[Senate Hearing 108-545]
[From the U.S. Government Publishing Office]
S. Hrg. 108-545
PROFITEERING IN A NON-PROFIT INDUSTRY: ABUSIVE PRACTICES IN CREDIT
COUNSELING
=======================================================================
HEARING
before the
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
----------
MARCH 24, 2004
----------
Printed for the use of the Committee on Governmental Affairs
S. Hrg. 108-545
PROFITEERING IN A NON-PROFIT INDUSTRY: ABUSIVE PRACTICES IN CREDIT
COUNSELING
=======================================================================
HEARING
before the
PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
of the
COMMITTEE ON
GOVERNMENTAL AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
SECOND SESSION
__________
MARCH 24, 2004
__________
Printed for the use of the Committee on Governmental Affairs
U.S. GOVERNMENT PRINTING OFFICE
93-477 WASHINGTON : DC
____________________________________________________________________________
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
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
COMMITTEE ON GOVERNMENTAL AFFAIRS
SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio CARL LEVIN, Michigan
NORM COLEMAN, Minnesota DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas
Michael D. Bopp, Staff Director and Chief Counsel
Joyce A. Rechtschaffen, Minority Staff Director and Counsel
Amy B. Newhouse, Chief Clerk
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PERMANENT SUBCOMMITTEE ON INVESTIGATIONS
NORM COLEMAN, Minnesota, Chairman
TED STEVENS, Alaska CARL LEVIN, Michigan
GEORGE V. VOINOVICH, Ohio DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama MARK PRYOR, Arkansas
Raymond V. Shepherd, III, Staff Director and Chief Counsel
Steven Groves, Counsel
Katherine English, Counsel
Elise J. Bean, Minority Staff Director and Chief Counsel
Mary D. Robertson, Chief Clerk
C O N T E N T S
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Opening statements:
Page
Senator Coleman.............................................. 1
Senator Levin................................................ 7
Senator Akaka................................................ 9
Senator Dayton............................................... 11
Senator Pryor................................................ 29
Prepared statements:
Senator Durbin............................................... 85
Senator Lautenberg........................................... 87
WITNESSES
Wednesday, March 24, 2004
Raymond Schuck, Victim, Cambridge Credit Counseling Corp., Lima,
Ohio........................................................... 12
John Pohlman, Former Employee, Cambridge Credit Counseling Corp.,
East Granby, Connecticut....................................... 14
Jolanta Troy, Victim, AmeriDebt, Inc., Carlisle, Pennsylvania.... 16
Johnpaul Allen, Former Employee, AmeriDebt, Inc., New Market,
Maryland....................................................... 17
Chris Viale, General Manager, Cambridge Credit Counseling Corp.,
Agawam, Massachusetts.......................................... 32
Matthew Case, Chief Operating Officer, AmeriDebt, Inc.,
Germantown, Maryland........................................... 34
Cuba M. Craig, Chief Executive Officer, American Financial
Solutions, Seattle, Washington................................. 35
James Kroening, Director, FamilyMeans Consumer Credit Counseling
Service, Stillwater, Minnesota................................. 37
Andris Pukke, President, DebtWorks, Inc., Germantown, Maryland,
accompanied by John Williams................................... 62
Michael Malesardi, Chief Financial Officer, The Ballenger Group,
LLC, Frederick, Maryland....................................... 63
Bernaldo Dancel, Chief Executive Officer, Amerix Corporation,
Columbia, Maryland............................................. 65
Mark W. Everson, Commissioner, Internal Revenue Service.......... 78
Thomas B. Leary, Commissioner, Federal Trade Commission.......... 80
Alphabetical List of Witnesses
Allen, Johnpaul:
Testimony.................................................... 17
Prepared statement........................................... 95
Case, Matthew:
Testimony.................................................... 34
Prepared statement........................................... 127
Craig, Cuba M.:
Testimony.................................................... 35
Prepared statement........................................... 142
Dancel, Bernaldo:
Testimony.................................................... 65
Prepared statement........................................... 175
Everson, Mark W.:
Testimony.................................................... 78
Prepared statement with attachments.......................... 181
Kroening, James:
Testimony.................................................... 37
Prepared statement........................................... 150
Leary, Thomas B.:
Testimony.................................................... 80
Prepared statement........................................... 193
Malesardi, Michael
Testimony.................................................... 63
Prepared statement with attachments.......................... 153
Pohlman, John:
Testimony.................................................... 14
Prepared statement........................................... 91
Pukke, Andris:
Testimony.................................................... 62
Schuck, Raymond:
Testimony.................................................... 12
Prepared statement........................................... 89
Troy, Jolanta:
Testimony.................................................... 16
Prepared statement........................................... 93
Viale, Chris:
Testimony.................................................... 32
Prepared statement........................................... 97
Supplemental written submission with attachments............. 102
APPENDIX
Staff Report entitled ``Profiteering in a Non-Profit Industry:
Abusive Practices in Credit Counseling''....................... 203
EXHIBITS
1. Corporate Chart of Cambridge-Brighton....................... 240
2. Corporate Chart of DebtWorks-Ballenger Group................ 241
3. Corporate Chart of Ascend One-Amerix........................ 242
4. Service Agreement between Raymond Schuck and Cambridge
Credit Counseling Corp., dated June 29, 2001................... 243
5. $1,946 check sent by Raymond Schuck to Cambridge Credit
Counseling Corp. for enrollment in his debt management plan,
dated July 13, 2001............................................ 248
6. Client Financial Disclosure of Raymond Schuck, dated October
12, 2001....................................................... 249
7. Correspondence between AmeriDebt and Better Business Bureau,
dated December 26, 2002, regarding Jolanta Troy's enrollment in
debt management plan........................................... 250
8. AmeriDebt Debt Management Plan Agreement, page 5............ 251
9. Flow Chart prepared by AmerDebt for employee training....... 252
10. Debt Relief Clearinghouse solicitation letter............... 254
11. AmeriDebt document outlining procedure for forwarding leads
for home equity loans to Fidelity & Trust Mortgage, Inc. and
outlining compensation received by AmeriDebt counselors for
such lead...................................................... 255
12. Get Excited employee training document prepared by AmeriDebt 258
13. Tip Sheet on telephone sales skills for AmeriDebt employee
training....................................................... 259
14. Portion of AmeriDebt script pertaining to ``voluntary''
contribution................................................... 260
15. AmeriDebt September 2001 Company Notes...................... 261
16. How Do You Respond When Explaining Questions Regarding The
Contribution, prepared by DebtWorks............................ 262
17. Was The Client Forced To Sign The Agreement?, prepared by
DebtWorks...................................................... 263
18. Deposition of John Puccio conducted by the Permanent
Subcommittee on Investigations, July 1, 2004................... 264
19. Statement for the Record of Preston O. Duppins, Jr.,
President and Chief Executive Officer, Genesis Financial
Management, Inc................................................ 322
20. Statement for the Record of David C. Jones, President,
Association of Independent Consumer Credit Counseling Agencies. 327
21. Responses to suplemental questions for the record submitted
by Senator Frank Lautenberg to:
a. The Honorable Mark W. Everson, Commissioner, Internal
Revenue Service............................................ 338
b. The Honorable Thomas B. Leary, Commissioner, Federal
Trade Commission........................................... 339
c. Chris Viale, General Manager, Cambridge Credit
Counseling Corp............................................ 341
d. James Kroening, Director, FamilyMeans Consumer Credit
Counseling Service......................................... 343
e. John Pohlman, Former Employee, Cambridge Credit
Counseling Corp............................................ 344
f. Raymond Schuck, Victim, Cambridge Credit Counseling
Corp....................................................... 345
PROFITEERING IN A NON-PROFIT INDUSTRY: ABUSIVE PRACTICES IN CREDIT
COUNSELING
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WEDNESDAY, MARCH 24, 2004
U.S. Senate,
Permanent Subcommittee on Investigations,
of the Committee on Governmental Affairs,
Washington, DC.
The Subcommittee met, pursuant to notice, at 9:04 a.m., in
room 342, Dirksen Senate Office Building, Hon. Norm Coleman,
Chairman of the Subcommittee, presiding.
Present: Senators Coleman, Levin, Akaka, Dayton, and Pryor.
Staff Present: Raymond V. Shepherd, III, Staff Director;
Joseph V. Kennedy, General Counsel; Steven Groves, Counsel;
Katherine English, Counsel; Leland Erickson, Counsel; Mark
Greenblatt, Counsel; Jay Jennings, Investigator; Mary D.
Robertson, Chief Clerk; Kristin Meyer, Staff Assistant;
Katherine Russell, Detailee, FBI; Bill Winne, Professional
Staff; Andrew Plehal, Intern; Elise J. Bean, Democratic Staff
Director/Chief Counsel; Laura Stuber, Counsel to the Minority;
Marianne Upton (Senator Durbin); Tate Heuer and Gita Uppal
(Senator Pryor); Joyce Nicolas (Senator Akaka).
OPENING STATEMENT OF SENATOR COLEMAN
Senator Coleman. This hearing of the Permanent Subcommittee
on Investigations is called to order. Good morning and welcome
to today's hearing. We are holding this hearing to address the
continuing ongoing problems with the credit counseling
industry.
Consumer debt has more than doubled in the past 10 years.
The Nation's credit card debt current tops $735 billion, or an
average of nearly $7,000 per household. Since 1996, more than
one million consumers have filed for personal bankruptcy each
year and a record 1.7 million new filings in 2003.
Since the 1960's, consumers with credit card debt regularly
turned to their local non-profit credit counseling agency for
advice and financial education. Consumers were given face-to-
face counseling sessions with trained counselors. Credit
counselors conducted a detailed budget analysis with a
consumer, analyzed their spending habits, determined why the
consumer was in debt, and educated the consumer in how to avoid
falling back into debt.
One such agency, FamilyMeans Consumer Credit Counseling
Service, will testify about how the industry has run
successfully for all these years. Even today, FamilyMeans
provides an in-depth analysis of each consumer who comes to
them for help, gives them proper counseling and education, and
only when the consumer needs intercession with their creditors
enrolls them in a debt management plan. They provide these
services free of charge or at minimal expense to the consumer.
FamilyMeans is by no means the only credit counseling
agency that takes a comprehensive and holistic approach to each
consumer they provide services to. The agencies organized under
the National Foundation for Credit Counseling and the
Association of Independent Consumer Credit Counseling Agencies
require their members to adhere to strict standards of practice
and restrict the cost that customers may be required to cover.
Those associations prove that self-regulation can be an
effective means of keeping this industry consumer-friendly.
Under traditional social service models, consumers who
could not afford to make all their monthly credit card payments
often enrolled in a debt management plan, or DMP for short,
which allowed them to consolidate their debts from several
credit cards, reduce their monthly payments, and lower their
interest rates. The traditional credit counseling agencies
provided counseling, education, and debt management plans free
of charge or for minimal contributions. To cover operational
costs, creditor banks paid credit counseling agencies a
percentage of the money that was collected from consumers
through debt management plans. The credit counseling industry
successfully operated in this manner for several decades.
Over the past several years, however, the credit counseling
agency has undergone significant changes. New and aggressive
credit counseling agencies have changed the manner in which
consumers are treated. These changes have resulted in consumer
complaints about excessive fees, pressure tactics, nonexistent
counseling and education, promised results that never come
about, ruined credit ratings, poor service, in many cases being
left in worse debt than before they initiated their debt
management plan.
We will hear testimony today from two insiders who worked
for two of the Nation's largest non-profit credit counseling
agencies. They describe the organizations at these non-profits
as telemarketing sweatshops designed to take advantage of
thousands of people in bad financial positions. One of the
insiders describes this scene as ``it was a boiler room
mentality. There was a large board at the front of the room
that reminded me of the leader board at a golf tournament. It
had the names of counselors who had the top sales for the month
in red and yellow lights.'' Make no mistake, these credit
counseling agencies were designed to sell a product, the debt
management plan, not primarily to deliver a service of
education and counseling.
The Federal Trade Commission and the Attorney Generals of
Illinois, Maryland, Minnesota, Missouri, and Texas have taken
action against AmeriDebt, DebtWorks, and their related
partners. The Internal Revenue Service has initiated audits of
over 50 credit counseling agencies. Several class action
lawsuits are currently pending against several of the new
entrants.
Clearly, something is wrong with the credit counseling
industry. So what has gone wrong and what has happened? It
would seem that money is the root cause of these problems. Many
of these new entrants in the credit counseling industry have
developed a business model which is based on generating revenue
rather than providing counseling to indebted consumers.
This new for-profit model is designed so that credit
counseling agencies generate massive revenues to fund
advertising, marketing, executive salaries, and any number of
other activities beyond actual credit counseling. The new model
looks to the consumer to provide these revenues.
When profit motive is injected into a non-profit industry,
it should come as no surprise that harm to the consumers will
follow. Indeed, the primary effect of the for-profit model has
been to corrupt the original purpose of the credit counseling
industry, which was to provide advice, counseling, and
education to indebted consumers free of charge or at minimal
charge and place consumers on debt management plans only if
they are otherwise unable to pay their debts.
Some of the new entrants now reverse the practice. They
provide no bona fide education and counseling and place every
possible consumer into a debt management plan charging
unreasonable or even exorbitant fees.
For the past several months, Subcommittee staff has
conducted interviews of individuals, agencies, and for-profit
corporations to play a role in the credit counseling industry,
including credit counseling agencies, major creditor banks,
State and Federal officials, and consumer advocates. Thousands
of documents were reviewed. Over 500 consumer complaints were
examined and we spoke with over 50 consumers about their
experiences with several different credit counseling agencies.
We have also spoken to over 40 current and former employees of
credit counseling agencies in order to see how these agencies
operate from the inside.
Today's hearing presents the results of our investigation.
As I stated earlier, it would seem that money is at the root of
the problems currently facing the credit counseling industry.
The affiliation between non-profit credit counseling agencies
and for-profit businesses is at the core of that problem. A
review of the tax returns for both the non-profit and for-
profit entities reveals that the vast majority of the fees and
contributions made to the credit counseling agency are siphoned
off by the for-profit partners.
Our hearing today focuses on three particular credit
counseling conglomerates, and I say conglomerates because these
new entrants often consist of a complex network of interrelated
companies who are organized and operated for a common purpose,
to generate revenue by charging fees to consumers for enrolling
in debt management plans. The business practice of these new
entrants constitute a potential abuse of the 501(c)(3) tax-
exempt status granted to the credit counseling agencies by the
IRS. The misrepresentations made by these agencies to consumers
regarding fees and what education will be provided may likely
violate the Federal Trade Commission Act.
Our investigation has revealed the common patterns of
improper conduct by the new entrants. Each new entrant has been
established and organized for the specific purpose of
generating profits for one or more insider beneficiaries. The
insiders of the new entrants have engaged in questionable
transactions for the purposes of turning the non-profit agency
into a profit-generating business.
The new entrants, through their affiliated agencies, have
generated massive revenue for themselves by charging excessive
fees for initiating and managing a debt management plan and/or
siphoning off such fees to related for-profit companies.
Multiple non-profit counseling agencies have been organized by
the insiders to provide multiple streams of revenue for the
for-profit back-office processing companies.
Regardless of what business model is used, debtors received
little or no actual credit counseling or education as was
contemplated by granting them tax-exempt status. Employees are
routinely given bonuses based on their ability to enroll
debtors in debt management plans, evidencing an intent to
generate revenue rather than to provide relevant counseling and
education.
The new entrants that we have investigated engage in most,
if not all, of these practices. One of the conglomerates we
have invited to testify today is the Cambridge-Brighton family
of companies. Cambridge-Brighton consists of three credit
counseling agencies and three for-profit affiliates. Cambridge-
Brighton is owned and operated by two brothers, John and
Richard Puccio, who control each of the five entities in the
conglomerate. All revenues for this family of companies come
directly from the consumers. The vast majority of revenue that
comes into the three credit counseling agencies from consumers
is channeled to the three for-profit affiliates.
At the top of the pyramid is the for-profit Brighton Credit
Corporation of Massachusetts, now known as Brighton Debt
Management Services, which does the account processing for the
debt management plans generated by the three credit counseling
agencies. Since 1998, this entity realized gross revenues in
excess of $40 million.
Debt Relief Clearinghouse is the for-profit company that
produces infomercials, promotional videos, and other marketing
materials for the conglomerate. Between 2000 and 2002, Debt
Relief Clearinghouse has been paid in excess of $25 million.
A third for-profit company, Cypress Advertising and
Promotions, serves as an advertising broker and has been paid
over $6.5 million since 1999.
In total, the Cambridge-Brighton for-profit companies
boasts over $71 million during that time period, all as a
result of consumers being enrolled in debt management plans.
From where did all this money originate? It comes from
consumers who look to Cambridge for assistance with their
debts. Where some credit counseling agencies charge $25 or no
fee at all to set up a debt management plan, the Cambridge-
Brighton agencies charge a full month's payment as an up-front
fee. Raymond Schuck will testify as to how he was charged close
to $2,000 just to enroll in a debt management program. That fee
did not go to Mr. Schuck's creditors. It went into Cambridge's
coffers. Mr. Schuck's counseling and education consisted of two
phone calls lasting a total of 20 minutes. Unfortunately for
Mr. Schuck, the Cambridge debt management plan left him in
worse financial condition than when he started and he
ultimately declared bankruptcy.
The second conglomerate that is testifying today consists
of AmeriDebt and its for-profit affiliate, DebtWorks, now known
as The Ballenger Group. The credit counseling agency known as
AmeriDebt was operated for several years by Pamela Pukke as a
stand-alone entity enrolling consumers in DMPs and doing all
the necessary processing for the accounts. Then in 1999,
AmeriDebt decided to simply split itself into two companies,
one non-profit to enroll customers onto DMPs and one for-profit
company to perform the DMP processing function. The new for-
profit was called DebtWorks and was wholly owned and controlled
by Pamela Pukke's husband, Andris Pukke.
Employees who had been trained at AmeriDebt fanned out to
form additional credit counseling agencies which provide
additional streams of revenue for DebtWorks. DebtWorks and Mr.
Pukke assisted in the formation and organization of new credit
counseling agencies with start-up loans and legal assistance.
In return, these new agencies also contracted with DebtWorks
for DMP processing and referred consumers to Mr. Pukke's other
for-profit entities, Infinity Resources Group, Fidelity and
Trust Mortgage, and F&M Mortgage.
The non-profit credit counseling industry was very
profitable for DebtWorks. Between 1999 and 2002, DebtWorks
grossed in excess of $108 million. Again, it was the consumer
who paid all the money.
AmeriDebt's price for enrolling in a debt management plan
is 3 percent of the consumer's total debt, so if the consumer
is $25,000 in debt, the price of their plan with AmeriDebt
would be $750. Jolanta Troy will testify today about how she
thought her first payment to AmeriDebt of $783 was going to be
sent to her creditors, only to find out that AmeriDebt actually
kept the money. She had specifically told AmeriDebt she could
not afford to make the large up-front contribution. Mrs. Troy
wrote to AmeriDebt asking for the money to be returned, but
AmeriDebt flatly refused. Mrs. Troy received no actual
counseling and education. She was simply enrolled in a debt
management plan and left to her own devices. Like Mr. Schuck,
Mrs. Troy was left worse off by her debt management plan than
she was before and had to declare bankruptcy.
The final conglomerate we have invited to testify today is
the Ascend One conglomerate. The Ascend One conglomerate began
like AmeriDebt, as a single credit counseling agency called
Genus Credit Management. It was operated by Bernaldo Dancel.
Like AmeriDebt, Mr. Dancel simply split his agency into two
parts, naming his new for-profit company Amerix Corporation.
Amerix then set out across the country in an effort to form
additional credit counseling agencies. Amerix assisted in the
formation of five credit counseling agencies, all of which
currently contract with Amerix for DMP processing services.
As with the prior two conglomerates, the Ascend One-Amerix
group of companies is funded by consumer fees and
contributions. The credit counseling agencies in this
conglomerate are contractually obligated to remit between 50
and 85 percent of all their revenue to Amerix. In all, between
1998 and 2002, Amerix received gross revenues in excess of $386
million, all generated by the debt management plans. Other
revenues realized by Ascend One come from consumers who were
referred by the affiliated credit counseling agencies to its
wholly-owned for-profit subsidiaries, FreedomPoint Corporation
and FreedomPoint Financial. These companies market mortgage
broker services and other projects to highly leverage
consumers.
Consumers who contact credit agencies affiliated with the
Ascend One receive little counseling or education. In fact,
consumers were permitted to enroll in a debt management plan
entirely over the Internet without having spoken to a credit
counselor. This practice apparently removes the expense
associated with the counselor actually spending time to give
advice and education to consumers.
We will also hear testimony today from the Federal agencies
responsible for regulating and enforcing the laws in this area,
the Internal Revenue Service and the Federal Trade Commission.
Each of these agencies have taken modest steps to enforce the
tax code and consumer protection laws within this industry. I
am heartened to hear that Commissioner Everson has initiated
over 50 audits of credit counseling agencies. However, where
consumers are being victimized by supposed non-profit agencies
they trust to help get them out of debt, it is incumbent upon
the Federal Government to do more.
I look forward to hearing from our panelists this morning
and I know we will all learn a great deal. I am committed to
discovering the causes of the problem plaguing this once
consumer-friendly industry. I am equally committed to finding
solutions either by additional enforcement or legislation to
remedy these problems.
That was a rather lengthy statement, but due to the
complexity of what we are looking at today, I thought it was
the right thing to do.
As we have this hearing, I don't want to paint every credit
counseling agency with a broad brush here and say that all
consumers are being abused. But we had a system that was set up
to help people in debt and to provide them with counseling and
education and afterwards, if necessary, enroll in debt
management plans. It appears from our investigation that what
has happened in debt management plans for some of the new
entrants in this market have become a product, a product to
simply be marketed and to be sold. The person who loses out on
that is the person who needs help, who is reaching out for
help, who believes that they are going to a non-profit and
finds out in the end that, in fact, they are not getting the
counseling and the education that they need.
In addition, who is hurt are the other agencies out there.
I believe the best welfare program is a job. I want business to
prosper. But if I am a consumer out there, I am not going to
know who to call today. There are the NFCC and AICCCA, some of
the organizations that work with these agencies, have done, in
my opinion, a good job of working with their members, but it is
going to become difficult to distinguish between who is doing
the good job and who isn't and I think that is unfortunate. We
all get hurt by the actions of a few, and in this area, there
is a lot of money being made and it certainly caused this
Subcommittee to have a lot of concern.
I look forward to the hearing today, and with that, I will
turn it over to my distinguished colleague and Ranking Member,
Senator Levin.
OPENING STATEMENT OF SENATOR LEVIN
Senator Levin. Thank you, Mr. Chairman, and thank you for
calling these very important hearings. Your leadership here is
critically useful and it is going to make a difference.
The United States is awash in consumer debt. U.S. credit
card debt alone now exceeds $730 billion. That is even larger
than the country's deficit at the moment, our annual deficit.
Much of this consumer debt is owed by working families of
modest means trying to make ends meet. Part is due to expenses
associated with a health crisis, a death in the family, legal
problems, a divorce, or a job loss. For many middle-income
households, substantial debt is a fact of life and debt
management is an urgent and a painful necessity.
The issue that the Subcommittee is examining today under
the leadership of our Chairman is how to ensure that persons
who are struggling with debt and who turn to a credit counselor
for help are protected against abusive credit counseling
agencies seeking to exploit their financial distress.
Traditionally, and hopefully in most cases today, credit
counseling agencies are community-based, truly non-profit
entities seeking to educate consumers about their finances and
helping them to get back on their feet. For nominal fees,
reputable agencies set up formal debt management plans for
consumers to consolidate their debts, find ways to reduce the
debts owed, establish a schedule for repaying them, and in many
cases are able to reduce the interest rates owed.
Such agencies will contact creditors like a bank or a
credit card company and arrange for a waiver of late fees and
penalties, negotiate a reduction in debt in return for a
debtor's promise to begin a regular repayment schedule. When
done right, this work can save individuals and families from
bankruptcy and financial ruin while helping creditors obtain
some of the monies owed to them.
The problem is that in recent years, a less benign type of
credit counseling agency has infiltrated the credit counseling
industry. These newcomers generally claim to operate as non-
profits but are, in fact, organized to squeeze as much cash as
possible from debt-laden consumers and then funnel the bulk of
it to insiders or for-profit affiliates.
The 6-month Subcommittee investigation of three of the
largest credit counseling conglomerates in operation today has
documented a host of disturbing and abusive practices. One key
abuse involves debtors being charged excessive start-up and
monthly fees by a non-profit credit counseling agency to set up
and administer a debt management plan. For example, instead of
start-up and monthly fees of $23 and $14, the average charged
in 2002 by credit counseling agencies who are members of the
reputable National Foundation for Credit Counseling, the
investigation found some agencies charging hundreds or even
thousands of dollars per debtor.
Consumers have also complained of being misled about their
initial payment, believing it would go to their creditors when
instead the money was kept by the credit counseling agency as a
fee. The investigation also found that some agencies were
providing little or no individualized counseling to their
clients, instead, simply directing them to standardized debt
management plans.
In addition to excessive fees and poor counseling, the
Subcommittee investigation found a pattern of non-profits
funneling substantial amounts of cash to affiliated for-profit
entities under the guise of paying processing costs or other
charges. While reputable credit counseling agencies typically
pay monthly processing costs of a dollar to two dollars per
debt management plan, the monthly processing costs in the three
case studies investigated by the Subcommittee are dramatically
larger, typically $25 to $30 or more per plan. In this way,
significant sums are transferred from the non-profits to an
affiliated profit-making entity.
The Subcommittee found, for example, in a one-year period
between June 2001 and July 2002, one credit counseling agency
sent over $80 million to its for-profit affiliate. Another for-
profit entity over a 4-year period accumulated gross receipts
from five different non-profit credit counseling agencies in
excess of $386 million.
At the same time, the related owners of the for-profit and
non-profit companies were paying themselves lucrative salaries.
At one time, for example, in 2002, the owner and his brother
each drew salaries of $624,000. This is not how non-profit
community-based charities are supposed to operate.
The staff report being released today details three case
studies of credit counseling conglomerates which manage
billions of dollars in consumer debt and are suspected of
engaging in these kinds of abusive practices. All three groups
will testify today.
We will also hear from the two Federal agencies with key
responsibilities for stopping credit counseling abuses. One is
the Internal Revenue Service which has the power to determine
whether a tax exempt CCA is acting as a front for a profit-
making enterprise. The second agency is the Federal Trade
Commission which has the authority to determine whether
particular businesses are engaged in deceptive or unfair trade
practices. Both agencies have begun to tackle the mounting
problems in the credit counseling industry, but much more
enforcement is needed.
There is one more group that isn't here today but also has
an important role in stopping credit card abuses, and that is
the creditors. This is a third group with a real interest in
stopping these abuses. Major banks and credit card companies
often support credit counseling agencies by providing them with
a percentage of the payments made by the debtors they counsel.
These so-called fair share payments are a key source of revenue
for credit counseling agencies. Creditors can and should do a
better job in screening the credit counseling agencies they
support to stop abusive practices that hurt debtors and often
leave them in worse shape after paying their bills. Creditors
have powerful tools to help clean up the industry if they
choose to use them. It is clearly in their own financial
interest that the money owed to them actually reach them and
not be skimmed by unscrupulous operators.
Again, I commend Chairman Coleman for taking on this issue
and for shining a spotlight on credit counseling abuses. Too
many predatory credit counseling agencies are profiting at the
expense of debt-laden consumers who are very vulnerable, at
times leaving these consumers worse off than when they found
them. It is time to stop these practices before they ruin a
vitally needed community service sector.
Again, I thank you, Mr. Chairman, for taking this issue on
and for protecting America's consumers.
Senator Coleman. Thank you, Senator Levin. Senator Akaka.
OPENING STATEMENT OF SENATOR AKAKA
Senator Akaka. Thank you very much, Mr. Chairman. I will
make a brief statement and ask that my full statement be placed
in the record.
Senator Coleman. Without objection.
Senator Akaka. I appreciate your conducting this hearing
today, Mr. Chairman, and all of the work that has gone into
this thorough investigation of the credit counseling industry.
Americans are carrying enormous amounts of debt, and let me
mention some data from the Federal Reserve and Daily Bankruptcy
News. In 2003, consumer debt increased for the first time to
more than $2 trillion, according to the Federal Reserve. This
is a 28 percent increase since the year 2000. According to the
Daily Bankruptcy News, consumer debt is now equal to 110
percent of disposable income. Ten years ago, it was 85 percent,
and 20 years ago, it was 65 percent. These are daunting facts.
I have placed tremendous importance on the issue of
economic and financial literacy so that individuals are able to
make informed financial decisions in today's complex modern
economy. We must do more to increase financial literacy in our
country to help people better manage their credit.
I have sponsored a number of initiatives intended to
increase the financial knowledge of students, adults, and
investors, and I will continue to pursue these efforts to
empower individuals to better manage their finances.
In addition to education efforts, we must ensure that
people seeking help in dealing with complex issues, such as
debt management, are able to locate the assistance they need
and ascertain the quality of such assistance. More and more
working families are trying to survive financially and meet
their financial obligations. They seek out help from credit
counselors to better manage their debt burdens. It is extremely
troubling that unscrupulous credit counselors exploit for their
own personal profit, individuals who are to locate the
assistance that they need. As debt burdens increase, people
will need to seek more credit counseling.
I am concerned that certain credit counseling agencies have
abused their non-profit tax-exempt status. People believe
sometimes, mistakenly that they can place blind trust in all
non-profit organizations and that their fees will be lower than
those of other credit counseling organizations. Too many
individuals may not realize that the credit counseling industry
does not deserve the trust that the consumers often place in
it.
Many credit counseling organizations simply lead their
consumers to debt management plans. This may not be the best
option for many consumers. Certain credit counseling agencies
fail to provide consumers with their full range of options and
recommendations. For some individuals, bankruptcy is
appropriate for their set of circumstances and they may be
better off in the long run declaring bankruptcy instead of
having an ill-suited debt management plan imposed on them.
This flagrant abuse of individuals seeking assistance to
help manage their debts by certain credit counseling
organizations is appalling. I intend to introduce legislation
that will increase fee disclosures and prohibit certain unfair
practices so that consumers are adequately protected. We must
act to ensure that vulnerable individuals have access to
financial education and counseling that they need. Consumers
must be better informed about credit counseling fees and the
possibility that debt management plans may not be appropriate
for them.
In addition, relevant financial arrangements with lenders
or other financial service providers need to be disclosed to
consumers. In the past, the majority of credit counseling
organizations provided a reliable and valuable service to
people in need. We must restore consumer confidence in this
troubled industry.
Mr. Chairman, I look forward to working with my colleagues
and with you to restore trust in the credit counseling
industry. Thank you very much.
Senator Coleman. Thank you, Senator Akaka.
[The prepared statement of Senator Akaka follows:]
PREPARED OPENING STATEMENT OF SENATOR AKAKA
Thank you, Mr. Chairman. I appreciate your conducting this hearing
today and all of the work that has gone into this thorough
investigation of the credit counseling industry. Americans are carrying
enormous amounts of debt. In 2003, consumer debt increased for the
first time to more than 2 trillion dollars, according to the Federal
Reserve. This is a 28 percent increase since 2000. The Congressional
Research Service reports that the percentage of income used for
household debt payments, including mortgages, credit cards, and student
loans, rose to the highest level in more than a decade in 2001 and
remained above 13 percent in 2003. According to the Daily Bankruptcy
News, consumer debt is now equal to 110 percent of disposable income.
Ten years ago, it was 85 percent, and 20 years ago, it was 65 percent.
It is also important to note that when interest rates do eventually
rise, consumers will be faced with increasing debt obligations. These
are daunting facts.
I have placed tremendous importance on the issue of economic and
financial literacy so that individuals are able to make informed
financial decisions in today's complex modern economy. We must do more
to increase financial literacy in our country to help people better
manage their credit. I have sponsored a number of initiatives intended
to increase the financial knowledge of students, adults, and investors,
and I will continue to pursue these efforts to empower individuals to
better manage their finances. In addition to education efforts, we must
ensure that people seeking help in dealing with complex issues, such as
debt management, are able to locate the assistance they need, and
ascertain the quality of such assistance.
More and more working families are trying to survive financially
and meet their financial obligations. They seek out help from credit
counselors to better manage their debt burdens. It is extremely
troubling that unscrupulous credit counselors exploit, for their own
personal profit, individuals who are trying to locate the assistance
that they need. As debt burdens increase, people will need to seek out
more credit counseling.
I am concerned that certain credit counseling agencies have abused
their nonprofit, tax-exempt status. People believe, sometimes
mistakenly, that they can place blind trust in all nonprofit
organizations and that their fees will be lower than those of other
credit counseling organizations. Too many individuals may not realize
that the credit counseling industry does not deserve the trust that
consumers often place in it. The Consumer Federation of America (CFA)
found that 46 percent of agencies it surveyed encouraged debt
management plan (DMP) participants to view their voluntary
contributions as charitable donations. The representation that these
fees are voluntary is often misleading and inaccurate.
In addition, many of the fees imposed by credit counseling agencies
appear to be excessive. The National Federation of Credit Consumers
(NFCC) indicates that the average credit counseling organization in
2001 charged $14 for budget counseling sessions while most banks
offered this information for free. Furthermore, the average agency
charged $19 to enroll in DMPs, and $12 monthly to service them.
Together, these fees equaled $179 in expenses for participants during
the first year of enrollment. NFCC has sited that some organizations
are charging sliding and fixed monthly account fees as high as $50 and
$95, respectively.
Many credit counseling organizations simply lead their customers to
debt management plans. This may not be the best option for many
consumers.
However, certain credit counseling agencies fail to provide
consumers with their full range of options and recommendations. For
some individuals, bankruptcy is appropriate for their set of
circumstances and they may be better off in the long run declaring
bankruptcy instead of having an ill-suited debt management plan imposed
on them.
This flagrant abuse of individuals seeking assistance to help
manage their debts by certain credit counseling organizations is
appalling. I intend to introduce legislation that will increase fee
disclosures and prohibit certain unfair practices so that consumers are
adequately protected. We must act to ensure that vulnerable individuals
have access to financial education and counseling that they need.
Consumers must be better informed about credit counseling fees, and the
possibility that debt management plans may not be appropriate for them.
In addition, relevant financial arrangements with lenders or other
financial service providers need to be disclosed to consumers. In the
past, the majority of credit counseling organizations provided a
reliable and valuable service to people in need. We must restore
consumer confidence in this troubled industry. I look forward to
working with my colleagues to restore trust in the credit counseling
industry. Again, thank you Mr. Chairman for conducting this hearing.
Senator Coleman. Senator Dayton.
OPENING STATEMENT OF SENATOR DAYTON
Senator Dayton. Thank you, Mr. Chairman. I received a note
that you are limiting your opening statements to 5 minutes. I
haven't been here long enough to be allowed to make opening
statements. [Laughter.]
This is a novelty for me, so that won't be a problem. But I
do want to commend you, Mr. Chairman, and this excellent staff
for this excellent investigation report. It is very troubling,
what you have uncovered, but it is very important as it
affects, I am sure, many Minnesotans, whose concerns we share
as well as others.
I am mainly looking forward to hearing from the witnesses
and getting a perspective of that and I want to compliment the
Ranking Member also for involvement of himself and his staff.
He has put me to shame, once again. While I was enjoying the
balmy climes of Minnesota in March, he was in Iraq for the
second time last week savoring that 115-degree or whatever the
approximation is this time of year temperature.
Anyway, thank you again, Mr. Chairman. Congratulations on
excellent work and I look forward to hearing the witnesses
today.
Senator Coleman. Thank you very much, Senator Dayton.
I would now like to welcome today's first panel. Raymond
Schuck, a consumer who used Cambridge Credit Counseling
Corporation's debt management services; John Pohlman, former
employee of Cambridge Credit Counseling Corporation; Jolanta
Troy, a consumer who used AmeriDebt's debt management services;
and Johnpaul Allen, a former employee of AmeriDebt.
I really do appreciate all of you coming today to tell your
stories. I want to thank you in advance for your courage in
testifying. I know it is probably a pretty daunting thing to be
sitting on that side of the hall here.
As I mentioned in my opening statement, we are here to
address problems that are facing the credit counseling
industry. Mr. Schuck and Ms. Troy, you have had bad experiences
with credit counseling agencies, and since you have been most
directly and unfortunately affected by the changes in the
industry, I appreciate your willingness to share your stories
with us today. And as former employees of credit counseling
agencies, Mr. Pohlman and Mr. Allen will enlighten us to the
inside operations of some of these new entrants.
Before we begin, pursuant to Rule 6, all witnesses who
testify before the Subcommittee are required to be sworn in. I
would ask the witnesses to please stand at this time and raise
your right hand.
Mr. Schuck. May I take it by affirmation, please?
Senator Coleman. Yes. Do you swear that the testimony you
will give before the Subcommittee will be the truth, the whole
truth, and nothing but the truth, so help you, God?
Mr. Schuck. I so affirm.
Mr. Pohlman. I do.
Ms. Troy. I do.
Mr. Allen. I do.
Senator Coleman. We will be using a timing system today.
You will see the lights change from green to yellow to red.
Yellow means time to wrap up. Your full statements will be
entered into the record in their entirety.
Mr. Schuck, we will begin with you first, followed by Mr.
Pohlman, Ms. Troy, and Mr. Allen, and then after we have heard
all the testimony, we will turn to questions.
With that, Mr. Schuck, you may proceed.
TESTIMONY OF RAYMOND SCHUCK,\1\ VICTIM, CAMBRIDGE CREDIT
COUNSELING CORPORATION, LIMA, OHIO
Mr. Schuck. Good morning, Mr. Chairman and Members of the
Subcommittee. Thank you for the opportunity to share my story
with you. I am Raymond Schuck and I am here today briefly to
share my experience with you in dealing with Cambridge Credit
Counseling.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Schuck appears in the Appendix on
page 89.
---------------------------------------------------------------------------
In the summer of 2001, after retiring from 20 years of
serving as the director of a museum in Ohio, I found myself in
a strained financial situation. I was having difficulty
managing my debt, which had risen to the amount of
approximately $90,000 distributed among nine credit cards and
various banking institutions.
I heard about Cambridge on the radio and I decided to look
into what this non-profit credit counseling agency could do for
me to help me manage my debt. I called Cambridge and spoke with
a credit counselor. The counselor suggested a debt management
plan. I was promised a considerable reduction in interest rates
and that Cambridge could handle all my accounts.
After answering a list of questions about my various credit
cards, the counselor told me my monthly payment would be
$1,946. He said that Cambridge could charge me, or would charge
me 10 percent of my monthly payment for their services, which
amounted to $194 a month. I thought this was high, but I knew
very little about the industry and what was appropriate as far
as a fee goes. Also, I made the apparently naive assumption
that because it was a non-profit agency, I could trust them.
The counselor told me to hurry and send my first payment to
Cambridge to get the program started. I sent in a cashier's
check and felt optimistic that I was on the right path. I put
every credit card I could on the program except for one that I
retained for emergencies. And then I started getting calls from
some of my creditors. I received calls from three of my
creditors asking me why I had not made payments. I told them I
was with Cambridge on a debt management plan. Each of these
creditors was unaware of this fact and told me that no payments
had been received on my behalf.
I called Cambridge to find out what was going on, and
getting in touch with someone who knew about my debt management
plan and the status of my payments was an exercise in
frustration. When I was finally able to speak with someone in
customer service who could tell me about my account, I was
informed that the first payment I sent to Cambridge, almost
$2,000, was a fee for constructing my debt management plan. I
was absolutely shocked by this information. Had I known this
policy in advance, I would have reached a different--certainly
researched and looked into a different credit counseling
agency. I would not have agreed to give Cambridge $2,000 when
my money could have gone to my creditors.
I made numerous attempts to get matters straightened out
with my creditors on the late status of my accounts. Meanwhile,
I was receiving no help from Cambridge. In fact, I found out
that two of my cards actually never received payment from
Cambridge, even though I had been on their plan for several
months.
Taking all this into consideration, I felt obligated to
file a complaint against Cambridge with the Better Business
Bureau of Massachusetts. Not only was I disappointed by
Cambridge's failure to provide any financial counseling or
assistance to me, but also, I was actually financially worse
off after dealing with this company.
My credit rating was completely ruined because of the late
payments, and in addition, I was even penalized for these late
payments on my own credit card that I had left off the debt
management plan. The card raised my interest rate from 9.9
percent to 24 percent because they saw the late payments on the
other accounts.
After the mess of dealing with Cambridge, I went to a local
credit counseling service. This agency accepted a monthly
donation. There was no set-up fee like Cambridge. I was on a
debt management plan with this agency for about 2 months when
it became clear to me that the only reasonable option was to
file for bankruptcy, which, in retrospect, I probably should
have done in the first place.
It seems to me that if Cambridge had done a reasonable
analysis of my financial circumstances, the proper
recommendation would have been to advise me that a debt
management plan was not a feasible option. Putting me on a debt
management plan that cost $2,000 plus a high monthly
maintenance fee seems irresponsible and far from what one
considers a normal practice for a non-profit agency.
Having directed a non-profit organization myself for 20
years, I know that if I had operated my organization the way
Cambridge operates their organization, my non-profit status
would have been revoked. I can only conclude that credit
counseling agencies such as Cambridge are more interested in
making profits than they are in providing financial advice and
education.
Thank you for allowing me to tell my story and I look
forward to answering any questions that you may have.
Senator Coleman. Thank you, Mr. Schuck. Mr. Pohlman.
TESTIMONY OF JOHN POHLMAN,\1\ FORMER EMPLOYEE, CAMBRIDGE CREDIT
COUNSELING CORPORATION, EAST GRANBY, CONNECTICUT
Mr. Pohlman. Mr. Chairman, Senator Levin, and Members of
the Subcommittee, it is an honor to be here today to testify
about working in the credit counseling industry and
specifically working at Cambridge Credit Counseling.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Pohlman appears in the Appendix
on page 91.
---------------------------------------------------------------------------
I began working in the credit industry in 1991. I worked
for two different National Foundation of Consumer Credit
agencies until I was laid off by Consumer Credit Counseling
Services of Southern New England, who was downsizing due to the
state of the market. Large national credit counseling agencies
were acquiring significant portions of the market, causing
National Foundation of Consumer Credit agencies to merge
amongst themselves or to close their offices altogether.
With this in mind, I decided to look for a job with one of
those larger organizations, so I applied and was hired as a
counselor with Cambridge in September 2003. It did not take me
long to realize that Cambridge's approach to the credit
counseling industry was fundamentally different from mine. I
disagreed with most of Cambridge's practices, particularly
those that related to how they treated, managed, and served
their customers.
On the first day at Cambridge, I had to pick a false name.
I chose my son's name, Daniel. I thought this practice was very
strange, although most every Cambridge employee uses a fake
name when they are on the telephone talking to their customers.
I did not understand why I was unable to use my own name when I
was dealing with customers. I would always use my own name in
the past. Even management personnel used different names.
This, sir, was my first clue that I was about to take a
trip down a disheartening path. I was immediately uncomfortable
with the environment at Cambridge. I would describe it as a
boiler room mentality. All the counselors were in a large room
with video cameras on us all day long. You had to clock in and
out to go to the bathroom, to eat lunch, even to make a
personal call.
There was an electronic board at the front of the room that
reminded me of the leader board in a golf tournament. It had
the names of the counselors who had top sales for the month in
red and yellow flashing lights. This exhibited an obvious
emphasis on the sale of debt management plans.
In addition, I was surprised to learn that Cambridge paid
commissions to its counselors based on the size of the up-front
fees that are charged to their customers. A counselor could
earn 25 percent of this amount. Some counselors were rewarded
with 2-week sales trips to Florida for high sales volume. This
was unusual to me, as it was clear it would give the counselor
motive to enroll consumers on a debt management plan regardless
of their financial situation.
Along with positive incentives for sales, Cambridge also
used negative incentives when a counselor had low sales. On the
refrigerator in the Cambridge lunchroom, a sign hung on the
refrigerator saying, ``The two lowest producing counselors will
be cleaning the refrigerator on Saturdays.''
Cambridge's overall approach to the consumer was the most
troubling matter for me. I was entirely dissatisfied with the
level of scrutiny this company gave to a consumer's financial
circumstances when making such important decisions as whether
to go on a debt management plan. There are many options out
there in addition to the debt management plan--education, self-
budgeting, financial restructuring, and yes, in the worst case,
bankruptcy. I never heard any of these options discussed by
anyone at Cambridge. It was focused solely on the debt
management plan.
In my experience working at the National Foundation of
Consumer Credit agencies, I would spend an hour and a half
working with a consumer and their finances. When I was at
Cambridge, this process was expected to take roughly 10 to 15
minutes, all the time that was needed because the only
information that we got from the consumer was the account
information. There was no true budget analysis done for the
consumer. It was just an analysis to determine whether their
creditors would allow the consumer to enroll in the debt
management plan.
I was uneasy with the fact that I did not know anything
about the person's mortgage payments, health care costs, car
insurance, etc. How could I recommend this person to go on a
debt management plan? I knew nothing about them except that
they were in debt.
With the time they spent with the consumer so limited, I
had little confidence that they understood that the first
payment was kept by Cambridge. In fact, I was trained to tell
the customer, ``I will be faxing you the paperwork. It is very
simple and easy to fill out, shouldn't take you more than 10
minutes.'' But this was a pressure tactic that we were supposed
to use. It was a goal to authoritatively take them through the
process of signing up the plan as quickly as possible. I was
even instructed by one member of management to ``Treat them
like alcoholics.'' In other words, they need to know they need
help. Make them get it. Be authoritative and be forceful.
I truly believe that Cambridge preyed on a consumer's
desperation. In fact, I was regularly reprimanded for being too
nice to consumers. I was told to stick to the scripts. There
was no need for conversation or pleasantries. Words cost money
and defeat the purpose.
I only worked for Cambridge for 2 weeks, long enough to
realize that the practices of companies like Cambridge can give
the entire industry a bad name. Agencies like Cambridge abuse
the trust and vulnerable position of financially stressed
consumers and fail to provide any meaningful counseling or
education.
I came here today to help this Subcommittee understand that
something must be done about the credit counseling agencies
like Cambridge. The industry must be reformed for the good of
the American consumer. Thank you.
Senator Coleman. Thank you very much, Mr. Pohlman. Ms.
Troy.
TESTIMONY OF JOLANTA TROY,\1\ VICTIM, AMERIDEBT, INC.,
CARLISLE, PENNSYLVANIA
Ms. Troy. Good morning, Mr. Chairman and Members of the
Subcommittee. My name is Jolanta Troy and it is an honor to sit
before you this morning to tell you about my experience with
the company called AmeriDebt.
---------------------------------------------------------------------------
\1\ The prepared statement of Ms. Troy appears in the Appendix on
page 93.
---------------------------------------------------------------------------
In 1999, shortly after my divorce, I found myself in a
terrible financial situation. I am a behavior specialist
consultant. I work with mentally ill children and children with
behavior problems. I love working with the kids, but I don't
necessarily make a lot of money. I have two young children who
I have been raising by myself since my husband and I split up.
I had to use my credit cards to help support my children and
myself. The expenses started adding up and my credit card debt
reached a level I could not manage. I was $30,000 in debt.
I was very upset and depressed at this time of my life. I
was in terrible financial trouble. I was worried about my bills
and losing my house. I had no family here and nobody to turn to
to borrow money from or for support.
I saw a commercial for AmeriDebt on television. They said
they were a non-profit company, so I called AmeriDebt and I
spoke with a counselor who told me to go on a debt management
plan. I wasn't sure what to do and I wanted to think about it
for a while. After this call, the counselor called me back four
times, four different times. Every time the counselor called,
she would tell me how bad my situation was and that I needed to
do something about it. This counselor also said that AmeriDebt
was a non-profit organization, like a charity, and that I
needed their help. She was very pushy and almost degrading. She
made me feel embarrassed and ashamed, but I eventually decided
to go on the program.
The AmeriDebt counselor told me there would be a small
monthly charge, but since they were a non-profit, I was not
worried about the fees. The counselor told me to send a money
order to AmeriDebt right away for $783 so they could start my
payment program as soon as possible. So I sent AmeriDebt $783
and believed my debt management program would be set up
immediately and money would be going to my creditors.
Then I started receiving calls from the credit card
companies asking why I had not paid them. I tried to get in
touch with my counselor at AmeriDebt. I called customer service
and they told me that AmeriDebt kept the money as a voluntary
contribution. I knew that I agreed to a monthly charge, but I
knew nothing about them keeping my first payment as a voluntary
contribution. This was the first I heard of this.
I told AmeriDebt that I wanted a refund. They said it was
too late and they would not give me a refund. I was devastated.
I wrote to Better Business Bureau, but AmeriDebt still would
not refund my money. AmeriDebt wrote a letter saying that I had
agreed to make a contribution. That was not true. They never
refunded my money to me. I could not afford to give AmeriDebt
$800. I thought that money would go to my credit cards to pay
down my balances.
I did not have any money left over to pay my credit card
bills that month. I was still getting calls from my creditors.
They were now charging me late fees because they had not
received my payments. I was in a worse position than before I
went to AmeriDebt. I felt that I had no choice but to go to a
lawyer to help me file for bankruptcy. I wanted to be able to
pay my bills, but my income only stretched so far.
I am here today so that no other person has to go through
what I did. AmeriDebt took advantage of me. They present
themselves as some kind of charity there to help people.
Instead, they took almost $800 from me when they knew how bad
my finances were. This company preyed on me when I was at a
most vulnerable time, when I was frightened and unsure how to
manage my finances. I feel like my fears were manipulated by
AmeriDebt for their own benefit. Something must be done to stop
companies like AmeriDebt who are making money off good people
who are just trying to do the right thing.
Thank you very much.
Senator Coleman. Thank you, Ms. Troy. Mr. Allen.
TESTIMONY OF JOHNPAUL ALLEN,\1\ FORMER EMPLOYEE, AMERIDEBT,
INC., NEW MARKET, MARYLAND
Mr. Allen. Mr. Chairman, Senator Levin, and Members of the
Subcommittee, good morning. My name is Johnpaul Allen. I am
speaking to you this morning because of my experience as an
employee with AmeriDebt. I worked at AmeriDebt as a credit
counselor during the summer of 2003. My experience at AmeriDebt
was frustrating and disappointing.
---------------------------------------------------------------------------
\1\ The prepared statement of Mr. Allen appears in the Appendix on
page 95.
---------------------------------------------------------------------------
I was interested in being a credit counselor because I
enjoy working with people and helping them. I thought that
working for a non-profit organization would be a great way to
interact with people and to actually make a difference in
somebody's life. What I found at AmeriDebt was nothing short of
a sweatshop, a telemarketing outfit taking advantage of
thousands of people in bad financial situations.
I should have seen a red flag during my interview with
AmeriDebt when I was asked by my interviewers to sell them a
stapler to prove that I can make a sales pitch. That is really
what AmeriDebt is all about, sales. The goal for AmeriDebt's
counselors was to sell consumers a debt management plan
regardless of whether they needed it or not. When I was
training for my position as a counselor, I asked about the
education provided to consumers on financial matters. I was
told by management to ``concentrate on getting them on a debt
management plan.''
Throughout my time working at AmeriDebt, I was reprimanded
for spending too much time with consumers on the phone. When I
was trained, I was told that each call should take no more than
20 to 25 minutes and I would generally spend at least that long
with each caller explaining our program. Several times, I was
instructed to spend less time on each call and that my calls
should be no more than 15 minutes. This bothered me because I
didn't want to have to rush through such important things with
consumers who really needed my help.
Another thing I was repeatedly reprimanded for was the
information I was giving to customers. AmeriDebt charges a set-
up fee and a monthly fee, or as they call it, a ``voluntary
contribution.'' The consumer was supposed to have a choice
whether they wanted to pay the contributions. I would always
tell the customer that they did not have to pay the voluntary
contribution, or if they wanted, they could make the initial
contribution or the monthly contribution and not necessarily
both. At least two or three times a week, I would get pulled
aside by my managers and instructed to make sure that consumers
paid the voluntary contribution. The managers would say such
things to me like, ``Do you know that you are letting them
choose to pay or not to pay your salary?'' Or, ``Think of all
the money you could make if you collected those voluntary
contributions.''
What they were referring to were the bonuses that could be
made for enrolling people on debt management plans. AmeriDebt
would pay you a commission every 2 weeks for the number of debt
management plans you signed up or if you hit a certain amount
of voluntary contributions.
The pressure to get people signed up on the debt management
plan was significant. In fact, the only time we were allowed to
go off the script on a call was when a customer was not going
to give the voluntary contribution. We were instructed to say
things like, ``Don't you want us to be around for the next
person?'' We would tell them that we were a non-profit
corporation and thus subject to be audited by the IRS in an
effort to gain their trust in our fees and their
reasonableness. These were practices that seemed strange for a
non-profit organization.
In addition to feeling like a used car salesman pushing
these debt management plans, I also had concerns about the
service that these customers were getting after they set up on
a plan. I would get calls from people 2 or 3 months after I set
them up on a plan complaining that their creditors had still
not received a payment. The only thing I could do was to refer
them to The Ballenger Group. I did not have access to the
consumer's payment information.
One time, I took a special interest in a particular
client's predicament. This man was named Derek and he kept
calling me because his creditors were not getting paid. I tried
several times myself to get in touch with someone over at The
Ballenger Group so I could help this man, but to no avail. I
felt helpless and responsible, since it was me personally who
had enrolled Derek on the debt management plan.
I made the decision to leave AmeriDebt shortly after that.
I wanted to help these people, but in the end, I felt I had
done them a disservice. I can relate to these people. I have
been through tough financial times myself and have had to file
bankruptcy several years ago. I know how these people feel. No
one wants to declare bankruptcy. The average person wants to
take responsibility and pay their bills. They want to do the
right thing and AmeriDebt just pulls the rug right out from
underneath them.
I am thankful for the opportunity to be heard on the real
need for change in the practices of the companies like
AmeriDebt and I thank you for your time.
Senator Coleman. Thank you very much, Mr. Allen.
Each of the witnesses talked about non-profit. Ms. Troy,
you mentioned it twice in your testimony, that it was a non-
profit. Mr. Allen, I think I would describe you as talking in
altruistic terms, working for a non-profit, wanting to help
people. For the sales people, was there any doubt in your mind
that the use of the non-profit was as a vehicle to get the
trust of the customer?
Mr. Allen. Without a doubt.
Senator Coleman. Was there any question about that?
Mr. Pohlman. No.
Mr. Allen. If I were to tell you that we were a 501(c)(3)
corporation subject to be audited by the government every 3
months, I believe people do put a little trust in that.
Senator Coleman. Mr. Schuck, you have worked with non-
profits. Did you come in with a preset notion of it being a
non-profit? What did that mean in the back of your mind? What
were your expectations of dealing with a non-profit?
Mr. Schuck. My expectations were that I could trust them. I
felt they had the fiduciary responsibility as a non-profit to
take that trust and hold it sacred and, therefore, I felt quite
comfortable working with them initially until actually I
started to and then it changed and went the other way.
Senator Coleman. Both Mr. Pohlman and Mr. Allen--excuse me.
Ms. Troy, you mentioned that twice. You used the phrase non-
profit. Can you tell me what, in the back of your mind, what
you were thinking?
Ms. Troy. Yes. For me, I understood non-profit organization
as an organization which is getting donations or grants from
some sources, the State possibly, and I was sure that those
were trusted sources. I never thought that they might be
actually making profits. I thought they were designated to help
people.
Senator Coleman. Mr. Allen, you made a comment and we have
a chart there, for the DebtWorks-Ballenger Group.\1\ I think
DebtWorks is a predecessor to The Ballenger Group, but The
Ballenger Group then would be where DebtWorks is today. You
made the comment that you were concerned about one of your
customers----
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\1\ See Exhibit No. 2 which appears in the Appendix on page 241.
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Mr. Allen. Yes, sir.
Senator Coleman [continuing]. And when you wanted to track
down what happened, you said you had to check with The
Ballenger Group? In other words, there wasn't anybody within
AmeriDebt who could answer those questions?
Mr. Allen. There was no one at AmeriDebt that could answer
the questions. I would try to go in to my supervisor, to go to
my supervisor's supervisor, tried going up the chain as best I
could to no avail. They didn't have the questions.
Senator Coleman. Did you understand what the relationship
was between AmeriDebt and The Ballenger Group?
Mr. Allen. I did. From the time that we get a consumer's
information back, it is checked over and then it is sent over
to The Ballenger Group. The Ballenger Group is the group of
people that are responsible for setting up the program,
contacting the creditors, or so we thought. So it seemed
natural to get a hold of The Ballenger Group to find out what
is going on with this particular person's case.
Senator Coleman. Were you aware that DebtWorks or The
Ballenger Group you dealt with is a for-profit organization.
Mr. Allen. Yes.
Senator Coleman. Both of you, to Mr. Pohlman and Mr. Allen,
talked about the environment. I just want to touch on what is
probably obvious here, but when you talked about sales and
bonuses, were there any bonuses for enrolling people in an
education program? Mr. Pohlman.
Mr. Pohlman. No, absolutely not.
Senator Coleman. Mr. Allen.
Mr. Allen. The only thing I educated people on was how to
send their payment in.
Senator Coleman. And the big board, Mr. Pohlman, that you
talked about, was there any doubt in your mind that board was
about sales of debt management plans?
Mr. Pohlman. Oh, absolutely not. You wanted to be there. I
wanted to see my name up there some day----
Senator Coleman. What kind of bonuses, were they?
Mr. Pohlman. Training trips to Florida. There was a
commission based on the amount of DMPs that we sold, in
addition to an hourly wage, in addition to health care
benefits. So it was clear there was an emphasis on putting
people on the DMP.
Senator Coleman. Both to Mr. Schuck and Ms. Troy, I want to
kind of focus again on this education issue. Non-profits are
supposed to provide education. Mr. Schuck, can you tell us what
kind of education or what kind of counseling you received from
Cambridge?
Mr. Schuck. I received absolutely no counseling and
absolutely no education.
Senator Coleman. You were asked to make your payment at
what point in time in this transaction?
Mr. Schuck. My estimated payment?
Senator Coleman. When were you asked to make it?
Mr. Schuck. Oh, when was I asked to make the payment?
Senator Coleman. Yes.
Mr. Schuck. Oh, I am sorry. As soon as I had the initial
contact with a fellow from Cambridge. He asked me to make a
payment and that the payment should be in the form of a
cashier's check or a money order, not a personal check, and
that I should send it out immediately. In fact, before I even
had signed the contract, he wanted payment.
Senator Coleman. So you, in fact, sent out a cashier's
check.
Mr. Schuck. That is right.
Senator Coleman. This is before any education, of which
there was none, any counseling, of which there was little or
none?
Mr. Schuck. Oh, yes.
Senator Coleman. Ms. Troy, you made an attempt to get back
your money. During the course of this time as you tried to get
it back, can you talk about the education and the counseling
that you received from AmeriDebt?
Ms. Troy. There was no education, absolutely none. It was
just pushing me to set up a management plan, the bill
management, debt management plan, and actually to make a
payment on time because there was a due date, so I sent the
money Western Union as soon as I got my paycheck. But there was
absolutely no education, no support of any kind.
Senator Coleman. Mr. Pohlman and Mr. Allen: One of the
goals of credit counseling, I presume if you are going to solve
a problem, is to analyze somebody's financial situation. Can
you give me a little more information on what kind of budget
analysis that you were instructed to do for your clients? Mr.
Pohlman.
Mr. Pohlman. Yes, sir. I was not allowed to give any budget
analysis to the client. What I was able to do was to give them
a script. I was to get them to commit to me sending them the
paperwork. It was seven pages of paperwork. I was told to tell
them it was very easy to fill out. It would take 10 minutes.
They would send it back to me via fax and I would have their
new payment amount later in the day. So there was no budget
analysis.
Senator Coleman. So you were attempting to enroll people in
the DMPs before any budget analysis?
Mr. Pohlman. Absolutely.
Senator Coleman. Is a debt management plan the right path
for every person in debt?
Mr. Pohlman. No, absolutely not. There are many other
areas. There is self-administration. There is referral to other
non-profit agencies. There is certainly the legal option.
Senator Coleman. And I presume there are times when you
simply look at the facts and say that bankruptcy may be the
option for that person.
Mr. Pohlman. Of course, particularly in a very large
deficit and depending on the creditors involved.
Senator Coleman. But the only bonuses and the only
incentives that both you and Mr. Allen were given was for
signing up debt management plans?
Mr. Pohlman. Exactly.
Senator Coleman. Mr. Schuck paid a fee of close to $2,000
dollars. Eleven years in the business, can you assess, in terms
of the amount of that fee, do you find that unusual?
Mr. Pohlman. It is appalling. It makes me very upset.
Senator Coleman. Mr. Schuck, you did sign a contract,\1\
and I think we have a copy of that.
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\1\ See Exhibit No. 4 which appears in the Appendix on page 243.
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Mr. Schuck. Yes, I had.
Senator Coleman. And that contract did provide a disclaimer
in there about the payment, is that a fair statement?
Mr. Schuck. You have to find it, but it is in there.
Senator Coleman. How many pages is that contract?
Mr. Schuck. I don't recall the exact number, but I know it
was a multi-page contract.
Senator Coleman. Is that exhibit a copy of the conract that
we are looking at now? Is that a copy of the contract?
Mr. Schuck. Yes, it is. It looks exactly like the one that
I signed.
Senator Coleman. Five pages?
Mr. Schuck. That is right.
Senator Coleman. But there is on the second page, I do
note, there is a provision in there that says, summary of
Cambridge's fee. Monthly payment design fee equals proposed
monthly payment equals one time only.
Mr. Schuck. I see that. That is right, yes. And actually,
it was only later that I realized that was the initial fee. I
had no reason at all to believe that first payment wasn't going
to my creditors.
Senator Coleman. Ms. Troy, did you have any reason to
believe that you were paying, was it $783----
Ms. Troy. Seven-hundred-eighty-three dollars, yes.
Senator Coleman [continuing]. That money was going to the
credit counseling agency rather than to your creditors?
Ms. Troy. No. I had no idea until I started to get calls
from the creditors. I was sure that was going to my monthly
payments. And then I confirmed with AmeriDebt that they
received my payment and they said they did, and when I talked
to the customer service, that is when I found out that the
first payment is my voluntary contribution.
Senator Coleman. Mr. Allen, you talked about a script.
Mr. Allen. Yes, sir.
Senator Coleman. Mr. Pohlman, did you have a script?
Mr. Pohlman. Absolutely.
Senator Coleman. In that script, were there--and I think we
have a copy,\1\ I am not sure whether it is for Cambridge or
AmeriDebt--but were you given responses if someone said that,
``I don't think I want to make a payment now,'' or ``I don't
want to make a voluntary contribution?'' Would the script
provide your answers? Mr. Allen.
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\1\ See Exhibit No. 14 which appears in the Appendix on page 00.
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Mr. Allen. There were no set answers given to us from a
script as to how to deal with that. We were given guidelines,
suggestions from supervisor, training staff. I believe I made
mention of it in my statement. We were supposed to make them
feel guilty, make them ashamed that they weren't going to keep
us around for the next person.
Senator Coleman. When you were credit counseling, did you
have a training manual? Did you ever take a look at that?
Mr. Allen. Yes, I did.
Senator Coleman. And in that manual--this purports to be a
copy of a page from the Credit Counseling training manual.\1\
Does that look familiar to you?
Mr. Allen. Yes, it does.
Senator Coleman. And at one point, it says for the
statement, ``I cannot afford a contribution now, but maybe I
can afford to contribute later,'' and do you have a prepared
response that you are supposed to give back?
Mr. Allen. Again, it was something that we were to make up
on the spot. We were supposed to use our selling techniques.
Senator Coleman. The idea was to do what?
Mr. Allen. The idea was, if you can do this later, why
can't you do this now? What is keeping you from doing it right
now? It was all about the ``right now.''
Senator Coleman. Thank you, Mr. Allen. Senator Levin.
Senator Levin. Thank you, Mr. Chairman.
First, Mr. Schuck, you were told to send in a cashier's
check, not a personal check?
Mr. Schuck. That is right.
Senator Levin. Why was that? Did they tell you why they
wanted a cashier's check instead of----
Mr. Schuck. No, they did not. I only had to surmise that it
perhaps was safer and that was it. But they did not explain
why. They just simply said they would not take a personal
check.
Senator Levin. And you were told originally on the phone
that 10 percent of your check would go to them for a fee?
Mr. Schuck. That is right.
Senator Levin. Did they distinguish between a monthly fee
and your original fee?
Mr. Schuck. Not that I intentionally recall. I know the
initial payment had to be made because that is what they said,
they needed to get started. And like I said, in my thoughts,
thinking my creditors are being paid, and that there would be
then a monthly fee of 10 percent of every payment that I made
that would go toward a maintenance fee of the contract for the
life of the contract period.
Senator Levin. Did they distinguish between the initial fee
and the monthly fee?
Mr. Schuck. Yes, they did, actually.
Senator Levin. And then what----
Mr. Schuck. There were two separate----
Senator Levin. What did you believe the initial fee would
be?
Mr. Schuck. Well, I thought the initial fee would go toward
my creditors. I thought that initial monthly fee was actually
like what I would consider my first payment, my first fee.
Senator Levin. So that after that conversation, you
believed that all of the check you were sending would go to
your creditors, and from that point on, 10 percent of each of
your monthly checks----
Mr. Schuck. Each monthly fee would be the maintenance fee,
that is right. Actually, I thought the first $196 or whatever
it was, the 10 percent of that first payment, was actually the
maintenance and start-up fee. That would be, to me, in my mind,
that was what their fee would be to run the program, basically,
and that the $2,000 that I sent or the other amount would be
the amount that is paid to my creditors. Of that, 10 percent
would come out for them.
Senator Levin. How many payments did you make?
Mr. Schuck. Several payments. I was in the program for, I
believe, maybe half a year, 7 months, and finally after calls
and trying to work out some sort of a compromise with them, I
simply could not and I just simply stopped----
Senator Levin. There were several payments that were made?
Mr. Schuck. That is right.
Senator Levin. As many as three or four?
Mr. Schuck. Oh, absolutely.
Senator Levin. Out of the second, third, fourth payments,
did they retain 10 percent and send the rest of those payments
to your creditors?
Mr. Schuck. I can only assume that they had. I did not
receive something that indicated to me that they might not
have.
Senator Levin. So the difficulty you had with creditors was
over that first payment which did not get to the creditors, not
over the 10 percent that may have been withheld from your
second through your fifth or sixth payment?
Mr. Schuck. I believe that is right, because apparently the
creditors, when I called them--I remember one day specifically
where I had called--a creditor called me. I talked with them.
They said they hadn't received payment. I called Cambridge and
said they said they hadn't received payment. What is going on?
They said, ``No, we have paid them.'' And then I called the
creditor back and they said, no, indeed Cambridge had not paid
them. And so there seemed to have been more than just that one
payment.
Senator Levin. And Mr. Pohlman, what did you represent to
folks about that first payment?
Mr. Pohlman. We also had scripts at Cambridge that were
very highly structured. We were not allowed to take the
employee handbook, or bible, as I called it, home. The idea was
to get them to commit to the plan. Yes, they were told verbally
that the first month's fee would be retained by the
organization, but again, I had to fax the paperwork to them.
They had to fill it out. They had to send it back.
So yes, I told them there was a monthly fee up front, but I
didn't even know what it would be until it came back from the
Automated Underwriting Department and then I would tell them.
But by then, they have already forgotten about it or they are
too excited that someone is going to take all the pain away
from them. So it was really kind of an illusion, if you will.
In other words, they were verbally told in a 5 minute
conversation, perhaps while they were driving, that, yes, there
is a service fee that is retained by the Cambridge
organization.
Senator Levin. From the first payment?
Mr. Pohlman. Yes, sir.
Senator Levin. Were you told to create an impression of any
kind relative to the first fee going totally to the----
Mr. Pohlman. Oh, gosh, no. Again, these were highly
structured scripts in which----
Senator Levin. Yes, but when you say highly structured,
what was the impression that was created in the mind of the
listener, that it was all going to the company?
Mr. Pohlman. The impression--no----
Senator Levin. That a part of it was going to the company?
Mr. Pohlman. The clients were told that 1 month, the first
month's fee, was a service type of fee and it was to be
retained by the organization. I don't recall their exact
verbiage, but the verbiage was very confusing, very
authoritarative. It was glossed over.
Senator Levin. Are you surprised that people like Mr.
Schuck got the impression that the first month's payment would
go to creditors?
Mr. Pohlman. No, absolutely not.
Senator Levin. That doesn't come as a surprise to you no
matter what it was that you were saying on your script?
Mr. Pohlman. No, sir.
Senator Levin. Ms. Troy, what were you told in terms of
that first payment?
Ms. Troy. As far as I recall, the first conversation with
the counselor, I was told that I would be paying about $5 per
account. That would be the monthly fee which will be going from
month to month. And based on my number of my credit cards, I
figure it will be probably about $30, $35 a month. She
mentioned a voluntary contribution and I told her, I am not in
a position right now to give any voluntary contributions to
anybody. And she said, well, you don't have to. We can do that
later. Just don't worry about it. It was just something like
that.
Senator Levin. And what about that first month's payment?
What were you told about it? Was that any different from the
other payments that would follow?
Ms. Troy. No. I was not informed about any difference. To
my full knowledge, the first payment I sent, it was going to
cover my debts to my creditors.
Senator Levin. And that is the impression you got from the
phone call?
Ms. Troy. Definitely, yes.
Senator Levin. And you signed a contract, as well?
Ms. Troy. I believe I signed the contract.
Senator Levin. Did you read the contract, or could you have
read it given the size of the print?
Ms. Troy. I have difficulties with reading without
glasses----
Senator Levin. You should try a magnifying glass on some of
those contracts.
Ms. Troy. From now on, I will.
Senator Levin. Mr. Allen, were you surprised to hear that
Ms. Troy believed that her fee that was sent in, or the check
that was sent in with her first payment, she thought would go
to her creditors? Does that surprise you?
Mr. Allen. Yes and no. As a counselor, I gave my consumers
a choice. Because we were a non-profit organization, I took it
at face value. If we are not here to make a profit, why should
I push the contributions? I gave people a choice. They could
either do a monthly contribution, and by the time I came on in
2003, the costs had risen slightly. It was now $7 for every
creditor you put on the program, with a $20 minimum and a $70
maximum that AmeriDebt would accept as a monthly payment.
Senator Levin. As the alternative to what?
Mr. Allen. As an alternative to not make a contribution----
Senator Levin. At all?
Mr. Allen. At all.
Senator Levin. And could you be given that service if you
made no contribution?
Mr. Allen. Supposedly.
Senator Levin. Did you have people who were serviced by
your company who made no contribution whatsoever?
Mr. Allen. I serviced many consumers that decided not to
give a contribution one way or another.
Senator Levin. And were they serviced, do you know?
Mr. Allen. As far as I know and as far as I hope. I hope
that----
Senator Levin. You hope they were?
Mr. Allen [continuing]. What they signed for is what they
got.
Senator Levin. And so they may or may not have been
serviced if they made no contribution whatsoever, either up
front or month-by-month, is that correct?
Mr. Allen. Very true.
Senator Levin. So you just don't know that part of it?
Mr. Allen. I just don't know. I never saw them, the
maintenance of these----
Senator Levin. And were they told that the first payment
that they would send, like the $700-and-some that Ms. Troy
sent, would go entirely to the company? Is that the impression
which was left with them? Her impression was only a small part
of it, as I remember her testimony, would go to the company,
the rest to her creditors. Are you surprised that she had that
impression?
Mr. Allen. I am surprised that it actually happened based
on what her counselor had told her. If her counselor had said,
we will not worry about it at this point in time, to me, that
seems then my first payment is going to my creditors. Now, like
I said, I can only speak for myself and the type of counselor
that I was.
Senator Levin. I understand. And then were you told that
you could send a personal check?
Ms. Troy. No. They didn't accept personal checks. I had to
obtain cashier's checks from my bank because it was the only
option, cashier's checks or money order.
Senator Levin. Did they explain to you why they would not
accept a personal check?
Ms. Troy. No, they didn't, but I figured that maybe, if
people realized what went wrong, they can always stop the
check. You cannot stop the money order or cashier's checks.
Senator Levin. Thank you. Thank you, Mr. Chairman.
Senator Coleman. Senator Dayton.
Senator Dayton. Thank you, Mr. Chairman. I want to thank
all of you for coming forward today and sharing your
experiences with the Subcommittee.
Mr. Schuck, when did you contact Cambridge Credit?
Mr. Schuck. I contacted them when I realized that I simply
wanted to control the debt that I had.
Senator Dayton. What date? At what point in time?
Mr. Schuck. It was--point in time--it must have been about
in June or something in 2001.
Senator Dayton. Two-thousand-one, OK.
Mr. Schuck. I believe it was----
Senator Dayton. Were you sent then at some point in the
process this service plan, service agreement?
Mr. Schuck. I am sorry?
Senator Dayton. Were you sent at some point in the process
a service agreement?
Mr. Schuck. Yes, sir, I was.
Senator Dayton. And when was that in the process?
Mr. Schuck. It would have been after I talked with them,
they indicated they would be able to fax me a copy of the
service agreement.
Senator Dayton. And did you read the agreement, then?
Mr. Schuck. Well, I read it as fast and as close as I could
thinking----
Senator Dayton. And you were----
Mr. Schuck [continuing]. The sooner I get it back, the
better off I will be.
Senator Dayton. But you were not aware, based on your
review of that document, of this monthly payment--the first
monthly payment was, in fact, going to be a set-up management
fee to them?
Mr. Schuck. No, I was not. No. And certainly in retrospect,
now looking back, I should have read the document a lot closer.
It was only several months later that I realized that.
Senator Dayton. Mr. Pohlman, you joined the company in
September of last year?
Mr. Pohlman. Yes, sir.
Senator Dayton. I don't know what changed in terms of the
format of the document that was sent. This one is five-pages,
single-spaced. We have a document that has been provided by the
company. You haven't had a chance to see that, but at what
point in the process was that document sent to your people you
were recruiting?
Mr. Pohlman. Just about right on the first contact, sir. I
was going to explain myself, the organization, and how we can
help them. I was to push and push and push until I could fax
the service agreement and the creditor information to them. I
was to tell them that it was very simple to fill out, takes
about 10 minutes. They were instructed to fax it back to me
immediately and I would be calling them back later that day
with their new payment amount.
Senator Dayton. So they are getting the service plan. Are
they then at that point aware of what their actual monthly
payment is going to be?
Mr. Pohlman. No. When I am faxing the service agreement to
them, they are to review it and review it closely, fill out
their creditor information, send it back to us. We would
process that and then I would contact them later today with
their new payment amount.
Senator Dayton. OK. So they are signing this document----
Mr. Pohlman. The agreement----
Senator Dayton [continuing]. They are agreeing to terms
without knowing what those terms are, if they haven't received
word about what their monthly payment is going to be, and the
10 percent on top of that.
Mr. Pohlman. But I am faxing them out the five-page service
agreement----
Senator Dayton. Right.
Mr. Pohlman [continuing]. A one-page cover sheet and the
creditor sheet.
Senator Dayton. Right, and they are filling that out and
they are signing a document here that I believe is--I haven't
read the whole document, but is an agreement they are making
for payment of an amount that has not yet been specified to
them, is that----
Mr. Pohlman. The first month's payment.
Senator Dayton. The first month's payment, all right. What
is the value to the client of this arrangement? You are
consolidating all or some portion of their existing credit card
debt----
Mr. Pohlman. Right.
Senator Dayton [continuing]. And then that determines the
monthly payment, and then on top of that is a 10 percent fee
collected by or retained by Cambridge Credit. What does that
monthly payment amount to?
Mr. Pohlman. Typically a repayment of a debt management
plan is 3 to 5 years, depending on the amount of the debt.
Senator Dayton. So you are paying off the credit card
companies based on a monthly payment of X amount----
Mr. Pohlman. Yes.
Senator Dayton [continuing]. And then in addition to that X
amount, there is another 10 percent surcharge on that?
Mr. Pohlman. No. It would have been included in the total--
--
Senator Dayton. Included in that, OK.
Mr. Pohlman [continuing]. Payment amount.
Senator Dayton. So that 10 percent is in there. So the 90
percent, then, is sufficient to pay off these existing debts
plus interest within 3 to 5 years.
Mr. Pohlman. That is the theory.
Senator Dayton. Do you make that computation?
Mr. Pohlman. No, sir. I believe it was an automated process
in the computer system.
Senator Dayton. So you plug in the information and then the
computer spits out the terms?
Mr. Pohlman. No. They were highly sophisticated. The client
was instructed to fax the information back to us and it was
faxed into their system and it was electronic from there on.
Senator Dayton. Electronic being that some computation then
is made of the amount necessary to pay off all the debts within
three to 5 years plus the 10 percent surcharge for the company.
Mr. Pohlman. Yes, sir. Creditors have minimums and there
are some----
Senator Dayton. Right, and that is all included in the 90
percent.
Mr. Pohlman. Yes. It is all included in the monthly payment
amount.
Senator Dayton. So what is the benefit to the client?
Mr. Pohlman. I don't see any.
Senator Dayton. But what are you representing as the
benefit when you sign up the client?
Mr. Pohlman. That they are going to be debt free within a
specified period of time.
Senator Dayton. Is there any value in that? You are
basically in sales. If he calls back to try to get any
clarification of the information about why money wasn't sent to
creditors, you don't take those calls?
Mr. Pohlman. No, sir. We were highly departmentalized and
customer service was a separate department and we were not
encouraged to speak with other departments.
Senator Dayton. You are representing yourself as a credit
counselor?
Mr. Pohlman. Yes, sir.
Senator Dayton. You are a credit counselor, but you don't
deal with customer service?
Mr. Pohlman. Once they are on the plan, it was out of my
domain.
Senator Dayton. So, what kind of counseling is actually----
Mr. Pohlman. Performed?
Senator Dayton. Yes.
Mr. Pohlman. Little to none, sir.
Senator Dayton. At all. If somebody actually wants either
some questions asked or some actual hands-on direct counseling
after you have enrolled them, then that goes on to someone
else. What do they call themselves, do you know? They are not
credit counselors, are they?
Mr. Pohlman. Customer service reps.
Senator Dayton. OK. So you have a fake name and you have a
fake title, in effect. You are a credit counselor, and you are
working for somebody that is also representing itself to a non-
profit, so it is really basically faked all the way through
until that person has been put on the line and started to pay
money.
I guess my time has expired, Mr. Chairman. Thank you.
Senator Coleman. Thank you, Senator Dayton. Senator Pryor.
OPENING STATEMENT OF SENATOR PRYOR
Senator Pryor. Mr. Chairman, thank you, and I am so glad
that you are taking the lead on this issue. I think it is a
very important issue for consumers all across America.
Mr. Pohlman, if I can follow up with some of the questions
that Senator Dayton was asking, he asked about the credit
counselor moniker that you had. Did you receive any training or
any accreditation as a credit counselor?
Mr. Pohlman. No, sir. My training was about one day of
reading their material. I was on the phone the next day. They
are very structured scripts. You were not to deviate a single
word or syllable from the scripts and I just jumped right in.
Senator Pryor. Is it fair to say that the training you
received from your company was more sales training than it was
counseling training?
Mr. Pohlman. Yes, sir. I mean, you must understand, I had
11 years' experience in the industry.
Senator Pryor. Yes, I want to ask you about that in just
one second, but first, I want to ask about something you said
in your opening statement about your fake name.
Mr. Pohlman. Yes, sir.
Senator Pryor. I have been sitting here trying to think of
why anyone in the credit counseling business would want a fake
name to be used, even managers having fake names, with the
customers and I am having trouble coming up with a rationale
for that. Do you know what the rationale is for having a fake
name?
Mr. Pohlman. No. When my wife also had a lot of trouble
with that rationale, I can tell you that we went by a first
name. It was more of an acronym. I mean, if your name was David
Wood, they may call you Woody or what have you. But anyway, I
chose the name of Daniel. I was not allowed to be John. I was
told that the reason why I could not use my name of John was
because of computer and customer service reasons. Years ago, we
had a John, and we don't want our customers confusing the
previous John with the current John.
Senator Pryor. Yes, but----
Mr. Pohlman. So I was told that I had to----
Senator Pryor. I guess the reason that doesn't hold water
with me is that the company probably had employed people in the
past named Daniel, too. That doesn't make sense. But is that
all you were told about it at the company?
Mr. Pohlman. That was what I was led to believe, sir.
Senator Pryor. Now, you had mentioned that you had had,
what, 11 years' experience----
Mr. Pohlman. Yes, sir.
Senator Pryor [continuing]. In this type of work before,
and you had worked for non-profits, as I understand it.
Mr. Pohlman. Yes, sir.
Senator Pryor. Tell me, in your view, how this is supposed
to work. How should non-profits service consumers who are
having financial and debt problems? How should this work?
Mr. Pohlman. Yes, Mr. Pryor. We were spending an hour and a
half with our clients, and again, this was an NFCC affiliate
and we were licensed within the State of where we were doing
business. We had----
Senator Pryor. I am sorry, licensed in what way?
Mr. Pohlman. Licensed, I am sorry, by the State of--in my
case, the State of Connecticut----
Senator Pryor. Right.
Mr. Pohlman [continuing]. Banking Department. We were
licensed debt adjustors.
Senator Pryor. OK. And were you licensed at this new
company where you were working?
Mr. Pohlman. I believe they were licensed in the State of
Massachusetts, but we did business all across the country.
Senator Pryor. OK. Now keep going. I am sorry.
Mr. Pohlman. OK. In my 11 years with an NFCC affiliate, we
provided up to an hour and a half counseling with the client.
The client was mailed a budget worksheet in which they were to
put their income, their expenses, who their creditors were. We
told them--they were then booked for an appointment for an hour
and a half. They were told to bring a source of income, such as
pay stubs, such as child support, any legitimate form that
income comes in. We were looking at budgeting, money
management. Perhaps they were having too much money withdrawn
from their paycheck.
There was an intensive hour and a half of budgeting, money
management. In some cases, the clients were so well educated in
that hour and a half that they could handle things on their
own. They found out that they were having too much money taken
out of their paycheck, so the counselor told them to reduce
that. Perhaps there are ways of eliminating debt that they
weren't aware of. We made referrals to other non-profits, other
social service agencies like legal aid or aid for the elderly.
We considered those successful counseling sessions.
We let them go home and let them talk to their spouse,
their significant other, about a debt management plan. We did
not push the plan during the session. If they chose the plan,
fine. They had the options. They could go home and think about
it.
Senator Pryor. When you were working for other non-profits,
did you feel like you were helping consumers?
Mr. Pohlman. Absolutely.
Senator Pryor. And when you were working for Cambridge, did
you feel like you were helping consumers?
Mr. Pohlman. No, sir.
Senator Pryor. That is all I have, Mr. Chairman. Thank you.
Senator Coleman. Thank you very much, Senator Pryor.
Just one last thing, if I can do a follow-up, Mr. Allen,
just to follow up on a question that you responded to from
Senator Levin. He was trying to understand what you would have
told your customers, again, to understand whether Ms. Troy
would have been told about that first payment going to the
company, and you did testify that you told customers that was a
voluntary payment, is that correct?
Mr. Allen. Yes, sir.
Senator Coleman. Did you also recall in your testimony
saying that you were reprimanded for doing that by your
superiors?
Mr. Allen. Many times.
Senator Levin. Could I just ask one question about these
checks? Were the monthly checks after your first payment also
supposed to be cashier's checks and not personal checks?
Mr. Schuck. Absolutely, they were.
Senator Levin. Is that true with you, too, Ms. Troy?
Ms. Troy. The first one, I said it was. And then when I
picked up that the money didn't go to the creditors, I asked
for a refund. I wanted to----
Senator Levin. Did you send a second check?
Ms. Troy. I don't think so.
Senator Levin. Thank you.
Senator Coleman. I want to thank the panel very much. I
appreciate your testimony, appreciate you coming forward today.
Senator Coleman. With that, I would then call our second
panel for today's hearing.
I would now like to welcome our second panel to today's
hearing. This panel is comprised of representatives of four
credit counseling agencies. I welcome Chris Viale, General
Manager of Cambridge Credit Counseling Corporation; Matthew
Case, the Chief Operating Officer of AmeriDebt; Ms. Cuba Craig,
the Chief Executive Officer of American Financial Solutions;
and finally, James Kroening, the Director of FamilyMeans Credit
Counseling Service in Stillwater, Minnesota.
I believe, Mr. Kroening, you are an NFCC member?
Mr. Kroening. That is correct.
Senator Coleman. I appreciate all of you being with us this
morning and I look forward to hearing your testimony regarding
the credit counseling industry.
Before we begin, pursuant to Rule 6, all witnesses who
testify before this Subcommittee are required to be sworn in. I
would ask you now to please rise and raise your right hand.
Do you swear that the testimony you are about to give
before the Subcommittee will be the truth, the whole truth, and
nothing but the truth, so help you, God?
Mr. Viale. I do.
Mr. Case. I do.
Ms. Craig. Yes.
Mr. Kroening. I do.
Senator Coleman. As I indicated to the first panel, we do
have a timing system. When you see the yellow light come on, it
means you should conclude your testimony. Your entire written
statement will be entered into the record.
With that, we will start with Mr. Viale, followed by Mr.
Case, Ms. Craig, and finish up with Mr. Kroening. After your
further testimony, we will then turn to questions.
Mr. Viale, you may proceed.
TESTIMONY OF CHRIS VIALE,\1\ GENERAL MANAGER, CAMBRIDGE CREDIT
COUNSELING CORPORATION, AGAWAM, MASSACHUSETTS
Mr. Viale. Thank you, Mr. Chairman and Members of the
Subcommittee. My name is Chris Viale. I am the Chief Operating
Officer of Cambridge Credit Counseling. I want to use my 5
minutes to respond to the Subcommittee's staff report and the
first panel because I think the public so far has heard a very
slanted and biased view of Cambridge Credit Counseling.
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\1\ The prepared statement and supplemental written submission with
attachments of Mr. Viale appear in the Appendix on pages 97 and 102
respectively.
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I am proud that we are not a debt mill, that our main focus
is providing education and financal solutions for the
approximately two million consumers who have contacted us
during our 7 years of operation. These are productive, tax-
paying, middle-class people who are struggling under mountains
of consumer debt and our education and debt management plans
help them.
You found one unhappy client, but I wish the Subcommittee
had spoken to Sister Veronica or the other clients that are
here with us today. They would love to share their experience
and how we have helped them at Cambridge.
So let me first respond to Mr. Schuck and let me show you
how Cambridge provides full and adequate disclosure at two
critical points in the decisionmaking process. The first
example is our service agreement. As you can see, Section 1
covers services, fees, and sign-up instructions. The first
payment is our design fee, which is equal to 1 month's payment.
Our payment program service fee is charged monthly and is equal
to 10 percent of the client's payment or $25, whichever is
greater. The example box on the board was added in July 2002 as
a way to disclose this even clearer and it is very easily
summarized at the bottom of the section, right above where each
consumer has to sign.
As for Mr. Schuck, although he made seven payments and
interest fee concessions were arranged on his accounts, we
still refunded half his initial fee after he complained. But
for the record, I have a copy of a service agreement where Mr.
Schuck signed. Right above the signature is a clear disclosure
of the fees we charge. Our records also show that Mr. Schuck
took 2 weeks, not 1 day or 15 minutes, after he signed the
service agreement to think about joining our program and
sending the initial fee in. But again, I am sorry his
experience is not that of the vast majority of the clients that
we help.
The second example of disclosure is our debt management
summary. Now, while we have started this about 8 months ago,
the information provided is very clear. It illustrates for a
consumer exactly how much is going to each creditor, how much
the monthly service fee is, the fact that the first payments
are a fee, what the program costs will be, and how much the
consumer will save. And we have recently added even clearer
disclosure that the first payment fee does not go to your
creditors.
Now, I hope for the Q&A that I will get the opportunity to
address many of the false statements that Mr. Pohlman has made
today.
Now let me respond to the Subcommittee's staff report,
which unfortunately is slanted against Cambridge because it
conveniently leaves out several important facts. The first, the
staff report does not mention that our fees are regulated and
approved by State authorities in four different States and that
we undergo annual reviews in Michigan, Connecticut, and Maine.
In New York, the Banking Department has licensed Cambridge's
sister company to conduct its programs and has approved its fee
structure under the statute that says fees charged to consumers
cannot be unreasonable. If the Subcommittee staff believes our
fees are ``clearly excessive,'' then perhaps the staff should
investigate the New York State Banking Department, which has
also approved the similar up-front fee structures of other
credit counseling companies.
Second, the staff report does not mention at all the
Cambridge ``Good Payer'' program. Cambridge is the only company
in this industry that actually rebates half of the fair share
money that we get from creditors to our qualified clients. We
have given to over 75,000 clients a total of more than $14
million back in rebates, and here is the data that we submitted
to the staff, but for some reason it is not mentioned in the
report. It is important, because if a client successfully
completes our program, in almost all cases, they will receive
more back in rebates than they were charged in the initial fee.
And the third thing, the report makes an unfair and
distorted accusations that Cambridge is essentially a money-
making machine for the Puccios. I can tell you this is not what
Cambridge is about. We provide real benefits for real people
with real value to them. Moreover, the vast majority of the
40,000 consumers that contact us each month take advantage of
access to financial education. Only about 12 percent of the
consumers that contact us ever join our debt management
program. We are not telemarketers in any way.
Doesn't the fact that tens of thousands of consumers are
succeeding under our program mean anything to this
Subcommittee? I wish the Subcommittee staff had told a balanced
story about the value that our clients get for the fees they
pay. They might have done this if they had accepted our
invitation to visit the Cambridge site and to see firsthand how
much we care and how much we help consumers.
Now, I am sorry that my CEO, Mr. Puccio, will not be here
today to appear on the second panel. He is in the George
Washington Hospital with symptoms of a stroke, and the
Subcommittee has received a letter from the Chairman of the
George Washington Neurology Department.
In conclusion, the Cambridge revolution is all about
education, empowerment, service, choice, and ultimately
financial freedom. Congress can share in this mission or kill
it, but if you kill it, you will be denying consumers the
innovative solutions they need in today's environment.
At Cambridge, we are committed to the consumer. You can ask
Sister Veronica or the other Cambridge clients that are here
with us today if you really want to know how consumers feel
about Cambridge and their experience. Thank you.
Senator Coleman. Thank you, Mr. Viale. Mr. Case.
TESTIMONY OF MATTHEW CASE,\1\ CHIEF OPERATING OFFICER,
AMERIDEBT, INC., GERMANTOWN, MARYLAND
Mr. Case. Thank you, Mr. Chairman and Members of the
Subcommittee. I am Matthew Case, Chief Operating Officer of
AmeriDebt. On behalf of everyone at AmeriDebt, I would like to
express our thanks for the opportunity to participate in this
hearing today.
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\1\ The prepared statement of Mr. Case appears in the Appendix on
page 127.
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AmeriDebt has helped hundreds of thousands of Americans
work their way out of debt and gain control over their
finances. We are proud of our record as a pioneer in the modern
credit counseling industry. At the outset, let me stress the
fact that AmeriDebt is actively engaged in attempting to
resolve the concerns of consumers and government officials.
Even though the vast majority of AmeriDebt clients have no
complaints with the organization, we are working diligently to
correct any remaining concern.
What is more, AmeriDebt took an extraordinary step last
November when we decided to stop advertising and stop accepting
new clients onto our program. Today, we continue to fulfill our
non-profit mission by serving approximately 72,000 clients
whose accounts were active at the time. For these clients,
AmeriDebt represents a lifeline of fiscal health. It would be
tragic if their financial recovery plans were jeopardized by
hasty or ill-conceived regulatory action.
AmeriDebt has worked hard to resolve all alleged consumer
protection issues. There is no question that we continue to
pursue our non-profit counseling and consumer education
missions. The time has come to put these issues behind us and
work together with policy makers and the public to deal with
the much larger crisis of consumer debt.
Revolving consumer debt has now surpassed three-quarters of
a trillion dollars. As this crisis depend over the past few
years, AmeriDebt helped consumers save millions by providing
credit counseling services and debt management plans to reduce
monthly payments, lower interest rates, and reduce or eliminate
late payment and over-the-limit penalties.
Correcting financial problems years in the making is no
easy task. It requires commitment and discipline by consumers
and is time and labor intensive for credit counselors. As a
result, many credit counseling agencies follow the advice of an
influential report published by Visa in 1999. The Visa report
suggested that the credit counseling agencies could be more
efficient and serve clients better by contracting with private
sector companies to perform back-office administrative tasks.
AmeriDebt's decision to do so accomplished these objectives.
Some say this approach clashes with the non-profit status
of credit counseling agencies. Although AmeriDebt was formed
before I joined the organization, it is critical to realize
that our non-profit status, like that of nearly every credit
counseling agency in the country, is in large measure an
outgrowth of State laws and creditor mandates. Many States
require credit counseling agencies to be non-profit and
creditors reject debt management plans unless the plans come
from non-profit organizations. The practical effect is to force
any credit counseling agency to organize as a non-profit entity
if it wishes to help consumers in more than one State.
Historically, credit counseling was provided only by small,
local counseling agencies. Unfortunately, their services were
either unknown or unavailable as a practical matter to a
majority of the people in need. Even if this credit counseling
model made sense 30 or 40 years ago, there should be no
question that the magnitude of America's consumer debt problem
far exceeds the capacity of traditional credit counselors to
fix.
AmeriDebt helped pave the way for effective credit
counseling on a national scale. We hope our knowledge and
experience prove helpful to the Subcommittee as it considers
the future of credit counseling.
Once again, on behalf of AmeriDebt and our 72,000 clients,
I would like to thank the Subcommittee for this opportunity to
testify.
Senator Coleman. Thank you, Mr. Case. Ms. Craig.
TESTIMONY OF CUBA M. CRAIG,\1\ CHIEF EXECUTIVE OFFICER,
AMERICAN FINANCIAL SOLUTIONS, SEATTLE, WASHINGTON
Ms. Craig. Thank you, Mr. Chairman. Members of the
Subcommittee, good morning. I am Cuba Craig, President and CEO
of American Financial Solutions, AFS, a non-profit consumer
credit counseling agency and a division of North Seattle
Community College Foundation in Seattle. We have offices in
Seattle and Bremerton, Washington, which is across from the
Puget Sound Naval Shipyard.
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\1\ The prepared statement of Mr. Craig appears in the Appendix on
page 142.
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AFS first opened its doors with two full-time employees,
including me, in 1999. Since then, we have grown substantially.
This morning, I would like to tell you what we do and how we
support ourselves. Then I would like to explain recent changes
we have made and other changes we have initiated as a result of
your investigation.
AFS provides financial counseling and education to
consumers and, where appropriate, enrolls them in debt
management plans. Under such plans, clients agree to make
regular payments and creditors typically agree to reduce their
interest rates. This helps creditors to the extent it is an
alternative to bankruptcy.
AFS does not charge up-front or other fees to our clients.
Because of the steep decline in fair share payments from
creditors, we have recently begun to request voluntary
contributions from our clients. The client is informed that any
contribution is voluntary, and the client can stop his or her
contribution at any time. A client who cannot afford to
contribute is not asked to do so. The maximum amount we allow a
client to contribute is $50 per month.
Although we always intended to handle all of our original
calls in-house, in the past, both AFS and counselors at Amerix,
a for-profit back-office service provider, handled some of
those calls. Origination calls are the initial calls from
clients seeking credit counseling. The Amerix employees who
handled the origination calls were trained and certified to our
AFS standards. The arrangement was to assist us while we built
up our workforce. AFS counselors now take all of our
origination calls in-house.
AFS opened its Bremerton facility in 2001 with 12
counselors. When we reached 60 counselors, I began exploring
options for further expansion, including plans to refurbish a
former school and double our counseling capacity. Last fall,
the foundation board decided not to purchase the new facility
and asked for financial plans to support the project and cost-
effective alternatives. Since then, I have been considering
other ways to move all of our origination in-house.
At midnight on March 14 of this year, we stopped having
Amerix handle our origination calls. Although handling all
origination calls in-house has always been our plan, your
investigation helped to bring this about more quickly than
otherwise might have happened.
Last fall, the North Seattle College Foundation Board,
which is composed of volunteers, installed a new president and
oversight committee. Since then, they have been studying our
operations to ensure that our activities are appropriate and
that our management systems are effective and efficient.
Since the Subcommittee began its investigation, we have
stepped up our efforts to ensure that AFS meets all applicable
requirements. To that end, a review was conducted for AFS and
the board and recommendations were prepared and considered.
Earlier this month, the oversight committee made several
recommendations to me for action.
First, AFS has stopped outsourcing origination. Any future
expansion will be accomplished only by employing AFS counselors
in-house.
Second, AFS counselors are trained to make all appropriate
disclosures. We will review all of our written materials and
scripts to ensure they reflect that practice.
Third, AFS will review and attempt to negotiate its
contracts with Amerix, with particular attention to changing
certain provisions, including the method by which payments to
Amerix are calculated in favor of a transaction-based or
similar payment system, and the assist rate provision in the
current contract, which is counter to AFS philosophy and
practice. We also will seek to terminate the FreedomPoint and
the FreedomPoint Financial contracts.
Fourth, we will again seek competitive bids for back-office
services.
Fifth, we will review and revise our debt management plan
form agreements as appropriate.
Sixth, we will review all applicable laws and regulations.
AFS is proud of our well-trained counselors and the service
we offer to the public. AFS, the foundation board, and the
board's oversight committee are dedicated to ensuring that AFS
carries out its mission appropriately and effectively and
completely within the bounds of the law. I am happy to answer
any questions you may have.
Senator Coleman. Thank you very much, Ms. Craig.
Ms. Craig. You are welcome.
Senator Coleman. Mr. Kroening.
TESTIMONY OF JAMES KROENING,\1\ DIRECTOR, FAMILYMEANS CONSUMER
CREDIT COUNSELING SERVICE, STILLWATER, MINNESOTA
Mr. Kroening. Good morning, Chairman Coleman and
distinguished Members of Congress. I am James Kroening,
Director of Consumer Credit Counseling Service at FamilyMeans,
a multi-service agency located in Stillwater, Minnesota,
serving not only the Twin City metropolitan area but Western
Wisconsin and also Southeastern Minnesota. I am here today to
describe how FamilyMeans CCCS, with a department budget of
approximately $1 million and a program staff of 12, is able to
provide affordable, effective, and client-centered budget
counseling, education, and debt management plans to 10,000
people a year while adhering to the highest stringent standards
of quality.
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\1\ The prepared statement of Mr. Kroening appears in the Appendix
on page 150.
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To understand our approach, one must first look at our
organizational history. FamilyMeans is a mission-based non-
profit started over 40 years ago by community leaders. Because
financial stability is a key to a family's well-being,
FamilyMeans has always provided financial counseling, mental
health counseling, and supportive services to give people the
tools they need to lead healthy, productive lives. Our multiple
services give our clients assistance with underlying issues
that may be affecting their lives.
Our 18-member board of directors provides fiscal oversight,
establishes policy, and raises financial support for the
agency. They serve a maximum of six consecutive years, sign
disclosure statements about potential conflicts of interest,
and are not related to staff members.
FamilyMeans has a long history of being accredited and
licensed, meeting the rigorous standards set by the National
Council on Accreditation of Services for Families and Children
and the National Foundation for Credit Counseling. Our
organization is licensed by the States of Minnesota and
Wisconsin. Each of these licensing and accrediting bodies
conducts thorough reviews and audits of business practices and
our professional services. The agency also has an ongoing
quality assurance program to help monitor and improve our
programs.
Our community roots, the capable board of directors, and
our adherence to the highest standards in the non-profit sector
ensure that we provide well-run mission-based programs that
effectively meet community needs.
FamilyMeans CCCS provides budget counseling, financial
education, and debt management programs, which I will refer to
as DMPs. Budget counseling is the heart of our CCCS program. We
conduct one-and-a-half-hour comprehensive financial counseling
sessions because they are effective. A certified financial
counselor and a client work together to examine their income,
their monthly expenses, and their debts. Each client leaves
with a workable budget and a tailored action plan.
Many families learn how to manage their money from these
sessions and, therefore, do not need a DMP. In fact, the DMP is
only recommended to clients who need intervention with
creditors. We put all unsecured debt on the DMP, not just major
creditors or those who make creditor contributions.
Equally important, FamilyMeans CCCS offers consumer
education each year to approximately 5,000 people. We conduct
free classes about money management, home buying, credit use at
schools, colleges, shelters, treatment and recovery programs,
community centers, correctional facilities, and other non-
profit organizations. This work helps to prevent future
financial problems.
Over the last decade, organizations have entered into the
credit counseling field who focus on the DMP and its potential
revenue generation rather than offering comprehensive
counseling and education services. The practices of these
companies have adversely affected the credit counseling field
and tainted the non-profit sector.
I am appalled to know that consumers receive only a 15-
minute survey instead of comprehensive counseling and education
that can lead to lasting change. I am disappointed to hear that
some organizations put selected debt on a DMP, charge high set-
up fees, guaranteeing income to the company and almost certain
failure to the consumer. I am saddened that many individuals
who could manage their own debt are lured into debt management
plans with promises of lowered interest rates. I am frustrated
that current laws tie our hands when people come to us after
they have been badly served by another organization. I am angry
that these same businesses enrich their executives and have
for-profit affiliations that taint the word non-profit,
betraying the spirit and the standards we honor.
Not surprisingly, creditors have responded to these
practices by reducing their contributions, limiting customer
concessions, such as lowered interest rates, actions that both
hurt consumers and legitimate non-profit agencies like
FamilyMeans. For us, creditor contributions have decreased 30
percent in the last 4 years. Our inability to replace this
revenue has forced us to close four locations and significantly
reduce staff over the last 4 years.
Fortunately, others see the value in the work that we
provide. We successfully have raised charitable dollars from
the United Way, foundations, and many individuals to support
our counseling and our education. With the help of these
charitable funders and by voluntarily adhering to the standards
of not only COA, the NFCC and its consumer protection
standards, FamilyMeans will strive to maintain and restore the
public's trust and continue to bring financial stability to
families.
I am hopeful that Congress and the Executive Branch take
action to uphold the integrity of the credit counseling field
in the face of these questionable business practices by recent
market entrants so that FamilyMeans and other non-profits like
ours can continue to serve consumers experiencing financial
difficulties in the communities throughout the country.
Senator Coleman. Thank you very much, Mr. Kroening.
Mr. Viale, is it correct that the employees at Cambridge
are asked to pick out false names?
Mr. Viale. If when they start there are other counselors
with the same first name that are presently working within the
group itself, we do ask them to pick out a different name for
the purpose of making it simpler for a client to call in and
get to that counselor from customer service.
Senator Coleman. Can't they just call themselves, Mr.
Viale?
Mr. Viale. They could, but people like to be more formal
and call it by--more personal and go by their first name. This
has recently changed--that policy. It has changed several
months ago, but that was a policy we had in place and it was
just to simplify the process for the client calling in.
Senator Coleman. There was testimony that there is what one
would describe as a leader board for top sales for employees
who are supposedly providing credit counseling services. Is
there, in fact, what one would describe as a leader board in
the Cambridge operation?
Mr. Viale. There are two separate boards. One board is
daily productivity, which is monitored by the people around
them just so we can help motivate the counselors within the
floor, and then there is the board that illustrates what the
counselors achieved as far as their goals and what they have
done as far as helping consumers.
Enrollment in debt management plan and also through
education.
Senator Coleman. There is a board for education?
Mr. Viale. Yes.
Senator Coleman. Could you describe that board?
Mr. Viale. The board--well, it is actually--it is not the
big monitor board but it is a board that goes up that shows how
many consumers the counselors are getting to our education
website, goodpayer.com, and having them opt in for financial
newsletters.
Senator Coleman. So your education is not personal
counseling. If someone doesn't enroll in a DMP, do you refer
them to a website?
Mr. Viale. Correct, and if they enroll, we refer them to
our own website, correct.
Senator Coleman. If they enroll, aren't they sent
educational videotapes and workbooks?
Mr. Viale. That is correct.
Senator Coleman. If they don't enroll, are they sent
educational videotapes and workbooks?
Mr. Viale. No, they are not. The counselors work with each
consumer to try and deliver whatever education, the wants and
needs the best to our ability, and then we work with them to
get them to our education wellness site, which is
goodpayer.com.
Senator Coleman. Are there bonuses that are paid to
employees for enrolling consumers in debt management plans?
Mr. Viale. There are three separate incentives that we have
for our counselors. Our counselors are hourly employees and
they have incentives based on the number of qualified consumers
they enroll in the program, the retention rates of the
qualified consumers they enroll in the program, and the amount
of people that they deliver some value of education to.
Senator Coleman. Do you disagree with Mr. Kroening's
assessment that there are many people for whom DMPs aren't the
appropriate path?
Mr. Viale. One hundred percent correct. That is why only 12
percent of the people that enroll in our program, people that
call in actually enroll in our program. We have----
Senator Coleman. But the bonuses you give are for DMPs?
Mr. Viale. For qualified clients that do, indeed, need a
DMP. Our systems, the technology that we have in place and the
compliance measures we have in place only allow our counselors
to enroll consumers that need a DMP plan.
Senator Coleman. Do we have Exhibit 6? \1\ It is actually
Mr. Schuck's client financial disclosure. On Exhibit 6, it
appears that his expenses exceed his gross income. Is that the
kind of client that needs a DMP?
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\1\ See Exhibit No. 6 which appears in the Appendix on page 249.
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Mr. Viale. This person exceeds by $24?
Senator Coleman. Right, gross income, not take-home. Gross
income, expenses exceed gross income.
Mr. Viale. This document is not familiar to me. I know it
has Cambridge Credit Counseling Corporation on it----
Senator Coleman. Assume just for the purposes of this
discussion, assume that this is a document----
Mr. Viale. No, this would be someone that does not belong
in our DMP plan.
Senator Coleman. Mr. Kroening, would you disagree with
that?
Mr. Kroening. I would agree, with it. A deficit, we would
not put a client onto a debt management plan.
Senator Coleman. That is Mr. Schuck's counseling----
Mr. Viale. From--correct.
Senator Coleman. The individual who is paying a fee of
close to $2,000 to enroll in a DMP.
Mr. Viale. Right, and that is from our systems of 2001.
Senator Coleman. Exhibit 10 \1\--Mr. Viale, does this
exhibit look familiar to you?
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\1\ See Exhibit No. 10 which appears in the Appendix on page 254.
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Mr. Viale. Yes, it does.
Senator Coleman. Is this a letter that you sent to
consumers?
Mr. Viale. Yes, we do.
Senator Coleman. And this is sent to consumers who have not
enrolled in a DMP?
Mr. Viale. That is correct.
Senator Coleman. And I note it says, ``Second letter. We
have no record of receiving a response from you. Please review
this offer before it expires.''
Mr. Viale. Correct.
Senator Coleman. Does it appear you are selling something
here? Is this an offer?
Mr. Viale. Often to try and help people. We want them to
call in to be able to try and provide them with whether or not
they need a DMP or whatever type of education we can deliver to
them.
Senator Coleman. And again when it comes to education, Mr.
Kroening talked about an hour-and-a-half session with his
clients. How long are your sessions?
Mr. Viale. For in-house counseling, which his organization
does, it lasts anywhere from an hour to an hour and a half.
Phone counseling, which is a lot different than in-house, can
last anywhere from 15 minutes to an hour, depending upon the
perplex situation of the consumer.
Senator Coleman. But the decision to make a DMP often
relates to that initial phone counseling?
Mr. Viale. Not even close, no. It is not until we have done
a full budget disclosure with the consumer, information has
been put into our systems, and the systems allow for that
consumer to come on our program. This is relatively new
programming that we have, but that is the system that is in
place. It has been in place that way for 2 years now.
Senator Coleman. Mr. Case, who founded AmeriDebt?
Mr. Case. Who founded AmeriDebt?
Senator Coleman. Yes.
Mr. Case. To my understanding, it was founded by three
directors, Pamela Shuster, Ilze Vipulis, and Jane Conigliaro, I
believe.
Senator Coleman. Is it Pukke, or how did you pronounce it?
Mr. Case. Pamela Pukke.
Senator Coleman. Pukke. Is she related to Pamela Shuster?
Mr. Case. It is the same person.
Senator Coleman. The same person?
Mr. Case. Yes.
Senator Coleman. And Pamela Shuster is related to Andris
Pukke?
Mr. Case. Correct.
Senator Coleman. So Andris Pukke, DebtWorks, does the back-
room services for AmeriDebt?
Mr. Case. They have in the past. It is now The Ballenger
Group who does the----
Senator Coleman. The Ballenger Group. But in the past,
under AmeriDebt. AmeriDebt would sign the folks up, but
everything would be processed by----
Mr. Case. AmeriDebt had processed clients in-house for
approximately 2 years before the outsourcing arrangement was
done with DebtWorks, sir.
Senator Coleman. Was Pamela Pukke ``Pamela Pukke'' when she
started AmeriDebt, do you know?
Mr. Case. I am sorry?
Senator Coleman. Was Pamela Pukke--you said Pamela Shuster.
That is why I was a little confused early on. When AmeriDebt
was formed and DebtWorks was in the position of processing
AmeriDebt's work, was there a relationship between Ms. Pukke
and Mr. Pukke?
Mr. Case. Pamela Shuster had stepped down from the board
somewhere around August 1999 and the contract was signed with
DebtWorks in October 1999.
Senator Coleman. How long have you known Mr. Pukke? What is
your relationship with him?
Mr. Case. Long-time family friend.
Senator Coleman. If I may turn to a copy of Exhibit 15, can
you identify Exhibit 15? \1\ Does that look familiar to you?
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\1\ See Exhibit No. 15 which appears in the Appendix on page 261.
---------------------------------------------------------------------------
Mr. Case. Yes.
Senator Coleman. And can you tell me what it is?
Mr. Case. From my understanding, this is a company meeting
that the Executive Director Jeff Formulak had, and his notes.
Senator Coleman. And the notes talk about ``We met our
goal. We achieved $2,837,033 in contributions. Our goal last
month was 7,500 clients and $2,600,000 in contributions.'' Does
this look like a sales meeting?
Mr. Case. It is kind of a--to get the morale up around the
office, to my understanding.
Senator Coleman. But what are you selling?
Mr. Case. Well, it also states there, sir, that we did help
9,100 clients, approximately.
Senator Coleman. Helped enroll them in DMPs.
Mr. Case. These are the individuals that were enrolled in
DMPs, that is correct, sir.
Senator Coleman. It talks about bonus structure. Is there a
bonus for education?
Mr. Case. A bonus is for several things. Again, I did not
deal directly with the clients. The managers really handle all
the bonuses.
Senator Coleman. Mr. Viale, who do you report to at
Cambridge?
Mr. Viale. I report to John Puccio.
Senator Coleman. John Puccio, he is the CEO?
Mr. Viale. Correct.
Senator Coleman. Is there anyone else between you and Mr.
Puccio?
Mr. Viale. No, there is not.
Senator Coleman. Do you know how much Mr. Puccio earns each
year from Cambridge Credit?
Mr. Viale. Yes, I do.
Senator Coleman. Can you tell us what that is, what is his
salary?
Mr. Viale. Six-hundred-and-twenty-four thousand, I think,
was his salary last year.
Senator Coleman. And your salary in this non-profit is how
much?
Mr. Viale. It is right around $400,000.
Senator Coleman. Ms. Craig, by the way, I do want to thank
you for the initiatives that American Financial has made.
My time is going to be up, but I did want to follow up. Mr.
Kroening and Ms. Craig, I want to thank you for the changes,
and I am running out of time here. Mr. Kroening, I appreciate
what the NFCC is doing and I think one of the great
difficulties in this hearing is that we are grouping folks
together.
Clearly, there is a difference in non-profits, and that may
be one of the issues here. People buying something, it is a
non-profit. It may be that you need for-profit agencies and
folks should get out there and have that and they can make
choices. But what you have got here is non-profits that do
certain things with the idea of not making bonuses and not
making money and not making $600,000 and $400,000 a year, and
you have for-profits that are acting as non-profits. I think
that is problematic.
Senator Levin.
Senator Levin. Thank you, Mr. Chairman.
Mr. Viale, you are presumably telling people that you are
selling these management plans to how much their initial fee
is. That is the theory of it, is that correct, on the
telephone?
Mr. Viale. I didn't understand the question. I am sorry.
Senator Levin. What is the initial fee?
Mr. Viale. The first payment they make to our company is
the----
Senator Levin. Regardless of that amount?
Mr. Viale. Regardless of that amount, correct. About 20
percent of the consumers that join our program get a reduced
initial fee due to hardship.
Senator Levin. So regardless of the amount of their debt,
whether it is a small amount or a large amount, their initial
fee is 10 percent of that debt?
Mr. Viale. No, it is not 10 percent. It is the monthly
payment that we develop, or our computer systems develop based
on creditor guidelines to handle the debt for them.
Senator Levin. What is the amount of the initial fee, set-
up fee?
Mr. Viale. Whatever their monthly payment is going to be to
satisfy the creditors and the program.
Senator Levin. I am sorry?
Mr. Viale. Whatever their monthly payment needs to be to
satisfy the program. So, for instance----
Senator Levin. So the first monthly payment is the fee.
Mr. Viale. That is correct.
Senator Levin. It all goes to you.
Mr. Viale. That is correct.
Senator Levin. And no matter what the size of that fee is,
you keep it?
Mr. Viale. Correct.
Senator Levin. Shouldn't there be a relationship between
the fee you get to set up a management plan and the services
that you render?
Mr. Viale. There should be a relationship to the savings
and the rebates available for the consumer. It is all relative
to the size of the debt the consumer has, an example being if
somebody owes----
Senator Levin. Shouldn't it relate to the services that you
render?
Mr. Viale. No, it should relate to the savings the consumer
can receive, the rebates they are able to receive through the
program, and also, it should also relate to the fact that we
have our fees reviewed and licensed in separate States, so they
are deemed reasonable.
Senator Levin. All right. Does that fee directly relate to
what they are going to get in the future?
Mr. Viale. It directly relates to their savings in interest
rate reductions. It directly relates to the amount of rebates
they can get back.
Senator Levin. Not can get back, but do get back.
Mr. Viale. That they can get back, qualified----
Senator Levin. What if they don't get back any rebate?
Mr. Viale. They haven't made their payments on time. Some
of that is not in our control. Our system is not immune to the
consumer following through with it.
Senator Levin. But you keep that first monthly fee
regardless of what comes subsequently in terms of benefits to
that consumer, is that correct?
Mr. Viale. That is correct. The consumer understands that
when they come into the plan. It is disclosed very clearly to
them.
Senator Levin. Apparently, some consumers don't understand
that.
Mr. Viale. We disclose it at two very critical points. I
can't see any other way to disclose it. Plus, our counselors
reinforce it.
Senator Levin. You have that in fairly small print, do you
not?
Mr. Viale. No. It is boxed out. It is right above where
they have to sign.
Senator Levin. Because apparently there were quite a few
consumers that don't understand that their first fee was--just
read that to us again.
Mr. Viale. It says, ``Payment design fee, proposed monthly
payment, one time only.'' Below that, it is ``Payment program
service fee, 10 percent of each payment made to Cambridge or
$25, whichever is greater,'' and then there is an example box.
``This is not a finance charge or an interest rate. This is not
your proposed monthly payment. This is only an example.
Proposed monthly payment, $300, 10 percent, $30, dispersed to
creditors, $270. This is only an example.''
Senator Levin. I see. And where does it say that you are
keeping the entire fee?
Mr. Viale. It says it right there, ``Payment design fee,
proposed monthly payment, one time only.'' Plus, it says it all
through-out----
Senator Levin. You are talking very fast. Payment--this is
a program design fee?
Mr. Viale. That is correct.
Senator Levin. Where does that say that you are keeping all
the money?
Mr. Viale. It says it throughout the text and it says it
here.
Senator Levin. No, I know the text, which no one can read.
I am talking about in the box you pointed to. Where does it say
you are keeping all the fee? Program design fee are not words
which jump out to the average reader as being, none of this
goes to your creditors.
Mr. Viale. Well, we have it here. It is--I mean, we feel
that is clear enough. We feel this is way above what any other
company does as far as disclosure, plus the consumer receives
this before they join the program. I think we have to
understand that once they sign the service agreement, they are
not obligated to our program. They are not signing up. They
receive this. It is very clear exactly what we are charging
them. The counselors go through this line by line.
Senator Levin. Your counselors on the telephone go through
your customers line by line with that debt management plan
summary after it is received?
Mr. Viale. Correct.
Senator Levin. So after that is received by your customers,
they call back and then they go through with Mr. Daniel, or
whoever it is, if they can find them, the----
Mr. Viale. It is not----
Senator Levin. It is not hard to find your folks?
Mr. Viale. No, it is not hard to find us.
Senator Levin. All right. They go through it line by line,
OK. And your first payment fee there----
Mr. Viale. Line by line. Each----
Senator Levin. No, just point out the first payment fee, if
you would.
Mr. Viale. ``Payment design fee. This payment is not paid
to your creditors,'' $374.
Senator Levin. All right.
Mr. Viale. Total estimated monthly fees----
Senator Levin. So on that right there, not where they sign
but something which is sent to them which looks like this is
where the words, ``This payment is not paid to your creditors--
''
Mr. Viale. That is relatively new, but yes, that is where
it is.
Senator Levin. Relatively new? How new?
Mr. Viale. Several weeks as far as just that--in
parentheses.
Senator Levin. In parentheses? You didn't even have the
parentheses year after year where people signed their name. It
obviously wasn't very clear because now, 3 weeks ago, you add
that.
Mr. Viale. The payment design fee has been there all along.
Senator Levin. I know it has been----
Mr. Viale. It is very clear.
Senator Levin [continuing]. But that is not intelligible to
people, and so you finally, a few weeks before this hearing,
add these words, not where they sign, not where they sign yet.
That is still not added, is it? Where is it?
Mr. Viale. Is what?
Senator Levin. Go back to where they sign their name, where
you say everything is so clear, where there are no parentheses.
See those words, ``Payment design fee''----
Mr. Viale. Yes.
Senator Levin [continuing]. Right where they sign?
Mr. Viale. Yes.
Senator Levin. That is not intelligible. That doesn't tell
people none of that goes to their creditors. So a few weeks
ago, you put on this other exhibit, ``None of this goes to your
creditors.'' Why don't you put that in that box where they are
signing their name, ``None of this goes to your creditors''?
Mr. Viale. These service agreements have been approved by
several different banking departments and the States we are
licensed in.
Senator Levin. That is fine.
Mr. Viale. We are trying to do our best with full
disclosure. The counselors go through this----
Senator Levin. Why don't you put the parentheses in that
box where people sign their names?
Mr. Viale. We can do that.
Senator Levin. Well, it is obviously clearer, isn't it, to
say none of this goes to your creditors?
Mr. Viale. Yes. That is why we have put it here.
Senator Levin. A few weeks ago.
Mr. Viale. Correct, but the payment design fee and the
counselors through their presentations, if you want to pull
this up--can I pull up the presentations?
Senator Levin. No, I think----
Mr. Viale [continuing]. Where we say----
Senator Levin. I think I would rather focus on my
questions.
Mr. Viale. OK, sir.
Senator Levin. Let me tell you, that is not disclosure. I
am just going to make a statement here. You have got your
statement that it is, but it is obviously not disclosure,
payment design fee, unless you tell people where they sign
their name and over the telephone that none of that is going to
go to your creditors. You have now done this on a form which
goes out afterwards, and that may or may not help. It is a
little better than what you have been doing all these years.
Let me just ask one more question before my time runs out.
You have got a relationship--let me be clear. The non-profit
has a relationship with the for-profit, is that correct? The
for-profit does the processing services, the so-called back-
room services for the not-for-profit?
Mr. Viale. Part of the family of companies is a for-profit
company, correct, that does back-end support.
Senator Levin. And the people who control the non-profit
also control the for-profit, is that fair to say?
Mr. Viale. That is fair to say.
Senator Levin. And those folks, then, are negotiating with
themselves in terms of what those processing fees are, is that
correct?
Mr. Viale. No. Those contracts--I am not 100 percent
familiar with this, but those contracts are evaluated at fair
market value.
Senator Levin. But they seem to be very different from all
of the contracts which are worked out by the associations, for
instance, the National Foundation for Credit Counseling and the
AICCCA. They have very different fees than you do. So when you
say fair market value, there is no place you look in a manual
to find fair market value, is there?
Mr. Viale. The back-end support systems we have are not
within the industry anywhere. We have looked closely with other
companies to gauge what fair market value would be.
Senator Levin. But in terms of setting that fee, it is set
by the people who control the non-profit with the people who
own the for-profit, is that correct?
Mr. Viale. I didn't understand the question, sir.
Senator Levin. Who negotiates that fee? Isn't it the non-
profit with the profit-making company?
Mr. Viale. Oh, I don't know.
Senator Levin. How is the fee set? Who sets it?
Mr. Viale. I don't know. That is not my line of expertise.
My responsibilities are day-to-day operations of our family of
companies.
Senator Levin. Does anyone outside of the two families of
the companies set it up or is it set up within the family of
companies as to what that fee is?
Mr. Viale. Well, this is reviewed by two separate
accounting firms----
Senator Levin. No, I know about that, but who sets the fee?
Is it set up within the family of companies?
Mr. Viale. I am not sure. I think it is reviewed and it is
proposed, but I am not sure how it gets approved.
Senator Levin. Would it surprise you to know that it is $25
or $30 that compares to $1 to $2 for each of these plans per
month by other non-profit companies, that it is 20 times higher
than other non-profits?
Mr. Viale. It is surprising, because there are other bids I
have seen for $13, $15, and $18.
Senator Levin. Do you put this out for bids?
Mr. Viale. That, I don't know.
Senator Levin. If it were--I thought you said a minute
ago----
Mr. Viale. I said I have seen bids from other
organizations.
Senator Levin. No, I know that, but before that, didn't you
say that this fee was negotiated between the profit----
Mr. Viale. No.
Senator Levin [continuing]. And the non-profit?
Mr. Viale. No, I did not say--I don't have the answer to
that.
Senator Levin. You just don't know where these fees are
set, or how these fees are set?
Mr. Viale. No.
Senator Levin. The larger the fee, the more money would go
to the profit-making corporation, is that fair to say?
Mr. Viale. It seems fair to say.
Senator Levin. Yes. And so the larger the fee, the more
money would get into a company which then is not regulated in
terms of profit by the IRS, is that correct?
Mr. Viale. I don't know. I am not an accountant. I don't
know those answers.
Senator Coleman. Thank you, Senator Levin. Senator Pryor.
Senator Pryor. Thank you, Mr. Chairman.
First, let me say to Mr. Case that I feel like your answer
a few moments ago when you talked about Pamela Shuster was not
forthcoming. I feel like you were deliberately misleading the
Subcommittee by not giving her married name, and I want to
thank the Chairman for drawing that out because I wouldn't have
picked up on that.
Mr. Case. I am sorry. I didn't mean to do that. I did not
mean to do that. We refer to her, because back in the time when
she was affiliated with the company, she was Pamela Shuster.
Senator Pryor. Well, I just want to thank the Chairman for
connecting the dots on that because I think that is a
significant----
Mr. Case. I apologize.
Senator Pryor [continuing]. Fact that you left out.
If I may, is your name pronounced ``Vile''? ``Vi-al''?
Mr. Viale. ``Vi-al-ee.''
Senator Pryor. ``Vi-al-ee.''
Mr. Viale. Yes.
Senator Pryor. Mr. Viale, let me focus with you just for a
few moments. You mentioned in your opening statement that you
felt like some of the early witnesses had unfairly painted your
company as a money-making machine for the two founders. And
again, I am sorry, I am not sure of the pronunciation, but
``Pu-chee''?
Mr. Viale. ``Pu-chee-oh.''
Senator Pryor. ``Pu-chee-oh.'' As I understand your
testimony, he made $624,000 in one year. His wife made $624,000
in one year.
Mr. Viale. His brother.
Senator Pryor. His brother. And in addition, he made an
additional $600,000 from related organizations. Is that----
Mr. Viale. That, I don't know.
Senator Pryor. In 2002, did he sell the company?
Mr. Viale. No. There was no sale of the company in 2002.
There was a sale of a company in 1996 or 1997 to the non-profit
when we moved to Massachusetts.
Senator Pryor. OK. And then, as I understand it, your
salary is $400,000 or more?
Mr. Viale. Right around there, correct.
Senator Pryor. And do you have any incentives or any
bonuses on top of that $400,000?
Mr. Viale. No.
Senator Pryor. Now, if I can, I would like to ask Mr.
Kroening down here on this end of the table, what is your
salary at your non-profit?
Mr. Kroening. My annual salary is $60,000.
Senator Pryor. Thank you. Mr. Viale, I believe you said
that you have about 40,000 customers or clients that call in
every month, is that the figure you said?
Mr. Viale. New callers that call in each month, correct.
Senator Pryor. But you only sign up, what, about 12 percent
of those?
Mr. Viale. That is correct.
Senator Pryor. As I understood your testimony, that is what
you said. So that is about 4,800 a month. Is my math right?
Mr. Viale. Something right there, yes.
Senator Pryor. What is your average fee that you charge
your clients?
Mr. Viale. Three-hundred-and-eighty dollars is right around
the average initial fee of a consumer that joins a program.
Senator Pryor. OK. Now, you said $385?
Mr. Viale. It is right around $380. It fluctuates, but
around $380
Senator Pryor. And you said something there that I think is
important, and that is your $385 for the initial fee.
Mr. Viale. Yes.
Senator Pryor. What is the total fees that they are charged
during their relationship with you?
Mr. Viale. It would be $38 per month from the second month
thereafter, and the plan can range anywhere from 4 to 5 years,
or 4 to 5\1/2\ years.
Senator Pryor. OK. Now, how are these fees calculated?
Mr. Viale. It is based on the service agreement. It is 10
percent of their monthly payment, and whatever their payment
needs to be on the program is the initial fee. That is the
first payment that is our fee.
Senator Pryor. OK. And these are averages. They are not the
same for everybody. They all fluctuate depending on what the
customer's needs are.
Mr. Viale. The payment size--well, it fluctuates for each
consumer, yes, correct.
Senator Pryor. OK. What percentage of your clients stay
with the program through the duration?
Mr. Viale. We have a little over a 30 percent completion
rate.
Senator Pryor. OK. And is there any penalty for dropping
out?
Mr. Viale. No penalty.
Senator Pryor. Now, of the clients that you have, how
many--what percentage, I think that is the best way to handle
this, what percentage actually enroll in a debt management plan
of the clients you have that have signed up with you? Do all of
them enroll in debt management?
Mr. Viale. No. Twelve percent of the people that call us
enroll in the debt management plan.
Senator Pryor. I understand that. We have already covered
that.
Mr. Viale. Right.
Senator Pryor. But I am asking, of those 12 percent, how
many sign up in the debt management, all of them?
Mr. Viale. That is correct. The other 88 percent is
counseled to our best ability with whatever education they
need.
Senator Pryor. OK. So you are going to try to tell the
Subcommittee today that those 88 percent do receive some
services from you?
Mr. Viale. We try as hard as we can to deliver services to
those consumers.
Senator Pryor. But everybody that ``signs up,'' they are
moved into a debt management plan?
Mr. Viale. That is correct.
Senator Pryor. Now, Mr. Kroening, let me ask you, based on
your experience, you have heard a lot about debt management
plans today. Do they work for everybody or how is this
consistent--is this consistent with your experience and what
you do?
Mr. Kroening. With our experience, again, we will only put
folks on plans when it is necessary and needed by the family.
Again, in our case, we don't talk about how many people contact
us. We talk about the folks that we actually counsel. In this
case, approximately 30 percent of the folks that we counsel
will go onto a debt management plan.
Senator Pryor. And your counseling is an hour and a half,
whereas I believe the testimony is their's may be about 15
minutes on that initial phone call?
Mr. Kroening. Yes. Our counseling will be an hour and a
half, sometimes as much as 2 hours.
Senator Pryor. Mr. Chairman, I have one last question. I
know I am almost out of time, but again, it is for Mr. Viale,
and that is you are operating under the label non-profit. Why
did you choose to operate under a non-profit label?
Mr. Viale. Well, I don't have a specific answer for that,
but I know the industry forces us to be a non-profit.
Senator Pryor. I don't think that is true. I think you
can----
Mr. Viale. Well, the creditors only endorse, for the most
part, a non-profit status to grant benefits to the consumer.
Senator Pryor. So it is to your benefit to work with
creditors to be a non-profit, but also, wouldn't you agree with
me that it is to your benefit to work with your clients to call
yourself a non-profit because it gives them an assurance that
there is a credibility with your company, would you agree with
that?
Mr. Viale. No, I wouldn't agree with that. If we were for-
profit or non-profit, we would put the same energy into working
with each consumer we are talking to.
Senator Pryor. I am not talking about the energy you put
in. I am talking about how consumers feel toward a for-profit
company versus a non-profit organization. Would you agree with
me that they feel better about going to a debt counselor or a
debt agency that is a non-profit, or would you not agree with
that?
Mr. Viale. I don't know. I don't know that to be true
either way.
Senator Pryor. That is all I have, Mr. Chairman. Thank you.
Senator Coleman. Thank you, Senator Pryor. Senator Dayton.
Senator Dayton. Thank you, Mr. Chairman.
So the purpose of your enterprise is ostensibly to provide
the client with a reduction in his or her payments based on
your negotiation with the creditors? How is that reduction
documented? How does the client know that he or she is getting
value from what you are charging?
Mr. Viale. We fax them our service agreement. They sign the
service agreement, so they understand the terms of the service
agreement. We provide them with a budget analysis. We go over
their bills in detail. Then we provide them with a debt
management plan summary, which is here, and it goes over
exactly each creditor we are handling, how much has to go to
each creditor, how long it will take, what it would cost them
on their own based on 18 percent interest, and what it would
cost through us and their savings, as well as the fees and the
rebates they can receive.
Senator Dayton. Is that 18 percent what is actually being
charged at that time?
Mr. Viale. It is an underestimate. Most consumers we are
talking to are being charged more than 18 percent interest.
Senator Dayton. But you are representing this as their
savings. Is this based on actual interest rates or are you
making assumptions here?
Mr. Viale. Well, they are not assumptions. They are not
based on the actual information the consumer has. We don't have
that available to us.
Senator Dayton. Well, you are asking the consumer to
provide you with information. Why wouldn't you obtain that
information?
Mr. Viale. We are not able----
Senator Dayton. How do you assess whether the client is
going to receive a benefit if you don't know what the client is
presently paying?
Mr. Viale. We don't know exactly what their interest rates
are with each account. That is impossible for us to know.
Senator Dayton. You are setting up a management fee, which
in the case of Mr. Schuck was $2,000. Wouldn't that be an
appropriate part of the service, then, to make an actual
determination rather than just plugging in some generic
assumptions?
Mr. Viale. There is no generic assumptions. We know what
the----
Senator Dayton. What are the interest rates based on?
Mr. Viale. The interest rates are based on creditor
guidelines. We know what they will do upon acceptance of the
proposals prior to our client joining our program. So there is
no guesswork involved in the plan that we are setting up for
them.
Senator Dayton. Why aren't you representing to them in the
plan the actual cost of their present situation and then
showing them what reductions you are able to gain for them?
Mr. Viale. Because it is creditor-specific. There are
sliding scales for each creditor. It is impossible for us to
determine exact figures for the consumer.
Senator Dayton. But don't you have the exact figures based
on that client's present situation?
Mr. Viale. It is impossible.
Senator Dayton. What is impossible?
Mr. Viale. Well, I will give you an example.
Senator Dayton. If I come to you and I have six credit
cards and I am overdue on whatever they are, I have six
interest rates that are being charged on my six accounts--what
is complicated about that?
Mr. Viale. Well, we don't know what certain creditors like
Discover, MBNA, or other creditors are going to do with the
interest rate concessions.
Senator Dayton. You are negotiating with each creditor a
reduction part of this management fee that you are collecting
up front?
Mr. Viale. No. There is not a negotiation process. They are
going to evaluate the proposal we send in based on criteria of
the client, their client. Then they are going to, in turn, set
an interest rate for that particular account.
Senator Dayton. These savings, then, are just based on a
set of fictitious assumptions? They are not based on actual
negotiations?
Mr. Viale. We don't negotiate with the creditors.
Senator Dayton. They are not based on an actual fact of
what is going to be accomplished on their behalf?
Mr. Viale. We have general terms for each creditor. Some
vary----
Senator Dayton. I am not talking about general terms. You
are charging $2,000 for a computer printout and representing
that as actual savings. If I am taking the time, which I would
hope I would, to be reading this and trying to make an
assessment, I am relying on your assertions that this is what I
am going to save so I can understand whether I am getting an
appropriate benefit or not, and you are saying that they are
not based on actual facts, they are based on your assumptions
or some generic numbers that you plug into a computer program.
Mr. Viale. It is not----
Senator Dayton. Why is that worth $2,000 to me?
Mr. Viale. Because that is what the amount of the--that
particular client, that is what you owe them. That is what it
is going to take to pay back the debt through us.
Senator Dayton. No, that is what you are charging. You are
charging me an up-front management fee, which in Mr. Schuck's
case is $2,000. I am just using that as an approximation. I
don't know if that is high or low for your average customer----
Mr. Viale. It is very high.
Senator Dayton. High, OK. So whatever it is, $1,500--what
is the average management fee?
Mr. Viale. Three-hundred-and-eighty dollars. Three percent
of our clients have payments over $1,000.
Senator Dayton. I am talking about the first month, the up-
front.
Mr. Viale. Three-hundred-and-eighty dollars is the average.
Senator Dayton. Does that include the 10 percent?
Mr. Viale. Correct.
Senator Dayton. All right. So for that, what am I getting?
I am getting this computer printout?
Mr. Viale. You are getting our systems of generating to our
best ability what the estimated savings will be for each client
that comes in to us.
Senator Dayton. What is that document being represented as?
What is the title of that, not the one in front of you now but
the one that you send out there?
Mr. Viale. It is called the Debt Management Plan Summary, A
Pro Forma Statement.
Senator Dayton. OK. Would I have any reason not to believe
that is reflective of my situation and that you made that
determination? I mean, what other kind of service are you
providing except for an effort to reduce my overall payments?
Mr. Viale. This is only part of what we do. I mean, this is
only----
Senator Dayton. What else do you do?
Mr. Viale [continuing]. Ten to 20 percent of what we do.
The rest is all education.
Senator Dayton. On a website?
Mr. Viale. No, not on the website. The counselors interact
with the consumers and do our best to deliver whatever
education they want and they need. What the Subcommittee
doesn't understand----
Senator Dayton. How can your counselors provide information
if they don't have the facts? How can they counsel without the
facts?
Mr. Viale. We do have----
Senator Dayton. Let me just ask one other question, Mr.
Chairman. I am sorry. This fair, what do you call it, the fair
share plan for the rebate----
Mr. Viale. Good payer program.
Senator Dayton [continuing]. The bonus you are paying----
Mr. Viale. Yes.
Senator Dayton. Based on the figures you have provided to
your almost 76,000 clients, the $14 million, that averages out
to $185 per client.
Mr. Viale. A hundred-and-eighty-two dollars, correct.
Senator Dayton. So that is less than--and you say the
average up-front payment is $385?
Mr. Viale. That is correct.
Senator Dayton. You are giving them back a fraction of what
they are paying you, but more importantly, I guess my question
is, if twice that is the total value of the savings that you
are getting from the creditors, again, what value are you
providing to this client for all that you are charging?
Mr. Viale. Some of those 10,000, and you have a payment of
$300, we will use $300 as our example, they are going to save
roughly between maybe $100 to $150 in interest charges every
month by being on our program.
Senator Dayton. How do you know that? You don't have that
information.
Mr. Viale. We have----
Senator Dayton. You just said it is impossible to get that
information.
Mr. Viale. It is impossible to get accurate information.
The information we are providing is very close to accurate.
Senator Dayton. How is it impossible to get accurate
information on what is actually occurring out there among your
clients?
Mr. Viale. You should talk to the banks about that.
Senator Dayton. Well, no, I don't talk to the banks. It is
what you----
Mr. Viale. It is not----
Senator Dayton. What do you----
Mr. Viale. The creditor----
Senator Dayton. I get a monthly statement. I get
information on what the current interest rate is. But at the
end of all my good behavior, I am getting $185 back as a bonus.
The other $185 you are saving, that is the total value of the
savings, $370, that on average you have achieved through
interest reductions from the creditors.
Mr. Viale. That is not true.
Senator Dayton. I am just using the numbers you provided.
Mr. Viale. That is not true. I mean----
Senator Dayton. What is true, then? What are you getting
for these costs?
Mr. Viale. Extreme value we are delivering to people who
need a debt management program.
Senator Dayton. No. Quantify it. What are you getting for
them?
Mr. Viale. We are getting reduced interest rates so they
can get out of debt in a reasonable time frame.
Senator Dayton. So they are getting $370 worth of reduced
interest rates?
Mr. Viale. On a monthly basis, they are getting----
Senator Dayton. No, not monthly, that is the total. The
total rebate is $185.
Mr. Viale. No, no----
Senator Dayton. It is half of the interest that you have
saved. So the total value of the interest you have saved--well,
don't shake your head. Then tell me what the facts are.
Mr. Viale. This is rebates. This is fair share money the
creditor sends to an organization.
Senator Dayton. And they get half of it and you get half.
Mr. Viale. Right. That is not interest rate reductions.
That is not savings on the plan. This is just fair share, that
we give half back to our consumers. No one does that. Interest
rate concessions, we all get. We all save the client the same
type of money from a monthly basis from each creditor. It is
all standard. There is no difference in what we do.
Senator Dayton. But again, what are you saving them?
Mr. Viale. Tens of thousands of dollars. Someone who owes
$10,000----
Senator Dayton. How do I know that if I am a customer? How
do I know what you are saving me?
Mr. Viale. It is our expertise, and everything we have in
our system is all computerized based on creditor guidelines.
There is no guesswork in what we do to a degree. We can't
provide an exact detailed report, and nobody can.
Senator Dayton. Thank you, Mr. Chairman----
Senator Coleman. Thank you, Senator Dayton.
Senator Dayton [continuing]. For your indulgence.
Senator Coleman. I want to just follow up on a couple
things. Fair share, you talked about fair share. The number one
creditor for Cambridge is Citibank, is that correct?
Mr. Viale. I am not exactly sure. It is one of the top
ones.
Senator Coleman. The top ones. Do you know if Citibank does
anything with fair share, provides any fair share rebate?
Mr. Viale. Provides any fair share--I don't understand.
Senator Coleman. Isn't it true that many of your top
creditors no longer participate in fair share or else only
rebate a very small percentage?
Mr. Viale. We are down----
Senator Coleman. Are you aware of that?
Mr. Viale. I am aware of it. We are down to a little bit
less than 5 percent fair share.
Senator Coleman. Your top creditor, Citibank, do you know
if they provide any fair share?
Mr. Viale. Yes, they do, to us.
Senator Coleman. And what percentage.
Mr. Viale. Yes. Well, 9 percent is the fair share. I think
it is nine. It is eight----
Senator Coleman. Citibank is giving you back 9 percent?
Mr. Viale. It is 8 or 9 percent based on--they are still
coming out with their new policy of their grants and that
hasn't been released to the community yet.
Senator Coleman. Bank One, one of your top three, what is
their fair share?
Mr. Viale. That might be zero right now.
Senator Coleman. It might be zero. And MBNA, your number
two credit group, what is their fair share?
Mr. Viale. They are at zero right now.
Senator Coleman. OK. So your top creditors, and I want to
turn to you, Mr. Kroening, because you are impacted by this,
aren't you?
Mr. Kroening. Yes.
Senator Coleman. Is it fair to say that the top creditors
today are not participating in fair share or have substantially
cut their fair share because of the fact that so much of this
revenue is being generated now through either for-profits that
are making a lot of profits or for-profits that are benefitting
from what the non-profits are doing?
Mr. Kroening. Yes, Mr. Chairman. My belief is that we have
seen a major decrease in the creditor support for our type of
counseling and debt management work that we do, related
specifically to the number of new entrants and the number of
folks that they are putting on plans. And specifically, I
believe it is related to the fact that many people are being
put into debt management plans that simply do not need it and
creditors have seen their line item expense go out the roof
with this. What they do is cut across the board. So this has
drastically affected us. Our organization has a budget of just
around $1 million. Over the last 4 years, these cuts have meant
about $250,000 in less revenue for us.
Senator Coleman. The last area of inquiry, I want to clear
up this thing about education so we are very clear. There is an
initial call to a customer. Mr. Schuck is a customer. That call
lasts approximately how long, Mr. Viale?
Mr. Viale. It can last anywhere from 5 to 15, 20 minutes,
the first call.
Senator Coleman. Let me back up. Is there any face-to-face
education you have with any of your consumers?
Mr. Viale. One hundred percent. If they live in the area,
they come in for face-to-face counseling.
Senator Coleman. What percentage of your customers come in
for face-to-face counseling?
Mr. Viale. People that live in the area, almost 100 percent
of them.
Senator Coleman. What percent of the total----
Mr. Viale. We are national. We don't have a facility in
every State and every county.
Senator Coleman. So what percent of your total customers
get face-to-face counseling?
Mr. Viale. Approximately 10 to 20 a day get face-to-face
counseling, so I don't know what that would relate to. I have
never done the numbers up.
Senator Coleman. The education--so I am making it very
clear, if you don't enroll in a debt management plan, you get
referred to a website, is that correct?
Mr. Viale. That is correct.
Senator Coleman. And if you do enroll in a debt management
plan, you get a workbook and a videotape, is that correct?
Mr. Viale. You get a two-and-a-half-hour video series and a
workbook plus the website plus newsletters and the education
center along with the counselor.
Senator Coleman. If there is just a little follow-up,
because we do have two more panels. Senator Levin?
Senator Levin. Mr. Viale, going back to the rebate issue,
you said that your customers get the average of $185 rebate, so
about half that average initial fee is rebated to all of those
customers you have got that get the plan and sign up, is that
what you are saying?
Mr. Viale. A hundred-and-eighty-two dollars, correct.
Senator Levin. That is the average?
Mr. Viale. That is the average amongst the whole group.
Senator Levin. All of the group?
Mr. Viale. Correct.
Senator Levin. So that half of your total money that you
got in initial fees last year, for instance, was rebated?
Mr. Viale. That would be untrue because they have to be on
the program for 6 months, so--but if you were to look at it
over the time, yes, that would be true.
Senator Levin. Only people who were on the program for 6
months get rebates?
Mr. Viale. Correct.
Senator Levin. What percentage of the 12 percent of the
people that you sign up are on your program for 6 months?
Mr. Viale. The average length of time for a consumer on our
program is 23 months. That stat I have.
Senator Levin. So you don't have that figure, what
percentage of people drop out before 6 months and therefore
don't get a rebate at all?
Mr. Viale. No. I do have that around 20 percent actually
get more than their initial fee back in rebates.
Senator Levin. But you don't have the percentage that get
nothing because they dropped out after----
Mr. Viale. I don't have that percentage here, no.
Senator Levin. Mr. Case, very quickly, what percentage of
your customers make no contribution up front at all?
Mr. Case. I don't have a percentage, sir, but 5,000-plus
are on our program right now with no contributions whatsoever.
Senator Levin. Up front?
Mr. Case. Anything, in all----
Senator Levin. And how many are in your program?
Mr. Case. We have approximately 72,000 people in the
program right now.
Senator Levin. Are the people who sign up these customers
discouraging folks from making voluntary contributions?
Mr. Case. I am sorry?
Senator Levin. Are they--excuse me. I misspoke. Are the
people who engage in these first phone calls trying to sign up
people, do they discourage folks from saying that they can't
make a contribution?
Mr. Case. Mr. Levin, as far as if people can't make the
contribution, we don't jam it down their throat. I mean, we
understand certain people are in certain hardship situations
and----
Senator Levin. Exhibit 14 \1\ has the following item. The
script tells your employees what to say in response to the
customer who says, ``I can't afford a contribution right now,
but maybe I can afford to contribute later,'' and here is what
your script advises the employee to say. ``If you can afford to
make a monthly payment, you can afford to make a contribution.
That contribution is not going into our pocket. It is going to
cover the costs of setting you up on the program. Would you
rather have that payment go to us to help people like you get
out of debt or would you like it to go into the creditors'
pocket as an extra interest? Would you rather support a non-
profit company or help a bank get richer?'' Is that your
script?
---------------------------------------------------------------------------
\1\ See Exhibit No. 14 which appears in the Appendix on page 260.
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Mr. Case. I didn't personally write the script, sir.
Senator Levin. Is that your company's script?
Mr. Case. That is in the company handbook, yes.
Senator Levin. Is that as disgusting as it sounds? Does
that not disgust you? If you don't call that pressure on
somebody to make a contribution, how would you label that?
Mr. Case. I would call it pressure.
Senator Levin. You would call it pressure. That is how
voluntary your contributions are.
One last question. Mr. Kroening, we have heard that the
average initial fee that is charged by Cambridge is $380. What
is your average initial fee?
Mr. Kroening. Twenty dollars.
Senator Levin. Thank you. Senator Dayton.
Senator Dayton. Thank you, Mr. Chairman.
I will be brief because we have a roll call vote starting,
but Mr. Kroening, I want to thank you for being here and
presenting a comparative perspective. You have given new
meaning to the phrase, ``swimming with the sharks.'' These are
your compatriots. Ms. Craig, I am glad that this investigation
has prompted a review of some of your practices. I hope they
are conforming to Mr. Kroening's.
Ms. Craig, since I didn't have a chance to ask--I am sorry,
Mr. Case--before, Ms. Troy stated that she was not able to talk
with a counselor when she wanted some counseling information
and was referred instead to ``customer service,'' Who is
customer service in your business?
Mr. Case. Sir, the customer service would either be The
Ballenger Group or DebtWorks, depending on when she was on the
program. I believe she was in 1999, so it would be DebtWorks.
Senator Dayton. And DebtWorks is another subsidiary of The
Ballenger Group?
Mr. Case. DebtWorks was bought by The Ballenger Group, sir.
Senator Dayton. OK. But she says she got a different person
each time, that she didn't have anybody who was familiar with
her case. So there is not a counselor? Mr. Allen is
representing himself as a counselor, but he doesn't do any
counseling.
Mr. Case. He does do counseling, sir. My understanding of
the customer service area is each client who comes onto the
program, their customer number is their Social Security number.
That enables them to be allowed to talk to any customer service
representative simply by giving them their Social Security
number to pull it up----
Senator Dayton. Are those people trained as counselors,
whatever that term means in your industry?
Mr. Case. The customer service?
Senator Dayton. Yes.
Mr. Case. They are trained in customer service, sir.
Senator Dayton. Who provides this ``counseling''?
Mr. Case. The counselors provide the up-front education.
Senator Dayton. In the 15 minutes that you are allotting
for that purpose?
Mr. Case. My understanding is there are several calls.
There is not one call and you are signing up. I mean, there is
a lot of----
Senator Dayton. What is the counseling? What is the content
of the counseling?
Mr. Case. Right up front, there is a budget analysis done
right away, because different people are in different
situations.
Senator Dayton. Your budget analysis with people who are
calling you, referring to your advertising, under the kind of
circumstances they are in, does that budget analysis show that
they are able to make voluntary ``contributions''? I mean, if
they could make voluntary contributions, why would they be
needing your service?
Mr. Case. Sir, there is a negotiation period which takes
normally between 30 and 45 days with the creditors to make sure
all these proposals are----
Senator Dayton. You are charging $5 per account per month.
Mr. Case. Per month, right, for maintenance fees.
Senator Dayton. Five dollars per account per month?
Mr. Case. It is actually $7, sir.
Senator Dayton. Seven dollars per account per month.
Mr. Case. Correct.
Senator Dayton. That presumably is the cost, probably more
than the cost, of actual time you are spending negotiating with
these creditors. Why is there a voluntary contribution
necessary at all?
Mr. Case. Because we are charged monthly fees by the back-
office company which helps us defer those costs.
Senator Dayton. Who is a for-profit that owns these other
operations, right?
Mr. Case. It is two different companies, sir.
Senator Dayton. Well, it is different companies but the
same principals?
Mr. Case. No.
Senator Dayton. Some of the same?
Mr. Case. No.
Senator Dayton. No relationship at all between The
Ballenger Group and AmeriDebt?
Mr. Case. No.
Senator Dayton. None at all between The Ballenger Group
and----
Mr. Case. Not at all.
Senator Dayton. OK. Just one last question. You talk about
the value that you have achieved for your customers. How do you
quantify all these tangible benefits, I think you called them?
Mr. Viale. Is this question to me?
Senator Dayton. No, Mr. Case.
Mr. Case. Oh, I am sorry, sir. What was the question?
Senator Dayton. For years, AmeriDebt helped consumers save
millions by providing these various services. How do you
determine what those savings are? What are the benefits the
clients receive?
Mr. Case. We had an analysis done which we refer to, the
Painter Analysis. It was a report done for our litigation in
the State of Illinois and these are the numbers that the
Painter Analysis came up with.
Senator Dayton. So when you say they have received
approximately $13,300 in tangible benefits----
Mr. Case. That is correct.
Senator Dayton [continuing]. What are tangible benefits?
Mr. Case. If, in fact, they stayed, making minimum payments
on their unsecured debt throughout--until the payment was paid
off or go onto this debt management program and reap the
benefits of re-aging the accounts, getting the interest dropped
down, and getting the debt paid off in a 3- to 5-year time
period, sir.
Senator Dayton. But what constitutes the tangible benefit?
Mr. Case. If, in fact, the interest rates were not lowered
and they paid the minimum payments, it would take them, I
forget the number, it is approximately, I believe, 20 years or
so pay off this debt.
Senator Coleman. Senator Dayton.
Senator Dayton. Is $13,300 in tangible benefits the sum of
the money that they paid off? What are you calling a tangible
benefit?
Mr. Case. It is a tangible benefit because they are not
paying the interest rates they were once paying, sir.
Senator Dayton. So the interest rate differential, the
value of that is $13,300 for an average client?
Mr. Case. That is my understanding.
Senator Dayton. You run the business, don't you? Wouldn't
you know?
Mr. Case. That is my understanding.
Senator Dayton. Thank you, Mr. Chairman.
Senator Coleman. Thank you. Just to clarify one thing and
we will dismiss this panel. The Ballenger Group bought
DebtWorks. That chart, though, DebtWorks was originally--
Ballenger is now DebtWorks, is that correct?
Mr. Case. That is correct, sir.
Senator Coleman. So when you answered Senator Dayton, you
said that there is no relationship between The Ballenger Group
and AmeriDebt, you are technically correct, but DebtWorks,
which was the predecessor to The Ballenger Group, was started
by Mr. Pukke, who was the husband of Pamela Pukke, is that
correct?
Mr. Case. That is correct, sir. They did not serve on the
boards at the same time, though.
Senator Coleman. But you said there was no relationship. I
just want to be very clear that there was very clearly a
relationship when DebtWorks started this relationship with
Debticated Scape, a relationship with DebtServe, a relationship
with Dedicated Consumer Counseling, a relationship with
CrediCure, a relationship with the Credit Network, a
relationship with Fair Stream. All the folks who started those
and were involved in those at one time were associated with
AmeriDebt, is that correct?
Mr. Case. I don't think that is correct, sir.
Senator Coleman. Senator Dayton.
Senator Dayton. Thank you, Mr. Chairman. If his answer to
me was as clarifying as his answer to the average customer, I
can see why there is so much trouble. Thank you, Mr. Chairman.
Senator Coleman. This panel will be excused. I want to
thank you for your participation.
We do have a vote. I have 6 minutes, and what I am going to
do is I am going to call the third panel. If Senator Levin gets
back, I will turn the gavel to him. Again, I want to thank
everybody for appearing, Ms. Craig, Mr. Kroening, Mr. Viale,
and Mr. Case.
I will warn the panel that we are in the midst of a vote
and if my colleague, Senator Levin, gets back within the next 2
minutes, we will continue. Otherwise, I will simply adjourn,
take a 10-minute break, and then reconvene.
But in the interest of time, I would like to welcome our
third panel to today's hearing. This panel is comprised of the
representatives of the for-profit companies that have contracts
with some of the credit counseling agencies from panel two. I
would welcome Andris Pukke, the President of DebtWorks; Michael
Malesardi, the Chief Financial Officer of The Ballenger Group;
and finally, Bernaldo Dancel, the Chief Executive Officer for
Amerix Corporation. I do appreciate all of you being here and
look forward to your testimony.
John Puccio, the Chief Executive Officer of Brighton Debt
Management Services, was invited to testify at today's hearing.
Yesterday afternoon, we learned that Mr. Puccio declined to
testify because of health concerns. I understand that he is in
the hospital. We certainly wish him a speedy recovery.
In order to provide the Cambridge-Brighton entities with an
opportunity to testify before this Subcommittee today, we
extended an invitation to Mr. Puccio's brother, Richard Puccio.
Richard Puccio, like his brother, is a part-owner of entities
in the Cambridge-Brighton enterprise and is involved in their
activities. Richard Puccio declined to testify, as well.
Senator Coleman. Mr. Pukke, Mr. Malesardi, and Mr. Dancel,
we are anxious to hear your testimony today. You each have a
certain level of corporate responsibility to deal with non-
profit agencies in a manner consistent with their non-profit
status and a manner consistent with the Internal Revenue Code.
Some of you have changed your operations since the outset of
the Subcommittee's investigation, some of you have not.
What I am going to do is I am going to swear in the panel
and then we are going to take a 10-minute break because I think
we are running close on the vote.
Before we begin, pursuant to Rule 6, all witnesses who
testify before the Subcommittee are required to be sworn. At
this time, I would ask you all to please stand and raise your
right hand.
Do you swear the testimony you are about to give before the
Subcommittee is the truth, the whole truth, and nothing but the
truth, so help you, God?
Mr. Pukke. I do.
Mr. Malesardi. I do.
Mr. Dancel. I do.
Senator Coleman. You may sit down, gentlemen, please. Mr.
Pukke, you have somebody sitting next to you. Please identify
that individual for the record.
Mr. Williams. Senator Coleman, my name is John Williams. I
am an attorney for Mr. Pukke. As we have informed the
Subcommittee staff in correspondence, in view of the pending
litigation and investigations into DebtWorks and Mr. Pukke, we
have advised Mr. Pukke to decline to answer any questions and
to assert his constitutional privilege. We understand the staff
has, despite this, insisted that Mr. Pukke be here personally
to assert his privileges and so he is here today. I am going to
say he will have no prepared statement, of course. If you
choose to put questions to him, he will assert his privilege.
Senator Coleman. Thank you very much, Mr. Williams.
What I will do now is I will adjourn the hearing for at the
most 10 minutes, but I ask all the members of the panel to
please then be back after that 10-minute recess. So we will
take a 10-minute recess.
[Recess.]
Senator Coleman. This hearing of the Permanent Subcommittee
on Investigations is back in order.
Mr. Pukke, I understand that you have made a request by
correspondence regarding Rule 11 of the Subcommittee's Rules of
Procedure requesting that no television, motion picture, other
cameras, or lights be directed at you. Rule 11 of the
Subcommittee's rules and procedures states a witness may
request on grounds of distraction, harassment, personal safety,
or physical discomfort that during the testimony, television,
motion picture, other cameras and lights should not be directed
at him or her. Such requests shall be ruled on by the
Subcommittee Members present at the hearing.
In considering Mr. Pukke's request, I note the Subcommittee
has rejected similar requests in the past. Therefore, after
consulting with Ranking Member Senator Levin, without
objection, the witness's request to invoke Rule 11 is hereby
denied.
Mr. Pukke, I understand from counsel that you have invoked
the Fifth Amendment privilege. I want the record, however, to
reflect that this Subcommittee has always taken care to treat
respectfully a witness who asserts a Fifth Amendment privilege.
The invocation of that right by American citizens should not
and does not imply guilt. This right does not, however, allow
one to refuse to appear before the Subcommittee. A witness
before the Subcommittee may assert a privilege against self-
incrimination, refusing to answer specific questions, but
cannot use the invocation of the Fifth Amendment to avoid
appearing before the Subcommittee altogether.
In furtherance of this Subcommittee's hearing today, its
ongoing fact finding responsibilities, and the Senatorial
exercise of legislative duties, I will begin the questioning.
TESTIMONY OF ANDRIS PUKKE, PRESIDENT, DEBTWORKS, INC.,
GERMANTOWN, MARYLAND, ACCOMPANIED BY JOHN WILLIAMS
Senator Coleman. Mr. Pukke, when you first formed DebtWorks
to offer back-end processing services to non-profit credit
counseling agencies, your first customer was AmeriDebt. At this
time, one of AmeriDebt's directors was your wife, Pamela
Shuster Pukke, and your brother, Erik, was an employee. How did
you ensure that the contract you signed with AmeriDebt did not
cause it to overpay for the services you were performing for
it?
Mr. Pukke. Senator, based on advice from counsel, I invoke
my right to not answer that question.
Senator Coleman. After you formed DebtWorks, friends and
family members of yours created additional non-profit
counseling agencies which promptly contracted with your company
for services. Is it fair to say that the primary motive of
setting up these additional agencies was to generate more
revenue for DebtWorks?
Mr. Pukke. On advice from counsel, I invoke my right to not
answer that question.
Senator Coleman. In 1996, you pleaded guilty to a Federal
charge of defrauding consumers by using your company, Infinity
Resources, to falsely promise to broker debt consolidation
loans. It is my understanding that customers of AmeriDebt and
the other 10 non-profit agencies currently contracted with The
Ballenger Group are still referred to your company. Is this
correct?
Mr. Pukke. Senator, on advice of counsel, I am asserting my
right to not answer that question.
Senator Coleman. Last question, Mr. Pukke. I also
understand that you own Fidelity and Trust Mortgage Company and
F&M Mortgage Company. Are customers of AmeriDebt and the other
10 non-profit agencies still referred to those companies?
Mr. Pukke. Again, I am asserting my right to not answer
that question.
Senator Coleman. Mr. Pukke, you have been asked several
specific questions about DebtWorks and about your practices
within the credit counseling industry. In response to each of
the questions, you have asserted your Fifth Amendment
privilege. Is it your intention to assert the Fifth Amendment
privilege to any question that might be directed to you by the
Subcommittee, any other questions that might be directed to you
by the Subcommittee regarding the organization of DebtWorks and
its practices?
Mr. Williams. Senator Coleman, in view of what we
understand to be the pointed questions, I can't imagine a
question that you are going to put to him that we will not
assert the Fifth, although we will respond to any question that
you may put to us.
Senator Coleman. Given the fact that you are asserting your
Fifth Amendment right against self-incrimination to any more
questions asked by the Subcommittee, you are hereby excused.
Mr. Williams. Thank you.
Senator Coleman. Mr. Malesardi.
TESTIMONY OF MICHAEL MALESARDI,\1\ CHIEF FINANCIAL OFFICER, THE
BALLENGER GROUP, LLC, FREDERICK, MARYLAND
Mr. Malesardi. Good morning, Mr. Chairman and Senators. My
name is Michael Malesardi and I am the Chief Financial Officer
of The Ballenger Group. Thank you for inviting me to speak
before you today and thank you to the Subcommittee staff for
their help and courtesy in helping us respond to your data
requests and prepare for our face-to-face meetings.
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\1\ The prepared statement of Mr. Malesardi with attachments
appears in the Appendix on page 153.
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Ballenger began doing business on January 1, 2003, as an
independent solutions provider of custom software development,
payment processing services, back-office functions, and
marketing programs, with a specialization in consumer debt
management. Our clients are credit counseling agencies and we
receive no direct funding from consumers or credit card
companies.
Clearly, the status quo in the credit counseling industry
is not acceptable. We are committed to the establishment of
fair and efficient Federal regulations that protect consumers
and preempt the confusing and costly patchwork of State
regulations.
By way of background, from 1982 to 1992, I spent 10 years
as a certified public accountant with Price Waterhouse. From
1992 until 2002, I was controller or CFO of three SEC
registrants. In July 2002, I joined a company by the name of
DebtWorks as CFO. Along with several other newly-hired
executives, I was hired to help the owner of DebtWorks, Andris
Pukke, prepare for and execute a sale of his company to a third
party.
In the summer of 2002, the new management team solicited
bids from third parties who were interested in acquiring a
majority stake in DebtWorks, primarily private equity firms.
Ultimately, the negotiations were unsuccessful and we mutually
terminated them in November 2002.
Following termination of negotiations with the third
parties, the management team then approached Mr. Pukke in
December 2002 about forming a new independent company and
executing a management buyout of a majority interest in the
operating assets of DebtWorks. The management team retained its
own counsel, separate from DebtWorks, and after extensive
negotiations, we reached an agreement to form The Ballenger
Group and began doing business on January 1, 2003.
The Ballenger Group did not acquire the stock of DebtWorks
and DebtWorks continued as a separate, unrelated legal entity
with its own separate management and business operations. The
Ballenger Group is not a successor to DebtWorks.
From January 1 through October 31, 2003, The Ballenger
Group was 51 percent owned by the management team, with the
remaining 49 percent owned by DebtWorks. To ensure the
managerial independence of The Ballenger Group, our purchase
agreement virtually eliminated any possibility of control or
influence by DebtWorks, including the removal of any of their
management, voting, or board rights.
On October 31, 2003, the management team then increased its
ownership of The Ballenger Group to 100 percent, completely
removing all of DebtWorks' ownership.
Mr. Chairman, in plain English, I want to reemphasize that
since our inception as an operating business, neither Mr. Pukke
nor DebtWorks have had anything to do with the management,
operations, or control of The Ballenger Group. There is no
ongoing relationship between The Ballenger Group and DebtWorks
other than payments associated with our purchase of the assets.
Concerning the three companies the Subcommittee asked us
about as to their relationship with DebtWorks, I am not
familiar with either F&M Mortgage or Fidelity and Trust
Mortgage. My knowledge of Infinity Resources Group is limited
to an understanding that it is a debt consolidation loan
business in which Mr. Pukke has been involved, but The
Ballenger Group does not and has never performed any service
for or on behalf of Infinity.
Since the formation of The Ballenger Group, we have added
two new CCA clients and have had one existing client reinitiate
counseling operations. The Ballenger Group has never initiated
the formation of a credit counseling agency and has no plans
ever to do so.
At the request of their banks, The Ballenger Group agreed
to act as a back-up guarantor to the start-up loans that these
three agencies obtained. Our guarantee falls in line behind the
obligation of the agency and the personal guarantees of their
principals.
Since the launch of The Ballenger Group in 2003 as an
independent company, we have been steadfast in setting The
Ballenger Group apart from DebtWorks and Mr. Pukke. In fact,
during 2003, we terminated a client relationship with
Dedicated, an agency that was headed by his brother.
Mr. Chairman, we can't change the historic fact that The
Ballenger Group acquired the assets of DebtWorks, but in
creating The Ballenger Group, we created a new entity operating
under new management and have held ourselves to a new standard
for the company, our client agencies, and the consumers that
they serve. We appreciate the chance to set the record straight
with respect to our complete independence from Mr. Pukke and
DebtWorks.
We are actively engaged in proposing reforms we believe
will make the industry more consumer-friendly, including
national regulation and competition. Our written testimony,
which we would ask be placed in the record, addresses our
thoughts on reforms.
Thank you for the opportunity to be here today and I would
be pleased to take any questions.
Senator Coleman. Your written testimony will be placed in
the record, without objection.
I will stand corrected, Mr. Malesardi. I think in
questioning the previous panel, on a number of occasions, I
called The Ballenger Group a successor to DebtWorks and your
testimony has made it very clear that you are not a successor
to DebtWorks, and so the record will be corrected on that
account.
Mr. Malesardi. Thank you, Senator.
Senator Coleman. Thank you. Mr. Dancel.
TESTIMONY OF BERNALDO DANCEL,\1\ CHIEF EXECUTIVE OFFICER,
AMERIX CORPORATION, COLUMBIA, MARYLAND
Mr. Dancel. Thank you, Mr. Chairman and Members of the
Subcommittee. My name is Bernie Dancel. I serve as the CEO of
Ascend One Corporation. I appreciate the opportunity to discuss
with you important issues concerning credit counseling. The
Subcommittee's inquiry is important, and at least for our
company has stimulated constructive self-examination.
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\1\ The prepared statement of Mr. Dancel appears in the Appendix on
page 175.
---------------------------------------------------------------------------
I want to make two points today. First, I do not believe
the term ``profiteering'' in the title of this hearing applies
to our company, as I will explain in discussing several aspects
of credit counseling and our company. Second, since there is
always room for improvement, I will briefly discuss important
initiatives we have undertaken, in no small part as a result of
our interaction with the Subcommittee.
I would like to begin with a word about how my own
experience led me to the credit counseling field. Growing up, I
watched my mother struggle financially and ultimately file for
bankruptcy. And at age 25, after struggling to support two
households as a divorced dad, I ended up filing for bankruptcy
myself. This was one of the worst experiences of my life.
Later, I worked as a counselor with a credit counseling
agency. I saw firsthand that there was a better way to reach
financially distressed consumers like myself. I realized that
CCAs needed to be more accessible, offer more privacy, and
become more efficient by using modern technology to meet this
growing demand.
Now let me turn to my main points. First, the term
``profiteering'' does not apply to our company. Of course, we
are a for-profit business and we serve non-profit entities, but
I am sure you agree that there is nothing wrong with that. The
real question is whether we offer good service at a fair price,
and the answer to that is clearly yes.
First, we offer unique and valuable services that agencies
can purchase more efficiently from us than performing these
services themselves.
Second, our prices are clearly fair. The bottom line is
that consumers working with the CCAs we serve typically
contribute the same or less than what consumers pay with other
CCAs.
In addition, as the documents we produced to this
Subcommittee show, we operate on a very low profit margin,
generally less than 3 percent before taxes annually.
With respect to debt management plans, we recognize that
DMPs are not right for everyone, and in fact, consumers, CCAs,
and Amerix are all best off when DMPs are limited to consumers
who are qualified for them. More than 70 percent of callers to
CCAs we serve do not enroll on a debt management plan, as is
true for CCAs that are members of the two leading trade
associations.
Also, and Mr. Chairman, this is critical, the CCAs we serve
do not charge large up-front fees. They charge nothing. So we
can only recoup our costs if the consumer sticks with their
plan. Some other entities, including AmeriDebt and Cambridge,
charge hefty up-front fees that let them recoup their cost on
day one. So where these other CCAs make money if the consumers
immediately drop off their debt management plans, we actually
lose money on consumers who don't stick with their plans for an
extended period of time.
We agree with the Subcommittee that education and
counseling for all consumers is crucial. The CCAs we serve
provide a variety of educational resources through community
programs, web-based materials, and monthly publications. And we
publish and update a comprehensive online educational library
available to any visitors to the Care One website. In addition,
DMPs themselves are a very valuable educational tool--indeed
the best--when they are right for a consumer. By making regular
payments and exercising financial discipline, consumers learn
to stick to a plan, modify their behavior, and get back on
their feet.
At the same time, we recognize we can do better. In that
spirit, we recently announced a number of new initiatives
summarized in our March 16 letter to this Subcommittee. These
initiatives are designed to ensure that all consumers get a
useful education and counseling experience, whether or not they
use a DMP.
First, we are adopting enhanced licensing standards for
Care One that require agencies to provide patient counseling to
every consumer, devote significant time to community outreach,
and comply with standards established by the two leading trade
associations. We will also offer each consumer a personalized
budget worksheet whether or not they enroll in a DMP.
Second, we will assist our CCA clients in revising scripts
consistent with this objective.
Third, we no longer offer overflow origination services.
Fourth, we are eliminating from our service contracts
certain provisions relating to debt management plans, such as
assist rates and revenue standards.
Finally, we have made a $5 million commitment to the Ascend
One Fund for Financial Literacy to educate children and young
adults about how to manage their finances responsibly.
Mr. Chairman, Ascend One is committed to playing a positive
role in the credit counseling field so that all consumers can
get the help they need, like myself, delivered in a fair and
straightforward manner. Thank you, and I look forward to your
questions.
Senator Coleman. Thank you very much, Mr. Dancel.
If we can get Exhibit 3 up,\1\ to both you gentlemen, what
we are struggling with here is the reality of individuals being
processed through non-profits. I mean, that is the voice that
they hear, and you heard from the consumers here and even some
of the employees. There is something about being a non-profit
that makes people feel safe.
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\1\ See Exhibit No. 3 which appears in the Appendix on page 242.
---------------------------------------------------------------------------
And the concern we have is the relationship between the
non-profits and the for-profits. In many cases, as with one of
the instances we had here, what you have got are non-profits
that have relationships, either marital relationships or
friendship relationships. So I am trying to sort out, what is
the right way to go here? I mean, is it at all possible for
consumers to benefit when you have situations such as what The
Ballenger Group is trying to do and Amerix is trying to do?
One of the issues, one of the criteria that I think I would
like to see in place is the for-profit shouldn't be in a
position to substantially influence the non-profit so that the
non-profits can't do things independently.
Mr. Dancel, I would ask you, looking at Amerix, and we had
folks here from American Financial, can you talk to me about
the independence of the non-profits in dealing with you? Was
there a point in time where you actually had what I might call
quotas in terms of the number of folks that had to be signed
onto DMPs?
Mr. Dancel. The CCA clients that we have are completely
independent organizations. There is no overlap in governance or
board membership or executive or any kind of management
positions. They make decisions independent of one another as
well as independent of Ascend One or Amerix. In fact, we have
had CCA clients in the past who have terminated particular
services that we provide and in other cases have terminated
their relationship with us altogether. So I believe that is a
demonstration that there is complete independence of these
organizations from us.
We have had in the past certain standards within our
agreements with them. At one point, we had a transaction-based
pricing model where we had a fairness opinion as to the
fairness of the price that we provided.
Senator Coleman. I just want to make sure I understand what
transaction-based models mean. Can you, in lay terms, explain
that?
Mr. Dancel. Sure. That is where, based on the activity, we
charge them a flat amount for that service. It is not connected
with any kind of sharing of revenue or other types of pricing
models.
Senator Coleman. I just want to clarify my notes here,
looking back at some of the responses given earlier--did you at
one time require credit counseling agencies to enroll 30
percent of their calls into a debt management plan?
Mr. Dancel. Yes, we did. There was a contractual standard
that was set which we used--an industry standard, as you heard
earlier today from the gentleman from Minnesota, that has been
published through the NFCC as well as AICCCA--in terms of the
number of customers who sign up for debt management enrollment
after they have been counseled. It is approximately 30 percent.
Senator Coleman. Doesn't that really fly in the face of
allowing credit counselors to make some independent judgment as
to the needs of their particular client when you are actually
setting a target, you have got to do 30 percent?
Mr. Dancel. This 30 percent simply allowed us in the event
that over an extended period of time we could not recoup our
costs for the services we provided, that we would be able to
terminate the contract.
Senator Coleman. I would suggest, though, that it flies in
the face of what you would want from your credit counselors, to
make independent judgments. Have you changed that policy, by
the way?
Mr. Dancel. We have heard the Subcommittee's concern about
that and we have changed that.
Senator Coleman. I appreciate that.
Mr. Dancel, one other question. Our investigation showed
that you started up a non-profit called, was it Genus Credit
Management, is that correct?
Mr. Dancel. Yes, Mr. Chairman.
Senator Coleman. And that Genus later sold its portfolio of
debt management plan accounts to American Financial Solutions,
and I think the figure was around $17 million.
Mr. Dancel. Yes, Genus Credit Management sold their
portfolio to American Financial Solutions, I believe for $17
million in 2001.
Senator Coleman. And can you tell us what happened to the
proceeds from that sale?
Mr. Dancel. The proceeds for that sale, sir, went to Genus
Credit Management, or the In-Charge Institute, the parent of
Genus Credit Management.
Senator Coleman. For what purposes?
Mr. Dancel. The In-Charge Institute sold the Genus Credit
Management Portfolio to American Financial Solutions. They had
independent--both parties, Genus Credit Management and AFS, had
independent reasons for why that made sense to them. AFS wanted
to grow their credit counseling business and the number of
consumers that they were serving through counseling and
education, and I believe Genus Credit Management and In-Charge
Institute wanted to capitalize on that portfolio for other
business ventures that they were looking at.
Senator Coleman. I am just trying to get where the proceeds
went. Again, where did those proceeds go?
Mr. Dancel. They went to In-Charge Institute.
Senator Coleman. And who are the principals in that?
Mr. Dancel. I only know that Dave Jones, at the time, was
the chairman of In-Charge Institute. I don't know who the other
principals were.
Senator Coleman. Mr. Dancel, one further question, and I do
appreciate some of the changes that you have made. Do you
support the standards that NFCC or AICCCA provide?
Mr. Dancel. We do support those standards. In fact, in the
standards that we have for Care One agencies that license that
service mark, they are required to comply with those standards.
Senator Coleman. Mr. Malesardi, does The Ballenger Group
support those same standards?
Mr. Malesardi. We support industry standards. We don't have
any NFCC clients, but I can tell you that the standards that we
do offer exceed any industry standards out there and we do--we
are ISO certified and have five metrics that do exceed those.
Senator Coleman. How does The Ballenger Group exercise some
sense of corporate responsibility to ensure that its counseling
agency truly educates its consumers? I mean, you have heard a
lot of testimony today that is not occurring the way it should.
So what do you do? Talk to me a little bit about corporate
responsibility, what you do to make sure that happens.
Mr. Malesardi. OK. Well, we are definitely pro-consumer and
you can see that in the fulfillment agreement that we have
provided to the Subcommittee. We did add last year three best
practices that really cover three different areas, and that is
that the credit counseling agencies that we serve should be
providing full disclosure of material facts, that they should
be doing things to maximize consumer satisfaction, and also
minimize consumer confusion, and the agreement provides that if
they don't adopt the best practices that we have provided,
which include sample contracts, sample disclosure statements,
that we can terminate that relationship.
Senator Coleman. Are these best practices mandatory or
voluntary?
Mr. Malesardi. We consider them to be mandatory in the
sense that if they don't follow them, we can terminate the
relationship.
Senator Coleman. Do we have a chart \1\ that is the
organization chart for AmeriDebt? And again, I want the record
to correct that The Ballenger Group is not the successor to
DebtWorks.
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\1\ See Exhibit No. 2 which appears in the Appendix on page 241.
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Mr. Malesardi. Thank you.
Senator Coleman. But is The Ballenger Group still serving,
for instance, Fair Stream?
Mr. Malesardi. Fair Stream is one of the two new clients
that we actually started providing services for in 2003 after
the company was formed.
Senator Coleman. And I believe Mr. Case would not affirm
for the record that the entities Fair Stream and Credit
Network, DebtServe, DebtScape, Debticated, all those have the
names of individuals who we believe, the Subcommittee
investigation believes were involved in AmeriDebt. It appears
that, for instance, Andrew Smith, originally involved in
AmeriDebt, is now involved in Fair Stream.
I am sitting in your shoes and AmeriDebt is the poster
child for ills in this industry. How do you generate a level of
confidence that the folks who are working through agencies with
folks who are former AmeriDebt officers, that they are serving
their clients in a proper fashion?
Mr. Malesardi. I think you have to look to the fact that
these are distinct entities, that The Ballenger Group is
providing only certain services for these agencies. So they
take the consumer through the counseling and education process,
and that is the point at which time The Ballenger Group takes
over responsibility. I can tell the Subcommittee that the data
entry and the payment processing and the customer support we
provide are superior to anything we think they can get
elsewhere in the industry.
Senator Coleman. Thank you, Mr. Malesardi.
I would note that Mr. Puccio cannot be here today. We will
be keeping the record open. There are questions that we still
need to have answered, and so we will keep the record open in
regard to questions that Mr. Puccio can answer.
With that, I will turn to Senator Levin.
Senator Levin. Thank you, Mr. Chairman.
Mr. Dancel, American Financial Solutions testified that as
a result of the PSI, our investigation, it wants to renegotiate
the contract that it has with you for processing. Are you aware
of that?
Mr. Dancel. Yes, we are.
Senator Levin. That they have made that announcement? Are
you willing to renegotiate?
Mr. Dancel. Yes, Senator, we are.
Senator Levin. When does your contract with them run out?
Mr. Dancel. August 2005.
Senator Levin. And your contract charges them $30 per plan
per month, is that correct?
Mr. Dancel. No, that would not be correct. The cost depends
on the level of service that we are providing to them on a per
account basis. So that would range anywhere from 50 percent of
their revenue to 85 percent of their revenue.
Senator Levin. Depending on the services you provide?
Mr. Dancel. Depending on the number of services we are
providing, yes.
Senator Levin. What does that average, do you know, per
plan, per debt management plan per month?
Mr. Dancel. Our average across the AFS customer base, the
average would be in the $15 to $16 level.
Senator Levin. Per month?
Mr. Dancel. Yes, sir.
Senator Levin. Now, Southern New England pays an outside
vendor $1.20 per plan per month and Consumer Credit Counseling
Services of Los Angeles pays an outside vendor $2 per plan per
month. Why is there such a huge difference between what you
charge and what they charge?
Mr. Dancel. I don't know what list of services they are
providing. I don't believe we are comparing apples to apples.
Senator Levin. How many competitors do you have?
Mr. Dancel. Processing entities?
Senator Levin. Yes, that do the same type of work you do.
Mr. Dancel. I am not sure how many there are out there.
Senator Levin. Would there be a handful?
Mr. Dancel. Again, that depends on the level of--what
services are being provided----
Senator Levin. The type of services, the range of services
you provide. How many would there be?
Mr. Dancel. I believe there probably are just a handful of
companies that provide all the services that we provide.
Senator Levin. Is The Ballenger Group one of them?
Mr. Dancel. I don't know the business of The Ballenger
Group.
Senator Levin. Have you competed with any other company for
a service contract?
Mr. Dancel. Yes, we have. American Financial Solutions, in
fact, has put out a request for proposal----
Senator Levin. Now?
Mr. Dancel. They put out a request for proposal in 2001
when they were looking at purchasing the Genus portfolio and
they put it out to many suppliers within the industry as well
as processors outside the industry and they were not able to
get any comparable price to what we were----
Senator Levin. So the contract that you won was a contract
that was bid on by others?
Mr. Dancel. They put out a request for proposal. I don't
know what types of bids came in, but they came back to us and
said they couldn't get it at a price that we were offering.
Senator Levin. They solicited proposals on the contract
that you are now under with them?
Mr. Dancel. Yes.
Senator Levin. Is the 50 to 80 percent of all the income
that they generate a large percentage compared to what other
processors like you get?
Mr. Dancel. We don't believe that AFS or any of our other
credit counseling agency clients can get the services that we
provide at the price that we provide it anywhere, and evidence
of that is that our CCAs are able to pass that savings on to
consumers, where they have no up-front contribution or fee and
they meet, if not lower, the monthly amount of voluntary
contribution that they ask for from the consumer is either at
the NFCC or AICCCA standards or lower than most, as well as
they are able to do quite a lot of education and counseling
activity. For example, I believe AFS in just the last 12 months
has provided to their foundation over $4 million towards
education and scholarships.
Senator Levin. You are saying that your clients do not
charge up-front fees, is that what you said?
Mr. Dancel. Yes. They charge no up-front fee whatsoever.
Senator Levin. None of them?
Mr. Dancel. None of them.
Senator Levin. Mr. Malesardi, you charge AmeriDebt a
monthly processing fee of about $25 per month, is that about
right?
Mr. Malesardi. That is correct.
Senator Levin. Per plan?
Mr. Malesardi. Per DMP, that is correct.
Senator Levin. These figures, again, are a multiple of the
$1 to $2 per month processing fee that the vendors that I
referred to in New England and Los Angeles charge. What is your
justification of that large fee, the larger fee?
Mr. Malesardi. I agree with Mr. Dancel's comment that I
don't think these are apples to apples comparisons.
Senator Levin. Your services are different from theirs?
Mr. Malesardi. We are providing a comprehensive service,
software solution, and other things that go beyond that.
Senator Levin. Have you had competitors for your contract
with AmeriDebt?
Mr. Malesardi. AmeriDebt has--we haven't done anything new
with AmeriDebt since we assumed responsibility in 2003. We
have, as I said in my statement, added two new clients in 2003.
I don't know what process they went through, but we were
successful in getting that business.
Senator Levin. And you don't know if there were bids for
those contracts or not?
Mr. Malesardi. I do not.
Senator Levin. Were they negotiated directly with those
other customers of yours?
Mr. Malesardi. We did negotiate them directly. We are
independent entities. We went through a negotiation process, as
would be typical for any service provider.
Senator Levin. They didn't tell you whether or not there
were other people they were considering?
Mr. Malesardi. They did not disclose that to us.
Senator Levin. All right. Did you hear the testimony about
the voluntary contributions?
Mr. Malesardi. Is that directed to me?
Senator Levin. From Mr. Case, did you hear that testimony
that they----
Mr. Malesardi. Yes, I did.
Senator Levin. Were you troubled by it?
Mr. Malesardi. I can't comment, really, on their business
practices. We have a fixed fee that we charge to the credit
counseling agencies. They are our client and not the ultimate
consumer.
Senator Levin. Were you troubled when they heard that they
acknowledged that they pressured consumers into buying their
service? Did you hear that?
Mr. Malesardi. I did hear his comment.
Senator Levin. That amounted to pressure?
Mr. Malesardi. We are pro-consumer, and as I said, our best
practices push on full disclosure of these facts and treating
consumers in a fair manner so that they are satisfied, so we
would promote any practice that leads to that.
Senator Levin. You are benefitting from pressure being
placed on somebody who is vulnerable. That is what it amounts
to.
Mr. Malesardi. I would disagree with that assertion,
because we get a flat fee from the credit counseling agency
regardless of whether a consumer makes a contribution to them
or not. So we don't really benefit or get hurt by the amount of
their contribution.
Senator Levin. So the stronger that non-profit is has no
effect on how much money you are paid?
Mr. Malesardi. No. I mean, our----
Senator Levin. It doesn't make any difference how many
customers they have?
Mr. Malesardi. Oh, we would benefit by if they have more
customers in the sense that we get more of the revenue stream.
But that is the extent of it.
Senator Levin. Let me ask you again, because it seems to me
it is so obvious. If they are not paid by any of their
customers, you are not going to get paid, either, are you?
Mr. Malesardi. I think, ultimately, that is the risk in
this business. That is the risk of being an outsourcer.
Senator Levin. And if they pressure people into signing up
with them, which they acknowledge that pitch does, since you
are the indirect beneficiary of that, shouldn't that trouble
you just a little bit?
Mr. Malesardi. As I have said, we want them to follow best
practices and if they didn't follow best practices and didn't
change that, then we could terminate that relationship, as we
have done.
Senator Levin. As you have done?
Mr. Malesardi. Not with one client.
Senator Levin. Thank you, Mr. Chairman.
Senator Coleman. Senator Dayton.
Senator Dayton. Thank you, Mr. Chairman.
Mr. Malesardi, I am trying to understand how this works.
These non-profits are called credit counseling agencies and the
people who come to them believe then that they are getting
credit counseling services. I am going to use AmeriDebt as a
prototype. I don't know how the other 10 of your non-profits
operate, but this is the only one I have any information on.
They stated in the testimony we just received that AmeriDebt,
and I am quoting on Mr. Case's statement, page two, ``AmeriDebt
helped consumers save millions by providing credit counseling
services and debt management plans to reduce monthly payments,
lower interest rates, and reduce or eliminate late payment and
overtime penalties.''
It goes on to say, then, that ``Correcting financial
problems years in the making is no easy task. It is time and
labor intensive for credit counselors, so as a result,'' and
this is a Visa board suggesting that credit counseling agencies
contract with private sector companies to perform back-office
administrative tasks. Is that you?
Mr. Malesardi. That is The Ballenger Group, yes.
Senator Dayton. And then you are stating in your testimony
that you are an independent, for-profit provider of customer
service solutions, custom software development, payment
processing services, back-office functions, and marketing
programs to credit counseling agencies. So your clients, as you
view them, are these 11 agencies.
Mr. Malesardi. Absolutely.
Senator Dayton. So when Ms. Troy testifies that she was
pitched this plan by a ``counselor,'' and when she was calling
back then to talk with the counselor, she was sent to a
``customer service''--somebody in customer service. Is that
under your entity or is that under AmeriDebt's?
Mr. Malesardi. It would depend on what time it happened. If
it was during the initial----
Senator Dayton. Now.
Mr. Malesardi. No, I am saying, if it was during the
initial counseling process, the back and forth that happens
happens with a counselor at the credit counseling agency. Only
once a consumer makes a decision to enroll in a debt management
plan does that file get transferred to The Ballenger Group and
does our work really begin on it.
Senator Dayton. So at that point of----
Mr. Malesardi. So if a consumer then called up after that
to ask questions about the status of payments, the status of
the creditor proposal process, any of those types of
administrative things, that would come to a customer service
center that is under The Ballenger Group. But if a consumer
then asked for additional follow-up counseling or education,
that again goes back to the credit counseling agency and that
is their responsibility.
Senator Dayton. Well, as I understand it from the testimony
of Ms. Troy and also from what Mr. Allen said, they think that
is your responsibility. As I understand it, Mr. Allen and his
contemporaries at AmeriDebt are in sales. What you call
counseling, it sounds to me like it is a sales pitch and then
negotiation, and at that point, once this agreement or whatever
is signed, then it goes to you.
According to Ms. Troy--again, I don't know the experience
of other clients, but if she called for ``counseling'' at that
point, they are getting somebody in your operation, not
somebody in AmeriDebt.
Mr. Malesardi. That is not correct.
Senator Dayton. Who is providing the service? Who is
providing what service, then, to the client for which they are
paying $7 an account per month?
Mr. Malesardi. On a monthly basis for the process of
providing the payment processing--they send their payments in
and they get distributed to their creditors--and any follow-up
customer support that they need related to that, that service
is provided by The Ballenger Group.
Senator Dayton. And they are paying----
Mr. Malesardi. If they have follow-up questions on their
counseling or budgeting, that service is provided by the credit
counseling agency.
Senator Dayton. But according to the testimony of at least
one person today, they go to you when they call for
``counseling.'' Who establishes this plan? Who takes the
information from the client and establishes this DMP?
Mr. Malesardi. The credit counseling agency does that.
Senator Dayton. Based on what?
Mr. Malesardi. They do it based on guidelines from the
creditors as to what they are willing to do in terms of
applying debt management plan benefits.
Senator Dayton. And you have no role in that whatsoever?
Mr. Malesardi. That is correct.
Senator Dayton. So they establish this and then they hand
that over to you and then you just take the payments and
process them and----
Mr. Malesardi. Well, they would transmit the proposed plan
to The Ballenger Group. We would then, in turn, issue proposals
that would get sent electronically to their creditors, or by
paper if they don't accept it that way, and the creditors then
respond back either accepting or denying and making changes to
that. That is where the kind of back and forth negotiation
process begins that is very time and labor intensive.
Senator Dayton. So the credit counseling agency is
establishing the framework of the plan or the concept of the
plan and then you negotiate that actual arrangement with those
various creditors?
Mr. Malesardi. If it is a major creditor, they have
established guidelines as to what they are willing to do.
Senator Dayton. So it is a no-brainer. That is
established----
Mr. Malesardi. If the----
Senator Dayton. You are just plugging in numbers.
Mr. Malesardi. Yes. If the proper information is provided
by the consumer, then it is a no-brainer. If they understate,
for example, how much they owe to a particular creditor, then
the creditor will deny that proposal and insist on a few more
dollars. If their creditors are not one of the major creditors,
I mean, it can be doctors, dentists, or people like that who
don't have established policies, then there is more interaction
with that creditor.
Senator Dayton. There is millions of dollars to savings to
consumers by credit counseling services and debt management
plans. Where does that come from? Where do they save money in
this whole process? They are paying more in the voluntary
contribution. They are paying more--in addition to everything
else they owe, they are paying more to you and to AmeriDebt.
Where do they realize savings in this?
Mr. Malesardi. I can't speak to the specific example you
gave, but I do know that relative to the high interest rate and
the over-limit fees and the late payment charges that they are
incurring, that when those are reduced by the creditors to the
benefits they offer under a DMP, there are dramatic savings to
be made, and over time, that is significant.
Senator Dayton. Who determines what those dramatic savings
are? Are you quantifying those dramatic savings?
Mr. Malesardi. We do not. That would be----
Senator Dayton. But you are negotiating the final
arrangement. Is AmeriDebt computing that? They don't even know
what the final arrangement is. You are handling that. Who is
keeping score for the consumer?
Mr. Malesardi. The credit counseling agency would quantify
for the consumer what kinds of savings they can get from
enrolling in a DMP.
Senator Dayton. Based on a plan that they submit to you,
but then you negotiate those actual arrangements with the
creditors?
Mr. Malesardi. I am sorry if I am not being clear, but when
the proposed debt management plan comes in to us, it has
already been set up by the credit counseling agency and the
savings or the costs of that program----
Senator Dayton. I thought you said you were negotiating
with the creditors.
Mr. Malesardi. I did say we transmit that proposal that the
CCA has made. We transmit that to the creditors, and if there
is a need for an adjustment based on what the creditors want,
then there is a back and forth process. I am not sure
negotiation is the proper term, and I know I used that, but----
Senator Coleman. Senator Dayton----
Mr. Malesardi. It is an administrative back and forth.
Senator Dayton. I just don't understand where this millions
of dollars of savings----
Mr. Malesardi. To the consumers?
Senator Dayton [continuing]. Where it comes from. The
consumer, it seems to me, is paying--I mean, you are just
setting up arrangements for them to pay what they owe and then
you are getting something back from the creditors for doing so,
and then they don't in your case even see their fair share or
whatever it is called of that. And then they are paying an
additional surcharge of $7 an account per month of which you
are getting $25 per month per account. I mean, I see where you
are making your money. I see where AmeriDebt is making its
money. I don't see where the consumer is getting anything. It
is apparent to me that it has got to be more costly.
Mr. Malesardi. I don't think that is the case. I think if
you look at a lot of the industry information, the consumers
are being charged penalty rates of interest that may be 25
percent or higher, and by enrolling in a DMP, they get that
reduced.
Senator Coleman. Senator Dayton, we are going to have to
rest----
Senator Dayton. I just want to thank you for this----
Senator Coleman. I will give you an opportunity for follow-
up questions, if you want.
Senator Dayton. Thank you. I am going to have to leave, but
I want to thank you for this hearing. It has been extremely
valuable and you have gotten into an area that is very
disturbing and I thank you very much for your leadership on
this.
Senator Coleman. Thank you, Senator.
I just have one follow-up, perhaps two questions. Mr.
Malesardi, just to follow up on Senator Levin's question, he
asked if you were concerned. May we have Exhibit 14? \1\ I want
to make it first very clear that you make your money off of
folks who enrolled in DMPs, right? In other words, your income
is dependent--the relationships you have with the credit
counseling agencies are based on the number of folks involved
in debt management plans, is that correct?
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\1\ See Exhibit No. 14 which appears in the Appendix on page 260.
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Mr. Malesardi. That is correct. That is our business.
Senator Coleman. So Senator Levin asked whether you were at
all concerned about pressure tactics and you really didn't
answer that very directly. The reality is that you benefit if
folks use pressure tactics, is that a fair statement?
Mr. Malesardi. I will say that we are concerned about
pressure tactics because we are pro-consumer. We would not want
to see somebody pushed into a DMP that they shouldn't be in.
Senator Coleman. So my question, then, is if we look at
Exhibit 14 where we have folks saying, ``would you rather have
that payment go to us to help people like you get out of debt
or would you like it to go to the creditor's pocket? Would you
rather support a non-profit company or help a bank get
richer?'' Do you know if these practices are being used by the
other credit counseling agencies that you provide services for?
Mr. Malesardi. They are not to my knowledge, and I am not
comfortable with the way that is worded.
Senator Coleman. Do you have a process by which you are
aware of the scripts or the sales pitch that is being made by
the credit counseling agencies that you service?
Mr. Malesardi. No. We don't review the scripts of our
credit counseling agency clients.
Senator Coleman. I would suggest that you do, Mr.
Malesardi, and Mr. Dancel, I would suggest that you do.
The last thing, Mr. Dancel, Amerix is getting 50 to 85
percent of the non-profit's clients' revenue. How do you
respond to the charge that you are siphoning off the bulk of
the revenues from non-profits?
Mr. Dancel. We provide a level of services that are very
valuable, and for them to do the services or provide the
services themselves that we provide to them, we bring
tremendous economies of scale, technological advance, which
allows them to not only operate and put more funds toward their
educational and counseling mission, but it also allows them to
operate and provide debt management plans to consumers at a low
cost up front as well as on a monthly voluntary contribution
level that is commensurate with what is in the industry, if not
lower. In fact, many consumers of our client agencies, over
32,000 consumers, get their service on a monthly basis for free
and another 105,000 consumers of our credit counseling agency
clients pay just a partial amount of the voluntary contribution
that is requested.
Senator Coleman. Your revenues have increased from $43
million to $95 million in 3 years between 1999 and 2002?
Mr. Dancel. Yes, that is correct.
Senator Coleman. That is about a 120 percent increase?
Mr. Dancel. Yes, that is correct.
Senator Coleman. Mr. Malesardi, one last----
Mr. Malesardi. May I make a follow-up comment?
Senator Coleman. Please.
Mr. Malesardi. I misspoke on one thing, and that is in the
written testimony that we provided, on page 12, our best
practices actually do include a form disclosure script to
assist the CCAs in making adequate disclosures. So that is
something we are involved with.
Senator Coleman. I appreciate that, Mr. Malesardi.
Mr. Malesardi, Mr. Dancel, I want to thank you for
appearing. We will excuse this panel.
I will note for the record that we will take Mr. Puccio's
deposition. That deposition, once he recovers, will become part
of this official record.\1\
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\1\ See Exhibit No. 18 which appears in the Appendix on page 264.
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Senator Coleman. We will now call the fourth and final
panel.
I would like to welcome our final panel of witnesses for
today's important hearing. I appreciate their patience in this
process.
We have with us the Hon. Mark Everson, the Commissioner of
the Internal Revenue Service. Mr. Everson, I welcome you back
to the Subcommittee. You have testified before this
Subcommittee numerous times in the past several months,
including on tax shelter hearings and our focus on DOD
contractors who cheat on their taxes. I appreciate your
appearance once again.
I want to acknowledge the IRS's proposed 2005 budget
request, which includes $300 million for enforcement efforts.
On February 26 of this year, I, along with Senator Levin,
Senator Collins, and Senator Lieberman, wrote a letter to the
Subcommittee on Transportation, Treasury, and General
Government Appropriations in support of this 10.7 percent
increase in IRS funding for enforcement efforts that will
target tax cheaters. I support your efforts to vigorously
enforce our laws.
Today, however, I want to address the IRS's response to
date regarding non-profit entities within the credit counseling
industry whose practices appear to violate the tax code and
conflict with the specific purpose of granting tax-exempt
status to credit counseling agencies. Moreover, while progress
has been made on this front, I believe that more is needed.
I would also like to welcome the Hon. Thomas Leary,
Commissioner of the Federal Trade Commission. I appreciate both
of you being with us today and look forward to your testimony
and getting your perspective on addressing the problems facing
the credit industry.
As you are aware, witnesses before this Subcommittee are
required to be sworn. I would ask you to please rise and raise
your right hand.
Do you swear that the testimony you are about to give
before this Subcommittee is the truth, the whole truth, and
nothing but the truth, so help you, God?
Mr. Everson. I do.
Mr. Leary. I do.
Senator Coleman. Thank you, gentlemen. You know about the
timing system. When you see the yellow light goes on, please
conclude your testimony. Your full statements will be entered
as part of the official record.
With that, we will begin with Mr. Everson and then follow
with Mr. Leary and then I shall have some questions. You may
proceed, Commissioner.
TESTIMONY OF MARK W. EVERSON,\1\ COMMISSIONER, INTERNAL REVENUE
SERVICE
Mr. Everson. Thank you, Mr. Chairman. I am pleased to be
before you today to discuss IRS oversight of not-for-profit
credit counseling agencies.
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\1\ The prepared statement of Mr. Everson with attachments appears
in the Appendix on page 181.
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Before turning to the subject at hand, I do wish to express
my appreciation for your strong bipartisan support to the IRS
and the President's 2005 budget request. In your letter to
Senators Shelby and Murray of February 26, you wrote, ``Lack of
resources has encouraged abuse of the Federal tax system and
hampered IRS collection efforts. As a result, honest taxpayers
pay more than their fair share.''
Mr. Chairman, you, Senator Levin, Senators Collins and
Lieberman went on to say, ``Increased funding for IRS tax
enforcement is critical, not only to stop the tax cheating but
to strengthen public confidence in the fairness and integrity
of our tax laws.''
I agree with these views wholeheartedly. It is my strong
belief that tax administration is a subject about which there
can and should be bipartisan agreement.
As you know, I have articulated four enforcement priorities
for the IRS. They are up here on this chart.\2\ These
priorities align closely with areas of inquiry of this
Subcommittee. They include discourage and deter non-compliance
with emphasis on corrosive activity by corporations, high-
income individual taxpayers, and other contributors to the tax
gap; assure that attorneys, accountants, and other tax
practitioners adhere to professional standards and follow the
law; and detect and deter domestic and offshore-based tax and
financial criminal activity.
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\2\ The chart referred to appears as an attachment to the prepared
remarks in the Appendix on page 189.
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These first three objectives directly address concerns
which you surfaced last fall in your hearings concerning the
development and marketing of abusive tax shelters. I look
forward to a continuing dialogue with the Subcommittee on this
subject.
Our fourth enforcement objective is to discourage and deter
non-compliance within tax-exempt and government entities and
misuse of such entities by third parties for tax avoidance or
other unintended purposes. This, of course, directly relates to
your hearing today.
I am pleased that you are addressing the area of tax-exempt
credit counseling and I want to commend the staff for what I,
in contrast to one of your witnesses, consider a balanced and
very penetrating report.
Although many credit counseling organizations provide
important educational and charitable services, clearly, a
growing number do not. We are concerned some organizations are
preying on those in financial distress and using tax exemptions
for reasons of profit rather than charity. We have selected
over 50 organizations for examination. Over the course of this
year, we will be examining about one-half of the total revenue
of all known credit counseling organizations.
Our work to date is raising serious issues about a number
of these tax-exempt organizations. Some appear to have as their
principal activities selling debt management plans rather than
providing credit counseling. Rather than counseling, many
companies are promising to restore favorable credit ratings or
to provide commercial debt consolidation services. Some appear
to operate as ``boiler room call shops'' instead of charities.
Some tax-exempts have boards of directors that are not
representative of the local community. A board may also be
related by family or business ties to for-profit entities that
service the debt management plans. That raises the question,
just who benefits from the charity, needy people in debt or
company insiders and their business connections?
We are also seeing tax-exempt companies that are supported
by so-called ``voluntary'' fees from customers. I want to just
note, my wife got a call last week, perhaps it was a poorly
chosen target, but the first words out of the mouth of this
lady were, ``We are a charity and anything you put into the
program is tax deductible.'' It went on from there. [Laughter.]
Mr. Everson. Often, these fees are in the hundreds of
dollars and appear high in comparison to the nominal fees
historically considered by the courts to be appropriate for
such organizations.
Non-compliance involving tax-exempt entities is especially
disturbing because it involves organizations that are supposed
to be carrying out some special or beneficial public purpose.
If we don't act to guarantee the integrity of our charities,
there is a risk that Americans will lose faith in charitable
organizations in general, damaging a vital part of our Nation's
social fabric.
We are making an unprecedented effort to address abuses in
the credit counseling industry. IRS examinations and
investigations of credit counseling agencies may very well
result in the lifting of some tax exemptions and, in fact,
criminal referrals to the Department of Justice. Thank you.
Senator Coleman. Thank you, Commissioner Everson.
Commissioner Leary.
TESTIMONY OF THOMAS B. LEARY,\1\ COMMISSIONER, FEDERAL TRADE
COMMISSION
Mr. Leary. Yes, thank you, Mr. Chairman and Members of the
Subcommittee. You have a written statement from me that
represents the views of the Commission. Anything I say here
orally, is on my own.
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\1\ The prepared statement of Mr. Leary appears in the Appendix on
page 193.
---------------------------------------------------------------------------
Senator Coleman. That written statement will be entered as
part of the official record, without objection.
Mr. Leary. Thank you. I personally want to thank the
Subcommittee for putting a human face on the problems that we
normally just see on cold pieces of paper and I am pleased to
be here.
The Commission recognizes that credit counseling services
can help financially distressed consumers. But some firms are
deceiving consumers about who they are, what they do, and how
much they charge. For example, we have brought a lawsuit
against AmeriDebt and against Mr. Pukke, who was briefly here
this morning. Our complaint specifically pleads deceptive
conduct of the kind you have heard so much about:
Misrepresentation of non-profit status, misrepresentation that
consumers would get counseling services, and misrepresentation
that there were no up-front fees but rather only voluntary
contributions.
Your questions demonstrate that you know what this is all
about, so I don't need to elaborate in this oral statement, but
just let me comment on some things you have heard this morning.
You have heard a lot about practices that have changed very
recently. I won't comment on the adequacy of these changes, but
this fact illustrates the spillover benefits of this inquiry
and of our individual enforcement efforts. I want to emphasize,
however, that last-minute conversions do not expunge a law
violation if there was one.
You have heard a lot about the disclosure of voluntary
fees. Our concern is a practical one. Companies have every
incentive to continue to obscure this issue. Ask yourself if
people already in desperate shape, by definition, would
otherwise volunteer to pay hundreds or thousands of dollar to a
company that represents itself as a charity.
You have heard some mention that there are some satisfied
customers. Yes, indeed, there are some satisfied customers. But
you can still violate the law even though there are some
customers who are ultimately satisfied. The question is whether
you gave people what you said you would give them and whether
you told the truth about the fees you charge, and that is what
our investigations and our cases are all about.
Before I close, I want to mention some practices that were
not discussed today that do continue to concern us. Number one
is failure to pay creditors at all. 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.
Number two, promising results that cannot be delivered.
Some agencies promise that they will lower consumers' interest
rates, monthly payments, or overall debt by an unrealistic
amount. Some are also making false promises that they can
eliminate accurate negative information from consumers' credit
reports.
And number three is a failure to abide by telemarketing
laws. To the extent that these agencies are not bona fide non-
profit organizations, they must comply with the FTC's
telemarketing sales rule, including the new national Do Not
Call Registry.
I don't know whether you are on that registry,
Commissioner----
Mr. Everson. No, I am not, but I should be. [Laughter.]
Mr. Leary. We are continuing to address all these issues
together with others using both law enforcement and consumer
education. Our current efforts include joint education with the
IRS and State regulators, and we have recently issued a joint
press release that highlights troubling practices within the
industry and provides tips for choosing a credit counselor. We
have independently issued a variety of consumer educational
materials so that consumers can spot fraud and deception and
take action to avoid it.
We remain concerned about deceptive practices in the credit
counseling industry and will continue to work to protect
consumers in this critical area. Thank you very much, Mr.
Chairman.
Senator Coleman. Thank you very much, Mr. Leary.
I am going to go in reverse order here. And, I appreciate
the human face that you put on this and the focus on the
consumer, on the individual.
Does the FTC have jurisdiction over non-profits?
Mr. Leary. We don't have jurisdiction over genuine non-
profits, Mr. Chairman, but the courts thus far have been very
clear that we have jurisdiction over entities that are
nominally non-profits but that are in practical import run on a
for-profit basis. If for some reason or other that situation
ever should change in the courts, we may be asking for
something.
Senator Coleman. And we appreciate your efforts to work in
these areas and to have the willingness to address those
situations where companies who are in the guise of non-profits
may actually be operating as for-profit entities.
Mr. Leary. That is correct.
Senator Coleman. I want to thank you for your involvement
in this area. Are you troubled by the sales pitch that was
being made or has been made, in this case it is AmeriDebt but
certainly may be others, where individuals are being pushed to
get involved in a debt management plan, are told, ``Would you
rather support a non-profit company or help a bank get richer?
Would you rather have that payment go to us to help people like
you get out of debt or would you like it going into the
creditor's pocket?'' Does that kind of language trouble you?
Mr. Leary. Well, I think that is an illustration of just
what I was talking about, Senator. You know there is no magic
formula for making a disclosure adequate to consumers. There
are no magic words that will do it. As long as the incentives
are there for people financially to benefit in a big way from
deception on the issue of payments, they are going to try to do
it one way or the other. It is an ongoing struggle.
Senator Coleman. What kind of remedies are available? You
have indicated that the FTC has brought actions against
AmeriDebt, its back-office processing facility, for deceptive
practices, and Andris Pukke for deceptive practices. What kind
of remedies is the FTC seeking?
Mr. Leary. We can go to court, Mr. Chairman, and we can get
injunctions. We can get consumer redress. We can get
disgorgement of unearned profits. The monetary remedies, we can
get only through going to court. The longer administrative
process on our own can provide the injunctive remedy, but well
down the road. So we tend to bring these cases in court because
the most important thing is to shut off the deception as fast
as possible.
Senator Coleman. I understand that AmeriDebt is winding up
its operation. I don't think they accept new customers. How
does that affect your actions and will the FTC monitor entities
affiliated with AmeriDebt after it has closed its doors?
Mr. Leary. I don't want to comment on what we may or may
not be doing with reference to other AmeriDebt affiliates that
are not respondents in a particular action, Mr. Chairman, but I
can assure you that we will seek and hopefully obtain relief
that will give us the opportunity to remedy the situation
across the board.
Senator Coleman. Thank you, Mr. Leary.
Commissioner Everson, you talked a little bit about tax-
exempt entities, non-profits. You have made a very good point
about the impact this has on all non-profits. If there are
those out there who claim to be operating as non-profits that
are not, it really has an impact on consumer confidence in non-
profits.
If an entity is involved in selling debt management plans
as a primary focus or principal focus, maybe not sole but
exclusive, selling a product, would that cause some concerns
for the IRS if that entity is claiming to be an educational
non-profit?
Mr. Everson. It is important that the organization first
comply with the representations it makes when it originally
comes in for a determination as to its tax-exempt status. It
has got to be consistent with what they have told us. What they
have told us in order to be approved, would have to show that
they are doing something for the public good. In this arena,
that has traditionally meant education and counseling. Debt
management has been in there, but largely for the lower-income
folks and in a very targeted area.
What you have seen here is a real expansion, and I would
note one point that I haven't heard raised so far is we saw a
very significant increase in these applications for the
establishment of these organizations after a short lag from
when the new law, the Credit Repair Organization Act, came into
effect. And that law made these up-front fees that folks are
talking about illegal. But at the same time, it didn't apply to
the tax-exempts.
So it is pretty clear that the players learned how to
navigate the system and escape the regulation from the FTC and
also these prohibitions that came in. So very clearly, this has
all changed and gotten way out of line from traditional public
good organizations.
Senator Coleman. Does it trouble you when you hear
testimony about what appear to be boiler room call shops,
scripts to sell debt management plans? Does it trouble you when
we are talking about entities that are operating in the guise
of a 501(c)(3)?
Mr. Everson. It troubled my wife when she received this
call. I think that the testimony you have received today is
shocking and that the report very clearly documents problems.
In fact, you made reference to our hearing last fall. This
reminds me of that hearing, where you have these
interrelationships amongst parties established for mutual
benefit. The difference there was that at least those were all
profit-making businesses. Here, you have polluted charitable
organizations. That is a terribly serious problem.
Senator Coleman. Is this something in which one can
actually have kind of a bright line test, FTC, are there bright
lines? I am trying to figure out whether there are standards,
whether we can kind of set some bright line standards, or does
all of this have to be determined on a case-by-case basis?
Mr. Everson. I think that this is more a case of looking at
the individual facts and circumstances, and because of the
complexity that has been established, that takes some time.
There are some red flags, of course, and you have gone over
some of them, these salaries, the extent of dealings with other
related party profit-making entities. What we have to do as we
conduct these audits is to look at the whole web and sift
through it and see whether there is a private benefit that is
being channeled to some related party which might be bad even
if the entity itself that is making the call to the taxpayer is
actually a not-for-profit.
Senator Coleman. From the IRS perspective, and actually, I
will ask both witnesses here, principally, there are
enforcement concerns and enforcement efforts going on. Are you
aware of any legislative changes that you would suggest that
would increase or enhance your ability to provide enforcement
in this area? Commissioner Everson, and then Commissioner
Leary?
Mr. Everson. Well, there is----
Senator Coleman. Aside from money for enforcement that we
are working on.
Mr. Everson. If I could indulge you for just one minute on
that point. This chart shows you the decline in our enforcement
personnel more broadly that took place and that you are
familiar with. I want to show you just the impact on this tax-
exempt piece of our business.
Since starting here--the baseline is 1995--this is the
increase in assets in 501(c)(3) organizations. There are almost
a million of these organizations. This is the increase in
returns filed. This is the decrease in staffing trying to do
this work, and this----
Senator Coleman. This is IRS staffing, Commissioner?
Mr. Everson. IRS staffing within the piece of the IRS that
does this work. And this is this line adjusted for the returns
filed. It takes into account the volume increase.
I would suggest to you that that is a real challenge. Now,
we are addressing that. We have the bill that we requested. But
I would also say this gap doesn't even take into account the
changes in behavior which, of course, means that it is a much
more complicated problem. You don't have the same profile of
abuse that you had back at the beginning.
Senator Coleman. On the other hand, Commissioner Everson,
would it be fair to say that if the IRS took aggressive action
against a few individuals, that might impact the behavior of
other individuals in this area?
Mr. Everson. This is very much our hope, because we have at
present an expectation that by the end of this calendar year,
something like a third of the revenues, the actual examinations
will have been closed already. I would hope these closures and
the actions that would be taken if there are revocations, or as
I mentioned, criminal referrals, the word will get out and
people will come back to us to clean up their act.
That is exactly what the Commissioner is saying. It doesn't
mean you can excuse the past behaviors. There could be
sanctions. But I am hopeful that we don't have to go as far
down the road with as many audits as we are currently
contemplating if there are adjustments like some of the
adjustments you have already seen.
Senator Coleman. And Commissioner Leary, the question about
legislative changes or anything that you believe is required to
enable you to do the work you need to do in this area?
Mr. Leary. Mr. Chairman, I think the Congress has been
relatively generous with us in times of great budget pressure.
At the moment, we are not asking for any legislative fix.
However, as I indicated, in the event that we run into
difficulties in the courts, and I don't anticipate it, but in
the event that we run into difficulties on this jurisdictional
issue, we may be asking for some relief.
Senator Coleman. I appreciate the work that you are doing,
Commissioner.
Commissioner Everson.
Mr. Everson. Could I just second that point? Every time
that you exempt a certain sector of organizations from, be it
consumer protection laws or other areas, you will see a
channeling into the tax-exempt area, I think, and you have to
very carefully weigh when you make those exclusions. There are
valid reasons for the good organizations, such as one that you
had present here today, to enjoy exemptions, but you end up in
a situation where the IRS acts as a proxy for the Federal Trade
Commission. I am not sure that is wise public policy.
Senator Coleman. I appreciate your perspectives, gentlemen.
I want to thank you for appearing before this Subcommittee. I
want to thank you for the good work that you do.
The record of this hearing will be held open for 30 days.
This hearing is now adjourned.
[Whereupon, at 1:17 p.m., the Subcommittee was adjourned.]
A P P E N D I X
----------
PREPARED STATEMENT OF SENATOR DURBIN
The ``Roaring 1990s'' was an era of unprecedented prosperity. Yet
for many Americans families, it was also a ``Decade of Debt'' that left
them entering the new millennium with uncertainties about their
financial health.
Stagnant incomes. Job losses. Longer hours for lesser pay.
Increasing healthcare expenses. Rising prescription drugs. Housing
costs beyond reach. Soaring college tuitions. These are just some of
the unrealistic demands made today on the fixed budgets of the American
family.
At a time when our Nation is continuing to suffer from economic
troubles, many of us continue to be under siege financially. So where
does the American family turn to for help? The unfortunate answer, for
many, is ``plastic.''
Every day across this Nation, millions of families receive multiple
solicitations in the mail from a variety of eager creditors. No matter
what your particular financial situation may be, all you have to do is
sign the short, customized, user-friendly application form on the
dotted line, and you can activate your own personal line of credit
today for tens of thousands of dollars in instant cash.
It is literally that simple, and the aggressive marketing works.
The credit card companies sent out over five billion solicitations
in 2001 alone. Between 1993 and 2000, the amount of credit the industry
extended grew from $777 billion to almost $3 trillion.
An important study called, ``Borrowing to Make Ends Meet: The
Growth of Credit Card Debt in the '90s,'' released in September 2003 by
Demos, a nonpartisan nonprofit public policy research organization
based in New York City, found that low and moderate-income families who
are struggling financially, were forced to take on credit card debt at
rates unprecedented in American history.
Ironically, this took place during the 1990's, the same decade that
brought unprecedented prosperity to so many in our country.
The Demos study also found that over the last decade, credit card
debt among Americans over the age of 55 has increased more than it has
among the general population. The increase is even more substantial
among those over age 65. One reason for this demographic trend is the
similar rise in prescription drug costs that has moved beyond reach for
many seniors who live on fixed income.
The study concludes that a combination of structural and economic
trends, coupled with abusive credit card practices have left working
families and older Americans with few options other than to borrow
heavily just to make ends meet.
Those lucky enough to own homes were able to rely on cash-out
refinancing, home equity lines or credit lines secured by the roofs
over their heads. But for the vast majority and for the low-income
families without homes of their own, plastic was their only choice.
Between 1989 and 2001, the total amount of credit card debt that
Americans took on collectively almost tripled, from $238 billion to
$692 billion, while the average American family experienced a 53
percent increase in credit card debt.
This dangerous increase in personal debt took place during the same
time that the personal savings rate for Americans continued to decline.
This same period of time also saw the number of people filing for
bankruptcy jump 125 percent. Each year, over 1.5 million Americans
resort to bankruptcy as the only realistic option to escape from their
financial dead end street.
It is not just the low and moderate-income families facing
bankruptcy. According to a ground breaking book by Harvard Law
Professor Elizabeth Warren and Amelia Warren Tyagi, ``The Two Income
Trap: Why Middle-Class Mothers and Fathers are Going Broke,'' the
coming years will turn out to be most difficult for the average middle-
class American family.
It may sound counterintuitive, but Professor Warren makes a
compelling argument that in today's economy, it is the suburban home-
owning family with two wage earners and school-age children who are
most at risk financially, especially when one of the working parents
loses a job or faces a medical emergency.
More importantly, this book demonstrates that the major
responsibility for the problem lies with the credit card industry and
the unscrupulous practices that the industry engages in as it continues
its greedy drive for more and more credit-hungry customers.
The deregulation of Federal and State laws governing interest rates
during the 1970's and 1980's created incentives for credit issuers to
take advantage of the laws in States with the most lender-friendly
policies. The credit card industry flourished, as did its creative
adoption of abusive penalty fees, late fees, and other hidden tricks
designed to keep consumers in debt as long as possible. These practices
correlated with skyrocketing profits for the industry.
When consumers can no longer tolerate spiraling personal debts,
they are left with little choice but to seek bankruptcy protection in
court. Yet this Congress for years has been ready to pass harsh
legislation to block even that relief from being granted to the
consumer.
The bankruptcy bill pending in the Senate today would do this while
providing even more opportunities for the credit card industry to
prosper.
Today we will learn from this Subcommittee about another factor
that has contributed to the gathering of the economic ``Perfect Storm''
facing indebted and financially desperate Americans.
While the credit counseling industry was originally created to
serve debtor-consumers navigate their way out of financial trouble, the
industry as we know it today seems to lead the unwitting consumer
directly into the eye of the Perfect Storm.
Instead of serving as a good faith mediator between the debtor and
creditor, many of these agencies have become nothing more than
automated debt collectors for the credit card companies.
Worse, today's ``nonprofit'' counseling service provider is sorely
mislabeled--it seeks profit and provides no counseling.
The abusive credit counseling agency practices, together with the
abusive credit card industry practices provide a potent one-two punch
that knocks out most consumers' hope of staying away from the
bankruptcy court.
I am glad that the abuses of the credit counseling industry are
finally coming to light through this hearing.
Last year, my home State of Illinois took an important first step
by becoming the first State in the Nation to seek legal recourse
against AmeriDebt, a national credit counseling agency, which, I should
note, is represented at this hearing today. I am also glad to note that
several other States have followed suit.
On February 5, 2003, Illinois' Attorney General Lisa Madigan filed
a lawsuit alleging violations of my State's consumer protection laws.
For example, under the Illinois Debt Management Services Act, a
debt counseling agency cannot charge more than a $50 initial fee and
cannot charge more than $30 average monthly fee per debtor.
As our State's Attorney General and this Subcommittee learned,
however, AmeriDebt charges an average of approximately $305 for an
initial fee, and averages intakes of approximately $35 per month per
Illinois consumer.
Similar to the findings of this Subcommittee, the suit in my
homestate alleges that AmeriDebt violated Illinois' Consumer Fraud Act
by:
Failing to disclose hidden fees and payments;
Failing to tell consumers that their first payment under
a debt management plan is kept by the company instead of being sent to
the creditors as the consumers were led to believe;
Representing that AmeriDebt will bring debtors' accounts
up to current status then failing to make timely payments to creditors;
Representing that consumers' payments are ``voluntary
contributions'' when they are in practice mandatory fees; and
Representing itself as a not-for-profit when the debt
management work is done by a for-profit company.
Additionally, we discovered that AmeriDebt was never licensed in
Illinois to operate as a debt management company, yet it took on over
11,000 clients in Illinois during years of marketing in the State.
I would like to commend Chairman Coleman and Ranking Member Levin
for undertaking a bipartisan investigation into this troubling industry
and for holding this important hearing today.
I hope this effort results in some serious and much-needed Federal
legislation being adopted in this Congress, and I pledge to work with
you and other interested members to make that happen.
Ever since I drafted the first comprehensive bankruptcy reform bill
in the 105th Congress, I have been concerned about some of the
aggressive practices of the credit card industry and their growing
influence in our economy.
I believe we need to address these concerns and offer possible
solutions in an open and honest way if we are going to change the
course of the economic trend that is so intricately tied to the
practices of that vast industry.
I would also like to see us continue to look for reasonable reform
in the bankruptcy area, and, in particular, focus on the conditions
that lead American consumers to bankruptcy. Still, any serious reform
effort has to take into consideration the significant role of the
credit counseling industry, and I hope this industry, as a whole, will
work with us in crafting some solutions that are unquestionably
necessary.
It is good to see representatives from the credit counseling
industry here ready to explain their side of the story. I think we
should be fair in listening to the legitimate voices on that side.
We should be careful not to paint a picture with a broad brush that
raises unfair suspicion about every single credit counseling agency in
the Nation. I have no doubt that there are many credible agencies doing
the counseling and educational work in the true spirit of their
nonprofit missions.
So I ask you--especially the agencies that are already living up to
the high standards established by the associations--to join us in
promoting stronger standards for everyone.
I know that the bankruptcy bill currently pending in the Senate
contains a provision that proposes standards for the credit counseling
industry, which is a positive step. But I agree with the Subcommittee's
report and its recommendation that changes may be necessary to
strengthen this provision in the bill, and I look forward to working on
those changes.
Finally, I urge the government representatives here today--the
Internal Revenue Service and the Federal Trade Commission--to continue
your diligent pursuit of the wrongdoers.
As I know from my homestate's experience, a few States have already
shown leadership in protecting the citizens within their borders. But
this is a problem with national implications and it is time for the
Federal agencies to do all they can to curb these abusive practices.
Please let us know what, if any, tools you need to carry out your
pursuit of this matter.
Thank you.
__________
PREPARED OPENING STATEMENT OF SENATOR LAUTENBERG
Mr. Chairman: Thank you for holding this hearing on a very
important subject: fraud and abuse in the credit counseling industry.
This hearing is important because consumer debt has exploded in
this country--it now exceeds 2 trillion dollars. Revolving credit--
mostly in the form of credit cards and overdraft protection--exceeds
750 billion dollars. That's about seven thousand dollars per household.
And because so many people have lost their jobs over the last 3 years,
more and more Americans are having trouble paying their bills. Our
economy went into a recession in March 2001.
In part because of overly aggressive marketing by the credit card
industry, more and more Americans have tried to make ends meet in a bad
economy by borrowing. And now many of them are in trouble.
When they get in trouble, many of them turn to non-profit credit
counseling companies for help. The problem, as it turns out, is that
some of the largest credit counselors have the same management as for-
profit debt consolidation firms. The non-profit counselor steers people
with credit problems to the for-profit consolidator.
Given such a scenario, it's difficult to imagine that the
counseling being given is truly objective and always in the customers'
best interests. I look forward to learning to what extent the business
ties between the counselors and the consolidators are made known to the
customers desperate to work out their debt problems.
The Subcommittee has learned that some of these ``non-profits'' pay
their officers excessive wages--in one case as much as $624,000 a year.
And the Subcommittee has learned that representatives of some non-
profits deceive their customers with hidden fees and deliberately make
promises they know they cannot keep with regard to lowering monthly
payments and improving credit scores.
We're talking about an industry with one billion dollars in annual
revenues.
Mr. Chairman, I certainly don't want to indict the entire industry.
There are counselors and consolidators who are truly helping customers
dig out from a mountain of debt. But there is enormous cause for
concern here in Congress when 9 of the top 15 non-profit credit
counselors--whose firms account for 40 percent of that one billion
dollars--are being investigated by the Internal Revenue Service.
We need to sort out the ``bad apples'' in this industry and I think
this hearing is a useful first step in that process.
Thank you Mr. Chairman.
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