A Massachusetts credit counseling agency and its two owners must pay $4.2 million in penalties and consumer restitution to settle allegations that it misled thousands of consumers and funneled millions of dollars to related for-profit companies.

The consent judgment resolves a lawsuit filed by Massachusetts Attorney General Tom Reilly in April 2004. The suit charged that owners John and Richard Puccio violated Massachusetts charities laws by using Cambridge Credit Counseling to funnel millions of dollars to for-profit companies that they also owned.

The state also alleges that the company violated consumer protection laws by misleading thousands of consumers about the benefits of credit counseling offered by Cambridge Credit.

Under the consent judgment, both Cambridge Credit and the Puccio brothers will pay civil penalties and restitution to consumers.

The Puccios will pay a total of $2 million to the Commonwealth - including a $500,000 civil penalty, $500,000 restitution to consumers, and an additional $1 million in disgorgement of ill gotten gains from the charity.

Cambridge will pay $2.2 million -- a $500,000 civil penalty and $1.7 million in restitution to consumers. The Puccios also are permanently barred from working with Cambridge, contracting with the charity, or receiving any money from the charity.

"What is clear is that the owners set up this charity primarily to enrich themselves - funneling millions of dollars to their other for-profit companies - and not to benefit the people using their services," Reilly said.

"This judgment forces the company to pay a significant fine and consumer restitution. It also removes the owners from the company and fundamentally changes the structure of the organization to help assure that it stays true to its charitable mission."

Cambridge, minus the Puccios, will continue to service existing credit counseling clients and will continue to operate as a Massachusetts charitable organization, following a comprehensive overhaul of the organization and its charitable operations.

Cambridge Credit also will overhaul its credit counseling practices and its marketing of credit counseling services. Cambridge Credit will charge no more than a $75 fee to enroll in credit counseling, plus a monthly fee not to exceed 10 percent of monthly payments, capped at $50. Before the lawsuit, Cambridge charged an up-front fee equal to one months payment, which ranged between $100 and $1,500, and on average was around $300.