The credit-counseling industry faces state and federal scrutiny at the same time that Citigroup introduces more revenue uncertainty with a new compensation plan.
The last few years have been rough on several major industries as technology, changing tastes and questionable, in some cases, illegal, practices remade the business landscape. Companies in accounting, telecommunications, music, and publishing have all entered the remake/remodel zone.
Last year, the one-time obscure field of credit counseling joined the list of industries brought under the microscope. This year is shaping up to be a time of aftershocks as counseling agencies adapt to 2003's earthquake.
In October, the Internal Revenue Service announced it was auditing a number of credit-counseling agencies. Many agencies are classified as not-for-profit and receive tax-exempt status. But observers have questioned compensation paid to top officers at some firms, their spending on advertising, and the fees charged consumers. The Federal Trade Commission has also weighed in, warning consumers to be careful when selecting an agency.
Also in October, a congressional subcommittee held hearings on counselors, focusing on the issues raised by the federal regulators.
Meanwhile, several states decided it was time to watch credit counselors more closely and enacted regulations designed to make clear agencies' responsibilities to their clients.
Possibly the most far-reaching event was the quiet announcement by Citigroup Inc. that it would change the way it compensated agencies.
Citi told agencies in a November letter that it would replace its "fair-share" donation with a quarterly charitable contribution. The size of the contribution will depend on Citi's "perception of the agency's needs and the benefit they provide to the customer and the community," the letter says. The payments may vary quarter to quarter and year to year.
Fair share is a payment by credit grantors, such as credit card issuers, to the counseling agencies for consumer debt repaid under agency-arranged plans. For many agencies, fair share is their major source of funds.
Agencies provide education and advice to consumers on spending and budgeting. Some consumers need to be placed in a formal debt-management plan, or DMP, where debts are consolidated and paid off on schedule. Counselors attempt to lower their clients' monthly payments to credit card issuers by seeking to reduce interest and penalty charges. The agency doesn't get paid until the consumer is in a DMP.
That forces counselors to walk a fine line in representing their debtor clients to credit grantors. This balancing act has been made more difficult in recent years as creditors cut fair share from about 15% of debt repaid to under 10%.
Counseling agencies have also seen competitive pressure. New agencies have sprung up, offering counseling on the phone or over the Internet. These agencies often advertise heavily and have eliminated old-fashioned, labor-intensive, face-to-face counseling. These newer agencies may also charge their clients a variety of fees.
The Citi announcement has met mixed reactions. Several major credit grantors, including American Express Co., Discover Financial Services and Wells Fargo & Co., said they didn't plan to change their policies and wouldn't comment on Citi's actions. A Bank One Corp. spokesperson said the bank was open to new ideas and interested in the details of the Citigroup program.
The oldest agency trade group, the 53-year-old National Federation of Credit Counselors, applauds Citi's move.
Agencies won't be dependent on the fair-share system and can educate consumers before trouble arises, says Suzanne Boas, an NFCC board member and president of Consumer Credit Counseling Service of Greater Atlanta Inc. "This helps support portions of our work that may not be self sufficient," says Boas.
Last year, the Atlanta group provided 75,000 free counseling sessions and held 27,000 seminars on topics such as home buying. Those kinds of educational programs, and a new outreach effort to the Atlanta-area Hispanic community, could receive funding from Citi's compensation plan, says Boas.
The Association of Independent Consumer Credit Counseling Agencies, the industry's second major trade organization, also believes the Citi program could be positive.
Combined, the members of the NFCC and AICCCA were contacted by about three million consumers last year.
Joel Greenberg, president and chief executive of Novadebt, a Freehold, N.J.-based consumer credit-counseling agency, praises Citi for moving from compensation based on money returned.
"Compensation (will be based on) the education and counseling of debt-burdened individuals," says Greenberg.
Citigroup's move is also important because Citi is the largest card issuer, with over 100 million accounts. "Citi can (account for) as much as 20% of a (counseling) agency's portfolio" due to its size, says Greenberg.
Citi has a huge stake in cutting losses. In 2003's third quarter alone, Citi's North American card group reported net credit losses of $1.65 billion on its portfolio of managed receivables of $117.4 billion. That loss will surely rise as Citi integrates the $28.6 billion Sears, Roebuck and Co. portfolio that the bank closed on in the fourth quarter.
Citi's plan is receiving a wait-and-see response from the Consumer Federation of America. "It's not clear what the nuts and bolts (of the plan are)," says Travis Plunkett, legislative director. "This could be great if funding is detached from debt-management plans."
But if agency compensation remains tied to the amount of debt repaid to creditors, then Citi's plan is little improvement, reasons Plunkett.
The Citi program is still sketchy. Along with a cover letter, Citi distributed an application to agencies seeking to participate. The application requested 27 agency facts that ranged from hours of operation to client fee structure to filings with the IRS.
After Citi conducts its review, a qualified agency will receive a lump-sum charitable donation at the beginning of a quarter. The donation criteria may change and "contribution amounts will be based on a variety of objective and subjective factors," which may change at Citi's discretion, according to the letter. A Citi spokesperson in late December wouldn't provide any further information but said the plan would start in January.
As the industry prepares for the ramifications, some veterans are questioning whether the reimbursement business model even makes sense.
Steve Rhode, co-founder and president of Myvesta.org Inc., resigned in December, citing the growing control of counselors by credit grantors. The 10-year-old Myvesta is a Rockville, Md.-based counselor that has tried to create a niche for itself by offering counseling that addressed the consumer's behavior beyond just spending.
In a farewell letter, Rhode stated that "Credit-counseling groups are sadly crumbling into credit card company-controlled operations with their allegiance directed more towards their funding source" than towards consumers.
Credit card companies aren't entirely to blame for the current state of the counseling business, says Rhode. Most strapped consumers are well aware they are overspending and don't deserve a free pass when they can't pay their debts. And card companies, unlike auto lenders and mortgage companies, can't take back the car or take possession of a home when the consumer stops paying his bills.
The Citi plan, however, isn't the answer because it will give even more control to issuers, says Rhode.
Instead, he offers some "tough-love" solutions. First, debtors should pay for the assistance they receive and agencies should be clear what they are charging for their expertise. Second, credit card issuers must decide what they will contribute to agencies for the help they provide. Finally, card issuers must be more flexible and treat each debtor as an individual, Rhode says.
Myvesta will soldier on, with Pamela S. Rhode, operations director and Steve Rhode's wife, becoming president. Myvesta will offer consumer education only, dropping its one-on-one counseling sessions and other personal services. Steve Rhode will remain on Myvesta's board. He says he will return to providing one-on-one counseling of consumers.
Many of the changes and conflicts buffeting the counseling industry have occurred as federal bankruptcy reform legislation continues to bounce around the halls of Congress. The legislation would send more consumers who file for bankruptcy into Chapter 13, where they would be put in a debt-management plan to pay off a portion of their debts. The legislation also would require consumers who declare bankruptcy to undergo credit counseling.
Clouds of Change
A version of the legislation, widely supported by credit grantors, was first proposed in the mid 1990s and its enactment is far from certain.
As agencies grope through these dust clouds of change, there is one unfortunate factor working in their favor. The need for counseling is greater than ever, with a record 1.66 million bankruptcies declared in fiscal 2003, according to the Administrative Office of the U.S. Courts. That's up 7% from 2002, another record-setting year ("Looking for the Sunny Side," December 2003).
Those numbers and media coverage of consumer complaints about their treatment by agencies caught the ear of Congress. That led to hearings in November by the Oversight Subcommittee of the House Ways and Means Committee.
J. Howard Beales, director of the FTC's Bureau of Consumer Protection, testified that some agencies abuse their federal not-for-profit status to charge their clients fees that are falsely characterized as donations. Beales also said that some agencies enroll consumers, but don't provide education or counseling.
Beales' testimony followed a civil complaint filed by the FTC against AmeriDebt Inc., a Germantown, Md.-based credit-counseling agency. The complaint charges AmeriDebt with deceptive practices because it claimed that it was a non-profit agency. The company, however, charged clients an average up-front fee of $200 without passing that on to creditors, according to the FTC.
AmeriDebt denies the charges.
The complaint, filed in the U.S District Court in Baltimore, asks the court to order AmeriDebt to repay its clients. AmeriDebt in November had 90,000 clients, according to the FTC.
Last February, Illinois sued AmeriDebt, charging the agency failed to disclose hidden fees and failed to make timely payments to creditors. AmeriDebt denies the charges and the case is continuing. However, AmeriDebt in October announced it would discontinue advertising and seeking new clients.
The FTC's suit and Beales' testimony come hot on the heels of the agency's hugely successful implementation of the do-not-call program that enrolled over 50 million households in a program to limit unsolicited telemarketing calls.
Having that regulator on your tail would be enough to worry any industry. But it gets worse. Joining the FTC at the congressional hearing was IRS Commissioner Mark Everson.
The IRS is auditing over 30 counseling agencies and related entities, Everson testified. The top concern is finding if any of them are violating their not-for-profit status. The IRS won't disclose the names of firms being audited. But Everson said that some of the largest firms in the industry were among those being examined.
In the U.S. Senate, plans call for hearings early this year to be led by Sen. Norm Coleman, R-Minn., before the Permanent Subcommittee on Investigations of the Governmental Affairs Committee.
Regulatory action already has been taken at the state level. Georgia and Maryland enacted bills last year that set ceilings on the fees an agency can charge consumers and set fines for violations of the law ("Regulating the Counselors," August 2003).
Louisiana gave greater oversight of agencies to its Office of Financial Institutions and implemented license fees. Mississippi also set fee ceilings and put in place deadlines for agencies for sending debtor payments to creditors.
Some leaders are taking another tack to improving the business. Boas has been in discussions with the National Conference of Commissioners of Uniform State Laws to determine if consistency could be brought to state laws regarding the counseling industry.
This is crisis time for counselors. Agencies are trying to provide services for more consumers than ever before as regulators, legislators and creditors all demand change. It appears the industry needs a counselor of its own.
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