They promise “debt-free” living, safety from bankruptcy, shelter from creditors,
peace of mind and a happy financial future. And they let you know they’re nonprofits
– consumer advocates, not businesses trying to get rich off people’s indebtedness.
Many are the real deal. But across the nation, more and more credit counseling agencies are coming under fire for diverting millions into for-profit enterprises, charging clients exorbitant fees, and holding on to people’s money while their credit is ruined.
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AmeriDebt Inc., one of the nation’s most prominent credit counseling groups, is now being sued by several states, and this month was levied $15 million by the Internal Revenue Service, which is trying to strip it of its nonprofit status. In Massachusetts, the state’s attorney general is suing Cambridge Credit Counseling, accusing the company of charging huge fees to consumers, then diverting two-thirds – more than $60 million – to for-profit enterprises.
Now, empowered by a new state law, the Rhode Island Department of Business Regulation is preparing to take a much closer look at credit counselors activity here than had ever been possible.
The law, sponsored by state Sen. William A. Walaska, a Warwick Democrat, requires anyone providing “debt management plans” – the agencies’ main source of income, and the one that can hurt consumers – to get licensed annually by the DBR, document their staff’s professional certification, submit annual audits and make their entire records available for inspection by the state for at least seven years after the end of each contract.
The law also gives consumers very specific rights: debt management plans must clearly specify the services they are to get, their obligations and the agency’s, all the costs, a detailed budget analysis and a statement that they can bow out anytime.
“There’s some really good consumer legislation here,” said state Chief Bank Examiner Steven L. Cayouette, whose division oversees credit counselors.
Almost no regulation
Walaska, who chairs the Senate Committee on Financial Services, Technology and Regulatory Issues, said it was the same TV ads that ensnare many consumers that sparked his own curiosity and led him to sponsor a bill.
“You’re channel surfing through the cable and you see these ads come up, and you see couples with thousands of dollars in debt, and they make a phone call to a credit counseling agency, and next thing you know they’re riding off on vacation in an SUV,” Walaska said in an interview.
“There’s almost no regulation, and many of them are scams,” he added. “There are thousands upon thousands of Rhode Islanders who use these services each year.”
Exactly how many is impossible to tell. Before this law was passed, a less-strict law required only that agencies involved in “debt pooling” in Rhode Island – meaning collecting money from a debtor to pay multiple creditors – get licensed by the DBR, but the agency had no legal power to examine their records or even charge a licensing fee.
In a letter to Walaska supporting his bill, Stephen R. Bucci, president of Consumer Credit Counseling Service of Southern New England, a 13-year-old nonprofit with a close partnership with the Rhode Island Housing & Mortgage Finance Corporation, said his agency alone took 9,000 calls from Rhode Islanders with credit questions and issues last year, and counseled more than 2,500 families.
As of March, Bucci told the senator, CCCS had more than 2,000 families on its roster, with about $40 million in debt. “And we are only one agency,” Bucci stressed.
Cayouette said the DBR had eight agencies on record with “debt pooling” licenses; search online or in the Yellow Pages, and the numbers are much higher, though Cayouette said it would be illegal for anyone without a local office and license to provide such services.
As Bucci, who was involved in drafting the old law, explained to Walaska, groups such as his do much more than debt management; they look to educate consumers – from schoolchildren to the elderly – about credit issues, homeownership, general financial management, budgeting, etc. They do their counseling face to face, and when they’re working with a client in financial trouble, they try to find the “root cause” to ensure that, once that debt is paid off, new debt doesn’t accumulate.
Changing the tone
But those services are costly to provide and don’t make any money, Bucci said. Debt management plans, on the other hand, do produce revenue. Some agencies, Bucci noted, have chosen to do only that kind of work.
That, in turn, has changed the whole tone of the credit counseling world. In the past, the income came primarily from the creditors, who gave agencies as much as 15 percent of what they collected to support their educational work. Now, creditors are paying out far less, and fees are increasingly what makes agencies money. Some also keep consumers’ money when they fall behind on their payments or end their contracts.
“We do not feel Rhode Island consumers are well served at all by these entities,” Bucci wrote the senator. “Yet these organizations are allowed to prosper in Rhode Island.”
Much of that is now going to stop, Cayouette said. The new law, which also forbids agencies to buy consumers’ debt or act as collection agencies for creditors, will protect consumers much better, he said, and will make it easier to expose violators.
Applications for the new licenses, which cost $200, are already posted on the DBR Web site. Cayouette said he’s already begun to get applications, though registered debt pooling agencies will be allowed to continue operating under those licenses until they expire. The DBR still has extensive work to do to implement the law, however; Cayouette said he’s “not even close” to posting proposed regulations.
Walaska, for his part, is pleased to have created some new protections for the most vulnerable consumers in this “nation of debtors.”
“I’m not one for big government or heavy regulation,” he said. “But I do think
that government needs to act as a referee to ensure nobody gets hurt.”
