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Credit Counseling Crisis

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As consumer debt problems grow, about nine million Americans seek out a consumer credit counseling agency annually. But a new report shows that consumers may be getting a raw deal as a new generation of credit-counseling agencies often harm debtors with improper advice, deceptive practices, excessive fees and abuse of their non-profit status. The Better Business Bureau says that complaints about credit counseling agencies nationwide had increased to 1,480 in 2002, up from 261 in 1998.
The new research report, released today by the National Consumer Law Center and Consumer Federation of America, found that some of these newer agencies do not make consumers’ payments on time, deceptively claim that fees are voluntary, and do not adequately disclose fees to potential clients. The NCLC/CFA report says that in an industry that rarely charged for counseling and other services a decade ago, most agencies now charge fees to set up a “Debt Management Program” or “DMP” and to maintain it on a monthly basis. The report says some agencies charge as much as a full month’s consolidated payment-usually hundreds of dollars-simply to establish an account. The report also found that some “non-profit” credit counseling agencies are increasingly performing like profit-making enterprises. Nearly every agency in the industry has non-profit, tax-exempt status. Nevertheless, some of these agencies function as virtual for-profit businesses, aggressively advertising and selling DMPs and a range of related services, maintaining close ties to for-profit firms, reaping high revenues and paying their executives salaries that are much higher than average for the non-profit sector.

The NCLC/CFA says the root of the problem lies with financial institutions. Major banks have reduced funding to credit counseling agencies, a trend that started in the mid-1990s. Credit card issuers historically paid agencies 15% of the debt they recovered from borrowers in DMPs. By 2002, however, one credit counseling trade association (the National Foundation for Credit Counseling) was reporting an average contribution of just 8 percent. More recent data collected for this report indicates that creditors often contribute less than 8 percent, but on a sliding scale, depending on the ability of individual agencies to meet a range of requirements. As available revenue has declined, most agencies have curtailed the range of services they offer and have increased the fees they charge to consumers.

Most creditors are also becoming increasingly unwilling to reduce interest rates for consumers who enter debt management programs. In the last four years, five of 13 major credit card issuers have increased the interest rate they offer to consumers in DMPs (Bank One/First USA, Discover, Chase Manhattan, Fleet and Wells Fargo). Only two creditors, Providian and Capital One, have lowered rates during the same period, which still leaves Capital One’s interest rate at a very high 15.9%. Sears, which generally charges interest rates above 20%, continues to refuse to negotiate any discount. Bank of America, on the other hand, will completely eliminate interest for consumers in a DMP. Other creditors that charge relatively low rates are Chase Manhattan, at 7%, and Providian, at 8%.

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