Report on Credit Counseling Practices by "New Breed" of Credit-Counseling Agencies Shows Problems for Consumers

WASHINGTON – The National Consumer Law Center and Consumer Federation of America released the findings of their report, “Credit Counseling in Crisis,” on the “severe threat to consumers from a new generation of credit-counseling agencies,” and the findings are sobering. The study found that, unlike most creditor-funded counseling agencies that have been around for awhile, the new generation of credit counseling agencies “often harm debtors with improper advice, deceptive practices, excessive fees and abuse of their non-profit status.” The report also concluded that credit practices and funding reductions have resulted in agencies being forced to cut back on education services which in turn have led more consumers to discontinue counseling and declare bankruptcy. The findings of this report show that the credit counseling industry has undergone an alarming transformation in the last decade, said NCLC Staff Attorney Deanne Loonin. “Aggressive firms masquerading as non-profit organizations are gouging consumers.more consumers are getting bad advice and access to fewer real counseling options. Meanwhile, most state and federal regulators appear to be asleep at the switch.” The study found that “poor oversight of credit counseling agencies by the Internal Revenue Service and the states has allowed unscrupulous counseling agencies to grow and prosper.” According to the NCLC and CFA, the number of consumer complaints filed with the Better Business Bureau in 2002 had increased to 1,480, up from 261 complaints filed in 1998. Based on these complaints, they ascertained three types of problems are adversely affecting consumers: * deceptive and misleading practices: complaints and government investigations have focused on agencies that don’t make consumers’ payments on time, that deceptively claim that fees are voluntary, and that don’t adequately disclose fees to potential clients. * excessive costs: most credit counseling agencies charge fees to set up a debt management program and to maintain it on a monthly basis. Some agencies allegedly charge as much as a full month’s consolidated payment just to set up an account. * abuse of non-profit status: some so-called non-profit credit counseling agencies are increasingly doing business like for-profit companies. They advertise, sell a range of services, maintain close ties to for-profit firms, and earn high revenues. In addition, the study found that most creditors are becoming increasingly unwilling to reduce interest rates for consumers who enter debt management programs. According to the study, in the last four years, five of 13 major credit card issuers increased the interest rate they offer consumers who are in debt management programs. Only two – Providian and Capital One – lowered rates. Sears, says the study, continues to refuse to negotiate any discount. This behavior by creditors, says the study, causes more consumers to drop out of credit counseling and to declare bankruptcy. To resolve these problems, the study makes several public policy recommendations. Among them, the Internal Revenue Service “should aggressively enforce existing standards for non-profit credit counseling organizations” and “use its power to impose `intermediate sanctions’ when agencies pay unreasonable or excessive compensation to individuals associated with the.” The study also recommends Congress and the states enact laws to directly address abuses by credit counseling agencies; credit counseling trade association should set “best practices standards” and vigorously enforce them; creditor should increase financial support to credit counseling agencies. According to the NCLA and CRA, an estimated nine million consumers have some contact with a consumer credit counseling agency annually. -