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Credit Counselors Not Always What They Seem

Debt-Ridden Consumers Often Get Bad Advice, Report Claims

July 13, 2004
Heavily-indebted consumers often get bad advice about where to go for help, according to a Washington-based organization that itself is of questionable parentage.

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The media, government agencies and policymakers frequently steer troubled consumers to Consumer Credit Counseling Services (CCCS) or other agencies that are members of the National Foundation for Credit Counseling (NFCC). In doing so, they tell consumers that the decades-old NFCC and its CCCS affiliates are neutral, reputable, "nonprofit" charities that serve consumers' interests.

But according to the report issued by Consumers for Responsible Credit Solutions, consumers seeking help from an NFCC affiliate may be handing their financial futures over to the very creditors who buried them in debt in the first place -- and who will profit handsomely from collecting on those debts.

They may also be relying on the reputation of an organization whose leadership and affiliates have been associated with some recent, troubling financial scandals.

Some of the report's key points include:

• Credit counseling agencies under the NFCC umbrella are essentially agents of creditors. Creditors created the NFCC and many of its affiliates. NFCC members receive two-thirds of their funding from creditors. The NFCC and many of its affiliates are led by former creditor executives. The NFCC's governing board has included representatives of credit industry giants including VISA, CitiCorp, Household Credit Services, Bank of America, JC Penney, Dayton Hudson (Target Corp.), TransUnion, Experian, and Zales Jewelry. Major debt collectors have also held positions on NFCC governing boards.

• Creditors profit tremendously from the debt collection activities of the NFCC, which through its nonprofit network of more than 1,300 locations collects close to $5 billion in at-risk debts for creditors every year. For their work on behalf of creditors, the NFCC's "nonprofit" executives have received compensation packages approaching $400,000 per year.

At one NFCC affiliate, the top four officers received compensation totaling about $1 million for their "charitable" work of collecting debts from consumers and turning them over to creditors.

When consumers seek advice on finding a good credit counseling agency, one of the first things they need to consider is how their money will be handled. The report finds the recent financial record of some NFCC leaders and affiliates should raise serious concerns:

• NFCC President's Financial Scandal In 2004, the current NFCC president, Susan Keating, joined the NFCC following her resignation as president of Allfirst Financial bank, where she presided over one of the largest financial scandals in history in which it was discovered that one of the bank's foreign currency traders had hidden $691 million in currency trading losses.
• Utah CCCS Seized by State Regulators In 2004, just weeks after the NFCC withdrew its membership, the decades old CCCS of Utah, a founding NFCC member, was seized by state regulators in search of missing funds after consumers complained that their payments were not being forwarded to their creditors.
• Hawaii Credit Counseling Agency Used to Launder Drug Money. In 2001, just three months after the NFCC withdrew its membership, the president and treasurer of the decade-old Hawaii Credit Counseling (HCC) service were suspects in an investigation that lead to their conviction for using their clients' funds to launder drug money for heroin dealers. Even as the police were investigating HCC, the media and an official of the U.S. Government continued to publicly recommend HCC as "among the best" providers of credit counseling services for consumers.
• NFCC Board Member Companies Have Paid Record Fines for Abusing Consumers. Creditors who have been represented on the NFCC Board of Trustees have recently paid hundreds of millions of dollars in Federal Trade Commission fines and other settlements for anti-consumer practices and abusing consumers' rights.

• The report asserts that the chief aim of creditors in controlling the NFCC is to discourage consumers from declaring bankruptcy. By using the NFCC to discourage bankruptcy, creditors reduce their financial risks and assume less responsibility for granting excessive credit to already overextended consumers. The NFCC has been very effective in achieving that goal. Although 86% of the consumers who approach the NFCC are legally insolvent, only 11% go on to declare bankruptcy.

Bankruptcy is a bad outcome for everyone, but discouraging eligible people from declaring bankruptcy can make things even worse for the consumer and the public. Keeping insolvent people paying endless debts often results in high personal costs for the consumer and high social costs for taxpayers who end up paying the costs associated with broken families, failed businesses and other problems.

Consumers are also harmed when creditors use control of the NFCC to scrutinize consumers and deny them debt management plan benefits, leaving them financially strapped and unable to dig themselves out of debt.

Recommendations

The report argues the best way to make the credit counseling industry more favorable to consumers is to reduce the direct influence and control of creditors. The report presents a number of options to consider, which range from the outright banning of creditor management and funding of agencies to simply limiting or even just disclosing the creditors' influence. It also includes recommendations to the industry for improvement of customer service.

The report argues that the recent growth of independent, non- NFCC credit counseling agencies has brought many benefits, including wider public awareness and access to credit counseling and debt management plans through advertising and marketing, and improved customer service and technology.

At the same time, there have been new entrants who have not served consumers well. Two factors have contributed to problems: a lack of national regulatory standards; and mandates that credit counseling agencies be "nonprofit," which exempts them from most state and federal regulation. This has left an industry that handles billions of dollars in consumer payments largely unregulated.

The report recommends establishing national standards and opening the industry to professional financial services businesses that already serve consumers and are already subject to regulatory scrutiny.

Consumers for Responsible Credit Solutions is a Washington, D.C.-based organization that says it is an ad hoc group of about 800 consumers, credit counselors, bankruptcy attorneys and consumer advocates. Its parttime executive director, Darrell McKigney, said the group has been in existence for about two years.

The full text of the report is available at www.responsiblecredit.com.

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