Credit agencies blasted at hearing

March 25, 2004

By Marcy Gordon
The Associated Press


WASHINGTON - Hidden charges, high fees and even failure to send payments to creditors of debt-laden consumers are widespread among newer credit counseling agencies, senators and federal regulators said at a hearing Wednesday.

As senators cracked open the counseling industry and its complex webs of companies and interlaced executives, the president of one company invoked his Fifth Amendment right against self-incrimination and refused to answer questions.

Credit counseling companies, which often advertise heavily, portray themselves as offering a refuge for consumers drowning in debt. But lawmakers, regulators and consumer groups say some counseling agencies trade on their nonprofit status to gouge customers and end up plunging them deeper into debt.

Each year, an estimated 9 million Americans have some contact with credit counseling agencies -- often the last stop before bankruptcy filings.

One of them was retired museum director Raymond Schuck. Saddled with $90,000 in credit-card and bank debt, he heard an ad on the radio and called Cambridge Credit Counseling. Schuck said he was promised lower interest rates and was asked to make a monthly payment of $1,946 -- but the money didn't make it to his creditors as it was supposed to.

"My credit rating was completely ruined because of late payments" and he eventually filed for bankruptcy, Schuck told the hearing of the Senate Governmental Affairs Committee's investigative panel.

A report prepared by the panel's bipartisan staff found that consumer complaints are on the rise as new companies come into the credit counseling business and abuses proliferate. The investigators found a pattern of abuse among some counseling agencies, especially new entrants to the field.

"Clearly, something is wrong with the credit counseling industry," said Sen. Norm Coleman, R-Minn., chairman of the investigative subcommittee. "Our investigation has revealed common patterns of improper conduct" by new entrants.

Internal Revenue Service audits of 50 credit counseling agencies "may very well" result in some of them being stripped of their nonprofit tax exemptions or even being referred for criminal investigation to the Justice Department, IRS Commissioner Mark Everson testified to the subcommittee.

Thomas Leary, a member of the Federal Trade Commission, said, "We remain concerned about deceptive practices in the credit counseling industry."

Former employees of Cambridge Credit and AmeriDebt Inc., who also testified, told of having to use fake names, "boiler room" sales operations and pressure on commission-paid counselors to get consumers to pay stiff upfront fees, with no counseling or debt education provided.

Officials of the two companies disputed the accounts of the former customers and employees. They said their companies act responsibly and provide a valuable service to consumers.

Chris Viale, chief operating officer of Cambridge Credit, called the accounts "unfair and distorted accusations."

"There is a popular notion that performance incentives encourage counselors to act in their own best interests rather than in the interests of consumers," Viale said. "This is not true."

As senators grilled the officials about industry practices, the president of Debtworks Inc., Andris Pukke, asserted his Fifth Amendment right in refusing to testify.

The for-profit Debtworks, Pukke and his brother are among several parties named in a lawsuit filed by the state of Missouri against AmeriDebt in September. Debtworks was formed in 1999 when AmeriDebt spun off its processing function for consumer debt plans and turned it into a for-profit business owned and controlled by Pukke, according to the Senate investigators.

With personal bankruptcies surging to record levels nationwide, there is a deep pool of customers for credit counseling companies.

Credit counselors historically have been financed by banks that issue credit cards, but those contributions have been declining, forcing counseling agencies to charge fees.

Credit counseling works by putting consumers who cannot afford to make all their payments into debt management programs that allow them to consolidate their debts from several credit cards, reduce their monthly payments and lower their interest rates. Consumers agree to destroy their credit cards, not take out new credit and make a monthly payment to the counseling agency, which distributes it to creditors.

But new entrants -- rather than relying on contributions to nonprofit counseling agencies from credit card companies or small fees paid by consumers -- use a different structure. They have nonprofit agencies that generate "massive revenues" paid by consumers for a for-profit affiliate for advertising, marketing and executives' salaries, according to the Senate report.

AmeriDebt, based in Germantown, Md., has been sued by the Federal Trade Commission, five states and consumers.

The FTC alleged that the company used deceptive marketing to bilk hundreds of thousands of customers and failed to educate people about how to get out of debt. The regulators also alleged that AmeriDebt made customers believe that an initial fee would be part of their debt-reduction payments to creditors -- but it instead went to AmeriDebt.

The company has disputed the regulators' allegations. It says it offers customers educational services and that the debt-reduction payments are "voluntary contributions."