Overburdened with indebtedness, consumers who seek help from the new generation of credit counseling agencies are putting their trust in a largely unregulated industry rife with the potential for worsening, not improving, consumers' indebtedness problems.
Too often, under-funded credit counseling agencies offer improper advice, deceptive practices, excessive fees and abuse of their non-profit status, according to "Credit Counseling In Crisis: The Impact on Consumers of Funding Cuts, Higher Fees and Aggressive New Market Entrants," the first ever such study of credit counseling agencies. The report is the work of National Consumer Law Center (NCLC) and the Consumer Federation of America (CFA).
The study also says credit counseling agencies have cut back on a component of credit counseling that saves many home owners from bankruptcy -- education -- and that has led more consumers to drop out of counseling and declare bankruptcy.
A large share of consumers in financial trouble are those who've tapped record growth in home equity over the past decade. Things could get worse if they look to some credit counseling agencies for help.
"Aggressive firms masquerading as 'non-profit organizations' are gouging consumers. Deceptive practices and outright scams are on the rise. 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," said Deanne Loonin, staff attorney for the NCLC.
The report says the new generation of credit counseling agencies has gained market share and along with it their share of complaints.
A growing number of concerned consumers are specifically checking up on debt consolidation services. The Better Business Bureau said last year, consumer requests for information about them increased by a whopping 162 percent -- up from 81,138 inquiries in 2001 to 212,875 in 2002. That's a bigger percentage jump than any other industry except insurance, the BBB reported.
The credit counseling report said some 9 million consumers have contact with credit counseling agencies each year and the report found numerous incidents of malpractice.
Deceptive and misleading practices. Some agencies don't make consumers' payments to creditors on time, they deceptively claim that fees are voluntary, and they don't adequately disclose fees.
Excessive costs. An industry that offered free services a decade ago, now often charges fees to set up and maintain Debt Management Programs (DMPs) -- sometimes as much as hundreds of dollars just to open an account.
Non-profit status abuse. So-called "non-profit" credit counseling agencies are increasingly performing like profit-making enterprises, aggressively marketing and selling DMPs and related services, maintaining close ties with for-profit firms, reaping revenues as high as $7.3 million a year and paying their executives salaries as high as $462,350 plus $130,000 in benefits.
Offering only debt consolidation. Traditional credit counseling agencies once offered a range of services -- financial and budget counseling, education and DMPs. Newer agencies more often funnel consumers into DMPs, even when they will not benefit. Debt counseling is fast disappearing.
The report says drastic funding cuts to non-profits from major banks and credit card operators and creditors' increasing unwillingness to reduce interest rates for consumers who enter programs are compounding the problems. Stiffer requirements that could come with a proposed national bankruptcy bill making its way through Congress will make matters worse.
"Credit card companies are leaving debt-choked Americans with few options other than bankruptcy," said Travis B. Plunkett, a legislative director with CFA. "It is hypocritical for the credit card industry to demand that Congress give them relief by enacting the bankruptcy bill, while closing off credit counseling as an effective alternative to bankruptcy for many consumers."
The report says the Internal Revenue Service should aggressively enforce non-profit laws, Congress should tightly regulate credit counseling agencies, trade associations should set strong practice standards and enforce them, creditors should increase financial support to bona fide credit counseling agencies and creditors should reverse the trend of reducing concessions for consumers honestly trying to clean up their credit act.
Consumers should beware and heed the seven "red flags" as reasons to reject an agency and look elsewhere for help.
Avoid debt management (consolidation) plans that cost more than $50 to set up and monthly fees higher than $25.
Beware of claims about "voluntary" fees. If voluntary fees are available don't succumb to pressure to pay more than you can afford.
If the telephone pitchman or woman sounds like he or she is reading from a script and aggressively pushing debt "savings" or the possibility of a future "consolidation" loan, hang up.
Employees paid by commission are more likely focusing on their wallets than yours. Ask how counselors are paid.
Any agency offering a debt management plan in 20 minutes or less hasn't spent enough time scrutinizing your finances. Thirty to 90 minutes is more realistic.
Avoid agencies that offer you only a debt management plan without discussing its appropriateness for your situation.
Don't immediately respond to aggressive television ads, Internet advertising, Spam or telemarketing. Get referrals from trusted friends, family members or others, determine which agencies have been subject to complaints and talk to a number of agencies before making a decision.
Additional guidance is available from the BBB's "Debt Negotiators Not the Same as Credit Counseling Agencies," its "Credit Repair Fraud," the NCLC's "NCLC Guide To Surviving Debt" and Nolo.com's "Debt and Bankruptcy" information area online.
Published: April 25, 2003
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The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services.
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Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News.
Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake.
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