Federal Trade Commission
Subcommittee on Oversight
House Committee on Ways and Means
Consumer Protection Issues in the Credit Counseling Industry
November 20, 2003
Mister Chairman and members of the Committee: I am Howard Beales, Director of the Bureau of Consumer Protection of the Federal Trade Commission ("FTC" or "Commission.").(1) I appreciate the opportunity to appear before you today on behalf of the Commission to discuss consumer protection issues raised in the credit counseling industry. This statement will describe the industry generally, discuss various practices by some of its members that raise consumer protection concerns, and summarize FTC law enforcement and educational efforts in this area.
As an initial matter, it is helpful to understand the Commission's role in enforcing laws that bear on the credit counseling industry. As part of its broad mandate to protect consumers, the Commission enforces the Federal Trade Commission Act ("FTC Act"), which prohibits unfair or deceptive acts or practices that are in or affect commerce.(2) The Commission also enforces a number of specific consumer protection statutes, including several relevant to credit counseling, such as the Telemarketing and Consumer Fraud and Abuse Prevention Act,(3) the Credit Repair Organizations Act,(4) and the Gramm Leach Bliley Act.(5)
The FTC Act excludes from the Commission's authority entities that are not organized to carry on business for their own profit or that of their members.(6) Therefore, the Commission does not have jurisdiction under that Act over credit counseling agencies ("CCAs") that are bona fide non-profit organizations.(7) The mere fact that a CCA has received tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, however, does not by itself oust the Commission of jurisdiction. The Commission may assert jurisdiction over such an entity if there is an insufficient nexus between the organization's activities and its alleged public purpose, for example, or if its proceeds inure to the benefit of private individuals.(8)
II. THE CREDIT COUNSELING INDUSTRY
The credit counseling industry has been in existence for about 50 years, providing valuable services to innumerable financially distressed consumers. Typically, the work of CCAs on behalf of their consumer clients is both present and future directed: to help debt-strapped consumers to manage their existing financial problems and to teach them better financial management skills for the future. CCAs historically have been relatively small, community-based non-profit organizations providing consumers with individualized advice and assistance. For these services, most traditional CCAs either charge nothing or solicit modest contributions from clients to help defray their expenses. As explained below, CCAs also can be funded by creditors through so-called "Fair Share" contributions.
CCAs have a number of options to offer their financially-distressed clients, depending on the client's individual circumstances, which range from simple advice and guidance on managing finances to (in extreme cases) advising that consulting a bankruptcy attorney may be the consumer's best option. In addition, CCAs, since the industry's inception, have offered to put certain clients into a payment program commonly termed a "debt management plan" ("DMP"). DMPs allow consumers to pay off their unsecured debts, such as credit card balances, by making a single, consolidated monthly payment to the CCA, which then disburses those funds to the creditors of debts covered by the DMP.
When administered properly, DMPs can benefit consumers because some creditors will reduce interest rates and waive certain charges, such as late and over-the-limit fees, for consumers on a plan. Most creditors and some state laws require CCAs to be non-profit entities before they can arrange payment plans for consumers, apparently for the purpose of eliminating the incentive for CCAs to deceive consumers. However, we are concerned that some CCAs may be evading these requirements by setting up non-profit entities that funnel money to for-profit affiliates.
DMPs can also benefit creditors by forestalling consumer bankruptcy. Importantly, traditional CCAs evaluate each client's individual circumstances and needs before deciding whether to enroll that person in a DMP.
DMPs generate revenue for CCAs in two ways. First, creditors voluntarily rebate to CCAs a small percentage of the funds that the organizations disburse to them. These payments are called "Fair Share" contributions. Second, some CCAs solicit "contributions" or "donations" from DMP enrollees, usually consisting of up-front and monthly fees. As discussed later, some CCAs appear to have turned these ostensibly voluntary contributions into de facto mandatory fees by automatically deducting money from consumers' payments without adequate disclosure.
In the last decade, the credit counseling industry has experienced dramatic growth, attributable in large part to ballooning consumer debt and the resulting demand for credit counseling to prevent default on that debt. The nature of the industry has also changed. Whereas it was once composed mainly of small, local credit counselors, the last decade has seen the rise of large, high-tech organizations that aggressively market their services to consumers via telemarketing, broadcast and print advertising, and the Internet. These organizations, many of which claim non-profit status, represent a new breed in this industry. Many appear to offer little or no individualized credit counseling, but rather urge all of their clients to enroll in a DMP without consideration of their particular financial situation.
III. CONSUMER PROTECTION ISSUES
Along with these changes in the industry have come complaints about troubling practices, including possible deception about the services offered, poor administration of DMPs, and undisclosed fees associated with DMPs.
The Commission is concerned about deceptive and other illegal practices in which some CCAs may be engaging. Our greatest concern is deception by CCAs about the nature and costs of the services they offer to consumers. The following practices have come to our attention that may violate the FTC Act or other statutes that we enforce:
- Misrepresentations about fees
or "voluntary contributions." Some CCAs may charge
substantial fees (sometimes denominated as "donations" or
"voluntary contributions") that they hide from consumers.
For example, some CCAs may automatically retain for themselves
certain payments consumers make on their DMPs, unless the
consumer affirmatively objects. These CCAs may not adequately
disclose this fact.
- Promising results that cannot
be delivered. Some CCAs appear to be marketing DMPs
with promises that they will lower consumers' interest rates,
monthly payments, or overall debt by an unrealistic or unattainable
amount. Some organizations also appear to be exaggerating
the amount of money consumers will save by signing up for
a DMP, or are promising falsely to eliminate accurate negative
information from consumers' credit reports.(9)
- Abuse of non-profit status.
As noted above, some unscrupulous CCAs misrepresent that
they are non-profit to comply with state laws and creditor
guidelines regarding the arrangement of payment plans for
consumers. In addition, some CCAs appear to use their 501(c)(3)
status to convince consumers to enroll in their DMPs and
pay fees or make donations. These CCAs may, for example,
claim that consumers' "donations" will be used simply to
defray the CCA's expenses. Instead, the bulk of the money
may be passed through to individuals or for-profit entities
with which the CCAs are closely affiliated. Tax-exempt status
also may tend to give these fraudulent CCAs a veneer of
respectability by implying that the CCA is serving a charitable
or public purpose. Finally, some consumers may believe that
a "non-profit" CCA will charge lower fees than a similar
- False advertising regarding
credit counseling services. Some CCAs claim to provide
advice and education to consumers on handling their finances,
when in fact they may merely enroll all clients indiscriminately
in DMPs without any actual counseling.
- Failure to pay creditors in
a timely manner or at all. Some CCAs may fail to pay
creditors in a timely fashion or at all. This failure can
result in serious consumer harm, such as from late fees
that the creditors impose.
- Failure to abide by telemarketing
laws. To the extent CCAs are not bona fide
non-profit organizations, they should be complying with
the FTC's Telemarketing Sales Rule, including the new national
- Gramm-Leach-Bliley ("GLB") Privacy and Safeguards. The Commission is also concerned that some CCAs may not be complying with the privacy and security requirements of the Gramm-Leach-Bliley Act, which apply to financial institutions such as credit counseling organizations.
IV. COMMISSION ACTIONS
The Commission has pursued a vigorous program to halt fraud and deception by those who purport to be able to solve consumers' financial difficulties. For example, last year the Commission filed a lawsuit against Jubilee Financial Services, a debt negotiation company, challenging misrepresentations about the services it offered.(10) The Commission alleged, among other things, that Jubilee made false promises that consumers who enrolled in its debt negotiation program would be able to pay off their debts at a substantially reduced rate; misled consumers about the effects of the program on their credit report; and failed to tell them that, as a result of the program, negative information would likely appear on consumers' reports and stay there for seven years. Instead of extricating themselves from debt, many of Jubilee's victims were left with little alternative but to file for bankruptcy.
Over the past several years, the Commission also has prosecuted numerous cases under the Credit Repair Organizations Act ("CROA"),(11) which prohibits fraudulent practices by organizations that promise to improve consumers' credit histories, such as falsely promising to remove accurate credit information from consumers' credit reports. The Commission has successfully conducted several sweeps of entities allegedly violating CROA, including Operation Eraser(12) and Operation New ID-Bad IDea.(13) Most recently, in August 2003, the Commission reached a settlement with one of the largest credit repair organizations in the United States, through which the defendants agreed to pay more than $1.15 million in consumer redress.(14)
The Commission also has engaged in extensive educational efforts to help consumers spot and avoid credit counseling and credit repair scams. Most recently, the Commission, in conjunction with the Internal Revenue Service and state regulators, issued a joint press release regarding CCAs, urging consumers to be cautious and providing tips for choosing a credit counseling organization.(15) The release advises consumers to pay careful attention to what fees the agency charges, the nature of the services it offers, and the terms of the contract. Consumers should consider using agencies that offer actual counseling and education and do not simply enroll all clients in DMPs.
The IRS announced at the same time its intention to re-examine certain CCAs with 501(c)(3) status to determine whether they are operating in a manner that complies with the laws and regulations governing tax-exempt status. The IRS also stated that in the future it will examine more rigorously CCAs' 501(c)(3) applications. Specifically, the IRS noted that organizations that place clients on DMPs without significant education and counseling do not qualify for tax-exempt status.(16)
The Commission recognizes that credit counseling can provide financially distressed consumers with valuable assistance in managing their money and paying their debts, and that many, if not most, CCAs operate honestly and fairly. The Commission is concerned, however, that some firms may be deceiving consumers about who they are, what they do, and how much they charge. The victims of the deception may find themselves in even more dire financial straits than before. The Commission, acting with our law enforcement partners, will continue to work to protect consumers in this critical area.
1. The views expressed in this statement represent the views of the Commission. My oral statement and responses to questions you may have are my own and are not necessarily those of the Commission or any Commissioner.
2. 15 U.S.C. § 45(a).
3. 15 U.S.C. §§ 6101-6108.
4. 15 U.S.C. §§ 1679 et seq.
5. 15 U.S.C. §§ 6801 et seq.
6. 15 U.S.C. §§ 44 & 45(a).
7. Most creditors and some state laws require CCAs to be non-profit entities before they can arrange payment plans for consumers.
8. See, e.g., College Football Association, 117 F.T.C. 971, 993 (1994).
9. Negative but accurate information cannot be removed from a credit report until the time specified by the Fair Credit Reporting Act has lapsed (generally, seven years after the event occurred). 15 U.S.C. § 1681c.
10. See FTC Press Release, FTC, States Give "No Credit" to Finance-Related Scams in Latest Joint Law Enforcement Sweep (Sept. 5, 2002), available at http://www.ftc.gov/opa/2002/09/opnocredit.htm. The Commission subsequently settled this matter. The settlement, among other things, banned defendants from advertising, marketing, or providing debt negotiation services. See FTC Press Release, Jubilee Financial Services Defendants Banned from Providing Debt Negotiation Services (Aug. 29, 2003), available at http://www.ftc.gov/opa/2003/08/jubilee.htm. Strictly speaking, Jubilee was not a CCA because it did not offer credit counseling or DMPs; rather, it purported to negotiate settlements of consumers' unsecured debts with the creditors.
11. 15 U.S.C. §§ 1679 et seq.
13. See FTC Press Release, Credit Identity Defendants Settle FTC Charges: Promoting False Identification Numbers to Create a "New Credit Identity" Is Illegal (Oct. 21, 1999), available at http://www.ftc.gov/opa/1999/10/badidea.htm.
16. See Press Release, IRS Takes Steps to Ensure Credit Counseling Organizations Comply with Requirements for Tax-Exempt Status (Oct. 17, 2003), available at http://www/irs.gov/newsroom/article?0,,id=114575,00.html.