FTC: Credit Counselors Must Be Honest and Fair

The credit counseling industry has changed dramatically in the past decade, giving rise to a new breed of large, high-tech organizations that frequently claim non-profit status, according to the Federal Trade Commission. In testimony delivered today before the House Subcommittee on Oversight, Howard Beales, Director of the FTC’s Bureau of Consumer Protection, cautioned that while credit counseling can provide financially distressed consumers with valuable assistance, some firms may be misleading consumers about who they are, what they do, or how much they charge.

Beales explained that the credit counseling industry has been around for about 50 years, providing financially distressed consumers with assistance on paying debts and better managing their money in the future. Historically, credit counseling agencies (CCAs) have been small, community-based non-profit organizations that charge nothing or solicit modest contributions. CCAs generally have offered to enroll certain clients in a “debt management plan” (DMP), which allows consumers to pay off unsecured debts with a single, consolidated monthly payment to the CCA. The CCA then disburses that money to the creditors whose debts the DMP covers.

The testimony states that DMPs generate revenue for CCAs in two ways: voluntary rebates from creditors to CCAs; and “contributions” or “donations” solicited by some CCAs from DMP enrollees, usually an up-front or monthly fee. In recent years, it appears that many of the larger, high-tech credit counseling organizations offer little or no individualized credit counseling, instead urging all their clients to enroll in a DMP without consideration of their particular financial situation.

“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,” Beales said. He stated that the FTC’s greatest concern is deception by CCAs about the nature and costs of their services, including the following practices:

• Misrepresentations about fees or “voluntary contributions,” including not adequately disclosing that the CCA may retain certain payments consumers make on their DMPs;
• romising results that cannot be delivered, including lowering consumers’ interest rates, monthly payments, or overall debt by an unrealistic amount, or exaggerating the amount of money consumers will save by signing up for a DMP;
• Abuse of non-profit status – some CCAs appear to use their 501(c)(3) status to convince consumers to enroll in their DMPs and pay fees or make donations, claiming that the “donations” will be used to defray the CCA’s expenses, when instead the money may enable the CCA to make a substantial profit;
• False advertising regarding credit counseling services – some CCAs claim to provide advice and education to consumers, when in fact they may simply enroll them in DMPs without providing actual counseling;
• Failure to pay creditors in a timely manner or not at all;
• Failure to abide by telemarketing laws – to the extent CCAs are not bona fide non-profit organizations, they should be complying with all aspects of the FTC’s Telemarketing Sales Rule, including the new National Do Not Call Registry; and
• Failure to comply with privacy and security requirements under the Gramm-Leach-Bliley Act.

“The Commission has pursued a vigorous program to halt fraud and deception by those who purport to be able to solve consumers’ financial difficulties,” Beales stated. The testimony listed several Commission actions, including a lawsuit against Jubilee Financial Services – a debt negotiation company – and numerous cases under the Credit Repair Organizations Act (CROA), including sweeps like Operation Eraser and Operation New ID-Bad IDea.

Beales explained that the FTC also has engaged in extensive consumer education efforts to help protect consumers from credit counseling and credit repair scams. Most recently, the FTC and the Internal Revenue Service (IRS) jointly issued tips for choosing a credit counseling organization, including:

• Pay careful attention to the fees an agency charges, the nature of the services it offers, and the terms of the contract;
• Make sure that your creditors are willing to work with the agency you choose; and
• Consider using agencies that offer actual counseling and education, instead of simply enrolling all clients in DMPs.

Additionally, the FTC recently reissued two consumer education publications with valuable tips on how to choose a credit counselor, take control of one’s finances, and avoid scams. The two publications – “Knee Deep in Debt” and “Fiscal Fitness: Choosing a Credit
Counselor” – are available at www.ftc.gov/bcp/edu/pubs/consumer/credit/cre19.shtm and www.ftc.gov/bcp/edu/pubs/consumer/credit/cre26.shtm.

The testimony states that credit counseling can provide valuable assistance to consumers in financial distress, 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,” Beales said. He concluded that the FTC remains committed to working with its local law enforcement partners to protect consumers against financial fraud and deception.

The Commission vote to approve the testimony was 5-0.

Copies of the testimony are available from the FTC’s Web site at http://www.ftc.gov and also from the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, D.C. 20580. The FTC works for the consumer to prevent fraudulent, deceptive, and unfair business practices in the marketplace and to provide information to help consumers spot, stop, and avoid them. To file a complaint, or to get free information on any of 150 consumer topics, call toll-free, 1-877-FTC-HELP (1 877-382-4357), or use the complaint form at http://www.ftc.gov. The FTC enters Internet, telemarketing, identity theft, and other fraud-related complaints into Consumer Sentinel, a secure, online database available to hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.