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
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
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.