Credit Counseling Agencies Come Under Fire in Congressional Report

By Sarah Borchersen-Keto, CCH Washington Staff Writer

The original purpose of the credit counseling industry has been corrupted by new entrants into the market who are involved in a variety of abusive practices such as charging excessive fees, putting marketing before counseling, and providing clients with inadequate educational, counseling, and debt management services, according to a report released in late March 2004 by the majority and minority staffs of the Senate Permanent Subcommittee on Investigations.

Some non-profit counseling agencies are funneling millions of dollars each year from their clients into affiliated for-profit businesses, which is in apparent violation of tax laws which prohibit tax-exempt charities from benefiting private interests, according to the report.

"Clearly something is wrong with the credit counseling industry," the report states. According to the subcommittee's investigation, AmeriDebt Inc., which has been sued by the Federal Trade Commission (FTC), "is not the only potential 'bad actor' in the industry." Many of AmeriDebt's practices, the staff say, "represent a pattern of abuse among several new entrants in the credit counseling industry."

The report recommends that, as part of ongoing efforts to halt abusive practices, major creditors should review and strengthen their standards for the credit counseling agencies with whom they do business, as well as strengthen their methods for monitoring and enforcing compliance. Meanwhile, the Internal Revenue Service (IRS) and the FTC should accelerate their enforcement efforts to review suspect credit counseling agencies and take action against those that are violating restrictions on tax-exempt entities or engaging in unfair and deceptive practices.

The staff also recommends that the Senate consider legislation, either modeling it on the Debt Repair Organizations Act of 1996 or expanding that law's application, to reach non-profit entities.

At a March 24 hearing of the Senate Governmental Affairs Committee, AmeriDebt's Chief Operating Officer Matthew Case said the company is actively engaged in attempting to resolve the concerns of consumers and government officials.

"Even though the vast majority of AmeriDebt clients have no complaints with the organization, we are working diligently to correct any remaining concerns," Case said. "There is no question that we continue to pursue our non-profit counseling and consumer education missions. The time has come to put these issues behind us and work together with policy makers and the public to deal with the much larger crisis of consumer debt," Case added.

IRS Commissioner Mark Everson told the hearing that the agency would utilize all tools available to it, including the pursuit of criminal charges if appropriate, and the revocation of tax-exempt status, in order to quash bad practices in the credit counseling industry. He told members that to qualify as a section 501(c)(3) credit counseling organization, it must limit its services to low income customers or, as its primary activity, provide education to the public on how to manage personal finances.

The IRS has seen an increase in applications for tax-exempt status from organizations intending to provide such services, Everson said. Among the more recent applicants, he explained, are credit counseling organizations whose principal activity is selling and administering debt management plans. The IRS is committed to taking the necessary steps to ensure that organizations that hold themselves out as non-profit credit counseling services are complying with all applicable requirements for tax exemption, Everson said.

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Posted April 5, 2004.