Counseling, Education and Other Services

Because DMP’s are the primary, or even sole, source of revenue for most agencies, there is a built-in bias toward enrolling consumers in these plans. However, particularly early on in the development of the industry, most agencies offered services other than DMP’s as well. Agencies often used excess revenues from DMP’s to fund these other services, including counseling for consumers who were not enrolled in DMP’s and consumer education seminars and courses. Despite growing financial problems, many agencies still offer a wide range of services. In fact, agencies should only be granted non-profit status if they provide meaningful educational services and meet other I.R.S. requirements.

Possible Legal Claims

There are a number of possible remedies available to challenge problems with credit counseling. The closest statutory scheme at the federal level is the Credit Repair Organizations Act (CROA). The CROA applies only to agencies that offer credit repair services. The definition is broad, encompassing any person who performs or offer to perform any service, for a fee or other valuable consideration, for the express or implied purpose of i) improving any consumer’s credit record, credit history, or credit rating; or ii) providing advice and assistance to any consumer with regard to any activity or service described above. Many credit counseling agencies should fit this definition. However, a critical problem with the CROA and its state analogues is that it does not apply to non-profit organizations. Although the vast majority of agencies now charge at least some fees for service, nearly every organization in the industry operates as a non-profit. It may be possible to overcome this hurdle by arguing that a non-profit is a for-profit business in disguise either because it focuses entirely on selling DMP’s or because of close connections to for-profit affiliates. Many state laws specifically prohibit the business of debt pooling (also known as debt management plans, debt consolidation, budget planning, or debt prorating). With notable exceptions, these state laws are generally ineffective and/or under enforced. The majority do not specifically provide for private enforcement. In fact, many of the laws are contained in the state criminal codes. Where no specific private remedy is provided, violations should be state unfair and deceptive acts and practices (UDAP) violations. The state laws vary in scope. About half of the states require some type of licensing for agencies providing debt management services. But nearly half of these states explicitly exempt most non-profits from the licensing requirements. A minority of states restricts debt management business in the state to non-profits and requires these non-profits to be licensed. The stronger state laws provide regulation beyond licensing and/or regulation. The most common substantive regulations include fee limits, requirements that consumers be given written contracts and that agencies maintain consumer payments in separate trust accounts. In addition, most of the states that require licenses also require agencies to post bonds. With only a few exceptions, most of the states that have licensing requirements also limit the fees that licensed agencies are allowed to charge. About twenty states take a different, generally less restrictive approach. Most of these states generally prohibit debt adjusting, but allow a long list of exceptions. Most important, nearly all of the states exempt non-profit organizations from the general prohibition. Other states do not require licensing, but still limit fees agencies can charge and/or other practices. In addition to these specific debt management laws, advocates should also consider state credit repair laws and UDAP laws. Unauthorized practice of law statutes and regulations and state loan broker laws may also apply.

Nearly every state has a law that regulates or attempts to regulate debt management services. More than half of these cover debt settlement services as well. Advocates should also keep up to date with I.R.S. rulings and investigations with respect to agency non-profit status. Information is generally available on the I.R.S. web site at www.irs.ustreas.gov. The Federal Trade Commission also has information on its web site about current lawsuits and information for consumers.

(See www.ftc.gov.)

Source: National Consumer Law Center, Inc. and Federal Trade Commission