Thank you for your time and attention.
Chairman HOUGHTON. Thank you, Mr. Illingworth. Also, thank
you, Ms. Loonin, and gentlemen, for your testimony. The reason
we are here is that there are a couple of sour apples, and we
are not trying to criticize the credit counseling industry. It
is a good industry. There are fine people, like yourselves, and
we appreciate you being here. It does not do us any good just
to wink at these practices and do nothing about them, so what
we are trying to do is to understand what we in Congress can
do. Do we lean on the IRS? Is that an administrative function?
Or do we create legislation?
Now, let me just ask you a specific question--I have it
written down here, Mr. Illingworth, and I am quoting from
numbers that we have researched. In 2001, the IRS Form 990
indicates that you had about $54 million in total revenue. Of
this, $18 million was paid by clients for initial registration
fees, about $23 million was paid by clients for monthly service
fees, and about $12 million was paid by creditors based on the
money you collected from clients for them. Yet your expenses,
including salaries and advertising for debt management and
other services, totaled $45 million. So, what this resulted in,
is an excess of $8.5 million for just 1 year. Adding this to
prior amounts for July 2002, your total net assets or fund
balance total about $26 million. So, the question really is:
the recipients of your services are essentially supporting the
nonprofit through fees. Why don't you charge your clients less
instead of operating as a charity, with millions of dollars in
gains, at their expense?
Mr. ILLINGWORTH. Sir, the question is, why don't we charge
them less?
Chairman HOUGHTON. Right. Why don't you charge your clients
less instead of operating as a charity?
Mr. ILLINGWORTH. We understand that our core mission is
education, and that our vision is charitable. It involves
education and counsel. In order to provide that, plus all of
the services that need to be involved in fulfilling that
mission, requires a certain amount of infrastructure--
infrastructure that is covered by the fees that are charged.
The fees that are charged have been found fair and reasonable
by all the regulatory authorities that govern us in those
States. This is including the IRS, who in all of our
submissions--and we have done outside studies as well, sir,
with an organization here in Washington--has found,
particularly with our rebates, that our fees fall within the
range in this industry. So, we think our fees are at a fair,
reasonable level, and help us execute our mission.
Chairman HOUGHTON. Well, it just seems the proportions are
rather strange. Now, I am not part of this business--I used to
be part of another type of business--but you have basically $52
million paid in by clients for monthly services, for creditors
as fees, and yet you have very high expenses. I just do not
understand that relationship.
Mr. ILLINGWORTH. The relationship between what and what,
sir?
Chairman HOUGHTON. In terms of the fees paid in, and also
the education of the services, totaling about $45 million.
Mr. ILLINGWORTH. I am sorry, I do not mean to be obtuse,
but----
Chairman HOUGHTON. Well, no, it just gets to the excess of
$8.5 million for 1 year.
Mr. ILLINGWORTH. The counsel we have been given by our
accountants is, to have a reserve is very wise for a nonprofit.
We have with us today our counsel from BDO Siedman, and you can
pursue that with him if you would like--frankly, that is his
area of expertise. So, I would like to suggest that if we are
going to delve deeply into this document, the counsel we have
been given is to have an excess--to have a reserve is wise, it
is responsible to our clients. If you are looking at the degree
of excess, I believe the gentleman from the IRS would say, and
I believe he did say, that it is not against the law to have
more revenues than expenses within the IRS guidelines, and we
have reported this every year since our inception.
Chairman HOUGHTON. Could you give me a feeling for the
percentage of the revenues that are spent on education? Also,
do you charge for any educational counseling services or
materials?
Mr. ILLINGWORTH. The first answer is, we do not charge for
any of the education we provide. As I mentioned in my
testimony, of the 1.8 million people, many hundreds of
thousands have been provided counseling and education for free.
We also sent those people the video, they can participate in
the newsletter, and they can come to our websites. This year, I
believe we will--or have--spent $1 million of hard money on a
series of educational outreach programs which Mr. Viale can
detail for you if you would like.
Chairman HOUGHTON. Okay. Well, thank you very much. Now, we
will turn to Mr. Pomeroy.
Mr. POMEROY. Thank you, Mr. Chairman. Mr. Illingworth, are
you a member of the firm, Cambridge Credit Counseling Corp.?
Mr. ILLINGWORTH. I am not, sir.
Mr. POMEROY. What do you do?
Mr. ILLINGWORTH. I am an executive at the public relations
firm of Ruder Finn in New York.
Mr. POMEROY. So, you are a hired public relations guy
talking on behalf of the company?
Mr. ILLINGWORTH. I am a passionate advocate for my client,
and I am also in public relations.
Mr. POMEROY. Now, do you know this Richard Puccio?
Mr. ILLINGWORTH. Yes, I do.
Mr. POMEROY. Can you tell us something about the action
taken against him by the Securities and Exchange Commission
(SEC) which resulted in him being barred for 5 years from the
securities industry in 1996?
Mr. ILLINGWORTH. Of course I am aware of that, and the
details of that have been represented to me by my client. I am
not an expert on precisely what happened, and I think----
Mr. POMEROY. Would you say that it had something to do with
the high-pressure, fraudulent sales tactics in disregard of his
obligations to customers and their welfare? Was that language
from the action taken by the SEC?
Mr. ILLINGWORTH. I recall it is something similar to that,
yes.
Mr. POMEROY. Now, the issue of salaries relates somewhat to
whether or not we have nonprofits functioning as nonprofits.
When compensation levels get to certain points, it appears that
it is being run for the proprietary benefit of the individuals
receiving compensation. I earlier asked the Commissioner of the
IRS about the suspicious $624,000 being paid to John Puccio.
Really I misstated it, in some respects, because there are
other extremes of income from a related entity that produced
yet an additional income stream on this 2001 Form 990, leaving
the Puccio brothers with $962,000, roughly, in annual
compensation that year. Now, do you acknowledge that that is
going to trigger at least an appearance that it should not be
fitting under the normal tax-exempt, nonprofit classification
under the IRS Code?
Mr. ILLINGWORTH. This is a question for the IRS, sir, not
me. The business structure we have, the levels of income that
are realized by the senior executives, are all reviewed. They
are approved by the regulatory authorities and the States in
which they are licensed, and by the IRS, and they have not told
us--so, at this point in time----
Mr. POMEROY. Well, I think the Commissioner is rather
interested in that level, but he, of course, was circumspect
about identifying whether or not particular action of the IRS
attaches to any particular individual or firm--as would not be
right under confidentiality of the IRS operations. Now, Mr.
Viale, you are on the staff, apparently, of Cambridge Credit
Counseling Corp.?
Mr. VIALE. I am the Chief Operating Officer.
Mr. POMEROY. On this 2000 filing, it says you were paid
$374,000. Is that in the range of your present compensation?
Mr. VIALE. That is correct.
Mr. POMEROY. Mr. Hall, your entity--what is the present
name of your entity?
Mr. HALL. Take Charge America.
Mr. POMEROY. Take Charge America.
Mr. HALL. Yes, sir.
Mr. POMEROY. That was previously the Credit Counselors of
America?
Mr. HALL. That is correct.
Mr. POMEROY. Now, in 1999, the report shows that you
received compensation of $371,000 from Take Charge America?
Mr. HALL. Correct.
Mr. POMEROY. Now, that was 4 years ago. Would the Form 990
reflect that at roughly the present level of your compensation?
Mr. HALL. I believe our current Form 990, our most current
one, would reflect about $440,000. I might point out to you,
Congressman Pomeroy, that we have a corporate governance policy
which takes me out of that process.
Mr. POMEROY. Are you concerned though, as the proprietor of
this firm, that this board that is setting your salary might be
setting you up for investigation where you could lose your
501(c)(3) status, because----
Mr. HALL. In setting those salaries--we have a very big
company. I have 428 employees. We manage over $500 million a
year in public funds.
Mr. POMEROY. Your testimony, Mr. Hall, states that for-
profit entities cannot be expected to view the needs of
consumers with the same charitable outlook as yours, a
nonprofit commission.
Mr. HALL. Correct.
Mr. POMEROY. I want to explore the structure you use,
because, as I understand it, you also do business in
conjunction with for-profit entities that are part of the
operation of Take Charge America. Does your credit counseling
organization pay another for-profit company to assist you, to
help process the debt repayment programs of your clients?
Mr. HALL. Absolutely not. We have never used any back-end
operations to provide support to us. We do all of our own
customer service and would never consider handing our customer
service process over to anybody else.
Mr. POMEROY. Okay, I am going to name several for-profit
companies and ask whether your company has ever had any
relation to them: Michael A. or Mary E. Hall Family, Limited
Liability Co. (LLC); Credit Counseling Information Systems,
LLC; Orion Network Enterprises, LLC; Frank and Marilyn Muggeo
(M&M) Leasing, Inc.; or Michael A. Hall, Inc.? Have you had
dealings with any of those entities?
Mr. HALL. Only with one of them.
Mr. POMEROY. Which one is that?
Mr. HALL. That would be Credit Counseling Information
Systems. I had been in the credit counseling business for 40
years, spanning a period of five decades, and for the first 27
years of that period of time, I was involved in the for-profit
side of the industry. During that period of time, I developed
enterprise software for the credit counseling industry. I
developed educational materials and educational software for
the industry that preexisted the creation of Credit Counselors
of America, which is now Take Charge America. Having good data
systems is essential to the operation of our business. The
reason that we dealt with Credit Counseling Information
Systems, is because of the fact that it was the only provider
that had the type of data systems that we needed to accomplish
our goals.
Mr. POMEROY. So, do you or your family members have an
ownership position in Credit Counseling Information Systems?
Mr. HALL. We do.
Mr. POMEROY. You do.
Mr. HALL. Yes, sir.
Mr. POMEROY. So, as the nonprofit Take Charge America pays
Credit Counseling Information Systems, is that to your
financial benefit?
Mr. HALL. It is.
Mr. POMEROY. What are the amounts of payment that you made
to Credit Counseling Information Systems this past year?
Mr. HALL. Approximately $750,000.
Mr. POMEROY. Now, I understand that you have about 100,000
clients, is that correct?
Mr. HALL. We have 65,000 clients--about 63,000 clients
currently enrolled in debt management plans. We do interview an
additional 120,000 to 130,000 families a year--put them through
full interviews. These are not 10- or 15-minute sessions. These
are
1-, 2-, or 3-hour sessions, totally free of charge.
Mr. POMEROY. So, you have 63,000 clients and you interview
another--how many?
Mr. HALL. Approximately 120,000 to 130,000 households seek
out our service.
Mr. POMEROY. You have how many employees?
Mr. HALL. At the current time, 438 employees.
Mr. POMEROY. Now, is your organization paid with checks
from your nonprofit, or do you hire that service out?
Mr. HALL. We do not hire any services out.
Mr. POMEROY. So, they come directly from Take Charge
America?
Mr. HALL. Correct.
Mr. POMEROY. What kind of time are these clients getting?
Now, as I counted, if you have 63,000 active clients and
120,000 others, that is almost 200,000 coming to your
enterprise--and you have 438 staff, period. Are you able to
give them the kind of individualized counseling that your
people are hoping for?
Mr. HALL. Absolutely. We are able to service the volume
based on the number of employees that we do have, yes.
Mr. POMEROY. What would be the average time commitment per
client?
Mr. HALL. We spend anywhere from a minimum of approximately
45 minutes, to an hour, to a maximum of 2 to 3 hours, depending
upon the complexity of the situation.
Mr. POMEROY. I have no more questions at this time, Mr.
Chairman. Thank you.
Chairman HOUGHTON. Thank you. Mr. Kleczka.
Mr. KLECZKA. Thank you, Mr. Chairman. A couple of
questions. Mr. Jones, if I wanted to become a credit counselor,
how much schooling would I need? What would I have to do to get
the certification--whatever you guys handout?
Mr. JONES. It typically takes somebody about 6 months to
pass the test for personal finance.
Mr. KLECZKA. So, you actually give the person a test?
Mr. JONES. Oh, absolutely. It is an independent test, yes.
Mr. KLECZKA. How many pages is this test? Is it true or
false?
Mr. JONES. No. There are true or false questions on the
test, but there are a number of essay-type questions on the
test as well.
Mr. KLECZKA. Then who grades the test? Somebody from your
operation?
Mr. JONES. The Institute for Personal Finance.
Mr. KLECZKA. Which is your operation?
Mr. JONES. No, that is an independent certifying body. They
use the Association for Financial Counseling and Planning
Education.
Mr. KLECZKA. I do not know anything about them, and that is
fine. How much am I charged once I am a full-fledged counselor?
Mr. JONES. Sorry?
Mr. KLECZKA. How much are you charged once I am a full-
fledged counselor?
Mr. JONES. For the test?
Mr. KLECZKA. For the test, or for the license--or whatever
I get.
Mr. JONES. Typically, the agency pays for their counselors
to take the test.
Mr. KLECZKA. The employing company, okay.
Mr. JONES. I think $125.
Mr. KLECZKA. Do I have to have an annual certification or
license----
Mr. JONES. You have to have continuing education credits,
yes.
Mr. KLECZKA. Mr. Hall, which of these two organizations are
you a member of?
Mr. HALL. I am a member of AICCCA and AADMO.
Mr. KLECZKA. God love you. I do not know what any of those
are. Mr. Jones, are you the AAICIO?
Mr. JONES. I represent the AICCCA members.
Mr. KLECZKA. Ah, the AICCCA--I am sorry. Okay, so then you
are a member of his organization, Mr. Hall?
Mr. HALL. I am.
Mr. KLECZKA. Okay, good. I was surprised when the Chairman
indicated that Mr. Illingworth, your client, ended up with a
profit of $8.5 million. Is that last year? You indicated that
it was reserves, and not profit. I just want to give you two
examples, and I think I might put into perspective what we are
talking about here. Number one, if my church at the end of the
year came out with their annual report and indicated
contributions were ``x'' amount, and expenses for hosts and
wine and electricity was this amount, and at the end of the
year we had $8 million, do you know what would happen? The
contributions would drop like a rock.
Another example is United Way of Milwaukee, Wisconsin. If
they indicated to any of us when they started their annual
appeal that we really need to go out and raise $53 million this
year because there are so many hardship cases in Milwaukee--if
they said, we got to do so many good things, and by the way, we
have $8 million left over from last year--their appeal would
drop like a rock. The reason I bring those two examples up is
to question how much of a nonprofit you guys really are, okay?
Why do we have to go through this guise of nonprofit? The
Commissioner of the IRS told us that what you folks are doing
is asking for a contribution. The contribution from your
clients is mandatory, not really disclosed, and basically is a
fee, all right? So, why do we go through this whole sham of
calling you guys nonprofit, when we know you ain't really
nonprofit?
I thought, maybe, for a while--and that is when I asked the
FTC a question--maybe it has to come under the umbrella of the
phone marketing, maybe that was the reason to do that. He said,
``No, there has been no jump in these types of groups forming
so they could make antagonizing calls to Americans at 6:00
p.m.,'' and so it just blows my socks. Why do you not just call
yourselves what you are: a for-profit business which gets great
income for charging fees to poor people who have credit
problems. You get a big kickback from the credit companies. You
run it like a business, and after you pay your taxes and do
things above-board, I do not give two rats whether you are
getting $600,000 a year, or $6 million a year.
You are a business like Allen-Bradley, Johnson Controls,
Inc., and Boeing. So, why are we doing these machinations and
twisting--and now we have got a couple that are under
indictment or are being charged? Let's just call a spade a
spade, and let's do it right. I know, Ms. Loonin, you are ready
to pounce in on this question. You have been chomping at the
bit. Respond to me--why don't we do it the right way?
Ms. LOONIN. Well, I certainly agree with wanting to do it
the right way. What I would suggest, though, is that
theoretically, it is possible to have a complementary sector
where you have for-profit businesses that do credit counseling.
I am not sure exactly how that would work, given the way the
fair-share is structured now, and that sort of thing. What we
want to emphasize is that keeping a thriving, legitimate,
nonprofit sector is also critical. I know you are not
suggesting this, but some have suggested actually, instead----
Mr. KLECZKA. Well, if it is a bona fide nonprofit, I would
probably be supportive--but if it is done under a kind of guise
or cloak, what is the sense?
Ms. LOONIN. Right. The other point I want to make is, in
some cases where maybe we are distracted by the nonprofit
versus the for-profit status, that is not the only issue. If
there is deception and abuse going on, which is also going on
in how we are talking about fees, what the agencies are saying
they can give to consumers--that is deception or abuse whether
it is in the nonprofit sector or the for-profit sector. So, we
have to watch that regardless of who is doing it.
Mr. KLECZKA. Thank you very much.
Chairman HOUGHTON. Okay. Mr. Sandlin.
Mr. SANDLIN. Thank you, Mr. Chairman. To start, Mr.
Boisclair, you have a presence in my district: in Paris, in
Greenville, in Texarkana, in Mount Pleasant, in Longview--and
possibly in other places. I appreciate what you do for folks
there. We have nothing but good reports from those citizens.
Mr. Hall, I noticed that with your company, you set up debt
management plans for consumers, is that correct?
Mr. HALL. That is part of our business, yes, sir.
Mr. SANDLIN. Now, you also do work for creditors, do you
not?
Mr. HALL. Oh, yes, as part of the service we provide to our
customers.
Mr. SANDLIN. So, what you are telling me is that the only
work you do for them is, by working with consumers, they get a
benefit, and that is all the work that you do for creditors?
Mr. HALL. That is correct.
Mr. SANDLIN. So, when you filed your Form 990, when you say
you will provide creditors a collection process for otherwise
uncollectible balances, that would be in error?
Mr. HALL. No. That has always been a vital function of the
debt management industry, Mr. Congressman.
Mr. SANDLIN. So, one of the things that you do is, you act
as a collection agency for credit groups, is that correct?
Mr. HALL. We provide, in effect, recovery services. That is
part of the plan that anyone in this industry provides.
Mr. SANDLIN. That would not be a tax-exempt function, would
it?
Mr. HALL. That is correct, and that is certainly not the
focus of our----
Mr. SANDLIN. It is one thing that you do.
Mr. HALL. It is one thing that all of us do.
Mr. SANDLIN. Now, is your company one of the companies that
receives a donation or contribution from consumers?
Mr. HALL. No, sir.
Mr. SANDLIN. So, all of the money that you receive from
them is shown as a fee?
Mr. HALL. Absolutely.
Mr. SANDLIN. What do they get for that fee?
Mr. HALL. The fee is basically intended to help offset
operating costs related to the services that are provided.
Mr. SANDLIN. How is that initial fee figured?
Mr. HALL. The initial fee is actually stratified. Since a
variety of State laws that are out there--we charge a different
range of fees.
Mr. SANDLIN. The fee is basically a payment to you.
Mr. HALL. It is disclosed as such, and we do not try to
veil it as a voluntary contribution. We never have done that.
We always quoted our fees as fees, and disclosed them up front.
Mr. SANDLIN. Well, I noticed--and I appreciate that. You
show that as taxable income, do you not?
Mr. HALL. Correct.
Mr. SANDLIN. I notice that in 1997, 1998, 1999, and 2000,
you show fees, which would be the money that folks send to you.
You show a total of over $28 million, and the gross receipts
for the services performed at only $42 million. In 2000, it is
$12 million, and I am rounding this off as $12,446,630, but $12
million in membership fees and $17 million in receipts for
services performed. So, are you telling me that you take out of
this total, you take this money, and $28 million out of $42
million goes to you--you only use the balance, which would be
$14 million, for the services that you provide to the consumer?
Is that what you are telling me?
Mr. HALL. Sir, I do not recognize those figures as being
accurate.
Mr. SANDLIN. I would think that your Form 990 that you
filed with the government for 2001 would be accurate.
Mr. HALL. I do not have a copy in front of me, sir. I guess
it would be accurate.
Mr. SANDLIN. It would be accurate, okay. That is what the
numbers show.
Mr. HALL. The fees are distributed--when we say fees, those
are user fees paid by consumers to our company.
Mr. SANDLIN. That is right.
Mr. HALL. The other is fees paid as fair-share by creditors
for the services----
Mr. SANDLIN. The money sent to you by consumers as fees is
not paid on their debt, is it?
Mr. HALL. That is correct.
Mr. SANDLIN. It is not sent to credit card companies?
Mr. HALL. That is correct.
Mr. SANDLIN. It is not sent to other folks. It is paid to
you?
Mr. HALL. That is correct.
Mr. SANDLIN. So, you received $42.9 million for those
years, and $28 million went to your company. Now, I was
interested in what Mr. Pomeroy asked you. In this last report,
of course, when times were a little tougher, you only made
$381,000. You said this next report would show $440,000 to you,
but last time you showed $381,000 to you for last year, 2001.
Mary Hall, I assume, is your wife?
Mr. HALL. Yes.
Mr. SANDLIN. Another $127,000. So, that is $508,000 to you.
Norm Hall, $116,000; Kevin Hall, $118,000; Terry Hall,
$116,000; and John Hall, $5,000. That totals $355,000. So, the
Hall family got $863,000 out of your company, is that correct?
Mr. HALL. Yes, sir. The Hall family has been involved in
providing these kinds of services for over 30 years. All the
people that you have mentioned there have been involved in our
company for 20 years.
Mr. SANDLIN. That is a very good point. The point is, this
is not $863,000 divided by 30; this is $863,000 for 1 year,
correct?
Mr. HALL. That is correct.
Mr. SANDLIN. Now, do you also have people working for you,
not named Hall, who are related to you?
Mr. HALL. No, I do not.
Mr. SANDLIN. You do not have any sons-in-law.
Mr. HALL. Actually, I have two sisters working for me that
are not named Hall, yes.
Mr. SANDLIN. Are they paid by your company?
Mr. HALL. They are.
Mr. SANDLIN. So, the Hall family would get the $863,000
that year, plus whatever salaries those folks got.
Mr. HALL. That is correct.
Mr. SANDLIN. Now, I was also interested in answering Mr.
Pomeroy. He listed off the names, I wrote them down, of various
companies--for-profits. He listed: Michael A. and Mary Hall
Family, LLC; Credit Counseling Information Systems; Orion
Network Enterprises; M&M Leasing; and Michael A. Hall, Inc.
Correct?
Mr. HALL. Yes.
Mr. SANDLIN. You said you had absolutely no relationship
with any of them except Credit Counseling Information Systems,
is that correct?
Mr. HALL. All of those corporations preexisted the
existence of Take Charge America.
Mr. SANDLIN. That was not the question.
Mr. HALL. We do not have any relationships with any of
them, no, sir. I do not even know who Orion is.
Mr. SANDLIN. Orion would not appear in any of your tax
returns?
Mr. HALL. I have nothing to do with Orion.
Mr. SANDLIN. I said would Orion appear anywhere in any of
your tax returns?
Mr. HALL. No.
Mr. SANDLIN. How about Walking Eagle Communications, Inc.?
Mr. HALL. Yes, it would. That is the survivor to Credit
Counseling Information Systems. They were merged a couple of
years ago.
Mr. SANDLIN. That is owned by your family, is it not?
Mr. HALL. Correct.
Mr. SANDLIN. Now, among these companies that you say you
have no relationship with, would there be any payments to or
from those companies--Michael E. Hall, M&M Leasing, Orion, or
Michael A. and Mary E. Hall? Would there be any payments to and
from those companies to Take Charge America?
Mr. HALL. No, there never has been.
Mr. SANDLIN. Never.
Mr. HALL. Again, I do not know who Orion is.
Mr. SANDLIN. They would not appear on any of your records,
or any of your tax returns?
Mr. HALL. No.
Mr. SANDLIN. Would there be any overlapping officers,
principals, or key employees between those groups that I just
listed?
Mr. HALL. None other than myself.
Mr. SANDLIN. None other than yourself. Are you an officer
in Michael A. Hall, Inc.?
Mr. HALL. Michael A. Hall, Inc. is a defunct company. That
is when I operated in the for-profit industry from 1971 to
1997--Michael A. Hall, Inc., American Financial Services. We
closed that company when I became involved full-time with----
Mr. SANDLIN. Would you have any relationship with M&M
Leasing?
Mr. HALL. We do not.
Mr. SANDLIN. Are you an officer or principal, or do you
share officers, principals, or employees with that company?
Mr. HALL. Again, M&M Leasing is also a defunct corporation.
It served as an auxiliary to the for-profit industry.
Mr. SANDLIN. Those are good comments. Are there any shared
officers between those corporations and Take Charge America,
Inc.?
Mr. HALL. Those corporations do not exist any longer, Mr.
Congressman.
Mr. SANDLIN. I understand that.
Mr. HALL. Only myself.
Mr. SANDLIN. You already said you never heard of Orion?
Mr. HALL. Correct.
Mr. SANDLIN. Credit Counseling Information Systems--you do
have shared officers there--employees, agents; is that correct?
Mr. HALL. I do have--there are employees who are employed
by Walking Eagle Communications.
Mr. SANDLIN. How many employees would that be?
Mr. HALL. We presently have about 13 or 14 employees
involved in enterprise systems development and other software
products that are totally unrelated to the business conducted
by Take Charge America.
Mr. SANDLIN. You share those employees with Take Charge
America?
Mr. HALL. Not in the sense that they would perform work.
Mr. SANDLIN. The employees that you are listing are shown
as employees of Take Charge America and Walking Eagle
Communication?
Mr. HALL. No. It is a completely different entity.
Mr. SANDLIN. I did not ask if it is an entity. The names,
the people--did the people work for both of those
organizations?
Mr. HALL. No, sir, they did not.
Mr. SANDLIN. Okay. Do you share any office space, staff,
computers, or things like that between any of these entities
that I just listed, without going through them again?
Mr. HALL. We do, in some cases under contract, employ
people to do development work for which Take Charge America is
reimbursed.
Mr. SANDLIN. You share what sort of relationship there?
With whom? With any of these companies, Michael A. and Mary E.
Hall Family----
Mr. HALL. Only Walking Eagle Communications, Mr.
Congressman.
Mr. SANDLIN. Okay. Are you involved in any sale of land
between any of the corporations or groups that I mentioned--to
or from Take Charge America?
Mr. HALL. None whatsoever.
Mr. SANDLIN. None whatsoever. Never have been?
Mr. HALL. No.
Mr. SANDLIN. Are there any loans or leases between those
parties that I mentioned for property, equipment leases, or
anything like that from a Hall family business to the
nonprofit?
Mr. HALL. There are not.
Mr. SANDLIN. None whatsoever.
Mr. KLECZKA. Would the gentleman yield?
Mr. SANDLIN. Certainly.
Mr. KLECZKA. Something has been bugging me since you
mentioned all the Hall salaries, Mr. Sandlin. Could you give me
the name of the Hall that is at $5,000?
Mr. HALL. That is John Hall.
Mr. KLECZKA. John? Well, if John's watching us on
television, he is going to have a real problem, because
everyone else is $116,000, $118,000, or $127,000. Then there is
poor old John at $5,000. How old is John?
Mr. HALL. John is about 60.
Mr. KLECZKA. Sixty?
Mr. HALL. Yes.
Mr. KLECZKA. Oh, come on, John.
Mr. HALL. I do not really know what that is, because he is
not an employee of the company.
Mr. KLECZKA. Well, if you could help John out at 60,
because the rest of them are getting much more.
Mr. SANDLIN. Mr. Chairman, I believe my time is over and I
appreciate your allowing me to go over. Thank you very much.
Chairman HOUGHTON. No, not a bit. I would like to ask Mr.
Boisclair and Mr. Jones a question. This gets back to the
question we had with Mr. Illingworth about Cambridge Credit
Counseling Corporation, and I am really interested in the
proportions. What I see--and I could be wrong here--is an
industry that started out as really a counseling and
educational industry, going into the debt management industry,
moving away percentage-wise from those things they were
originally set up to do, moving toward an entirely different
concept.
The program service revenue for Cambridge Credit Counseling
Corporation--and this comes out of the Form 990, the last one,
which is from August 2001--was $53 million. The excess or the
profit was $8.5 million. Also, the carryover from previous
years was $17 million. So, you got $53 million coming in, you
got a profit of $8.5 million, and you got a carryover from
other years that is $17 million. That looks pretty hefty for a
nonprofit organization. Explain this to me, will you?
Mr. BOISCLAIR. Well, I cannot explain that. I can tell you
that I think it is proper for any nonprofit that can, to
function with reserves, but there is a point where reserves
become excessive. The true nature of a nonprofit, as our
members would define it and as I define it personally, would be
if we continued to have excess revenues in--well, we are not
going to have those levels anyway. However, if we had excess
revenues we would, in our case, reinvest them in the community,
in other programs, so that we could reach more people, and
maybe even create new programs that we could----
Chairman HOUGHTON. So, you would not be plowing another
$8.5 million on top of the $17 million, and putting it in
further reserves for next year?
Mr. BOISCLAIR. You are asking me that as the CEO of the
nonprofit? No, we would not.
Chairman HOUGHTON. Do you have any comments, Mr. Jones?
Mr. JONES. Well, I would say that that would certainly not
be typical of the members of our association at all. Those are
very high numbers. I do not know whether they relate to success
or not, but this money is the people's money--it belongs to the
people of the United States, and it should be used for them.
So, I believe our members, if they had those kinds of reserves,
would attempt to do just that--either to reduce fees, or
provide more services to them. I do not believe our members
typically have those kinds of reserves.
Chairman HOUGHTON. Again, getting back to the original
question, in terms of the inside arithmetic in the company, do
you see that there is a trend away from the original intent of
education and counseling into the debt management process?
Mr. JONES. It certainly appears so, based on those numbers,
yes.
Mr. ILLINGWORTH. Sir, if I can jump in. I think the one
thing that is important to consider besides the money and time
spent on education and the educational programs for the
basketball hall of fame, College Bowl, Emory University, the
University of Massachusetts, and the high schools we work in--
we are always looking for new ways to invest in education and
counseling, in order to further fulfill our mission as a
501(c)(3) corporation. Mr. Viale can explain to you what new
things we have on the books, in our planning, in order to do
that.
I think the other thing is, part of our mission--part of
our responsibility to our clients--is to be there next year for
them, and not to disappear. Sir, there are people at this table
whose organizations, whose companies, are failing. There are
failing credit counselors in the State of California, in the
State of Maryland, and all over this country, who cannot
fulfill their mission. With fair-share declining as well--which
a lot of people are suffering from, including the consumer--God
help us that we have this reserve in order to do that. We fully
intend to deploy it in this matter.
Chairman HOUGHTON. No, I have been around that barn for 40
years--I understand it. Yet I have not been a part of a
nonprofit organization. I have been a part of a for-profit
organization. You can build up the reserves, build up the
profitability, as long as you are servicing your customer, and
they are the people who are determining it. When you are a
nonprofit, it is a different element. That is the thing that
has concerned all of us. Well, look, you have been nice to be
here. I appreciate your wisdom, and I want to thank you very
much for taking the time.
I do not know whether I speak for you, Mr. Pomeroy, or you,
Mr. Sandlin, but I think we are all concerned about what we
have heard today. Consumers need to be treated fairly, as we
all know, and the IRS and the FTC need to monitor the
activities of these groups. So, therefore, I think that Mr.
Pomeroy and myself are going to ask the IRS and the FTC to
report back to us in 6 months on their continued activities to
ensure the proper conduct of credit counseling agencies. We
hope they will be aggressive in their review of this matter.
So, I thank you, again, very much. I appreciate your time.
Mr. ILLINGWORTH. Thank you.
Chairman HOUGHTON. Hearing adjourned.
[Whereupon, at 4:35 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
Statement of Michael Barnhart, Coalition for Responsible Credit
Practices
On behalf of the Coalition for Responsible Credit Practices, I want
to thank the Subcommittee for this opportunity to share with you our
insights on consumer credit and the credit counseling industry.
The Coalition for Responsible Credit Practices is a newly formed,
nationwide group of consumer credit counseling agencies and supporting
businesses working together for a robust, consumer-friendly credit
counseling industry. The Coalition's mission is to promote a vigorous,
pro-consumer credit counseling industry that protects consumers from
unethical practices and unnecessary bankruptcy. The Coalition wants to
make sure that as the credit counseling industry continues to grow, it
stays strong, competitive, balanced, professional and, above all,
beneficial for American consumers.
Putting Consumers First: Broad Review from the Consumer's Perspective
The credit counseling industry needs reform. However, reform that
puts consumers first cannot be developed in a vacuum or by a narrow
gauged inspection of industry practices and government regulation that
ignores how Americans are living, working and borrowing. It cannot be
done piecemeal without looking at the parts of the industry including
creditor practices.
Pro-consumer changes to current legal and regulatory practices
require a broad understanding of the comprehensive consumer experience
in securing and managing credit. It is impossible to identify necessary
and effective reforms in helping consumers without examining how and
why some consumers get into credit trouble in the first place.
One cannot truly understand the credit counseling industry without
understanding the integral roles played by consumers, creditors (large
and small) and credit counselors.
Solutions that put consumers first must be holistic--helping
protect consumers from unethical practices and unnecessary bankruptcy.
The Coalition for Responsible Credit Practices appreciates the
opportunity to present issues and solutions from the perspective of
what best benefits consumers.
The 1990s: Booming Economy--Booming Debt
During the booming economy of the 1990s consumer debt skyrocketed.
In 1990, the average household non-mortgage debt was $8,500. By 2000,
it had increased sharply to $14,500. Incredibly, the portion of that
related to credit card debt nearly tripled, from $2,985 to over $8,100
per household.
Clearly, the commonly held notion that debt is the product of ``bad
times'' is wrong. Equally clear, something else is going on.
Obviously, consumers are borrowing large amounts of money.
Outstanding consumer debt rose from $355 billion in 1980 to a
staggering $1.65 trillion in 2001. Consumers owe money to hundreds of
thousands of small creditors --doctors, dentists, `rent to own'
furniture outlets and department stores--as well as to a few relatively
large national banks and credit card companies.
In his book ``Credit Card Nation,'' author Robert Manning likens
the expansion of consumer credit debt in the 1990s to personal ``junk
bonds.'' And how are consumers managing their debt load? The evidence
suggests that some are not managing it well.
U.S. credit card debt today totals about $700 billion. Late payment
fees to creditors have risen from $1.7 billion in 1996 to $7.3 billion
in 2002, making them the third largest source of revenue for credit
card companies, trailing only interest and merchant fees.
Today, the average American family is paying about $1,100 a year in
interest on its credit cards. Interest rates on bank issued cards range
from 4.75% to 35% when the Federal Funds Rate is at 1%, an historic 45-
year low.
Paradoxically, credit card issuers mailed five billion card offers
in 2001, a 20% increase from 2000. Manning notes that throughout the
1990s, ``aggressive marketing of consumer credit'' posed serious
personal and credit problems for small businesses and for college
students. In fact, in 1999, the Consumer Federation of America
conducted a major news conference about the terrible impact of crushing
credit card debt on students, revealing that several even turned to
suicide and tragically ended their own lives. Jean Braucher, author of
``Options In Consumer Bankruptcy: An American Perspective'' concludes
that if ``creditors persist in aggressive marketing to high-risk
debtors, effective legal and social reforms should include better
disclosure, financial education in secondary school and, perhaps, even
direct regulation of risky creditor practices.'' (A copy is enclosed.)
Significant and important research is being done on consumer
credit. The Coalition strongly recommends that the committee and staff
review the important data being reported in works such as: ``As We
Forgive Our Debtors, Bankruptcy and Consumer Credit in America;'' ``The
Fragile Middle Class;'' and ``Credit Card Nation.'' (A bibliography has
been enclosed for the Committee's reference and convenience.)
Especially helpful is research published by Demos Public Policy
research titled: ``Borrowing To Make Ends Meet: The Growth of Credit
Card Debt in the '90s.'' (Copy enclosed.) This article describes
numerous practices of creditors that generate increasing consumer debt,
including:
Disclosures that emphasize low introductory interest
rates and fail to fully apprise consumers of the true interest and
penalty structures of the credit being offered, see id. at 41;
Drastically increasing fees and penalties, including late
fees, over-the-limit fees, balance transfer fees and cash advance fees,
which are generally borne by the consumers that are least able to
handle them, see id. at 35-37;
Indiscriminate and aggressive credit card marketing and
solicitation, rising to the level of 5.01 billion credit card
solicitations in 2001, see id. at 37; and,
The reduction of minimum payment requirements to very low
levels, generally around 2% to 5% of the balance owed, which creates
increasing consumer debt and extends the length of time it takes
consumers to pay off their credit card debts, while simultaneously
generating greater interest income to the credit issuers, see id. at
37. As reported in the Demos article, it would take a consumer an
astonishing 56 years to pay off a $10,000.00 credit card balance at 18%
interest by making only the required minimum monthly payments of 2% of
the balance, see id. at 13.
Consumers in Debt Crisis Need Choices
Consumers experiencing debt crisis have limited alternatives. Some
may seek attorneys to aid them with Chapter 7 (debt discharge) or
Chapter 13 (repayment plan) bankruptcy. Yet others may borrow against
their future by securing a home equity loan. Some consumers are lucky
enough to have a family member willing to help. A fraction simply are
able to ``pull themselves up by their bootstraps'' but, unfortunately,
most cannot. Consumers being pursued by collection agencies usually
find ``self help'' in coping with their creditors is impossible.
Thousands of American families live better lives because they have
the option of choosing to use credit counseling services--resources
that serve as many consumers' protection from collection letters and
harassing phone calls. Most consumers in debt crisis simply want the
phone to stop ringing. Credit counseling is an essential and valuable
service. Public policy makers and the industry should work together to
ensure that consumers are able to use this vital credit counseling
resource.
Credit counseling agencies (CCAs) are now assisting over 1.5
million American households a year manage their debt, save money and
avoid bankruptcy. America's credit counseling industry has more than
tripled in size within the past decade, and must grow another 40% just
to fulfill the requirements of the proposed Federal Bankruptcy Bill.
The credit counseling industry provides services that offer real
value to consumers that include debt counseling and debt management
plans (DMPs). Agencies provide consumers with valuable expertise on
what creditors are willing to accept and what benefits can be achieved.
And, they offer efficient, effective ways for consumers to repay debt.
The consumer usually deals directly with the CCA and does not
understand the creditors' role in the process. As a result, when
something goes wrong, even when the consumers' creditor is the cause,
the consumer blames the CCA.
Increasingly, consumers are demanding more ``customer focus'' from
credit counseling agencies. Consumers expect CCAs to be as consumer
friendly as other businesses and to offer such services as telephone
counseling, Internet access, computerized payments and evening and
weekend hours. Many traditional CCAs have been slow to meet new
customer demands because they are revenue bound by declining ``fair
share'' contributions from the largest creditors.
``Non-profit'' CCAs frequently act as agents of banks and credit
card companies and hence are creditor driven instead of consumer
focused. Many have executives from creditors sitting on their board of
directors. In fact, the Federal Trade Commission determined that NFCC
affiliated, non-profit CCAs must disclose to consumers that these non-
profit CCAs represent the very banks and credit card companies
consumers may be seeking protection from. (www.ftc.gov/opa/1997/03/
nfcc.htm)
It should be noted that there are literally hundreds of thousands
of creditors. Very few creditors, i.e., the largest 100 creditors,
account for approximately 98% of all ``fair share'' paid by creditors
to non-profit CCAs. Significantly, though, these few large creditors
refuse to pay ``fair share'' to for-profit CCAs, but also refuse to
give debt management benefits to consumers choosing for-profit CCAs.
Unsurprisingly, no for-profit CCA exists today because of this industry
practice. Also troubling, many CCAs are also finding themselves
situated in a position to take the blame for consumer issues that are
actually the faults of the consumers' creditors. (Please see enclosed
memorandum detailing these issues.)
In an environment of shrinking support from creditors and
increasing demand, it is very likely that the non-profit business model
is not long for the world.
Few dispute that credit counseling is valuable and positive. Credit
counseling agencies not only help consumers manage their debt, save
money and avoid bankruptcy, but a recent study indicates that CCAs also
help consumers improve their budgeting skills, their ability to afford
a new home and their overall financial status, as well as their credit
profiles.
According to a Georgetown University study, consumers who received
credit counseling reduced their total dollar amount of debt, their
total dollar amount of non-mortgage debt and the number of accounts
with unresolved balances. Most of them also diminished their use of
bank card credit limits and experienced fewer delinquencies.
``And, the large majority of counseled borrowers had significantly
fewer accounts, lower debt and fewer delinquencies relative to other
borrowers--behavior consistent with the advice provided in credit
counseling.''
Today, personal debt is spiraling and personal bankruptcies are
following suit. Credit counseling agencies are attempting to meet the
needs of American consumers. More and more consumers need unbiased
credit advice and want a full range of consumer friendly counseling
options that include the latest in telephone and Internet counseling.
It is crucial that we preserve credit counseling as an option to
help consumers get out of debt as quickly as possible.
The future of the traditional, non-profit CCA is, frankly, dim. The
traditional credit counseling agency is too dependent on creditors to
give consumers unbiased advice and too revenue strapped to modernize
practices and services to meet demand as a true business would to serve
and retain customers. For example, most CCAs don't even advertise their
services, leaving many consumers unaware that this significant resource
is available.
Pro-Consumer Credit Counseling: Consumer Choice, Competition and
Federal
Regulation
Traditional CCAs are losing market share to the independent
agencies. Most of the growth among CCAs is among independent agencies.
Simply put, the non-profit model is no longer viable. It is being
rejected by consumers and suffocated by creditors who are investing
less and less. There are several crucial steps that must be taken to
preserve CCAs and the benefits they bring to consumers and taxpayers:
1. CCAs must become consumer focused and operate like true
businesses.
Competition for consumers among for-profit and non-
profit CCAs would provide consumers choice and the
industry with incentives to provide consumer focused--
not creditor driven--consumer credit counseling.
The traditional players in the credit counseling
industry, such as the consumer credit counseling
service members of the National Foundation for Consumer
Credit (``NFCC'') were created and remain heavily
influenced by creditor organizations and are highly
dependent upon ``fair share'' payments from creditors.
See Stephen Gardner, Consumer Credit Counseling
Services: The Need for Reform and Some Proposals for
Change, Fall 2001/Winter 2002, at 31, 32. Because of
their close relationships with creditors, the advice
provided to consumers by traditional NFCC member
entities is likely to be limited and may be ``improper
. . . [and] to the direct benefit of some creditors.''
See id. at 31, 33. For instance, organizations that are
NFCC members may ``not adequately disclose the[ir]
collection agency role to consumers who seek and obtain
counseling,'' and often ``it is the set policy of some
[of these] organizations that they never refer debtors
to bankruptcy.'' See id. at 31. It has been alleged
that the control of creditors over the NFCC member
entities is so great that some creditors will work only
with credit counseling agencies that are members of the
NFCC and that the NFCC and its member entities have
engaged in anti-competitive behavior in violation of
antitrust laws. See In re: Consumer Credit Counseling
Services Antitrust Litigation, No. MDL 97MS233, 1997
U.S. Dist. LEXIS 19669, at *4--*7, 1997 WL 755019, at
*2 (D.D.C. Dec. 4, 1997).
A recent report published by the Consumer Federation
of America and National Consumer Law Center highlights
the need for the credit counseling industry to elevate
its standard of professionalism, and embrace ``best
practices'' that increase consumer benefits and improve
customer service and satisfaction. We agree and we
believe that regulators, creditors, CCAs and consumer
advocates need to work together to find a funding
solution that will work for everyone--especially
consumers--while helping the industry continue to grow
and flourish.
2. Competition between ``non-profit'' and market based CCAs would
benefit consumers.
The ``non-profit'' CCA is only as viable as the level
of support they receive from creditors. Without a
creditor subsidy, consumers must forgo counseling or
pay reasonable fees. Large banks and credit card
companies created the credit counseling industry a
half-century ago as an alternative way to collect debt
from consumers who might otherwise file for personal
bankruptcy and gain release from the obligation of
repayment. These large creditors created and funded
CCAs by providing a subsidy of approximately 15%--
allowing CCAs to present themselves as `non-profits.'
In the meantime, American debt is soaring.
The large creditors are now drastically reducing or
eliminating their financial ``fair share'' support to
CCAs, reducing it, on average, to less than 4% of the
amounts repaid. There is a vast contingency of smaller
creditors who do not pay any fair share--encompassing
doctors, lawyers, collection agents, loan companies,
local banks, student loan companies, utility companies,
credit unions, and small retail stores, just to name a
few. And since most smaller creditors pay no fair
share, non-profit CCAs are not a sustainable business
model. A myriad of differing state laws are causing the
cost of compliance to skyrocket while, simultaneously,
fees are being ``capped'' by states. Without
competition from market-based companies, consumers will
be left on their own to negotiate against some of the
largest credit card companies and banks in the world.
And, with no revenues being generated by consumers who
pay for the services they receive, consumers will not
be able to get the key services they need.
In June of 2003, Howard Beales, Director of the
Bureau of Consumer Protection at the FTC, praised the
modernization of the consumer credit granting industry
from the old model of in-person visits to a local
banker. Likewise, modernization in the credit
counseling industry is desperately needed in allowing
competition among for-profit and non-profits in the
best, most efficient manner of financing modern credit
counseling services. Creditors--both for-profit and
non-profit--have dramatically changed over the last
half century. The same cannot be said for the credit
counseling industry because for-profits have been
banned.
3. Fair Federal regulation that preempts the confusing 50-state
patchwork status quo would benefit consumers.
Practical, consistent federal regulation of CCAs
would benefit consumers, creditors and counselors.
National rules will protect consumers across the
country with consistent standards while providing
incentives for industry investment. In some states
credit counseling is illegal. Georgia just this year
changed their statute outlawing credit counseling. In
Kansas, it is still illegal. Federal regulation would
be vastly more effective and efficient by overriding
the confusing, inconsistent, and unnecessarily
expensive state patchwork of laws and creditor
mandates.
The Coalition for Responsible Credit Practices believes the
industry should hold itself to high standards and employ industry
``best practices.'' This can be achieved through several mechanisms,
specifically:
1. Practical, consistent federal regulation.
National rules would protect consumers across the
country and provide incentives for industry investment,
while overriding the confusing, inconsistent state
patchwork of laws and creditor mandates.
2. Industry-wide adoption of Best Practices.
Industry trade associations should lead the industry
in developing and enforcing policies, and implementing
clear, dependable procedural and operating standards,
including:
Thorough, regular training and
certification.
Approved, documented standards for
proposal processing and program enrollment.
Honest, accurate advertising.
Full disclosure of funding sources,
including percentage from creditor.
3. Further resources pledged to customer service.
An even legal and regulatory playing field for
nonprofit and market-priced credit counseling agencies
alike will boost competition within our industry,
ultimately benefiting consumers through agency
investment in new products and services, such as:
Improved efficiency through superior
third-party vendors.
Faster, easier electronic payment
options for consumers and creditors.
More convenient counseling services
for consumers, like interactive voice response
and Internet.
It is also extremely important that creditors make a stronger
commitment to customer satisfaction. As previously noted, many consumer
complaints about credit counseling are actually the fault of the
creditors and beyond the control of the CCA. CCAs and creditors must
work together, employing the latest business methods and technological
innovations will help the industry exceed consumer expectations.
Creditors must give full benefits of
debt-management plan promptly, including waiver
of late fees, within first week of program
enrollment.
CCAs must provide effective,
efficient, time flexible counseling sessions.
Creditors should discontinue
collection calls within the first week of
program enrollment.
Creditors must provide timely
responses to payment proposals and payment
postings.
Creditors should provide greater
availability of creditor representatives.
CCAs owe consumers unbiased
counseling advice.
Creditors should ensure that credit
card statements reflect changes upon debt-
management plan enrollment.
The Coalition is committed to preserving and promoting this
valuable, vital industry. We hope the Coalition's work will ultimately
help millions more Americans manage their credit card debt, save money
and avoid bankruptcy. On behalf of our membership, I want to thank the
Oversight Subcommittee and offer our assistance in working together for
a strong and consumer-oriented service.
Thank you again for this opportunity to submit testimony.
______
Bibliography
``Credit Card Nation: The Consequences of America's Addiction to
Credit.'' Robert D. Manning. Basic Books, 2000.
``The Fragile Middle Class.'' Teresa A. Sullivan, Elizabeth Warren,
Jay Lawrence Westbrook, Yale University Press, 2000.
``As We Forgive Our Debtors: Bankruptcy and Consumer Credit in
America.'' Teresa A. Sullivan, Elizabeth Warren, Jay Lawrence
Westbrook, Beard Books, 1999.
______
Summary of Written Statement of Michael Barnhart, Coalition for
Responsible Credit Practices
The Coalition for Responsible Credit Practices is a newly formed,
nationwide group of consumer credit counseling agencies and supporting
businesses working together for a robust, consumer-friendly credit
counseling industry.
Putting Consumers First: Broad Review from the Consumer's Perspective
The credit counseling industry needs reform. However, reform that
puts consumers first cannot be developed in a vacuum or by a narrow
gauged inspection of industry practices and government regulation that
ignores how Americans are living, working and borrowing.
Booming Debt
During the booming economy of the 1990s consumer debt skyrocketed.
In 1990, the average household non-mortgage debt was $8,500. By 2000,
it had increased sharply to $14,500. Incredibly, the portion of that
related to credit card debt nearly tripled, from $2,985 to over $8,100
per household.
U.S. credit card debt today totals about $700 billion. Late payment
fees to creditors have risen from $1.7 billion in 1996 to $7.3 billion
in 2002, making them the third largest source of revenue for credit
card companies, trailing only interest and merchant fees.
Today, the average American family is paying about $1,100 a year in
interest on its credit cards. Interest rates on bank issued cards range
from a 4.75% to 35% when the Federal Funds Rate is at 1%, an historic
45-year low.
Paradoxically, credit card issuers mailed five billion card offers
in 2001, a 20% increase from 2000.
Consumers in Debt Crisis Need Choices
Consumers experiencing debt crisis have limited alternatives. Some
may seek attorneys to aid them with Chapter 7 (debt discharge) or
Chapter 13 (repayment plan) bankruptcy. Yet others may borrow against
their future by securing a home equity loan. Some consumers are lucky
enough to have a family member willing to help. A fraction simply are
able to ``pull themselves up by their bootstraps'' but, unfortunately,
most cannot.
Credit counseling is an essential and valuable service. Public
policy makers and the industry should work together to ensure that
consumers are able to use this vital credit counseling resource. Credit
counseling agencies (CCAs) are now assisting over 1.5 million American
households a year manage their debt, save money and avoid bankruptcy.
Increasingly, consumers are demanding more ``customer focus'' from
credit counseling agencies. Consumers expect CCAs to be as consumer
friendly as other businesses and to offer such services as telephone
counseling, Internet access, computerized payments and evening and
weekend hours. Many traditional CCAs have been slow to meet new
customer demands because they are revenue bound by declining ``fair
share'' contributions from the largest creditors.
``Non-profit'' CCAs frequently act as agents of banks and credit
card companies and hence are creditor driven instead of consumer
focused. There are literally hundreds of thousands of creditors. In
contrast, very few creditors, i.e., the largest 100 creditors, account
for approximately 98% of all ``fair share'' paid by creditors to non-
profit CCAs. The traditional CCA is too dependent on creditors to give
consumers unbiased advice and too revenue strapped to modernize
practices and services.
The ``non-profit'' business model is obsolete.
Pro-Consumer Credit Counseling: Consumer Choice, Competition and
Federal Regulation
There are several crucial steps that must be taken to preserve CCAs
and the benefits they bring to consumers and taxpayers:
1. Creditor Commitment to Consumer Satisfaction. It is extremely
important that creditors make a stronger commitment to customer
satisfaction. Many consumer complaints about credit counseling are
actually the fault of the creditors and beyond the control of the CCA.
CCAs and creditors must work together, employing the latest business
methods and technological innovations to help the industry exceed
consumer expectations.
2. Modernization of Traditional CCAs. CCAs must become consumer
focused and operate like true businesses. Competition for consumers
among for-profit and non-profit CCAs would provide consumers choice and
the industry with incentives to provide consumer focused--not creditor
driven--consumer credit counseling.
3. Competition Between ``Non-Profit'' and Market-Based CCAs.
Injecting competition would benefit consumers. Without a creditor
subsidy, consumers must forgo counseling or pay reasonable fees.
Without competition from market based companies, consumers will be left
on their own to negotiate against some of the largest credit card
companies and banks in the world.
4. Fair Federal Regulation. The federal government must establish
national regulation that preempts the confusing 50-state patchwork
status quo would benefit consumers. Practical, consistent federal
regulation of CCA would benefit consumers, creditors and counselors.
[Additional attachments are being retained in the Committee files].
Statement of Dewey T. Matherly, Consumer Credit Counseling Service,
Inc., Gastonia, North Carolina
Our position on the state of the credit counseling industry
is some of the companies have hurt the accredited agencies by
practicing services that are not for the good of the client,
such as charging outrageous fees and soliciting clients by
phone. Our clients are now questioning our practices because of
the unscrupulous agencies and we have always been above board
and offered budgeting classes and other services that help our
clients even if we do not sign them up for debt management. Our
revenues continue to decrease because creditors have not been
able to distinguish between reputable companies and companies
out to make a quick dollar and not provide their clients with
all the services they need. Our agency feels that all agencies
should have the same regulations and be held to the same
standard. We are a part of a committee that is trying to
establish a way to regulate the credit counseling industry in
our state.
Statement of Jane E. McNamara, GreenPath Debt Solutions, Farmington
Hills, Michigan
GreenPath Debt Solutions, a non-profit consumer credit
counseling organization headquartered in Farmington Hills,
Michigan, appreciates the opportunity to submit this statement.
GreenPath applauds the recent actions of the IRS and FTC and of
Chairman Houghton and this Subcommittee to combat abuses by so-
called credit counseling organizations that misuse their non-
profit status, offer consumers bad advice, and engage in
unconscionable and deceptive trade practices. We at GreenPath
are your allies in this effort.
GreenPath operates 38 full-time branch offices in Michigan,
New York, Wisconsin, Illinois, and Arizona and is authorized to
conduct business throughout most of the United States. Since
its establishment in 1961, GreenPath has sent nearly $1.2
billion to creditors on behalf of more than 200,000 debt
management clients. We are accredited by the Council on
Accreditation and are members of the National Foundation for
Credit Counseling (the ``NFCC'') and the Better Business
Bureau. GreenPath is also a HUD-approved Housing Counseling
Agency.
The credit counseling industry is, quite frankly, at a
turning point. Now is the time to comprehensively and
aggressively address the unconscionable trade practices of
phone-based debt prorating companies masquerading as credit
counselors, including abuse of their non-profit status. Failure
to act could result in an industry dominated by entities more
interested in their own well-being than the well-being of
vulnerable individuals who turn to credit counseling to avoid
financial ruin.
GreenPath, like all members of the NFCC, adheres to
rigorous certification and accreditation standards that require
us to live up to our nonprofit status and to serve consumers
professionally and with compassion. For example, GreenPath
offers free and low cost education and counseling services to
help consumers learn better money and credit management skills.
We work with other local support services, such as family
counselors, crisis lines, and legal aid, to help our clients
with other underlying issues that may affect their finances.
Most importantly, only consumers who can benefit from
intervention with creditors are recommended for formal debt
repayment plans, and those plans cover both secured and
unsecured debt and include concessions like reduced monthly
payments, waived late fees, and lowered interest rates.
GreenPath is governed by a local and independent Board of
Directors, which helps ensure that our practices are fair,
consumer-focused, and untainted by improper relationships and
shell transactions that enrich executives and inure to the
benefit of for-profit companies.
This has been, and continues to be, the holistic approach
to debt management that GreenPath offers consumers who contact
its offices.
Unfortunately, as Mr. Boisclair indicated in his testimony
on behalf of the NFCC, there has been recently a disturbing
proliferation of unsavory entities calling themselves credit
counselors, that are in fact single-focus, debt prorating
companies. These entities are not governed by local and
independent Boards. Instead of a holistic approach to
counseling, these organizations focus only on the revenue
generating aspect of our business: debt repayment plans. They
relentlessly advertise quick fixes, promise no or low fees, and
use the not-for-profit designation to attract or entice
unsuspecting consumers.
What they really offer is a brief, quick-fix telephone
question and answer session that is touted as a cure for a
consumer's ailing fiscal health. Many consumers are talked into
a debt repayment plan loaded with high fees, and those plans
cover only credit card and unsecured debt, because creditors do
not typically pay compensation for payments on auto loans,
mortgages, utilities, and other secured debt. The more people
these agencies sign up on debt plans, the more money they make.
In some cases, basic budget counseling is all consumers need to
solve their problems, but that advice is not offered.
GreenPath strongly believes that credit counseling
organizations must provide real counseling in order to educate
consumers and enhance their financial management skills. A
recent study by Georgetown University found that consumers who
received credit counseling, but did not enroll in a debt
management program, significantly improved their credit score
and payment behavior over the next three years (relative to
consumers who had similar credit risk profiles but did not
receive counseling). Counseled consumers:
Were 38 percent less likely to suffer an account
charge-off or file for bankruptcy;
Averaged 11 fewer delinquencies in the last year
of the observation period;
Increased credit scores by an average of 36
points more than the comparison group; and
Lowered non-mortgage debt by an average of
$14,400 more than the comparison group.
At GreenPath, all our clients receive 60 to 90 minutes of
credit counseling by accredited, college educated individuals,
including a personal budget and action plan, regardless of
whether they enroll in a debt management program. In fact,
unless GreenPath concludes it is a viable alternative, a
consumer is not even offered a debt management program. We
understand that counseling is all that is needed by some
consumers and that others lack the income to make a debt
management program workable.
For those individuals whose financial situation dictates a
debt management program, GreenPath negotiates with all
creditors and includes all types of debt on the management
program. Unlike single-focus, debt prorating companies, we
assist our clients with all their debts to help them avoid
foreclosure on their homes, repossession of their cars, and
shutoff of their utilities. We do this even though we receive
no additional fee from the consumer and creditors do not
provide any financial incentives for handling secured debt.
GreenPath paid 11,318 creditors in 2002, and only 1,694 of
those creditors contributed funding.
Moreover, unlike national single-focus, debt prorating
companies whose toll-free number is the only point of debtor
contact, GreenPath provides face-to-face credit counseling
service in its local communities. The availability of in-person
counseling can be critical. At GreenPath, we have found that
the success rate for consumers counseled face-to-face is about
35% higher than for those counseled over the phone.
We are active members of our communities in other ways too.
Over the past 12 months, GreenPath counselors have conducted
473 free community education presentations for 4,862 attendees
in schools, businesses, churches, and other community
organizations. Our local offices have relationships with
neighborhood credit unions and banks that enable them to pass
on greater benefits to our clients.
Unfortunately, to a debtor in financial straights, all non-
profit credit counselors look and sound alike. So by staying
true to our values, which include free financial consultations,
community involvement, and fully-staffed branch offices,
GreenPath is at a severe competitive disadvantage with respect
to companies that are little more than debt management program
mills staffed by people who provide little or no true
counseling. Obviously, our cost structure is much higher than
that of a call center, and true credit counselors like
GreenPath cannot spend enough on advertising to compete with
these operations. It is the consumer who suffers.
GreenPath welcomes government intervention to rid the
industry of entities that misuse their nonprofit status to
attract customers and charge high fees. Indeed, GreenPath has
already aggressively lobbied on a state level toward the same
goal. In New York, where GreenPath has been licensed since
1995, we successfully worked with the state legislature and
executive branch to close a licensing law loophole which
allowed out-of-state credit counselors that did not have a
physical presence in New York, including those targeted by the
FTC and IRS, to do business without a license. Unlike licensed
credit counselors, the State Banking Department had no
jurisdiction over the out-of-state entity's business and could
not impose disclosure requirements, regulate fees, or monitor
the process by which payments are actually made to creditors.
The 2002 law strengthened the Banking Department's ability
to protect consumers by giving it jurisdiction over any entity
that solicits budget planning business in New York and enters
into a budget planning agreement with a New York resident,
regardless of its physical location.
The new law also provides the Banking Superintendent with
the authority necessary to appropriately oversee all budget
planners who do business with New Yorkers. Included among the
important enforcement and regulatory tools are requirements
that:
licensees post a bond or deposit of at least
$250,000;
licensees annually submit an independently
audited financial statement;
licensees promptly notify the superintendent of
new officers and directors and provide such other information
that she may require;
a budget planner license may be revoked based on
a criminal conviction involving moral turpitude or fraud or a
civil action involving fraud, misrepresentation or deceit;
contracts between a planner and debtor must
contain certain consumer protection provisions;
prohibit deceptive advertising and the
commingling of monies received from debtors; and
the superintendent may direct a licensee to
adjust unreasonable fees.
Mandated measures such as these, fairly applied to all
businesses that hold themselves out to the public as credit
counselors, are the best way to rid the industry of those who
would exploit vulnerable debtors. Similar enforcement and
regulatory tools may serve as a model for the entire country.
GreenPath is dedicated to helping people resolve financial
problems and promotes the wise use of credit through counseling
and education. Our mission statement says it all: ``Through
financial knowledge and expertise, we enable people to enjoy a
better quality of life. ''
Like the NFCC, we look forward to working with Congress,
federal and state regulators, consumer advocates, creditors and
others to help shape a national dialogue that will establish
policies and guidelines to protect consumers from predatory
debt service providers and that will sustain the long-standing,
reputable credit counseling agencies in our industry. Thank you
for this opportunity to present our views.