Some newer credit counselors gouging clients, investigators find

March 25, 2004

By Marcy Gordon
The Associated Press

WASHINGTON — Raymond Schuck thought he was being responsible when he went to Cambridge Credit Counseling for help reducing $90,000 in credit card and bank debt. Instead, the retired museum director said the monthly payments he made never reached his creditors — and he ended up filing for bankruptcy.

"My credit rating was completely ruined," the Lima, Ohio, resident testified yesterday at a Senate hearing looking into the credit counseling industry.

Credit counseling companies, which often advertise heavily, portray themselves as offering a refuge for consumers drowning in debt. But lawmakers, regulators and consumer groups charge that some counseling agencies trade on their nonprofit status to gouge customers, serving more as an anchor plunging people deeper into debt than as a life preserver.

Each year, an estimated 9 million Americans have some contact with a credit counseling agency — often the last stop before a bankruptcy filing.

A report prepared by the bipartisan staff of the Senate Governmental Affairs Committee's investigative panel found that consumer complaints are on the rise as new companies come into the credit counseling business and abuses proliferate. The investigators found a pattern of abuse among some counseling agencies, especially new entrants to the field.

"Clearly, something is wrong with the credit counseling industry," said Sen. Norm Coleman, R-Minn., chairman of the investigative subcommittee. "Our investigation has revealed common patterns of improper conduct" by new entrants.

The industry has changed significantly since its early years in the 1960s when individuals struggling with debt could go to a nonprofit credit counseling agency and get free help, Coleman said before yesterday's hearing.

Only if their problems couldn't be solved through budgeting and education, he said, would debtors be put in a debt-management plan, where the counselor negotiates a repayment plan with creditors.

"It was a good system," Coleman said.

But in recent years as consumer debt climbed, a new, more aggressive breed of nonprofit counselor emerged. More than 810 credit counseling groups applied for nonprofit status in the past four years.

Audits of 50 credit counseling agencies by the Internal Revenue Service "may very well" result in some of them being stripped of their nonprofit tax exemptions or even being referred for criminal investigation to the Justice Department, IRS Commissioner Mark Everson testified to the subcommittee.

And Thomas Leary, a member of the Federal Trade Commission, said: "We remain concerned about deceptive practices in the credit counseling industry."

Former employees of Cambridge Credit and AmeriDebt, who also testified, told of having to use fake names, "boiler room" sales operations and pressure on commission-paid counselors to get consumers to pay stiff upfront fees, with no counseling or debt education provided.

Officials of the two companies disputed the accounts of the former customers and employees. They said their companies act responsibly and provide a valuable service to consumers.

Chris Viale, chief operating officer of Cambridge Credit, called the accounts "unfair and distorted accusations."

"There is a popular notion that performance incentives encourage counselors to act in their own best interests rather than in the interests of consumers. This is not true," Viale said.

As senators grilled the officials about industry practices, the president of Debtworks, Andris Pukke, asserted his Fifth Amendment privilege in refusing to testify.

The for-profit Debtworks, Pukke and his brother are among several parties named in a lawsuit filed by the state of Missouri against AmeriDebt in September. Debtworks was formed in 1999 when AmeriDebt spun off its processing function for consumer debt plans and turned it into a for-profit business owned and controlled by Pukke, according to the Senate investigators.

With personal bankruptcies surging to record levels in this country, there is a deep pool of customers for credit counselors.

Credit counselors historically have been financed by banks that issue credit cards but those contributions have been declining, forcing counselors to charge fees.

Credit counseling works by putting consumers who cannot afford to make all their payments into debt management programs that allow them to consolidate their debts from several credit cards, reduce their monthly payments and lower their interest rates. Consumers agree to destroy their credit cards, not take out new credit and make a monthly payment to the counseling agency, which distributes it to creditors.

But new entrants — rather than relying on contributions to nonprofit counseling agencies from credit-card companies or small fees paid by consumers — use a different structure. They have nonprofit agencies that generate "massive revenues" paid by consumers for a for-profit affiliate for advertising, marketing and executives' salaries, according to the Senate report.

AmeriDebt, based in Germantown, Md., has been sued by the Federal Trade Commission, five states and consumers.

The FTC alleged that the company used deceptive marketing to bilk hundreds of thousands of customers and failed to educate people about how to get out of debt. The regulators also alleged that AmeriDebt made customers believe that an initial fee would be part of their debt-reduction payments to creditors — but it instead went to AmeriDebt.

The company has disputed the regulators' allegations. It says it offers customers educational services, and that the debt-reduction payments are "voluntary contributions."