Credit counselling services

The New York Times fronts a story today on not-for-profit credit-counselling services. Here's the nut graf, which comes very high up for a NYT piece:

The investigation could jeopardize the agencies' nonprofit status and upend the industry just as a proposed change in federal bankruptcy law stands to steer many thousands more people to debt counseling. As nonprofit concerns, the agencies are now exempt from dozens of state and federal regulations.

The investigation is long overdue. The industry is huge, and almost certainly achieves more harm than good. While it's necessary in theory, in practice it's a disaster, and needs a radical shake-up.

A lot of the blame for the present state of affairs can be laid at the feet of the people who first decided that these companies could be eligible for non-profit status. Of course, a lot of very rich and successful institutions have such a status, like Harvard University or the Brooklyn Botanical Gardens. But in the case of the credit counselling services, the people who benefit are basically only the owners and senior employees. Meanwhile, as nonprofits, the services are essentially unregulated.

It shouldn't be like that, of course. The level of consumer debt in the US is skyrocketing, helped along by record-low interest rates and a negative or extremely low savings ratio. At the same time, the economy is decelerating sharply from the 1990s boom. The entirely predictable result is that the number of credit cards which are 30 days past due is at an all-time high, while – more seriously – the number of home equity loans in default has doubled in just nine months.

The interesting thing is that credit-card defaults, while high, don't seem to be accelerating. I put that down to two factors: for one, credit-card companies, which went after people lower and lower down the credit spectrum during the boom years, are now becoming increasingly picky about their customers and how much money they'll lend them. Second, when credit-card debts start spiralling out of control, consumers are likely to take out some kind of home equity loan in order to pay them off and bring down interest payments. In effect, they're jumping out of the frying pan of credit-card debt and into the fire of potentially losing their house.

Such consumers are easy targets for the more unscrupulous end of the financial-services industry. The IRS's official warning gives a good idea of what many such firms get up to:

Beware of high fees or required “voluntary contributions” that, with high monthly service charges, may add to your debt and defeat your efforts to pay your bills. It is illegal to represent that negative information, such as bankruptcy, can be removed from your credit report. Promises to “help you get out of debt easily” are a red flag.

In the New York Times article, one of the biggest such services, AmeriDebt, justifies its practice of asking for a 3% "voluntary contribution" from its clients. Yes, that's 3% of their entire debt, upfront, on top of any recurring fees they might charge, which start at $20 a month. AmeriDebt says that it'll happily do the same job without the voluntary contribution, but if there's one thing that nearly all of these services have in common, it's a lack of transparency.

The IRS encourages prospective clients of such firms to ensure that any deals they sign include the company's name and address: it's often very difficult to find out exactly who you're dealing with. Companies change their name frequently, and payments must be put in the mail to a post-office box somewhere: no easily-traceable automatic-payment plans or direct debits allowed. If you're trying to sign up, the toll-free number will put you straight through to a sales agent, but if you have any questions about where your money is going once you're already on the plan, expect interminable hold times and less-than-forthcoming customer service representatives.

In an ideal world, these companies would have good relations with major creditors, such as credit-card issuers, cellphone companies, and the like. They could then negotiate deals with them much more easily than an individual could: "Hi, we've put this person on a strict payment plan and they've torn up all their credit cards. In return for a much higher probability of payment in full, can you reduce your interest rates to something slightly less eye-watering?"

In practice, while that happens in a handful of cases, it's very unlikely to happen with all of an individual's creditors, and in fact many are downright hostile to the prospect of dealing with a credit service rather than the individual. It's not uncommon for one or two creditors to fall through the cracks, with the debtor falsely believing that the credit counselling company is taking care of the debt – and that can devastate someone's credit report.

What's more, most of these services are very bad at providing any kind of statement. The idea is that you send them one monthly payment, which they then divvy up and send out to all your different creditors. And since the individual credit card companies still have you as a client, you can usually see what's going on with those debts. But a universal statement, with all the debts and payments clearly listed along with any extra fees charged on top, is extremely rare.

Worst of all, many of these non-profit organisations are run by or closely associated with the owners of predatory lending companies. Rather than pay off umpteen different bills and credit cards, they say, why not simply consolidate all your debt into one simple loan? Inevitably, there will be an upfront fee, and the rate of interest probably won't be very clear, and any property assets will be at risk. But since the lender was referred by a non-profit credit service, a lot of people's defenses are down, and they just take what they're offered without shopping around.

The fact is, that most of these services provide very little in the way of value beyond allowing their clients to make only one payment a month rather than many. Needless to say, the total amount of money spent per month doesn't usually go down, and sometimes goes up, thanks to the fees charged. What the clients really need is to talk to a financial adviser who can lay out their options, from simple household budgeting to declaring bankruptcy, in an impartial manner. Local community-service centers are good at that sort of thing; faceless billion-dollar nonprofits are not. Unless these companies clean up their act and agree to be regulated by someone like the SEC, they shouldn't just lose their nonprofit status: they should lose their right to exist altogether.

Posted by Felix at 16:55 EST

Comments

Rock on, brother, rock on.

Posted by: Michelle at 22:52 EST, October 14, 2003

I keep getting annoying calls from a so called "Jeffery Cauldwell" of some sort of consumer credit debt company or other. They are the recorded variety, so I called to inform them I was on the Do Not Call registry and they said "We don' t have to pay attention to that because we are non-profit. " I then told them to take a hike in not so nice terms.

Posted by: sy Klopps at 10:45 EST, October 15, 2003

this deserves a much wider audience, but I do not know how you get it. Would some real non-profits (inclulding churches?) be willing to help? ideally you would get this published first in some journal, which would then be quoted.

Roger S

Posted by: Roger Salmon at 3:06 EST, October 26, 2003