[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





               NON-PROFIT CREDIT COUNSELING ORGANIZATIONS

=======================================================================

                                HEARING

                               before the

                       SUBCOMMITTEE ON OVERSIGHT

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 20, 2003

                               __________

                           Serial No. 108-27

                               __________

         Printed for the use of the Committee on Ways and Means


91-629              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
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Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512ï¿½091800  
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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, JR., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana               JIM MCDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania           LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona               EARL POMEROY, North Dakota
JERRY WELLER, Illinois               MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri           STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
                    Allison H. Giles, Chief of Staff
                  Janice Mays, Minority Chief Counsel

                                 ------                                

                       SUBCOMMITTEE ON OVERSIGHT

                    AMO HOUGHTON, New York, Chairman

ROB PORTMAN, Ohio                    EARL POMEROY, North Dakota
JERRY WELLER, Illinois               GERALD D. KLECZKA, Wisconsin
SCOTT MCINNIS, Colorado              MICHAEL R. MCNULTY, New York
MARK FOLEY, Florida                  JOHN S. TANNER, Tennessee
SAM JOHNSON, Texas                   MAX SANDLIN, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.
  
                            C O N T E N T S

                              ----------                              
                                                                   Page
Advisory of November 13, 2003, announcing the hearing............     2

                               WITNESSES

Internal Revenue Service, Hon. Mark Everson, Commissioner........     9
Federal Trade Commission, Howard Beales, Director, Bureau of 
  Consumer Protection............................................    15

                                 ______

Association of Independent Consumer Credit Counseling Agencies, 
  David C. Jones.................................................    47
Cambridge Credit Counseling Corp., Montieth M. Illingworth; 
  accompanied by Chris Viale.....................................    58
Consumer Federation of America, and National Consumer Law Center, 
  Deanne Loonin..................................................    32
National Foundation for Credit Counseling, Inc., and Consumer 
  Credit Counseling Service of Middle Georgia, W. Patrick 
  Boisclair......................................................    42
Take Charge America, Inc., Michael Hall..........................    55

                       SUBMISSIONS FOR THE RECORD

Coalition for Responsible Credit Practices, Michael Barnhart, 
  statement and attachment.......................................    75
Consumer Credit Counseling Service, Inc., Gastonia, NC, Dewey T. 
  Matherly, statement............................................    82
GreenPath Debt Solutions, Farmington Hills, MI, Jane E. McNamara, 
  statement......................................................    82
Village Family Service Center, Consumer Credit Counseling Service 
  of the Village, Fargo, ND, Sheri Ekdom, statement..............     6

 
               NON-PROFIT CREDIT COUNSELING ORGANIZATIONS

                              ----------                              


                      THURSDAY, NOVEMBER 20, 2003

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                 Subcommittee on Oversight,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:38 p.m., in 
room 1100, Longworth House Office Building, Hon. Amo Houghton 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-7601
FOR IMMEDIATE RELEASE

May 06, 2003

OV-4

                     Houghton Announces Hearing on

                 the Use of Private Collection Agencies

                     To Improve IRS Debt Collection

    Congressman Amo Houghton (R-NY), Chairman, Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee will hold a hearing on private collection agencies. The 
hearing will take place on Tuesday, May 13, 2003, in the main Committee 
hearing room, 1100 Longworth House Office Building, beginning at 2:00 
p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include the Honorable Mark Everson, Commissioner of the 
Internal Revenue Service (IRS), and Nina Olson, the National Taxpayer 
Advocate.
      

BACKGROUND:

      
    Each year, the IRS collects over $2 trillion in tax revenue from 
all sources. A small percentage of this amount is assessed, but not 
collected. The IRS has 10 years to collect newly assessed taxes. Over 
the past decade, the total inventory of unpaid tax assessments has more 
than doubled. It has grown from $130 billion in 1992 to over $280 
billion in March 2003.
      
    Much of this amount represents tax debts that cannot be collected, 
due to death or bankruptcy, but the IRS estimates that about $78 
billion is collectible. The amount judged to be collectible has grown 
by 12 percent during the past 2 years, and the inactive portion that 
the IRS is not currently pursuing has grown by 38 percent. As of March, 
the IRS had identified over $13 billion in tax debts that can only be 
collected if the IRS has more resources.
      
    The Bush Administration is highly concerned about the growth in the 
inventory of uncollected taxes, and the IRS issued a Request for 
Information that appeared in the Federal Register in January 2002 to 
seek input from private collection agencies (PCAs) on how PCAs could 
assist the IRS with its collection efforts, while preserving important 
taxpayer protections in existing law. Using this information, the 
Administration developed a proposal that appeared in the fiscal year 
2004 budget request for the IRS. Chairman Houghton introduced 
legislation (H.R. 1169) that would implement the Administration's 
proposal.
      
    In announcing the hearing, Chairman Houghton stated, ``We all know 
that it is a duty of citizenship to abide by the rules and pay our 
taxes. Yet, in the event that the rules are not followed, the IRS is 
unfortunately not able to adequately enforce this obligation due to a 
lack of funds. Enforcement is inconsistent at best. The Administration 
is looking for innovative solutions to this problem, and I applaud them 
for it.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the Administration's proposal to use 
private collection agencies to support the IRS's collection efforts and 
Chairman Houghton's bill to implement the proposal.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Due to the change in House mail policy, any person or 
organization wishing to submit a written statement for the printed 
record of the hearing should send it electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, by the close of business, Tuesday, May 27, 2003. Those 
filing written statements who wish to have their statements distributed 
to the press and interested public at the hearing should deliver their 
200 copies to the Subcommittee on Oversight in room 1136 Longworth 
House Office Building, in an open and searchable package 48 hours 
before the hearing. The U.S. Capitol Police will refuse sealed-packaged 
deliveries to all House Office Buildings.
      

FORMATTING REQUIREMENTS:

    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.

    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, in WordPerfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.

    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.

    3. Any statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman HOUGHTON. Well, good afternoon, ladies and 
gentlemen. I am terribly sorry for the delay. So, on behalf of 
Mr. Pomeroy, Mr. Sandlin, and myself, we have been doing the 
work of the Lord. We have been voting, but now we are yours. We 
are delighted to be here. Thank you, Mr. Everson and Mr. 
Beales, for being here. The hearing today, as most of you know, 
will explore the activities of consumer credit counseling 
agencies. While nonprofit consumer credit counseling 
organizations provide an important and educational counseling 
service to consumers who are experiencing financial 
difficulties, I think I can speak for my associates here--and 
Ms. Carson has just arrived. Julia, we are delighted to have 
you here.
    Ms. CARSON. Thank you, Mr. Chairman.
    Chairman HOUGHTON. Thank you very much.
    Ms. CARSON. I am glad you let me in here.
    Chairman HOUGHTON. I think we are all concerned with 
reports that they may be taking advantage of their tax-exempt 
status. In recent months, Federal, State, and consumer watchdog 
organizations have raised serious questions about the 
activities of some of these consumer credit counseling 
agencies. Today, we are going to hear from two Federal agencies 
that oversee these groups, the Internal Revenue Service (IRS), 
because most agencies have qualified as nonprofit 
organizations, and also the Federal Trade Commission (FTC), 
which regulates the consumer fairness side of their business.
    In addition, we are going to hear from a major consumer 
rights organization about the problems they see with the 
current activities of credit counseling agencies. Finally, we 
will hear testimony from two trade associations, and also two 
of the consumer credit counseling companies themselves. I would 
note for the record that the Subcommittee invited a number of 
other individual companies to testify, but except for these 
two, the others declined to appear.
    Our mission here, today, is not to be a judge and a jury, 
but to explore the evidence in a way that will help us 
determine whether changes need to be made to existing law and 
regulatory practices. Now, I am pleased to yield to my good 
friend, our Ranking Member, Mr. Pomeroy.
    [The opening statement of Chairman Houghton follows:]

   Opening Statement of the Honorable Amo Houghton, Chairman, and a 
         Representative in Congress from the State of New York

    Good afternoon. Our hearing today will explore the activities of 
consumer credit counseling agencies. While non-profit consumer credit 
counseling organizations provide an important educational and 
counseling service to consumers who are experiencing financial 
difficulties, I am concerned about reports that some groups may be 
taking advantage of their tax-exempt status.
    In recent months, federal, state and consumer watchdog 
organizations have raised serious questions about the activities of 
some consumer credit counseling agencies.
    Today we will hear from the two federal agencies that oversee these 
groups, the Internal Revenue Service--because most agencies have 
qualified as ``non-profit'' organizations, and the Federal Trade 
Commission, which regulates the consumer fairness side of their 
business.
    In addition, we will hear from a major consumer rights organization 
about the problems they see with the current activities of credit 
counseling agencies. Finally we will have testimony from two trade 
associations and one of the consumer credit counseling companies. I 
would note for the record that the Subcommittee invited a number of 
other individual companies to testify, but except for two, each of them 
declined to appear.
    Our mission here today is not to be a judge and jury, but to 
explore the evidence and weigh whether changes need to be made in 
existing law and regulatory practices.
    I am now pleased to yield to our ranking Democrat, Mr. Pomeroy.

                                 

    Mr. POMEROY. I thank the Chairman. Thank you for holding 
this important hearing. The issue before us is an important 
one. Consumers, data will show us, are becoming increasingly 
burdened with debt. Many will need help in terms of how to 
handle their budgets in light of the debt. If done well, I 
believe bankruptcy can be avoided--people can get back on their 
feet, and we can help people in dealing with their debt burden. 
Clearly, the credit counseling service activity can be very, 
very important to any number of families in this country.
    On the other hand, we are seeing more of an entrepreneurial 
character in terms of the marketing of these credit counseling 
services, and they certainly raise questions about what 
activity is actually being delivered. I know that the IRS and 
the FTC, our first panel, have urged consumers to seek caution 
in dealing with credit counseling organizations. They report 
that some organizations are using questionable practices--maybe 
even using tax-exempt status to circumvent State and Federal 
consumer protection laws. It is terribly disconcerting to think 
that there would be an enterprise masquerading in tax-exempt 
status, purporting to help consumers, but actually preying upon 
some of the most vulnerable families in our country in their 
time of need--facing financial crisis.
    You are going to have some outfit parading about, telling 
people they are helping them, and actually they are just 
another rip-off. We certainly want to smoke out in this hearing 
what is behind this kind of activity, who are the good ones, 
who are the bad ones, and what we can do about it. I am very 
pleased that you have held this hearing.
    I would like to offer testimony, Mr. Chairman, on behalf of 
a reputable credit counseling agency, the Village Family 
Service Center of Fargo, North Dakota. The Village Family 
Service Center is an organization that has provided credit 
counseling for more than 2 decades. I know the people; I know 
the operation; I know the reputation. I think they represent 
perhaps some of the best practices that are out there in this 
area. Their testimony, I think, is important to us. I would ask 
unanimous consent that their testimony be included. I thank the 
Chairman.
    [The opening statement of Mr. Pomeroy and insertion 
follow:]

 Opening Statement of the Honorable Earl Pomeroy, a Representative in 
                Congress from the State of North Dakota

    American consumers are becoming more and more in debt. This year, 
Federal Reserve data indicates that credit card debt has reached nearly 
$700 billion. Our current economic situation, high unemployment rates, 
uninsured health costs, and lack of financial education have caused a 
record number of Americans to seek credit counseling services.
    Credit counseling services and the debt consolidation industry have 
grown both in size and in marketing methods to meet this new demand. 
Unfortunately, some bad actors have surfaced and taken advantage of a 
largely unregulated system. This potentially gives a bad name to the 
hundreds of long-standing local organizations that are truly helping 
those in financial straits.
    The Internal Revenue Service has responsibility for overseeing the 
tax-exempt status of credit counseling organizations to insure that 
educational and charitable services are provided to consumers. The 
Federal Trade Commission is responsible for enforcing our consumer 
protection laws, including the new telemarketing ``Do Not Call List.''
    Together, the IRS and FTC have urged consumers to exercise caution 
when seeking help from credit counseling organizations. The agencies 
have reported that some organizations are ``using questionable 
practices'' and ``using tax-exempt status to circumvent state and 
federal consumer protection laws.'' This is just plain unacceptable. 
The Subcommittee's hearing will help us distinguish between 
``legitimate'' tax-exempt charitable and educational organizations and 
``fraudulent'' entities that no longer deserve our continued federal 
support.
    The Village Family Service Center of Fargo, North Dakota is an 
organization that has provided non-profit credit counseling services to 
my constituents for over two decades. I suggest that they provide a 
model for credit counseling ``best practices.'' I ask that their 
written statement be included in the Subcommittee's official hearing 
record.
    Finally, I want to thank Chairman Houghton for holding this 
important, bipartisan hearing. It is timely that we conduct oversight 
review of this area of the tax-exempt laws and support the IRS and FTC 
as they proceed.

                                 ______
                                 
 Statement of Sheri Ekdom, The Village Family Service Center, Consumer 
     Credit Counseling Service of The Village, Fargo, North Dakota

    The Village Family Service Center is a private, non-profit, multi-
program, human service agency founded in 1891 as The North Dakota 
Children's Home. The Village is accredited by the Council on 
Accreditation and serves people in need through 20 offices across North 
Dakota and Minnesota. The mission of The Village Family Service Center 
is to improve the quality of life through services designed to 
strengthen individuals, families, and organizations.
    Major programs offered include Pregnancy Counseling and Adoption 
Services, Big Brother Big Sister Mentoring, Mental Health Counseling, 
Intensive In-Home Family Based Services, Village Business Institute, 
Youth Services and The Village Financial Resource Center. The major 
programs are then tailored to the specific needs of the local community 
and service area, and smaller unique programs developed.
    The Village Family Service Center is governed by a diverse, 
community-based, volunteer Board of Directors. Board members contribute 
both their time and expertise to The Village and one hundred percent of 
the Board of Directors makes charitable financial contributions to 
support Village services.
    The Financial Resource Center includes Consumer Credit Counseling 
Service (CCCS) programming. The Village has been providing CCCS 
services and has been a member of the National Foundation for Credit 
Counseling since the early 70's when the community need for credit 
counseling and services was first identified. Despite the current 
changes in the industry, CCCS of The Village has continued to provide 
confidential, comprehensive, quality financial advice, education and 
counseling to the communities it serves.
    CCCS of The Village encourages people seeking financial guidance to 
know the difference between responsible and irresponsible agencies. Our 
agency upholds the best practices in the industry. One hundred percent 
of clients using our services receive a comprehensive counseling 
session and a written action plan tailored specifically to their 
individual situation.
    Our goal is to help clients be financially responsible adults and 
make positive choices to achieve their financial goals. Counselors take 
clients through an in-depth financial analysis examining their income, 
expenses, assets and debt--and then help develop a financial action 
plan specifically suited to their situation.
    Debt management programs are only set up only when appropriate for 
the client. Currently, about 25% of the clients we counsel join the 
DMP. It is our opinion that agencies whose main focus is debt 
management rather than counseling and education are not operating in 
the best interest of a client.
    CCCS of The Village challenges people to change their lifestyles so 
that their values and belief systems reflect in their money choices and 
decisions. Client goals include improved financial condition, reduced 
stress, decreased debt, improved credit reports and increased money 
management skills. Through budget counseling and education, CCCS seeks 
to assist families in restoring self-reliance, confidence, hope and 
family well-being while strengthening the economic fabric of the 
communities we serve.
    About 75% of our financial counseling sessions are in-office face-
to-face meetings. Counseling is also offered over the telephone or 
online. These methods have been especially beneficial for those living 
in rural areas or with disabilities.
    CCCS of The Village is diligent in its community outreach and 
education. We provide financial education through workshops, 
presentations in the workplace, and one-on-one sessions. We offer 
several unique education programs designed to help clients make changes 
in their spending habits and meet their financial goals. CCCS is known 
in the communities it serves as a trustworthy, non-biased source of 
financial information.
    Clients hear about our services in a variety of ways, however, our 
greatest referral source is word of mouth through friends and family 
that have utilized our services. We do not run deceptive ads--promising 
quick fixes in 20 minutes or less--nor do we rely on a telemarketer to 
sell someone a program they may not need or fully understand. Our focus 
is on doing what is best for a client.

                                 

    Chairman HOUGHTON. Thank you very much. Now we have been 
joined by Mr. Foley, distinguished Representative from Florida. 
Would anybody like to make an opening statement? Mr. Foley, 
would you like to make a statement?
    Mr. FOLEY. No, thank you, sir.
    Chairman HOUGHTON. All right. How about you, Mr. Sandlin?
    Mr. SANDLIN. Mr. Chairman, I rarely get to sit up here this 
high, so the altitude is affecting me. I can't find the button.
    Chairman HOUGHTON. We have some oxygen over here that might 
help you.
    Mr. SANDLIN. I have an opening statement that I would like 
to submit for the record. Let me just say very briefly that I 
really appreciate you having this hearing today. Certainly 
there are legitimate credit counseling groups and agencies in 
the United States that offer a very valuable service to my 
constituents, and the folks across the country, and I 
appreciate that.
    However, recently, as has been indicated by my friend Mr. 
Pomeroy, there has been just a plethora of advertising on 
television from groups that are little more than a sham, but 
that indicate that they are there to help the consumers. In 
fact, they do absolutely nothing for the consumers. They 
collect funds and don't distribute them properly. They 
adversely affect the credit ratings of my constituents. They 
bother them with telephone calls, and I have grave concerns 
about privacy issues and where some of these groups get the 
information that they have to call people who are in financial 
difficulty. I have been very disappointed in those groups, and 
certainly we need to do something to regulate that, and make 
sure that people who are in counseling are in counseling.
    It is one thing to counsel people about their credit, and 
talk to them about their budgets, incomes, and outgo. It is 
another thing to prey upon people who are in difficult 
situations, just to make sure the credit card companies get 
paid first and only--and I think that is the point of those 
groups that are on television. I am very disappointed with 
that, and I appreciate you having the hearing today.
    [The opening statement of Mr. Sandlin follows:]

  Opening Statement of the Honorable Max Sandlin, a Representative in 
                    Congress from the State of Texas

    Mr. Chairman, I would like to thank you for holding today's hearing 
to examine the operations of non-profit credit counseling 
organizations.
    According to the National Consumer Law Center, nearly nine million 
people sought the help of credit counseling organizations last year, 
and at least one million consumers have consolidated their debts with 
these groups. As consumer debt in America continues to grow and exert 
increasing pressure on struggling families, it is now more important 
than ever to scrutinize the operations of non-profit credit counseling 
organizations.
    The Federal Reserve estimates that revolving consumer debt exceeded 
$700 billion at the end of last year, and notes that household debt has 
risen to approximately 14% of disposable income. Household debt as a 
percentage of disposable income has never been higher in our country, 
which helps explain why, according to the American Bankruptcy 
Institute, personal bankruptcies in 2003 are projected to surpass last 
year's record of 1.5 million.
    While many credit counseling organizations have existed for decades 
and provide valuable services to consumers who are having a tough time 
managing their debts, a few bad apples may be abusing the tax code in 
an effort to avoid consumer protection laws. Many of the organizations 
that are now either under investigation or the subject of multiple 
lawsuits are new participants in the credit counseling industry. In 
fact, the estimated number of these groups has increased from 
approximately 200 in 1990 to over 1,000 last year. It appears that 
several of these groups have exceeded the original mission and intent 
of credit counseling organizations, and the lack of federal and state 
regulation of these groups makes congressional and regulatory oversight 
vitally important.
    As we know, non-profit credit counseling organizations qualify for 
tax-exempt status under section 501(c)(3) of the Internal Revenue Code 
because they are ostensibly ``educational organizations'' that 
``educate consumers about better money management practices'' and 
``promote debt reduction strategies.'' If a non-profit credit 
counseling organization is abusing its non-profit status, the I.R.S. 
needs to vigorously investigate that organization and examine the 
group's tax-exempt designation. I look forward to Commissioner 
Everson's testimony on this topic.
    I applaud the joint advisory issued last month by the I.R.S., the 
Federal Trade Commission, and several state regulators that warns 
people to be wary about the costs of entering into debt management 
plans. Consumers who are struggling financially need to be careful not 
to lose even more money to someone offering a quick fix for their 
credit problems. I look forward to Mr. Beales's testimony this 
afternoon regarding the ways in which consumers can protect themselves 
from those credit counseling groups that don't have consumers' best 
interests at heart.
    Paying bills is never easy and is never fun for any of us, but job 
loss, divorce, or unexpected medical bills can be absolutely 
devastating for some and force hard-working people to seek debt or 
credit counseling. Taxpayers struggling with financial problems don't 
deserve to be taken advantage of by debt counseling groups exploiting 
gaps in the law, and I again would like to thank Chairman Houghton for 
holding today's important hearing.

                                 

    Chairman HOUGHTON. Thank you very much. Well, as I 
indicated earlier, we are delighted to have Ms. Julia Carson. 
She is a distinguished Representative from Indiana. I welcome 
you, Julia, to this hearing. You are here representing your own 
personal dedication to consumer protection awareness. Maybe you 
would like to make a brief statement?
    Ms. CARSON. I would, thank you very much, Mr. Chairman. I 
will be very brief, because you have been gracious enough to 
have the hearing, and to allow me to speak. I thank the Ranking 
Member, Mr. Pomeroy, for his understanding of this--a major 
problem in my estimation. I know that the economy essentially 
caused a lot of financial hardships on Americans, and so, there 
were people who took advantage of a situation and created--and 
I noticed that the IRS and the FTC went after--we will call it 
the unscrupulous kind of operation. It was the kind of issue, 
and the kind of entity that brought my concern to the House 
floor. People are creating not-for-profit organizations, 
calling them ``debt counseling,'' and then having another shell 
corporation, for-profit, sending the money over to that--while 
people's bills are not getting paid.
    You know the situation, Mr. Chairman, better than I do--I 
won't make a long litany of it. Yet I would encourage the 
Committee, its leadership especially, to join me in the bill 
that I introduced. I don't think this could be any more timely. 
I can never remember the number of the bill. I do know that it 
affects a great deal of people. The bill is called the Debt 
Counseling, Debt Consolidation, and Debt Settlement Practices 
Improvement Act of 2003 (H.R. 3331). It provides a regulatory 
framework for these culprits that do bad. We have got a lot of 
good ones out there, Mr. Chairman. We don't want to do a broad 
stroke on all of them. The bill just gets after the bad ones, 
and I want to thank those who are already in the forefront of 
taking care of this. I yield back, Mr. Chairman. Thank you so 
much for allowing me to come.
    [The opening statement of Ms. Carson follows:]

 Opening Statement of the Honorable Julia Carson, a Representative in 
                   Congress from the State of Indiana

    I would like to thank Chairman Houghton and Ranking Member Pomeroy 
for their graciousness in permitting me to participate in today's 
hearing, which is on an issue very important to my constituents and 
myself.
    As my colleagues know, this economy has caused financial hardship 
for many Americans, especially for people trying to manage piles of 
debt. For a handful of scoundrels to take advantage of consumers 
seeking financial counseling in their greatest time of need is 
unconscionable. It is not just consumers who are hurt by the bad 
apples; legitimate consumer credit counselors, who are trying to save 
families and save lives, also bear the brunt in terms of business lost 
and ruined reputation. This is why I introduced H.R. 3331, the Debt 
Counseling, Debt Settlement, and Debt Consolidation Improvements Act, a 
bill to provide a regulatory framework to the debt management industry. 
As evidenced by the recent actions of the I.R.S. and the F.T.C., the 
bill couldn't be timelier.
    As household and credit card debt reach all-time highs, more and 
more Americans are turning to credit counselors for assistance. Many 
states are reacting to the trend by formulating a diverse array of 
requirements. New York, Maryland, and California, for instance, have 
instituted stringent laws regarding debt management organizations. I am 
pleased the Chairman and this Committee have recognized the urgency of 
this situation.
    Mr. Chairman, hiding behind non-profit status to defraud consumers 
is outrageous. This is a problem common to every District across the 
nation. It is my hope that we can work together to protect consumers 
and protect the good work of legitimate credit counseling 
organizations. I urge my colleagues to consider my bill, H.R. 3331, as 
a starting point.
    Thank you, Mr. Chairman.

                                 

    Chairman HOUGHTON. Well, thank you very much. Now I would 
like to introduce Mr. Mark Everson, Commissioner of the IRS, 
and J. Howard Beales III, Director of the Bureau of Consumer 
Protection, FTC. Gentlemen, we appreciate your testimony, and 
Mark, if you would begin.

STATEMENT OF THE HONORABLE MARK EVERSON, COMMISSIONER, INTERNAL 
                        REVENUE SERVICE

    Mr. EVERSON. Thank you, sir. Mr. Chairman, Mr. Pomeroy, 
Members of the Subcommittee on Oversight, and other----
    Chairman HOUGHTON. Do you want to turn your mike on?
    Mr. EVERSON. Yes, thank you. Thank you, Mr. Chairman, Mr. 
Pomeroy, Members of the Subcommittee, and other interested 
Members of Congress. Thank you for the opportunity to provide 
this Subcommittee with information concerning the role of the 
IRS in regulating the credit counseling industry. I commend 
this Subcommittee for your interest in this area. We, too, are 
concerned, and take a dim view of the use of the Tax Code by 
credit counseling groups to game the system. The potent 
combination of exemption from income tax, and exemption from 
consumer protection laws, has, in this instance, encouraged 
some individuals who are motivated by profit rather than 
charity.
    Let me stress that many credit counseling organizations 
continue to provide valuable services and meet the requirements 
for tax exemption. Nevertheless, the operations of a growing 
number of these organizations no longer reflect what has long 
been required for tax exemption.
    Some unscrupulous organizations now prey on those in 
financial distress. I want to assure the Subcommittee that the 
IRS is aggressively pursuing this matter. Currently, we have 
over 30 organizations at various stages of the examination 
process. Included in this group are 9 of the top 15 tax-exempt 
credit counseling organizations, as measured by gross receipts. 
Moreover, we have in the audit stream, organizations with over 
40 percent of the total gross receipts of the tax-exempt 
portion of this sector. Where warranted, we will revoke the 
tax-exempt status of these organizations.
    At its most basic, section 501(c)(3) provides for the 
exemption from Federal income taxation of entities organized 
and operated exclusively for charitable, educational, and 
certain other purposes. While tax exemption confers significant 
benefits to an organization, it also comes with 
responsibilities. This means that an exempt organization must 
engage primarily in activities that accomplish these charitable 
purposes, and may not distribute net earnings to insiders, or 
significantly operate, other than for the benefit of the 
public.
    The organization cannot be run for the benefit of a small 
group of individuals or for other commercial interests. The IRS 
and the courts have determined that certain credit counseling 
organizations can qualify for 501(c)(3) status, provided the 
organization limits its services to low income customers at low 
costs, or provides education to the public on how to manage 
personal finances as its primary activity. There are over 850 
section 501(c)(3) credit counseling organizations. Beginning in 
2000, we began to see a significant increase in credit 
counseling applications. In the determination letter area, our 
specialists traditionally work with applicants to perfect 
applications, in order to obtain tax-exempt status. Most 
applications are approved.
    However, in the credit counseling area, as we have had to 
put in place more rigorous procedures, our approval rate for 
tax exemption status has declined since 2000. As you are aware, 
there has been an increasing number of allegations of credit 
counseling abuses, including questionable business 
relationships, high fees, and little or no education or 
counseling. The FTC and others have confirmed what we have seen 
in the applications. Customers now served by the Internet, 
which appears to be driving much of the growth in the industry, 
are provided debt management services, not credit counseling. 
Individual budget assistance and public education programs that 
form the original basis for exemption, have been replaced by 
promises to restore favorable credit ratings, or to provide 
commercial debt consolidation services. So, how have we 
reacted? As indicated in my opening, we are moving aggressively 
to scrutinize applicants and existing organizations. Our 
strategy begins by identifying new credit counseling 
organizations as they seek exemption. At present, we are 
considering over 40 applications. These applications are 
identified and assigned to specially trained staff who use 
their broad investigatory experience to delve deeply into the 
complex structures and relationships of these organizations.
    I have mentioned already that we have also increased the 
number of examinations. More than 30 organizations and related 
entities, including some of the largest firms, are at various 
stages of the examination process. Again, 9 of the top 15 
organizations by gross receipts are included in that group, as 
are organizations with more than 40 percent of the total gross 
receipts of the sector.
    Mr. Chairman, this is an unprecedented effort by the IRS, 
and one which is fully justified by the risk that continued 
abuses in this area will broadly undermine our Nation's faith 
in charitable organizations. The current workload is only the 
beginning of our compliance effort in this area. By year's end, 
we expect to follow up on all examination referrals, and 
implement an approach to identify and classify other high-risk 
organizations for examinations to commence in 2004. We expect 
to see significant results in the coming months, and in accord 
with taxpayer privacy rules, we will publicize the outcome of 
our efforts. Again, we will revoke exemption where warranted.
    Furthermore, because of the magnitude of the problems, we 
are supporting and partnering with those agencies--like the 
FTC--whose primary purposes include consumer protection. Let me 
conclude by saying that I have designated our efforts in the 
credit counseling area an IRS-wide priority. We will stay on 
this until we see clear evidence of appropriate reforms within 
the industry. Thank you.
    [The prepared statement of Mr. Everson follows:]

Statement of the Honorable Mark Everson, Commissioner, Internal Revenue 
                                Service

    Thank you, Mr. Chairman, for the opportunity to provide this 
Subcommittee with information concerning the role of the Internal 
Revenue Service (the Service) in regulating the credit counseling 
industry. I commend the Subcommittee for your interest in this area. 
Many credit counseling organizations continue to provide valuable 
services that meet the definitions and requirements of exemption from 
taxation under section 501(c)(3) of the Internal Revenue Code. However, 
the operations of a growing number of credit counseling organizations 
no longer reflect what has long been required for tax exemption. We are 
concerned that certain of these organizations are now preying on those 
in financial distress.
    I will review our role and the general law relating to charities, 
the history of tax exemption for credit counseling organizations, 
recent trends in the area, and our actions to combat what we see as 
inappropriate activity by some in the sector. As you will see, we are 
aggressively pursuing this issue with a broad approach that begins with 
a more in depth determination letter process and includes an enhanced 
examination program, as well as partnering efforts with the state 
attorneys general and the Federal Trade Commission.

Background on the Requirements for Tax Exemption under section 
        501(c)(3)
    Role of the Service with respect to tax-exempt organizations: The 
Service regulates all tax-exempt organizations, of which a subset is 
described in section 501(c)(3). An organization seeking to be tax 
exempt under section 501(c)(3) generally is required to apply to the 
Service for a determination of its status. The organization initiates 
the process by filing a Form 1023, ``Application for Recognition of 
Exemption Under Section 501(c)(3) of the Internal Revenue Code.'' The 
application often is filed in advance of actual operations and can be 
based on representations about what the organization will do in the 
future. We review the application to determine whether the 
organization's proposed activities satisfy the statutory requirements. 
After we recognize an organization as tax exempt, generally the 
organization is required to file an annual information return, the Form 
990. The Form 990 is a self-reporting mechanism, whereby the 
organization provides information concerning its current activities, as 
well as its financial picture. Forms 990 are public documents and we 
image the forms from section 501(3) organizations making them available 
to various web sites for public scrutiny. The Service also uses the 
Form 990 as part of our ongoing effort to ensure compliance with the 
requirements for tax exemption. Our compliance efforts generally entail 
additional educational contacts, the review of filed returns and, if 
warranted, an examination based upon completed operations.
    General requirements for tax exemption: In our review of the tax-
exempt status of an organization, the Service looks to both statutory 
and regulatory requirements. At its most basic, section 501(c)(3) 
provides for the exemption from federal income taxation of entities 
organized and operated exclusively for charitable, educational, 
scientific, religious, and certain other purposes. This means that an 
exempt organization must engage primarily in activities that accomplish 
charitable purposes. Relieving the poor and distressed generally is 
considered a charitable purpose. Providing instruction and training for 
the purpose of improving or developing an individual's capabilities, or 
educating the public on subjects useful to the individual and 
beneficial to the community also are considered charitable activities.
    An exempt organization also must meet other requirements in order 
to be described in section 501(c)(3). Chief among these for today's 
discussion are that the organization must not distribute net earnings 
to insiders (the prohibition on inurement) and it must operate for the 
benefit of the public rather than for the benefit of private interests 
(the prohibition on private benefit). With respect to the private 
benefit rule, an organization must establish that it is not organized 
or operated for the benefit of private interests such as designated 
individuals, the creator or his family, shareholders of the 
organization or persons controlled directly or indirectly by such 
private interests.

History of Tax Exemption for Credit Counseling Organizations
    The Service and judiciary have determined that certain credit 
counseling organizations meet the requirements of section 501(c)(3).\1\ 
Credit counseling organizations may be exempt because of their 
charitable or educational work. The Service first provided guidance on 
this issue in 1969, when it addressed standards for credit counseling 
organizations. In Rev. Rule 69-41, 1-969-2 C.B. 115, we held that the 
organization cited in the ruling was charitable where it included the 
following favorable factors: its primary activity was providing 
educational information to the general public on budgeting, buying 
practices, and the sound use of consumer credit through the use of 
films, speakers, and publications; its counseling services were limited 
to low income customers and individual counseling was provided; the 
organization's board of directors was representative of the community; 
and, the organization's work in establishing budget plans and paying 
customer's bills was a minor portion of its overall activities.
---------------------------------------------------------------------------
    \1\ This hearing and the allegations of abuse in this area are 
focused on section 501(c)(3) charitable organizations. We note, 
however, that credit counseling organizations also can qualify for tax 
exemption under section 501(c)(4), as social welfare organizations. See 
Rev. Rul. 65-299, 1965-2 C.B. 165. Because contributions under that 
section are not tax deductible and such organizations are not exempted 
from consumer protection laws, few credit counseling organizations seek 
501(c)(4) status. As a result, we have not seen any significant 
increase in the number or activity of these organizations, and we have 
not addressed them in this testimony.
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    A credit counseling organization may be tax exempt even if it does 
not limit its clientele to low income individuals where the services 
provided by the organization are educational in nature. In the 1970's, 
the courts reversed the Service in its revocation of the exempt status 
of two organizations that provided credit counseling, but did not limit 
their services to low-income individuals. See Consumer Counseling 
Service of Alabama v. United States, 78-2 U.S.T.C. 9660 (D.D.C. 1978) 
and Credit Counseling Centers of Oklahoma, Inc. v. United States, 79-2 
U.S.T.C. 9468 (D.D.C. 1979). The courts in these cases held that 
providing information regarding the sound use of consumer credit was 
educational because it instructs the public on subjects useful to the 
individual and beneficial to the community. The courts considered the 
debt management services (the payment plan and creditor intercession) 
an integral part of the organizations' counseling and education 
function. Moreover, the debt management services were so minor that 
even if they were not considered educational in themselves, they were 
not significant enough to affect the organizations' exempt status. The 
boards of these organizations were controlled by the public. Finally, 
the fee structure was not a barrier to exemption because the fees were 
nominal and were waived where payment would create a financial 
hardship.
    To recap, to be exempt under section 501(c)(3), existing rulings 
and cases indicate that an organization that provides credit counseling 
must limit its services to low income customers or must provide 
education to the public on how to manage personal finances as its 
primary activity.

Recent Trends and Profile of the Credit Counseling Area
    Our information systems reflect over 850 credit counseling 
organizations that have been recognized as tax exempt under section 
501(c)(3). In recent years, the Service has seen an increase in 
applications for tax-exempt status from organizations intending to 
provide credit counseling services. Among the more recent applicants, 
we are finding credit counseling organizations that vary from the model 
approved in the earlier rulings and court cases. We are seeing 
organizations whose principal activity is selling and administering 
debt management plans. Often the board of directors is not 
representative of the community and may be related by family or 
business ties to the for-profit entities that service and market the 
debt management plans. The organizations are supported by fees from 
customers and from credit card companies, and the fees are much higher 
than those in the rulings or court cases. Finally, it does not appear 
that significant counseling or education is being provided. As we will 
discuss, we have modified our application process to deal with this 
change in circumstances.
    In 2002, as we saw an increasing number of allegations of credit 
counseling abuses, we contacted the Federal Trade Commission for 
assistance in understanding the developments in the industry. Based on 
the available information, it appears that customers, served solely by 
the Internet, are provided debt management--not credit counseling. The 
individual budget assistance and public education programs that formed 
the original basis for exemption under section 501(c)(3) have changed. 
In many cases, these services appear to have been replaced by promises 
to restore favorable credit ratings or to provide commercial debt 
consolidation services.
    We also learned of the favorable treatment accorded to section 
501(c)(3) consumer credit organizations under both federal and state 
regulatory schemes. Organizations recognized by the Service as 
described in section 501(c)(3) often are excluded from coverage under 
FTC rules, as well as state and local consumer protection laws. This 
exclusion appears to be one of the primary drivers for the increase in 
the number of these organizations. For example, the Credit Repair 
Organization Act of 1997 sought to further regulate the practice of 
organizations involved in ``credit repair,'' a series of activities 
aimed at improving a customer's credit history. The statute exempted 
section 501(c)(3) organizations from the provisions of this law. Many 
state consumer protection laws provide similar treatment for 501(c)(3) 
organizations. In 1993, for example, the California legislature imposed 
strict standards on credit service organizations and the credit repair 
industry. The California statute aims to protect the public from unfair 
or deceptive advertising and business practices. Most significantly, it 
does not apply to nonprofit organizations that have received a final 
determination from the Service that they are exempt under IRC 501(c)(3) 
and are not private foundations.
    Two more recent developments may encourage more credit counseling 
organizations to seek tax-exempt status. The first is the proposal, 
under pending bankruptcy legislation, to require credit counseling 
prior to filing for bankruptcy. Although the Service takes no position 
on the merits of this proposal, if this becomes law, we expect 
applications from traditional credit counselors, as well as the new 
internet based agencies to increase. The second development relates to 
the recently activated Do Not Call List, with its exemption for 
charitable solicitations. Again, our purpose here is not to opine on 
the merits of the solicitation exemption other than to note for the 
Subcommittee our belief that the additional benefit of exemption under 
the Do Not Call rules may also motivate certain individuals and 
organizations to seek section 501(c)(3) status. To the extent that we 
are concerned about bad actors in the current market, both of these 
developments will require even more diligence on our part.

Response of the Service
    The Service is concerned that the potent combination of exemption 
from income tax and exemption from consumer protection laws may 
encourage activity by individuals who are motivated by profit rather 
than charity. As a result, we are aggressively scrutinizing applicants 
and existing organizations to ensure that organizations seeking or 
having tax-exempt status as credit counseling organizations warrant 
that status. We have designed a comprehensive multi-faceted strategy to 
address alleged abuses, and commissioned a team to oversee the 
strategic management of our compliance efforts. Members of this 
coordinating team include individuals from all functions within the 
exempt organizations office at the Service, as well as lawyers from the 
Office of the Chief Counsel.
    Determination Letter Process: Our goal is to identify new credit 
counseling organizations as they seek exemption and ensure they meet 
all requirements before tax-exempt status is approved. We have 
established a process where all incoming applications are initially 
reviewed to identify organizations that provide credit services. All 
case files are then assigned to staff specially trained in credit 
counseling, who use a uniform development inquiry letter to fully 
develop the facts of the case. Where those facts indicate non-
compliance, cases are forwarded for additional development to higher 
graded specialists. These specialists use their broad investigatory 
experience to delve deeply into the complex structures and 
relationships of these organizations in order to determine whether they 
are charitable organizations. Once completed, either favorably or 
unfavorably, all applications are subject to special review. In 
addition to carefully scrutinizing individual applications, all credit 
counseling organizations will be centrally tracked to enable us to 
accurately determine the number and profile of these organizations, and 
to better manage and ensure consistent quality treatment.
    At present, EO is considering over 40 applications. As we process 
these applications, we request additional information regarding whether 
debt management is the organization's primary purpose and the extent to 
which the organization engages in educational or counseling activities. 
We also are exploring whether some of these applicants who have 
contractual relationships with for-profit service providers operate in 
a manner that improperly benefits private interests.
    Examination Process: The Service has increased the number of 
examinations targeted at tax-exempt credit counseling organizations. At 
present, over 30 organizations and related entities, including some of 
the largest firms, are at various stages of the examination process. 
These organizations represent a significant percentage of the combined 
gross receipts for the entire tax-exempt credit counseling market. 
Moreover, the current workload is only the beginning of our compliance 
effort in this area. By year's end, we expect to follow-up on all 
examination referrals, and implement an approach to identify and 
classify other high-risk organizations for examinations to commence in 
2004.
    As in the determination letter area, specialists have been 
designated to provide immediate phone or e-mail assistance to 
examination agents, and already have made visits to assist agents 
conducting examinations. These examinations focus on specific issues, 
including: whether the organization provides counseling; who the 
customers are; the nature of the fee structure; who controls the board 
and the contracts with the organization; and, whether there is 
inurement or impermissible private benefit. We expect to see 
significant results in the coming months, and within the constraints of 
section 6103, will publicize the outcome of our efforts.
    IRS Training: We have taken a number of steps to train our agents 
and other law enforcement personnel. We published a 50-page Continuing 
Professional Education text that reviewed the law in the area of credit 
counseling and provided tools for reviewing applications from new 
organizations. In addition to the CPE text, in 2002, we held training 
classes on this issue for specialists who review exemption 
applications. Several months later, we produced a live interactive 
training exercise on credit counseling organizations. The presenters 
included representatives from the Service, a representative from the 
Federal Trade Commission, and a state charity official. The panel 
discussed the law with respect to section 501(c)(3) organizations, 
disclosure concerns, and consumer protection issues. In addition to our 
employees, attendees included guests from state and local governments 
and the FTC, who had the opportunity to watch the training and 
participate in a question and answer session.
    Outreach Efforts: The Service has been active in educating the 
public and reaching out to other law enforcement agencies. We have 
partnered with the Federal Trade Commission, the National Association 
of State Charity Officials and other watchdog groups, who have well 
established channels for disseminating information to consumers, to 
send out a strong consumer protection message. That message, contained 
in News Release 2003-120 and Fact Sheet 2003-117, informs the public 
that credit counseling organizations using questionable practices may 
seek tax-exempt status to circumvent state and federal consumer 
protection laws. It advises consumers to guard against deceptive credit 
counseling practices by following the tips outlined in the documents. 
We have publicized these documents and our other credit counseling 
training materials on the IRS Web site.
    In addition to working with consumer protection organizations, we 
contacted state enforcement officials from Maryland, California, and 
New York, concerning the issues their states are facing in this area. 
We also have met with the United States Bankruptcy Trustees Office 
concerning the previously discussed pending bankruptcy reform 
legislation.
    In addition to working with our counterparts in law enforcement, 
our outreach efforts include speaking at credit counseling trade 
association conventions and at the annual meeting of the American Bar 
Association to inform the credit counseling industry and its attorneys 
of potential problems in this field and to open a dialog with industry 
participants.
Conclusion
    Because of the changes in the way the credit counseling industry 
now operates, the Service anticipates the need for continued action to 
ensure compliance. Let me assure you that we are committed to taking 
any steps necessary to inform the public of the requirements for tax-
exempt status and to ensure that tax-exempt credit counseling 
organizations comply with all applicable requirements. The public 
deserves and will receive our protection in the area of credit 
counseling services.

                                 

    Chairman HOUGHTON. Thank you very much, and thank you for 
the strong emphasis on enforcement that you put into effect in 
the IRS. We have been joined by a very distinguished Member of 
the Committee on Ways and Means, Mr. Kleczka of Wisconsin. 
Thank you very much. Have you any statement that you would like 
to make?
    Mr. KLECZKA. No, Mr. Chairman. I am here to listen.
    Chairman HOUGHTON. Fine. Now, what I would like to do is 
turn it over to Mr. Beales, the Director of the Bureau of 
Consumer Protection, FTC. Mr. Beales, thank you for being here.

   STATEMENT OF HOWARD BEALES, DIRECTOR, BUREAU OF CONSUMER 
              PROTECTION, FEDERAL TRADE COMMISSION

    Mr. BEALES. Thank you, Mr. Chairman, and Members of the 
Subcommittee. I am pleased to have this opportunity to discuss 
consumer protection issues in the credit counseling industry. 
Although the FTC recognizes that credit counseling can provide 
financially distressed consumers with valuable assistance in 
managing their money and paying their debts, we are concerned 
that some firms may be deceiving consumers about who they are, 
what they do, and how much they charge. The FTC is fighting 
deceptive credit counseling practices on many fronts, including 
law enforcement and consumer education.
    Today, I would like to focus on a lawsuit we filed in 
Federal court yesterday against a national organization that 
promotes itself as a nonprofit credit counseling agency. The 
complaint names Maryland-based AmeriDebt, Inc., which 
aggressively advertised itself as a nonprofit dedicated to 
assisting consumers with their finances. The complaint also 
names AmeriDebt's former for-profit service provider, 
DebtWorks, and DebtWorks' owner, Andris Pukke. This case 
illustrates some of the troubling practices in credit 
counseling that are before this Subcommittee today. Despite 
AmeriDebt's claim that it operates for charitable purposes with 
regard to its 501(c)(3) status, we alleged that AmeriDebt was, 
in fact, designed to generate profit for affiliated for-profit 
companies and individuals, including DebtWorks and Mr. Pukke.
    In addition, we alleged that the defendants misrepresent 
the services that AmeriDebt provides to consumers. Instead of 
teaching consumers about their finances and how to manage debt 
as claimed, the defendants indiscriminately enroll all of their 
clients in debt management plans without regard to their 
particular financial situations.
    Debt management plans are payment plans that enable 
consumers to make one consolidated monthly payment to a credit 
counselor, which then disburses the money to the consumers' 
creditors. Many creditors are willing to reduce interest rates 
or forgo late charges for consumers participating in such a 
plan, but only if it is administered by a nonprofit credit 
counseling agency. Depending on a consumer's financial 
situation, debt management plans can be beneficial, but for 
certain consumers, other options such as individualized 
counseling, education, and even bankruptcy, may be better 
choices.
    The key source of consumer injury in the AmeriDebt case is 
our allegation that the defendants charge consumers an up-front 
fee for enrolling in a debt management plan, despite 
advertising claims to the contrary. They collect the fee by 
keeping consumers' first payment for themselves, instead of 
disbursing the money to consumers' creditors. AmeriDebt's 
contracts with consumers refer to this first payment as a 
contribution. In our view, the fact that approximately 90 
percent of AmeriDebt's consumers who are ostensibly on the 
brink of bankruptcy, nonetheless make a voluntary contribution 
of several hundred dollars to AmeriDebt, only underscores that 
these purported contributions are obtained through deception.
    The FTC also entered into a settlement with the Ballenger 
Group, which has serviced AmeriDebt's debt management plan 
since the beginning of this year. This settlement resolves the 
FTC's allegations that Ballenger, which has close ties to the 
other defendants, contributed to the deception in the AmeriDebt 
case by repeating some of the misrepresentations in telephone 
calls with consumers. According to the FTC's complaints, 
Ballenger misrepresented that AmeriDebt is a nonprofit entity, 
and failed to disclose that the consumers' first payment is 
retained by AmeriDebt as a fee. The settlement contains strong 
injunctive relief, and requires Ballenger to pay $750,000 in 
consumer redress.
    In addition to the alleged practices in the AmeriDebt case, 
we are aware of other practices by some in the credit 
counseling industry that may violate the FTC Act (1914, 38 
Stat. 717, U.S.C. 41-51), or other statutes that we enforce. 
These practices include failure to abide by telemarketing laws. 
To the extent that some credit counseling agencies are not bona 
fide nonprofit organizations, they should be complying with the 
FTC's telemarketing sales rule, including the new National Do-
Not-Call Registry.
    We also see failure to pay creditors in a timely manner, or 
not at all, as a problem. Some credit counseling agencies that 
offer debt management plans may fail to pay creditors in a 
timely fashion, or at all. This can result in serious consumer 
harm, such as late fees that the creditors impose. Others 
promise results that cannot be delivered. They promise that 
they will lower consumers' interest rates, monthly payments, or 
overall debt, by unrealistic amounts. Some are also making 
false promises to eliminate accurate but negative information 
from consumers' credit reports.
    We remain concerned about all of these practices, and 
acting with our law enforcement partners, we will continue to 
work to protect consumers in this critical area. I thank you 
for the opportunity to appear today, and I will be happy to 
respond to your questions.
    [The prepared statement of Mr. Beales follows:]

 Statement of Howard Beales, Director, Bureau of Consumer Protection, 
                        Federal Trade Commission

I. INTRODUCTION
    Mister Chairman and Members of the Committee: I am Howard Beales, 
Director of the Bureau of Consumer Protection of the Federal Trade 
Commission (``FTC'' or ``Commission.'').\1\ I appreciate the 
opportunity to appear before you today on behalf of the Commission to 
discuss consumer protection issues raised in the credit counseling 
industry. This statement will describe the industry generally, discuss 
various practices by some of its members that raise consumer protection 
concerns, and summarize FTC law enforcement and educational efforts in 
this area.
---------------------------------------------------------------------------
    \1\ The views expressed in this statement represent the views of 
the Commission. My oral statement and responses to questions you may 
have are my own and are not necessarily those of the Commission or any 
Commissioner.
---------------------------------------------------------------------------
    As an initial matter, it is helpful to understand the Commission's 
role in enforcing laws that bear on the credit counseling industry. As 
part of its broad mandate to protect consumers, the Commission enforces 
the Federal Trade Commission Act (``FTC Act''), which prohibits unfair 
or deceptive acts or practices that are in or affect commerce.\2\ The 
Commission also enforces a number of specific consumer protection 
statutes, including several relevant to credit counseling, such as the 
Telemarketing and Consumer Fraud and Abuse Prevention Act,\3\ the 
Credit Repair Organizations Act,\4\ and the Gramm Leach Bliley Act.\5\
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    \2\ 15 U.S.C.  45(a).
    \3\ 15 U.S.C.  6101-6108.
    \4\ 15 U.S.C.  1679 et seq.
    \5\ 15 U.S.C.  6801 et seq.
---------------------------------------------------------------------------
    The FTC Act excludes from the Commission's authority entities that 
are not organized to carry on business for their own profit or that of 
their members.\6\ Therefore, the Commission does not have jurisdiction 
under that Act over credit counseling agencies (``CCAs'') that are bona 
fide non-profit organizations.\7\ The mere fact that a CCA has received 
tax-exempt status under Section 501(c)(3) of the Internal Revenue Code, 
however, does not by itself oust the Commission of jurisdiction. The 
Commission may assert jurisdiction over such an entity if there is an 
insufficient nexus between the organization's activities and its 
alleged public purpose, for example, or if its proceeds inure to the 
benefit of private individuals.\8\
---------------------------------------------------------------------------
    \6\ 15 U.S.C.  44 & 45(a).
    \7\ Most creditors and some state laws require CCAs to be non-
profit entities before they can arrange payment plans for consumers.
    \8\ See, e.g., College Football Association, 117 F.T.C. 971, 993 
(1994).
---------------------------------------------------------------------------
II. THE CREDIT COUNSELING INDUSTRY
    The credit counseling industry has been in existence for about 50 
years, providing valuable services to innumerable financially 
distressed consumers. Typically, the work of CCAs on behalf of their 
consumer clients is both present and future directed: to help debt-
strapped consumers to manage their existing financial problems and to 
teach them better financial management skills for the future. CCAs 
historically have been relatively small, community-based non-profit 
organizations providing consumers with individualized advice and 
assistance. For these services, most traditional CCAs either charge 
nothing or solicit modest contributions from clients to help defray 
their expenses. As explained below, CCAs also can be funded by 
creditors through so-called ``Fair Share'' contributions.
    CCAs have a number of options to offer their financially-distressed 
clients, depending on the client's individual circumstances, which 
range from simple advice and guidance on managing finances to (in 
extreme cases) advising that consulting a bankruptcy attorney may be 
the consumer's best option. In addition, CCAs, since the industry's 
inception, have offered to put certain clients into a payment program 
commonly termed a ``debt management plan'' (``DMP''). DMPs allow 
consumers to pay off their unsecured debts, such as credit card 
balances, by making a single, consolidated monthly payment to the CCA, 
which then disburses those funds to the creditors of debts covered by 
the DMP.
    When administered properly, DMPs can benefit consumers because some 
creditors will reduce interest rates and waive certain charges, such as 
late and over-the-limit fees, for consumers on a plan. Most creditors 
and some state laws require CCAs to be non-profit entities before they 
can arrange payment plans for consumers, apparently for the purpose of 
eliminating the incentive for CCAs to deceive consumers. However, we 
are concerned that some CCAs may be evading these requirements by 
setting up non-profit entities that funnel money to for-profit 
affiliates.
    DMPs can also benefit creditors by forestalling consumer 
bankruptcy. Importantly, traditional CCAs evaluate each client's 
individual circumstances and needs before deciding whether to enroll 
that person in a DMP.
    DMPs generate revenue for CCAs in two ways. First, creditors 
voluntarily rebate to CCAs a small percentage of the funds that the 
organizations disburse to them. These payments are called ``Fair 
Share'' contributions. Second, some CCAs solicit ``contributions'' or 
``donations'' from DMP enrollees, usually consisting of up-front and 
monthly fees. As discussed later, some CCAs appear to have turned these 
ostensibly voluntary contributions into de facto mandatory fees by 
automatically deducting money from consumers' payments without adequate 
disclosure.
    In the last decade, the credit counseling industry has experienced 
dramatic growth, attributable in large part to ballooning consumer debt 
and the resulting demand for credit counseling to prevent default on 
that debt. The nature of the industry has also changed. Whereas it was 
once composed mainly of small, local credit counselors, the last decade 
has seen the rise of large, high-tech organizations that aggressively 
market their services to consumers via telemarketing, broadcast and 
print advertising, and the Internet. These organizations, many of which 
claim non-profit status, represent a new breed in this industry. Many 
appear to offer little or no individualized credit counseling, but 
rather urge all of their clients to enroll in a DMP without 
consideration of their particular financial situation.

III. CONSUMER PROTECTION ISSUES
    Along with these changes in the industry have come complaints about 
troubling practices, including possible deception about the services 
offered, poor administration of DMPs, and undisclosed fees associated 
with DMPs.
    The Commission is concerned about deceptive and other illegal 
practices in which some CCAs may be engaging. Our greatest concern is 
deception by CCAs about the nature and costs of the services they offer 
to consumers. The following practices have come to our attention that 
may violate the FTC Act or other statutes that we enforce:

     Misrepresentations about fees or ``voluntary 
contributions.'' Some CCAs may charge substantial fees (sometimes 
denominated as ``donations'' or ``voluntary contributions'') that they 
hide from consumers. For example, some CCAs may automatically retain 
for themselves certain payments consumers make on their DMPs, unless 
the consumer affirmatively objects. These CCAs may not adequately 
disclose this fact.
     Promising results that cannot be delivered. Some CCAs 
appear to be marketing DMPs with promises that they will lower 
consumers' interest rates, monthly payments, or overall debt by an 
unrealistic or unattainable amount. Some organizations also appear to 
be exaggerating the amount of money consumers will save by signing up 
for a DMP, or are promising falsely to eliminate accurate negative 
information from consumers' credit reports.\9\
---------------------------------------------------------------------------
    \9\ Negative but accurate information cannot be removed from a 
credit report until the time specified by the Fair Credit Reporting Act 
has lapsed (generally, seven years after the event occurred). 15 U.S.C. 
Sec. 1681c.
---------------------------------------------------------------------------
     Abuse of non-profit status. As noted above, some 
unscrupulous CCAs misrepresent that they are non-profit to comply with 
state laws and creditor guidelines regarding the arrangement of payment 
plans for consumers. In addition, some CCAs appear to use their 
501(c)(3) status to convince consumers to enroll in their DMPs and pay 
fees or make donations. These CCAs may, for example, claim that 
consumers' ``donations'' will be used simply to defray the CCA's 
expenses. Instead, the bulk of the money may be passed through to 
individuals or for-profit entities with which the CCAs are closely 
affiliated. Tax-exempt status also may tend to give these fraudulent 
CCAs a veneer of respectability by implying that the CCA is serving a 
charitable or public purpose. Finally, some consumers may believe that 
a ``non-profit'' CCA will charge lower fees than a similar for-profit 
entity.
     False advertising regarding credit counseling services. 
Some CCAs claim to provide advice and education to consumers on 
handling their finances, when in fact they may merely enroll all 
clients indiscriminately in DMPs without any actual counseling.
     Failure to pay creditors in a timely manner or at all. 
Some CCAs may fail to pay creditors in a timely fashion or at all. This 
failure can result in serious consumer harm, such as from late fees 
that the creditors impose.
     Failure to abide by telemarketing laws. To the extent 
CCAs are not bona fide non-profit organizations, they should be 
complying with the FTC's Telemarketing Sales Rule, including the new 
national Do-Not-Call registry.
     Gramm-Leach-Bliley (``GLB'') Privacy and Safeguards. The 
Commission is also concerned that some CCAs may not be complying with 
the privacy and security requirements of the Gramm-Leach-Bliley Act, 
which apply to financial institutions such as credit counseling 
organizations.
IV. COMMISSION ACTIONS
    The Commission has pursued a vigorous program to halt fraud and 
deception by those who purport to be able to solve consumers' financial 
difficulties. For example, last year the Commission filed a lawsuit 
against Jubilee Financial Services, a debt negotiation company, 
challenging misrepresentations about the services it offered.\10\ The 
Commission alleged, among other things, that Jubilee made false 
promises that consumers who enrolled in its debt negotiation program 
would be able to pay off their debts at a substantially reduced rate; 
misled consumers about the effects of the program on their credit 
report; and failed to tell them that, as a result of the program, 
negative information would likely appear on consumers' reports and stay 
there for seven years. Instead of extricating themselves from debt, 
many of Jubilee's victims were left with little alternative but to file 
for bankruptcy.
---------------------------------------------------------------------------
    \10\ See FTC Press Release, FTC, States Give ``No Credit'' to 
Finance-Related Scams in Latest Joint Law Enforcement Sweep (Sept. 5, 
2002), available at http://www.ftc.gov/opa/2002/09/opnocredit.htm. The 
Commission subsequently settled this matter. The settlement, among 
other things, banned defendants from advertising, marketing, or 
providing debt negotiation services. See FTC Press Release, Jubilee 
Financial Services Defendants Banned from Providing Debt Negotiation 
Services (Aug. 29, 2003), available at http://www.ftc.gov/opa/2003/08/
jubilee.htm. Strictly speaking, Jubilee was not a CCA because it did 
not offer credit counseling or DMPs; rather, it purported to negotiate 
settlements of consumers' unsecured debts with the creditors.
---------------------------------------------------------------------------
    Over the past several years, the Commission also has prosecuted 
numerous cases under the Credit Repair Organizations Act 
(``CROA''),\11\ which prohibits fraudulent practices by organizations 
that promise to improve consumers' credit histories, such as falsely 
promising to remove accurate credit information from consumers' credit 
reports. The Commission has successfully conducted several sweeps of 
entities allegedly violating CROA, including Operation Eraser\12\ and 
Operation New ID-Bad IDea.\13\ Most recently, in August 2003, the 
Commission reached a settlement with one of the largest credit repair 
organizations in the United States, through which the defendants agreed 
to pay more than $1.15 million in consumer redress.\14\
---------------------------------------------------------------------------
    \11\ 15 U.S.C.  1679 et seq.
    \12\ See FTC Press Release, Credit Repair? Buyer Beware! FTC, 
States Announce Crackdown On Scams That Bilk Consumers (Mar. 5, 1998), 
available at http://www.ftc.gov/opa/1998/03/
eraser.htm.
    \13\ See FTC Press Release, Credit Identity Defendants Settle FTC 
Charges: Promoting False Identification Numbers to Create a ``New 
Credit Identity'' Is Illegal (Oct. 21, 1999), available at http://
www.ftc.gov/opa/1999/10/badidea.htm.
    \14\ See FTC Press Release, Nationwide Credit Repair Operation to 
Pay More than $1.15 Million in Consumer Redress (Aug. 11, 2003), 
available at http://www.ftc.gov/opa/2003/08/
nationwide.htm.
---------------------------------------------------------------------------
    The Commission also has engaged in extensive educational efforts to 
help consumers spot and avoid credit counseling and credit repair 
scams. Most recently, the Commission, in conjunction with the Internal 
Revenue Service and state regulators, issued a joint press release 
regarding CCAs, urging consumers to be cautious and providing tips for 
choosing a credit counseling organization.\15\ The release advises 
consumers to pay careful attention to what fees the agency charges, the 
nature of the services it offers, and the terms of the contract. 
Consumers should consider using agencies that offer actual counseling 
and education and do not simply enroll all clients in DMPs.
---------------------------------------------------------------------------
    \15\ See FTC Press Release, FTC, IRS, and State Regulators Urge 
Care When Seeking Help from Credit Counseling Organizations (Oct. 14, 
2003), available at http://www.ftc.gov/opa/2003/10/ftcirs.htm.
---------------------------------------------------------------------------
    The IRS announced at the same time its intention to re-examine 
certain CCAs with 501(c)(3) status to determine whether they are 
operating in a manner that complies with the laws and regulations 
governing tax-exempt status. The IRS also stated that in the future it 
will examine more rigorously CCAs' 501(c)(3) applications. 
Specifically, the IRS noted that organizations that place clients on 
DMPs without significant education and counseling do not qualify for 
tax-exempt status.\16\
---------------------------------------------------------------------------
    \16\ See Press Release, IRS Takes Steps to Ensure Credit Counseling 
Organizations Comply with Requirements for Tax-Exempt Status (Oct. 17, 
2003), available at http://www/irs.gov/
newsroom/article?0,,id=114575,00.html.
---------------------------------------------------------------------------
V. CONCLUSION
    The Commission recognizes that credit counseling can provide 
financially distressed consumers with valuable assistance in managing 
their money and paying their debts, and that many, if not most, CCAs 
operate honestly and fairly. The Commission is concerned, however, that 
some firms may be deceiving consumers about who they are, what they do, 
and how much they charge. The victims of the deception may find 
themselves in even more dire financial straits than before. The 
Commission, acting with our law enforcement partners, will continue to 
work to protect consumers in this critical area.

                                 

    Chairman HOUGHTON. Thank you very much. I have a couple of 
questions. Then, Earl, I will turn it over to you. Really, I 
have questions for Mr. Everson and Mr. Beales. I have two 
questions for you, Mr. Commissioner. I am interested in the 
standards that the IRS is going to use to make these 
evaluations. Maybe you can break that down a little bit. Also, 
I have always worried about the excessive salaries that are 
being paid. We have had a number of examples of this, which 
have poisoned the well for a lot of good companies that have 
tried to adhere to the level of good discretion.
    At what point do these salaries become excessive? Then, Mr. 
Beales, the question I would like to ask you is, if a voluntary 
contribution is included in the contract service agreement, 
isn't this a fee? So, maybe I could turn this over to you, Mr. 
Everson, and then to Mr. Beales.
    Mr. EVERSON. Sure. Mr. Chairman, there is no cookie-cutter 
model to reach a judgment on these issues, as you can imagine. 
There is a lot of judgment that needs to be brought to bear. 
That having been said, there have been standards that have been 
articulated by the IRS in rulings in the past, and also some 
that have been validated in the courts that we will look to as 
we conduct these examinations. What is the nature of the 
customer base--are these low-income people, deserving people? 
Are they receiving true counseling, or are they simply 
receiving packaged products? One of the things that has been 
happening here, is, as I indicated, an explosion through the 
use of the Internet. Simple solutions are developed, and there 
is no real education or exchange whatsoever with the individual 
who needs the service.
    We will look at the organizational structures of the 
organization, and the relationships with for-profit groups. 
There is nothing wrong with having a relationship with a for-
profit entity. It just needs to be on an arm's length basis, 
where the price paid for services would be comparable to that 
which would be normally expected of an organization that is 
processing services, or whatever it might be. So, I would 
suggest to you that we have a series of issues that we will 
look at. They will all be carefully weighed. Before anything as 
drastic as a pull-back of the exemption status is taken, we 
will be very careful to make sure that we have considered all 
the factors.
    As to salaries, high salaries, in and of themselves, are 
not a basis for withdrawing that exemption. Again, they must be 
considered in the context of geography, comparable 
organizations in terms of size or scope, and complexity of the 
work. Yet they certainly are an indicator of a potential 
problem, should there be a dramatic increase, or should they be 
out of line for any of those reasons that I have mentioned. So, 
as we engage in our examinations, those, too, will be 
considered as indicators of potential problems.
    Mr. BEALES. Mr. Chairman, I think the essence of what we 
have alleged in the AmeriDebt case, is that if you say there is 
no fee, but your contract has a voluntary contribution that is 
very poorly disclosed in many instances, or not disclosed at 
all--that that is, in fact, a fee, and it is deceptive to say 
you don't charge fees. Restyling it as a contribution, unless 
consumers clearly know that they are making the contribution, 
and clearly know that they can choose not to make the 
contribution and still get service--unless they know those 
things, it is a fee. It doesn't matter what you call it.
    Chairman HOUGHTON. Thank you. Mr. Pomeroy.
    Mr. POMEROY. Thank you, Mr. Chairman. I note that your 
testimony, Mr. Commissioner, says that to qualify under section 
501(c)(3), the organization must not distribute net earnings to 
insiders, must operate for the benefit of the public, not the 
benefit of private interests, and must not organize for the 
benefit of private interests such as designated individuals. To 
the extent that the compensation issue comes into focus, I 
would expect, at some point, that the compensation levels 
actually create at least the impression that this is indeed 
being run for private purpose--the purpose of providing this 
dimension of compensation to given individuals. Is that 
correct?
    Mr. EVERSON. I agree with that entirely. It has to be very 
carefully assessed, again, to demonstrate that it is not being 
run for the benefit of individuals, other insiders, or related 
parties.
    Mr. POMEROY. This information is available for public 
scrutiny in the Form 990 filed with the IRS. Is that correct?
    Mr. EVERSON. The Form 990, yes, would be available.
    Mr. POMEROY. So, I have a copy here, then, that is 
appropriately in the public domain--Cambridge Credit Counseling 
Corporation. I believe they will be testifying at a later 
panel. Compensation listed for two individuals, a John Puccio 
and Richard Puccio, is set at $624,000 each, per year. Now, at 
$624,000, that looks like it is beyond generous compensation, 
and indeed, looks like a distribution of earnings for private 
interests in violation of the 501(c)(3) status. Is this the 
type of thing that your organization audits, upon the filing of 
the Form 990?
    [The information is being retained in the Committee files.]
    Mr. EVERSON. This would be the kind of issue that we would 
look at. I don't want to comment on a particular case or 
matter, but a high salary would be a red flag for us to look 
at.
    Mr. POMEROY. The $624,000 salary would, in your notion, be 
generally deemed to be a fairly high salary?
    Mr. EVERSON. Well, let me put it--perhaps I will answer 
that indirectly. I am paid substantially less than that to do 
my job.
    Mr. POMEROY. Even Members of Congress are paid less than 
that. Within the last 12 hours, I have been spammed by 
purported credit companies--these advertising credit counseling 
services. I would ask that copies of this be submitted into the 
record, and be given to each witness on the panel. I would like 
you to give me your evaluation, not necessarily immediately, 
but as you have a chance to research the companies behind this 
marketing material, as to their legitimacy under the 501(c)(3) 
nonprofit credit corporation status. I think the record will 
show that these materials, again, contain many of the things of 
concern that you pointed out in your testimony. If they are 
going to take the trouble to spam me, well, I am going to take 
the trouble to have them investigated by you. I look forward to 
getting more information.
    [The information follows:]

----Original Message----
Sent: Thursday, November 20, 2003 9:31 am
Subject: Fwd: Take control of your debt Earlpomeroy
From: Linda Cox
To: earlpomeroy
Subject: Take control of your debt Earlpomero
Date: 20 Nov 2003 06:12:55 -0600
Reduce Monthly Payments Up To 70%!
Eliminate High Interest Rates!
Complete FREE Details Here:
[GRAPHIC] [TIFF OMITTED] T1629A.001


                                 
----Original Message----
From: Earl Pomeroy
Sent: Wednesday, November 19, 2003 12:19 PM To: Fremstad, Joel
Subject: Fwd: negotiating lower payments for you
From: Kristina
To: earlpomeroy
Subject: negotiating lower payments for you
Date: Wed, 19 Nov 2003 09:53--0600
Fellow Americans
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And Get the Credit That You Deserve!
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[GRAPHIC] [TIFF OMITTED] T1629B.001


                                 

If you're not interested, mail this to a friend; they will thank you 
later
WWW.CARDOFFERS.COM
You are being sent to Debt Saviors Inc.
An industry leader in assisting consumers for over 3 years to Non-
Profit Credit Counseling and Debt Management Companies.
[GRAPHIC] [TIFF OMITTED] T1629C.001

Category: Advertising/Deceptive                    Modified: 2/6/2003 
1:11:15 PM
Express Consolidation rip-off Del Ray Beach Florida

Company
Express Consolidation
Address:
Nationwide, U.S.A.
Phone Number:
    I am under contract with Express Consolidation. At first everything 
was fine. I started getting phone calls from one of the creditors I am 
trying to pay off. They advised they never received a proposal from 
Express. I told Express & they asked for my account info with the 
creditor & said they would resubmit. For a few months I heard nothing.
    I starting receiving new calls from the same creditor. They stated 
I was 79 days in arrears & a check that Express sent bounced. I had to 
pay them $155.00 in lieu of $116 that I pd to Express.
    I tried calling them, e-mailing, every way I could to contact them. 
Customer Service had me online for 20 minutes everytime I called. When 
I finally got through, they advised the bank they use had the wrong 
acct. # on the checks that went out in Dec. of 2002.
    Needless to say, I am very worried that all of this is going to 
blow up in my face. I am trying to keep this from my husband as he was 
very upset that I had all these bills to begin with.
    Any suggestions? Would you consider them in Breach of contract 
since their check bounced?I'll take all the advise I can get.
                                                             Eileen
                                                Baltimore, Maryland
                                                             U.S.A.

                                 

    [The information follows:]
                                           Internal Revenue Service
                                                   January 29, 2004
Hon. Earl Pomeroy
U.S. House of Representatives
Washington, D.C. 20515
    Dear Congressman Pomeroy:
    This is in reply to your concern about e-mails you received from 
two credit counseling organizations, Debt Solutions, Inc. and National 
Debt Relievers, which you presented to Commissioner Everson at the 
November 20, 2003 hearing on Credit Counseling. The Commissioner 
appreciates your bringing this matter to our attention.
    We maintain an ongoing examination program to ensure that exempt 
organizations continue to meet the requirements for tax-exempt status. 
Whenever we receive information about an organization that raises 
questions about its continued exempt status, we forward the information 
to our Exempt Organizations Examination Classification Office in Dallas 
to determine whether it warrants an examination. Your information has 
been forwarded to that office.
    The Internal Revenue Code includes taxpayer privacy provisions to 
protect the privacy of tax returns and tax return information of all 
taxpayers. Accordingly, I cannot comment on what action, if any, we may 
take regarding the e-mails.
    I hope this information is helpful. If you have any questions, or 
wish to submit any additional information regarding credit counseling 
organizations please contact me at (202) 622-4725.
            Sincerely,
                                             Floyd L. Williams, III

                                 

    Mr. EVERSON. They are not spamming me for some unknown 
reason.
    Mr. POMEROY. Now, specifically on some of the matters--to 
get a better handle on what numbers of entities we are dealing 
with, Commissioner Everson, how many credit counseling 
organizations have been granted tax-exempt status in the last 6 
months? Do you have any idea?
    Mr. EVERSON. I don't have a track record in the last 6 
months. As I indicated before, there are over 850 that have 
exempt status now, and if you look at the last 4 years, through 
2003, what has happened is, the numbers have gone up, as I 
indicated. There are about 100 or so each year that we have 
been granting for the last 4 years--higher than that in some 
instances.
    Mr. POMEROY. Mr. Beales, one would wonder why a credit card 
company will cut its rate for a group that is obviously 
handling, on a boilerplate basis, its clients, as opposed to an 
individual debt management workout framework. Have you seen 
instances where there is actually some revenues coming back to 
the intermediary credit management companies--some kind of 
kickback or rebate from the credit card companies themselves?
    Mr. BEALES. Well, that is a fairly common arrangement--that 
some of the money that the credit card company or other 
creditor is willing to contribute in order to reduce the debt, 
goes back to the credit counselor. That is true in the 
legitimate parts of the industry. It is the way the industry 
has always operated to some extent--and for some of the credit 
counseling organizations.
    Mr. POMEROY. Do you think that that has created a revenue 
opportunity that is driving the creation of these sham 
operations?
    Mr. BEALES. Well, I think that is part of it, but I think 
what drives the sham operations much more, is the money that 
they can get from consumers.
    Mr. POMEROY. Up-front fee payment?
    Mr. BEALES. The up-front fee and monthly payments. 
Particularly where they try to exploit the way the industry has 
traditionally operated with little or no charge to consumers, 
with most of the costs being borne by creditors through those 
payments back to the credit counseling organizations.
    Mr. POMEROY. So, you have seen a trend where costs are 
being shifted to the debtors themselves--increased costs by 
these entities on the individual seeking their help?
    Mr. BEALES. Well, certainly in the case of AmeriDebt and 
circumstances like that, there are substantial fees to 
consumers that are not present in the traditional circumstance. 
That is relatively new in the last couple of years, and in that 
sense, it is certainly a trend--whether it is a continuing 
trend is what we are trying to determine.
    Mr. POMEROY. This is my last question, Mr. Chairman. You 
have been generous on me going slightly over time. However, to 
the extent that something is happening here, we are seeing the 
creation and the marketing of credit counseling services, 
beyond what we have ever seen before. We are seeing an increase 
in questionable entities, it certainly raises at least the 
appearance that they have figured out how to make some new 
money in providing this kind of activity to the public. I am 
just wondering if we have identified where the new fees--or 
whatever activity is generating the new cash flow for them--are 
going.
    Mr. BEALES. Well, I think you are exactly right--they have 
figured out a new way. However, I think certainly in the case 
we just filed, where the new money is coming from the public, 
it is the consumers who are deceived into participating in the 
scheme.
    Mr. POMEROY. Thank you. Thank you, Mr. Chairman.
    Chairman HOUGHTON. Thank you. Mr. Foley.
    Mr. FOLEY. Thank you very much, Mr. Chairman. Again, I 
commend you for holding the hearing, and I think Mr. Pomeroy 
hit on it in his opening statement. The most vulnerable are 
being preyed upon, and I have noticed a proliferation of ads, 
as was mentioned, for these services. We used to have consumer 
credit counseling services in West Palm, Florida, which was 
not-for-profit, and existed and worked so well helping people 
pull out of their financial jams. However, now it seems like 
there is an ad a day indicating how they can help relieve the 
burden of debt for citizens, and it turns out to be a way in 
which they relieve more money off the citizen, and never help 
really get to the bottom of it.
    How much of a credit counseling organizational operation 
will be focused on education versus debt management, to be 
considered not-for-profit? Is there a rule of thumb? For 
example, is there an inappropriate amount of debt management 
services that crosses the threshold and could put its tax-
exempt status at risk? Mr. Everson.
    Mr. EVERSON. I would suggest to you that there is not, 
again, a hard and fast rule, but there would be a presumption 
that, what you are suggesting, the creation of a package to 
work out the debt, would be a relatively small piece of the 
activities. Traditionally, it has been very much in the 
education area, working with a couple or a family, reviewing 
their financial statements, trying to develop a long-term plan. 
It is not credit repair, per se--credit repair being, taking a 
look at someone's credit rating, trying to improve that, and 
developing any specific package. So, it would be a small piece, 
traditionally.
    Mr. FOLEY. I mentioned this point in a hearing we had 
before. I had a theft occur where somebody had created a credit 
card and charged merchandise, and then I had the debt 
collection agency calling me unmercifully, day and night, 
telling me I owed all this money. What concerns me about some 
of the credit counseling, is that they are merely substituting 
those piranhas in my case. They were never civil, and never 
nice, and as I explained that this was not my debt, they 
continue to harass.
    What concerns me, as I have seen some of these credit 
counseling services, is that they appear to be changing hats 
with the debt collectors and doing the same thing--only they 
are aggregating the debt and now pursuing the borrower. Where 
do you draw the line as to what is, and is not, an appropriate 
activity between closely related nonprofits and for-profits? Is 
there a way in which you separate those two?
    Mr. EVERSON. Again, I think that the test here would be: 
are the relationships between these two entities something that 
would pass the test of being at arm's length on a commercial 
basis? Nothing's wrong with having a relationship with a 
profit-making entity. That is a supplier of services. Is the 
price paid for that service a reasonable one? If you were to go 
to another party and ask for the services, would they charge 
you a lot less to do the same thing--run your computers, or 
make telephone calls, or whatever the actual product that is 
being provided might be?
    Mr. FOLEY. You use a comparison based on the market 
application.
    Mr. EVERSON. I think that is really the only fair way to do 
it, because if it gets out of line, it would clearly indicate 
that the related party structure has had an impact that is, in 
fact, not consistent with a charitable tax-exempt status.
    Mr. FOLEY. Thank you. Thank you, Mr. Chairman.
    Mr. KLECZKA. Mr. Chairman, I will try to be brief. First of 
all, this is a great hearing. I have not received any 
constituent complaints on this matter yet. However, I do 
represent a large segment of the inner city of Milwaukee, 
Wisconsin, and so, I am assuming some of these folks are 
working their wares back home, and I will be hearing about it 
shortly. Let me ask, Mr. Commissioner, how many of these 
organizations currently exist? What is the----
    Mr. EVERSON. It is north of 850, sir.
    Mr. KLECZKA. Wow--850. How many do you have under audit at 
this point?
    Mr. EVERSON. Right now we have active audits on 30, and as 
I indicated, this includes 9 of the top 15 organizations, as 
measured by gross receipts. Actually, if you look at the total 
gross receipts for the industry, which is about a billion 
dollars, plus or minus, last year, we are actually attacking 40 
percent of it. That is a very, very large number if you view it 
against our normal audit rates.
    Mr. KLECZKA. Now, we have had some discussion today about 
fees versus this involuntary contribution. I am assuming that 
if, in fact, it is an involuntary contribution, there is a fee. 
At that point, it very possibly would be a taxable event, would 
it not, Commissioner?
    Mr. EVERSON. This is really no different than any other 
exempt organization. People send their kids to private schools, 
and they pay a fee for a service provided. A contribution is a 
voluntary contribution beyond the value of the services 
provided. So, looking at it in this context, as we have just 
been discussing, it should not be an exchange for a service 
provided. If it is, in essence--as Mr. Beales has been 
indicating--an exchange for a service, then no, that wouldn't 
constitute a contribution that a taxpayer would deem as tax 
deductible. It would not be viewed as revenue generating for 
the entity.
    Mr. KLECZKA. If, in fact, it is, in reality, a fee, would 
it be taxable for that organization?
    Mr. EVERSON. Well, that is correct.
    Mr. KLECZKA. So, that is----
    Mr. EVERSON. So, it would be considered in that construct, 
yes.
    Mr. KLECZKA. So, that is what is going on here.
    Mr. EVERSON. That is a portion of what is going on--that is 
correct.
    Mr. KLECZKA. Now, Mr. Beales, since the advent of the do-
not-call list, have we seen a whole bunch of these groups pop 
up so they can come underneath the umbrella of the exemption 
for charitable groups?
    Mr. BEALES. I don't know that we have seen a growth in the 
number of groups. Certainly the people who claim to be 
nonprofits are a significant source of the complaints that are 
coming to us about violations of do-not-call.
    Mr. KLECZKA. So, you don't think they are just popping up 
out of the woods now because of the exemption for charitables 
under do-not-call?
    Mr. BEALES. Well, I think the charitables stick out more, 
because the background noise of for-profit telemarketing has 
gotten considerably quieter.
    Mr. KLECZKA. It sure has, thank you. I think all Americans 
are appreciative of that. The last item, Mr. Chairman, is a 
favor for the Commissioner. I have a constituent who was a 
former IRS agent, who has a suggestion for saving some money as 
far as issuing refund checks via the mail versus electronic 
transfer. Let me ask you to identify it with staff so we can 
share that and not burden the Committee.
    Mr. EVERSON. Thank you. We will take a good look at it.
    Mr. KLECZKA. Good. Thank you very much. Mr. Chairman, thank 
you.
    [The information follows:]
                                                    January 6, 2004
The Honorable Jerry Kleczka
U.S. House of Representatives
Washington, D.C. 20515

    Dear Mr. Kleczka:

    At the recent Ways and Means Oversight Subcommittee hearing on 
consumer credit agencies, you asked me to consider your constituent's 
suggestion for saving money on issuing tax refunds. Your constituent 
suggested that for tax refunds of $25 or less, we either require direct 
deposit or credit the amount against the next year's taxes. I have had 
a chance to review this proposal and would like to share my thoughts 
with you.
    On the surface, this proposal appears to have the potential to save 
the IRS and the Financial Management Service (FMS) money in printing 
and postage costs. The FMS, which is responsible for printing and 
mailing the checks, saves $.28 for each payment issued electronically 
rather than as a paper check. However, it is the practice of the IRS to 
notify taxpayers if we delay their refunds or otherwise take an action 
which they did not request. The cost of this notice is similar to the 
cost of mailing the check. If we were to apply the refund to the future 
year's tax liability, assuming they did not request the action, we 
would send the taxpayer a similar notice, and the savings would not 
materialize. Furthermore, if the taxpayer has met his or her obligation 
and submitted all required forms and documentation, it would be 
inappropriate and illegal for the IRS to retain the refund without the 
taxpayer's consent, even if the purpose is to apply it to future 
liability.
    Regarding a requirement for direct deposit, if a taxpayer does not 
have a checking or savings account, or does not provide us with routing 
information, we have no way of making an electronic refund deposit. The 
IRS does not have the legal authority to require individual taxpayers 
to maintain an account at a financial institution.
    I certainly share your goal to reduce the costs and burdens of 
paper processing at the IRS and thank you for passing along your 
constituent's suggestion. If you would like to discuss this matter 
further, please contact me or your staff may contact Floyd Williams, 
Director of Legislative Affairs, at (202) 622-3720.
            Sincerely,
                                                    Mark W. Everson

                                 

    Chairman HOUGHTON. All right. Mr. Sandlin.
    Mr. SANDLIN. Thank you, Mr. Chairman. Mr. Commissioner, you 
had said, I believe, the law provides that for these groups to 
get their tax-exempt status, the organization has to have an 
educational, charitable, or some other listed purpose on the 
Code; is that true?
    Mr. EVERSON. That is correct.
    Mr. SANDLIN. In these particular situations, they are 
supposed to educate or counsel the consumer concerning the 
management of their debt, correct?
    Mr. EVERSON. That is correct, sir.
    Mr. SANDLIN. The organization cannot run this organization 
for commercial interests, or to benefit a particular individual 
under the Code?
    Mr. EVERSON. Absolutely.
    Mr. SANDLIN. It appears to me--and I think we know what we 
are talking about--that what these two television groups 
actually do, is attempt to pool credit card debt, as opposed to 
other types of debt. Is that correct? Would that be fair?
    Mr. EVERSON. I will let Mr. Beales----
    Mr. SANDLIN. Mr. Beales, it appears to me that the effort 
by these groups is to take all the credit card debt. That is 
what they advertise. They say your credit card is too high. 
They pool that debt, and they work out a payment plan to pay 
credit card debt, correct?
    Mr. BEALES. That is clearly the focus. That is where most 
consumers get in debt trouble.
    Mr. SANDLIN. They don't offer that.
    Mr. BEALES. I don't know that it is limited to credit card 
debt.
    Mr. SANDLIN. They don't offer, for example, to combine or 
consolidate your car payment debt, or your house payment debt, 
or your open account payment debt down at the dress shop, 
correct?
    Mr. BEALES. The focus is unsecured debt. Your open account 
debt at the dress shop may be because that is unsecured----
    Mr. SANDLIN. Here is my point. Yes, it is open debt, but 
what they are really doing is, they are taking credit card debt 
from credit card companies that is unsecured, they are pooling 
that, and they are making sure you pay your credit card debt. 
They really don't care if you pay your house payment. They 
really don't care if you pay your car payment. They really 
don't care if you pay the dress shop. What they are, is a tool 
of the credit card companies to make sure that those credit 
card companies get preferential treatment, that they are paid 
first, and that they are paid in full to the exclusion of the 
requirements that the consumer has to pay other unsecured or 
secured debt. True?
    Mr. BEALES. I think the consumer that is in financial 
trouble should obviously worry about the home first.
    Mr. SANDLIN. Right. That is a charming story, and I 
appreciate that--and certainly they should. What I am saying is 
that these groups--what they do is take credit card debt, 
advertise about credit card debt, and pool credit card debt and 
make sure that consumers use their money to pay credit card 
debt. That is where the focus is--to make sure that credit card 
debt payment is made at a reduced rate, at a reduced payment 
over a certain period of time. They say, you pay this reduced 
rate over this period of time and your credit cards will be 
paid off in 60 months, for example. Is that correct?
    Mr. BEALES. Yes, but----
    Mr. SANDLIN. So, actually, what they are doing is operating 
this for the benefit of an individual group. They are operating 
this for the benefit of these individual groups, and, Mr. 
Commissioner, they really shouldn't have, under that 
circumstance, tax-exempt status; correct?
    Mr. EVERSON. Well, if that is the primary purpose, as you 
have outlined, I would suggest that they would have great 
difficulty in sustaining that exemption. Yet, again, I want to 
say that as we go forward with these examinations, we are going 
to be very careful to fairly assess the whole picture, and 
there is nothing wrong with helping people work out a specific 
plan and helping organize that. It has to be measured against 
the overall requirements of the education and the counseling.
    Mr. SANDLIN. That is right, and that is a good point. That 
is the whole point of being tax exempt--that they educate and 
help with the payment of other debt. However, what they are 
really doing is paying credit card debt. Isn't it true, Mr. 
Beales, that the credit card companies pay the tax-exempt 
companies money--they pay them fees and funds for their 
service?
    Mr. BEALES. They do pay them. I don't think you can infer 
from the fact that it is focused on unsecured debt that it is 
really a collection mechanism for that debt.
    Mr. SANDLIN. Yes, sir, it is exactly a collection 
mechanism. Now, let me ask you about this. Let me ask you about 
these contributions. We are indicating that this is a 
contribution to a charity or to a nonprofit. Now, that is just 
a fraud, isn't it? This isn't any kind of contribution, is it?
    Mr. BEALES. Well, it depends on the circumstances of the 
particular case, but if that is what you say, then it is a 
fraud, yes.
    Mr. SANDLIN. Well, the check you send down to the church, 
that is a contribution. The check to the library, that is a 
contribution. The American Heart Association, American Cancer 
Association--those are contributions. The check that you send 
to AmeriDebt, as it advertises on television, that is not a 
real contribution, is it?
    Mr. BEALES. No. That is what we have alleged. That is a 
fee.
    Mr. SANDLIN. I believe I see my light is on. I am out of 
time. I would like to say, I was shocked by the point, in 
closing, that Mr. Pomeroy made regarding how the executives 
here got over $600,000 in fees, and I would like to just point 
out in closing, that that is even more money than the $430,000 
a year Mr. Novelli gets from AARP to help seniors get 
prescription drugs. With that, I will end my statement. Thank 
you.
    Chairman HOUGHTON. Thank you very much. Well, gentlemen, I 
really appreciate your testimony here, and your being with us, 
and we look forward to seeing you again. Thank you.
    Mr. EVERSON. Nice to see you as always.
    Chairman HOUGHTON. Thank you. Now I would like to call the 
second panel. The second panel is Deanne Loonin, the staff 
attorney of the National Consumer Law Center (NCLC) in Boston, 
Massachusetts; Patrick Boisclair, Chairman of the Board of 
Trustees, National Foundation for Credit Counseling (NFCC) in 
Macon, Georgia; David Jones, President of the Association of 
Independent Consumer Credit Counseling Agencies (AICCCA) in 
Windermere, Florida; Michael Hall, Chief Executive Officer 
(CEO), Take Charge America, Incorporated in Phoenix, Arizona; 
and Montieth Illingworth, corporate spokesperson for the 
Cambridge Credit Counseling Corporation in Agawam, 
Massachusetts--who also, as I understand, is accompanied by 
Chris Viale, Chief Operating Officer of Cambridge Credit 
Counseling Corporation, also from Agawam, Massachusetts. So, 
when everybody gets settled--we appreciate your being here. 
Again, we are sorry we are late in starting. Ms. Loonin, if you 
would like to start the testimony, we would appreciate it. 
Thank you very much.

 STATEMENT OF DEANNE LOONIN, STAFF ATTORNEY, NATIONAL CONSUMER 
 LAW CENTER, BOSTON, MASSACHUSETTS, AND CONSUMER FEDERATION OF 
                            AMERICA

    Ms. LOONIN. Thank you, Mr. Chairman. My name is Deanne 
Loonin, and I am a staff attorney with NCLC in Boston. I thank 
the Chairman and the Committee Members for inviting us to 
testify today. I am also testifying on behalf of the Consumer 
Federation of America, who we partnered with on this issue, and 
on other issues as well.
    We have been following this credit counseling industry for 
some time, and in particular, we wrote a lot of our findings in 
a report that we released in April, called Credit Counseling in 
Crisis. We focused on credit counseling because of the 
tremendous benefits counseling can provide for many consumers, 
and because, unfortunately in the current environment, abusive 
and deceptive practices have made it difficult for consumers to 
reap these benefits.
    When done well, credit counseling can help consumers in 
financial distress understand their options, develop budgets, 
and prioritize debt. When done well and properly, both secured 
and unsecured debt is taken into account. Quality trained 
credit counselors help those consumers with secured debt figure 
out whether they can keep their homes and cars, and if not, 
work with them to help resolve these problems, or make 
appropriate referrals. They help consumers budget, and 
determine whether they can afford to pay back unsecured credit 
card debt, and in many cases, avoid bankruptcy.
    Regardless of whether there are for-profits involved in 
credit counseling, we believe that an ideal scenario is to have 
a thriving nonprofit counseling sector that works on behalf of 
consumers whenever possible, without regard to their ability to 
pay--certainly serving the lowest income and the neediest 
consumers, and also serving others in the communities through 
education and outreach. Their work often benefits creditors as 
well, but when done well and in keeping with nonprofit status, 
their primary purpose is charitable and educational. When done 
well and legitimately as a nonprofit, credit counseling is not 
a product-driven industry. In other words, it is not about 
selling debt management plans, but about serving consumers.
    This is a picture of credit counseling done well, and there 
are many agencies out there that fit this bill or that come 
fairly close. Sadly, and this is what we are focusing on today, 
there has also been rampant abuse, particularly in the last few 
years. Since the industry is comprised almost exclusively of 
tax-exempt nonprofit organizations, this abuse affects 
taxpayers as well as consumers, many of whom go to credit 
counselors seeking help, and end up in even greater financial 
distress. We highlighted a number of these problems in our 
report, including deceptive practices and excessive costs, but 
the focus of my short testimony today, as well as my written 
testimony, is the abuses of nonprofit status. These abuses 
occur because of the many agencies out there that aggressively 
advertise, sell debt management plans, and arrange the related 
services. The multi-service counseling, education, and debt 
management plan provider is becoming the exception rather than 
the norm.
    Nonprofit status has become, in practice, a requirement to 
do business in the credit counseling world, and the industry is 
comprised almost exclusively of 501(c)(3) tax-exempt 
organizations. The agencies seek tax-exempt status for a 
variety of reasons, many of which the IRS Commissioner spoke 
about, including the possibility of exemptions from a number of 
important consumer protection laws.
    This was also mentioned in the October IRS-FTC advisory on 
this issue. Perhaps most deceptively, agencies use their 
nonprofit status as a marketing tool. They promote the 
nonprofit label as a mark of credibility, appealing to consumer 
trust that nonprofit organizations are above board, and about 
more than just making money. We detail that in our report, and 
in fact, in our survey where we spoke with counselors from a 
wide range of organizations--credit counseling organizations 
across the country. I was involved in a lot of the survey, and 
more than once I was told, just in my initial call, that we are 
a nonprofit organization--and to tell you what that is like, 
that means we are just like a church. Using nonprofit status as 
cover, many agencies characterize any fees charged as 
donations. Similarly, agencies often claim that creditors work 
with them because they too can write off contributions to the 
agencies. All too often, this basic scheme is a charade 
disguising what is, in reality, a business.
    The reasons why these agencies really should not have 
received tax-exempt status in the first place, are detailed 
more in my written testimony, but just briefly, we focused on 
two areas. One is what is known as the ban on private 
inurement, and again, the IRS Commissioner spoke to this 
particular issue. What we are talking about is agencies that 
have arrangements with affiliated for-profits where they are 
profiting from those arrangements inappropriately. There is 
considerable evidence that this ban is violated by some credit 
counseling agencies, and that was the focus of the FTC action 
yesterday. There are other Attorney General lawsuits that are 
currently going on--private class actions, and the IRS 
investigations as well.
    The second set of problems relates to the IRS threshold 
requirements for tax-exempt status. That is, section 501(c)(3) 
exempts from payment of Federal taxes, groups organized and 
operated exclusively to accomplish permissible, charitable, or 
educational purposes. Do credit counseling organizations meet 
these purposes? Often the answer is no. The clearest problems 
occur among agencies that do not offer a range of services, 
have inappropriate ties to for-profit businesses, and 
aggressively sell debt management plan products--debt 
management plans. The key abuse in this area is that as they 
call them, the companies that are selling debt management 
plans, as opposed to providing multi-services, are steering 
consumers into those plans regardless of whether they can 
benefit from those plans or not. Some consumers can benefit 
from a debt management plan, and this is something that would 
be good and efficient for those consumers. Many others cannot.
    I would just like to close by saying that as we work 
together to address these problems, it is very important that 
all of the various players in the industry be at the table. We 
thank you for having many of them here today, such as consumers 
and consumer groups like us. Also the creditors--I think it is 
important to have them as a part of this dialog. They really 
created this industry in a number of ways many years ago, and 
can do a lot more to make it a more legitimate and honest 
industry. In just a minute, you will hear from the agencies 
themselves. We have already heard from a number of government 
regulators. I think together we can help weed out the abuses in 
the industry, and preserve credit counseling as a legitimate 
option for consumers. Thank you.
    [The prepared statement of Ms. Loonin follows:]
   Statement of Deanne Loonin, Staff Attorney, National Consumer Law 
   Center, Boston, Massachusetts, and Consumer Federation of America
    Mr. Chairman and Members of the Subcommittee, the National Consumer 
Law Center and the Consumer Federation of America thank you for 
inviting us to testify today regarding the non-profit credit counseling 
industry. NCLC offers our testimony here on behalf of our low-income 
clients and the Consumer Federation of America (CFA). The National 
Consumer Law Center is a non-profit organization specializing in 
consumer issues on behalf of low-income people. We work with thousands 
of legal services, government and private attorneys, as well as 
community groups and organizations nationwide that represent low-income 
and elderly individuals on consumer issues. The Consumer Federation of 
America is a non-profit association of almost 300 pro-consumer groups, 
which was founded in 1968 to advance the consumer interest through 
advocacy and education.

LEGITIMATE CREDIT COUNSELING AGENCIES PROVIDE MUCH-NEEDED SERVICES FOR 
                     CONSUMERS IN FINANCIAL TROUBLE

    Recent abuses by so-called non-profit credit counseling agencies 
have raised serious questions about the quality and legitimacy of 
credit counseling services. The National Consumer Law Center (NCLC) and 
the Consumer Federation of America (CFA) highlighted many of these 
problems in an April 2003 report, Credit Counseling in Crisis: The 
Impact on Consumers of Funding Cuts, Higher Fees and Aggressive New 
Market Entrants.\1\
---------------------------------------------------------------------------
    \1\ The executive summary is attached at the end of this testimony. 
The full report is available for downloading from either the NCLC web 
site (www.nclc.org) or the CFA web site (www.consumerfed.org ).
---------------------------------------------------------------------------
    The credit counseling industry is at a critical crossroads. 
Consumer debt (all non-mortgage loans) and credit card debt continues 
to grow, increasing consumer demand for debt relief. As of June of this 
year, American consumers held about $700 billion in credit card 
debt.\2\ The effects of the economic recession, especially the loss of 
jobs and a sharp increase in the number of Americans with inadequate or 
no health insurance, have combined with the growth in consumer debt to 
cause a record number of Americans to seek bankruptcy protection.\3\
---------------------------------------------------------------------------
    \2\ Revolving debt, most of which is credit card debt, was $725.6 
billion in June 2003, up from $712 billion at the beginning of the year 
and $667.4 billion at the beginning of 2001. Non-revolving debt 
(primarily auto and household loans) was $1.04 trillion in June, up 
from $1.01 trillion at the beginning of the year. Federal Reserve 
Bulletin, Table 1.55, October 2003.
    \3\ There were 1,661,996 non-business bankruptcies filed in fiscal 
year 2003, the highest level ever, and an increase of 7.4 percent from 
the 1,547,669 filings in fiscal year 2002. American Bankruptcy 
Institute, November 14, 2003.
---------------------------------------------------------------------------
    The need has never been greater to ensure that consumers who seek 
credit counseling receive quality services. Yet, policymakers are 
increasingly encouraging or requiring that consumers seek assistance 
from credit counselors without first taking adequate steps to improve 
the quality of credit counseling. This type of mandate is included in 
pending federal bankruptcy reform legislation.\4\ States are also 
increasing traffic at credit counseling agencies by imposing counseling 
mandates or requiring the disclosure of credit counseling options to 
consumers.\5\
---------------------------------------------------------------------------
    \4\ Section 106, H.R. 975.
    \5\ For example, Georgia and North Carolina do not allow lenders to 
make high cost mortgage loans unless the borrower has received 
counseling from an approved agency. Ga. Code Ann.  7-6A-5(7); N.C. 
Gen. Stat.  24-1.1E(c)(1). New York requires the lender to provide a 
notice urging the potential borrower to consider consulting a 
``qualified independent credit counselor or other experienced financial 
adviser'' and a list of approved counseling agencies. N.Y. Banking Law 
 6-1(1). Florida law allows consumers who cannot repay a payday loan 
to obtain a sixty day repayment grace period, but only if they 
successfully complete credit counseling by an approved agency during 
that period. Fla. Stat. Ann.  560.404.
---------------------------------------------------------------------------
    At the same time that these economic and political pressures have 
pushed more consumers toward counseling, abuses in the industry have 
led to serious deterioration in quality and an increase in deceptive 
and abusive practices. Aggressive firms masquerading as non-profit 
organizations have been among the credit counseling agencies that are 
most likely to deceive or to gouge consumers. Massive cuts in creditor 
funding for agencies has exacerbated this trend, and leaving many well-
intentioned organizations without sufficient funding to provide 
appropriate services. Most creditors have also reduced the economic 
concessions that they will offer to Americans who enter credit 
counseling, making it less likely that consumers will successfully 
complete credit counseling and more likely that they will have to 
declare bankruptcy.
    Despite these trends, we do not believe that the picture is 
entirely dark. On the contrary, we believe that multi-service credit 
counseling agencies can provide valuable services for consumers. We 
also believe that there is a legitimate and important role for non-
profit agencies to provide these services.\6\ However, if current 
abuses are allowed to persist, credit counseling services will all too 
often seriously harm rather than help consumers, leading them deeper 
into debt.
---------------------------------------------------------------------------
    \6\ Non-profit status is technically a state law concept, making an 
organization eligible for certain benefits, such as state sales, 
property and income tax exemptions. Although most federal tax-exempt 
organizations are non-profit, organizing as a non-profit at the state 
level does not automatically grant the organization exemption from 
federal income tax. We are focusing on qualifications for federal tax-
exempt status, but use the terms ``tax-exempt'' and ``non-profit'' 
interchangeably.
---------------------------------------------------------------------------

             SUMMARY OF PROBLEMS WITH CREDIT COUNSELING \7\

    It is important to note that the credit counseling industry 
developed in the mid-1960's through the efforts of credit card 
companies that saw a creative opportunity to recover overdue debts. 
Creditors created the industry and provided the bulk of the funding 
needed to keep the agencies in business. At first, most of the agencies 
were affiliated with the National Foundation for Credit Counseling 
(NFCC), a national trade organization that prescribes various standards 
for member organizations.
---------------------------------------------------------------------------
    \7\ Although not the topic of this testimony, many agencies now 
offer debt negotiation or settlement services in addition to or instead 
of debt management plans (DMPs). Negotiation and settlement differ from 
DMPs mainly because the agencies do not send regular monthly payments 
to creditors. In fact, they encourage consumers to pay fees to the 
negotiation firm and not pay their creditors. These agencies generally 
maintain debtor funds in separate accounts, holding these funds until 
the agency believes it can settle the entire debt. There are growing 
concerns about abuses in settlement and negotiation practices.
---------------------------------------------------------------------------
    From the outset, debt management plans (DMPs) were the feature 
service. Through these plans, a consumer sends the agency a lump sum, 
which the agency then distributes to credit card companies that the 
consumer owes money. In return, the consumer is supposed to get a break 
in the form of creditor agreement to waive fees owed, to eliminate all 
references to delinquent payments on the consumer's credit reports by 
``re-aging'' the account, and, and in some cases, to lower interest 
rates. Consumers also gain the convenience of making only one payment 
to the agency rather than having to deal with multiple creditors on 
their own. Through the ``Fair Share'' contribution, creditors 
voluntarily return to the agency a set percentage of the funds that are 
disbursed to them.
    Debt management plans include unsecured debt only. This is a 
critical issue because consumers with sparse resources should generally 
prioritize secured debt, such as home and car loans, over unsecured 
debt.\8\ In addition, DMPs may not even include all unsecured debt.
---------------------------------------------------------------------------
    \8\ See generally, National Consumer Law Center, Surviving Debt: A 
Guide for Consumers (2002).
---------------------------------------------------------------------------
    NCLC and CFA have found that in the last decade, the credit 
counseling industry has undergone an alarming transformation. Consumer 
demand for credit counseling has grown, funding to agencies has been 
sharply reduced, and an aggressive new class of credit counseling 
agencies has emerged. This new generation has brought some advances, 
such as flexible hours, electronic payments and easy access to 
counselors by phone and the Internet. Unfortunately, however, 
complaints about deceptive practices, improper advice, excessive fees 
and abuse of non-profit status have grown significantly as this new 
generation of credit counseling agencies has gained market share.
    Key problems highlighted in the NCLC/CFA report include:

     Deceptive and Misleading Practices: Among other problems, 
we described agencies that do not pay consumers' DMP payments on time, 
that deceptively claim that fees are voluntary, and that do not 
adequately disclose fees. In many cases, agencies deceptively 
exaggerate the types of concessions they can get from creditors to get 
people out of debt.
     Excessive Costs: As creditors have reduced funding, some 
reasonable fee increases are to be expected. However, in an industry 
that rarely charged for counseling and other services a decade ago, the 
vast majority of agencies now charge fees for services. At least a few 
agencies charge as much as a full month's consolidated payment simply 
to establish an account. Monthly DMP fees and costs for non-DMP 
services are also growing.
     Abuses in Non-Profit Status. This is the focus of our 
testimony today. The reality is that non-profit agencies are 
increasingly performing like profit-making enterprises. Many agencies 
aggressively advertise and sell debt management plans and a range of 
related services. The multi-service counseling, education, and debt 
management plan provider is becoming the exception rather than the 
norm.
     Decline in Consumer Education and Counseling Options: 
Consumer educational services are rapidly declining. Many agencies that 
claim to provide education and/or counseling merely sell slickly 
produced, but unhelpful, CD ROMs, videos or internet information. For 
example, our survey of agencies not affiliated with the National 
Foundation for Credit Counseling (NFCC) found that only five of the 
forty agencies surveyed offered services unrelated to DMPs. Among this 
minority of agencies, four out of five charged for these other 
services, including books and videos on debt problems.

    Although all of these issues are important and in many ways 
connected, I will focus mainly on issues related to non-profit status 
since this is the focus of today's hearing.

                      ABUSES OF NON-PROFIT STATUS

    Non-profit status has become, in practice, a requirement to do 
business in the credit counseling world. The credit counseling industry 
is comprised almost exclusively of 501(c)(3) tax-exempt organizations.
    Credit counseling agencies seek (and get) tax-exempt status for a 
variety of reasons. This status makes them eligible for exemptions from 
federal and state corporate income taxes. Most states automatically 
allow corporations that qualify for federal tax-exempt status to also 
qualify for state tax exemptions. Non-profit status is also required to 
get many public and private grants. In addition, creditors have 
traditionally required non-profit status to initiate Fair Share 
contributions.
    Agencies also seek non-profit status in some cases to comply with 
applicable state laws, some of which require non-profit status as a 
condition for doing business in the state. In other cases, non-profit 
status allows agencies to escape the reach of consumer protection laws. 
Many of these laws, such as federal and state credit repair laws and 
many state credit counseling laws specifically exempt non-profit 
organizations. This concern was explicitly noted in the October 2003 
joint I.R.S./F.T.C. advisory urging consumers to exercise caution when 
seeking help from credit counseling organizations. The agencies stated 
that, ``Federal and state regulators are concerned that some credit 
counseling organizations using questionable practices may seek tax-
exempt status in order to circumvent state and federal consumer 
protection laws.''\9\
---------------------------------------------------------------------------
    \9\ See ``IRS, FTC and State Regulators Urge Care When Seeking Help 
from Credit Counseling Organizations'', IR-200-20, October 14, 2003.
---------------------------------------------------------------------------
    Perhaps most deceptively, agencies use non-profit status as a 
marketing tool. They promote the non-profit label as a mark of 
credibility, appealing to consumer trust that non-profit organizations 
are ``above-board'' and about more than just making money. Agencies 
take great pains to characterize themselves as charitable in 990 tax 
forms, advertising and promotional materials. For example, many claim 
to serve the community through education even though, as noted above, 
they often charge for educational services or simply provide videos and 
CD ROMs and no individual counseling. More than one agency we contacted 
as part of our national survey told us that they are a non-profit 
agency, ``just like a church.''
    Using non-profit status as cover, many agencies characterize any 
fees charged as ``donations.'' Similarly, agencies often claim that 
creditors work with them because they too ``can write'' off 
contributions to the agencies. All too often, the basic scheme is a 
charade, disguising what is in reality a business arrangement between 
creditors and agencies. The truth is that even if they are voluntary, 
fees paid by consumers for services should not be classified as 
charitable contributions. Instead, consumers are paying for services. 
Similarly, the Fair Share arrangements between creditors and agencies 
are often formal, written agreements that describe how creditors will 
compensate agencies for helping the creditors collect money owed to 
them.
    Sadly and at great expense to taxpayers and to consumer clients, 
many credit counseling agencies should never have been able to attain 
the advantages of tax-exempt/non-profit status. There are two key areas 
where I.R.S. (and corresponding state laws) are being violated. Each of 
these is discussed in greater detail below.

               1. Improper Ties to For-Profit Businesses

    Agencies are not properly non-profit if they are organized or 
operated to benefit individuals associated with the corporation 
including directors, officers or members.\10\ No part of the net 
earnings of a Sec. 501(c)(3) organization may inure to the benefit of 
any private shareholder or individual. This is often called the ban on 
private inurement and is a basic tenet of I.R.S. tax-exemption 
requirements.
---------------------------------------------------------------------------
    \10\ 26 U.S.C.  501(c)(3).
---------------------------------------------------------------------------
    There is considerable evidence that the ban on private inurement is 
violated by some credit counseling agencies. Beginning a few years ago, 
the media began to uncover the extent of this problem, documenting 
instances of lavish salaries for agency directors and self-dealing in 
purchasing real estate and in creating close connections with for-
profit affiliated businesses such as lenders or payment services.\11\
---------------------------------------------------------------------------
    \11\ See, e.g., Eileen Ambrose, ``Debt Counseling Leads to Deeper 
Credit Woes'', Baltimore Sun, November 14, 2003; Jennifer Bayot, ``Not-
for-Profit Credit Counselors Are Targets of an I.R.S. Inquiry'', New 
York Times, October 14, 2003; Caroline E. Mayer, Easing the Credit 
Crunch?, Washington Post, November 4, 2001 at H01. Also see 
Massachusetts Senate Committee on Post Audit and Oversight, Losing 
Credibility: Troubling Trends in the Consumer Credit Counseling 
Industry in Massachusetts, July 2002.
---------------------------------------------------------------------------
    More recently, these abuses have been the target of public and 
private lawsuits. For example, both the Missouri and Illinois Attorney 
General Offices sued AmeriDebt, Debticated and related affiliates and 
individuals.\12\ Among other claims, both suits allege that AmeriDebt 
and Debticated falsely represent that they are ``not for profit'' 
companies. According to the Missouri complaint, the credit counselors 
are thought of and even referred to as ``salesmen'' of DMPs and are 
judged and evaluated in part upon their current week or month's sales 
and revenues. The complaint further alleges that AmeriDebt and 
Debticated transfer virtually all tasks and virtually all consumer fees 
to the related for-profit company DebtWorks. DebtWorks, according to 
the Missouri Attorney General, prepares proposals to creditors for 
consumers, communicates proposals to creditors, obtains consumers' 
approval for changes, and responds to consumer calls. The suit further 
alleges that the agencies falsely represent that they provide consumer 
credit counseling.
---------------------------------------------------------------------------
    \12\ The Illinois suit was filed in February 2003 and the Missouri 
suit in September 2003. For a copy of the Missouri complaint, see 
http://ago.missouri.gov/lawsuits2003/091103ameridebt.pdf. For a 
detailed discussion of a private lawsuit with similar allegations 
against Debticated, see Debra E. Blum, ``Checking Upon Credit 
Charities'', The Chronicle of Philanthropy, August 21, 2003.
---------------------------------------------------------------------------
    Interestingly, AmeriDebt announced in October 2003 that it would 
lay off most of its workers and stop seeking new customers because of 
negative publicity.
    A Massachusetts Attorney General action focuses on another way in 
which ``non-profit'' agencies have linked up with for-profit businesses 
to generate profits. In this case against Integrated Credit Solutions 
and Flagship Capital Services Corporation, the Massachusetts Attorney 
General alleges that Integrated, a for-profit telemarketer, solicits 
business for the non-profit Lighthouse Foundation.\13\ According to the 
complaint, Integrated induces consumers to pay exorbitant 
``enrollment'' and ``education'' fees to Integrated, a for-profit 
telemarketer, in order to receive credit counseling from Lighthouse, 
which purports to be independent and non-profit.
---------------------------------------------------------------------------
    \13\ This lawsuit was filed in December 2002. See ``AG Reilly Sues 
Telemarketer Accused of Using Deceptive and Misleading Tactics to Sell 
Credit Counseling Services to Consumers'', Press Release, December 19, 
2002. Available at: http://www.ago.state.ma.us/press--rel/
ics.asp?searchStr=1.
---------------------------------------------------------------------------
    To the extent the allegations discussed above are true, these 
agencies should have their non-profit status revoked and/or should be 
sanctioned appropriately.
    Related abuses involve unreasonable compensation and other benefits 
that are directed by the non-profit agencies to directors and officers. 
In our report, we described non-profit agencies that were paying 
directors salaries and related benefits worth over $400,000 annually. 
These troubling practices raise serious warning signs that agencies may 
be operating more to benefit themselves than the public. In addition, 
this is an area where I.R.S. has the power to sanction offending 
agencies.\14\
---------------------------------------------------------------------------
    \14\ 26 U.S.C.  4958 (I.R.S. ``intermediate sanctions'' rule).
---------------------------------------------------------------------------

  2. Many Credit Counseling Agencies Do Not Meet Threshold I.R.S. Tax-
                          Exempt Requirements

    This second set of problems relates to the I.R.S. threshold 
requirements for tax-exempt status. Section 501(c)(3) exempts from 
payment of federal taxes groups organized and operated exclusively to 
accomplish permissible charitable, educational, religions, literary or 
scientific purposes. Organizations must limit their purposes to one or 
more of these categories and must not engage, other than as an 
insubstantial part of their activities, in activities that do not 
further one or more of these purposes.
    The clearest problems occur among agencies that do not offer a 
range of services, have inappropriate ties to for-profit businesses as 
noted above, and aggressively sell DMP products. However, the question 
is relevant even beyond these most egregious offenders, primarily 
because of the close ties between credit counseling agencies and 
creditors. Credit counseling agencies can provide benefits for both 
consumers and creditors. However, an agency's primary concern, in all 
instances, should be providing the most appropriate services for 
consumers.
    It should be clear that an agency that primarily or exclusively 
sells DMPs is not providing a charitable service or product. This 
conclusion was affirmed in the October 2003 I.R.S/FTC statement that 
organizations that offer only DMP services, without significant 
education and counseling, ``. . . would not qualify for tax-exempt 
status.'' \15\
---------------------------------------------------------------------------
    \15\ See ``IRS, FTC and State Regulators Urge Care When Seeking 
Help from Credit Counseling Organizations'', IR-2003-120, October 14, 
2003.
---------------------------------------------------------------------------
    A DMP is a structured way to help consumers pay back unsecured 
debt. DMPs work well for some people, but not for everyone. In today's 
climate, creditors offer fairly limited concessions for consumers on 
DMPs. These limited concessions may be sufficient to allow some people 
to avoid defaulting on debt and to restore good credit. For others, it 
is just a dead end. It can prolong difficult financial circumstances, 
ruin a consumer's credit record, create innumerable difficulties and 
tensions at work and at home, and delay or stop a consumer from taking 
actions that might be more beneficial, such as negotiating individually 
with creditors or declaring bankruptcy. The exclusive focus on 
unsecured debt may also lead consumers to fall farther behind on 
secured priority debts such as mortgages or car loans. The consequences 
are severe, including possible foreclosure or car repossession.
    The key abuse that can occur when an agency with non-profits status 
is operating as a for-profit is that it will steer consumers into DMPs 
regardless of whether this is the best choice for them. The agencies do 
this because it makes financial sense for them, although not 
necessarily for consumers. DMPs bring in revenue and the agencies exist 
to bring in revenue. This may be a legitimate business if done well and 
honestly, but there is nothing ``non-profit'' or charitable about it.
    Over the years, the close ties between creditors and credit 
counselors have been questioned in a few court decisions, but for the 
most part upheld.\16\ The problem is that these decisions derive from 
earlier days when the vast majority of credit counselors provided a 
wide range of services, rarely charged consumers, and were able to 
receive sufficient funds from creditors to fund other aspects of their 
services.
---------------------------------------------------------------------------
    \16\ For example, in a key 1979 decision, the U.S. Tax Court 
disagreed with I.R.S revocation of tax-exempt status for a credit 
counseling agency. Consumer Credit Counseling Service of Alabama, Inc. 
v. U.S., 78-2 U.S.T.C. P 9660, 1978 WL 4548 (D.D.C. 1978). The court 
was persuaded that the agency's DMP services were merely ``adjunct'' to 
its counseling functions. The court also considered the fact that the 
agency charged only a nominal fee and that the community education and 
counseling assistance programs were the agency's primary activities.
---------------------------------------------------------------------------
    A more recent decision addresses the same issues in the context of 
the current credit counseling environment. In deciding that an NFCC-
affiliated agency was not entitled to a charitable tax exemption, the 
Supreme Judicial Court of Maine found that the agency provided benefits 
to creditors that were not merely incidental to its charitable 
purposes.\17\ The court noted the magnitude of the amounts collected 
for creditors and that the creditors paid Fair Share.\18\
---------------------------------------------------------------------------
    \17\ Credit Counseling Centers, Inc. v. City of South Portland, 814 
A. 2d 458 (Maine 2003).
    \18\ A dissenting judge argued that any benefit provided to 
creditors is incidental and that it is not clear in any case that 
creditors receive a benefit since they receive only a portion of the 
money already owed to them. See Id.
---------------------------------------------------------------------------
    The Maine Court recognized that the traditional model is no longer 
the norm. For the most part, however, courts and regulatory agencies 
have yet to catch up. The agencies have continued to get tax-exempt 
status despite the huge transformation in the industry toward national, 
aggressive agencies that often function as virtual for-profit business 
and are in ``business'' to sell a particular product--a DMP.
    Thus, the threshold requirement for tax-exempt status is in serious 
doubt in many cases. It is not always clear whether an agency is 
primarily charitable. The picture is clouded even further by 
unscrupulous agencies' efforts to disguise themselves. There is a lot 
of money at stake in the credit counseling industry. Disguised for-
profit agencies will go to great lengths to hide the true nature of 
their businesses.
    In many cases, the real picture can be uncovered simply by calling 
agencies and asking about their services, particularly about any non-
DMP counseling and educational services. We did this as part of our 
national survey and the results were often astounding. Nearly all of 
the ``counselors'' at the non-NFCC agencies we contacted by phone were 
surprised by inquires about courses or other consumer education 
resources. When asked this question, one counselor simply said, ``We 
consolidate credit cards. That's it.'' Another incorrectly said that no 
agency in the country offers classes. It is important to note, in 
contrast, that most agencies affiliated with the NFCC and some others 
still strive to provide some type of educational services. However, 
even among NFCC agencies, in-person presentations by counselors 
declined by 16.2% from 2000 to 2001.\19\
---------------------------------------------------------------------------
    \19\ Statistics provided with permission from the National 
Foundation for Credit Counseling. Data is derived from the 2001 Member 
Activity Report.
---------------------------------------------------------------------------
    Regulatory agencies should also focus on the content and quality of 
any education offerings. Does the agency simply sell cookie-cutter ``CD 
ROMS,'' videos and other materials? Does the agency have evidence that 
consumers have used these materials, have learned more about effective 
debt management, and, most importantly, have changed their behavior? Do 
they charge for these materials and, if so, how much?

            WHERE DO WE GO FROM HERE? VISION FOR THE FUTURE

    There have been many developments and responses, just in the past 
year, that have addressed abuses in the industry. As noted above, the 
I.R.S., F.T.C. and state regulators issued a joint October 2003 
advisory warning consumers about potential problems with credit 
counselors. The I.R.S. also issued a report earlier this year examining 
abuses in the credit counseling and credit repair industries.\20\
---------------------------------------------------------------------------
    \20\ Debra Cowen and Debra Kawecki, ``Credit Counseling 
Organizations'', CPE 2004-1 (January 9, 2003). As of November 2003, 
available at www.irs.ustreas.gov/pub/irs-tege/eotopica04.pdf.
---------------------------------------------------------------------------
    Public and private lawsuits, some of which were described above, 
have targeted key abuses. In addition several states have passed new 
laws meant to address abuses. However, some of these new laws either 
exclude ``non-profit'' agencies from regulation or confine the industry 
to non-profits without doing additional investigation as to whether the 
non-profit status of agencies that are operating is legitimate. In 
addition, to date, most of these laws have been inadequately enforced.
    Many sectors of the industry have also responded to the abuses that 
exist. For example, two of the key trade associations, the National 
Foundation for Credit Counseling and the Association of Independent 
Consumer Credit Counseling Agencies (AICCCA) have developed joint best 
practices standards. These standards are meant to foster self-policing 
of the industry. Although important, it is unclear to what extent the 
associations enforce these standards. In any case, the possible 
penalties include revocation of association membership only, with no 
effective recourse for consumers. In general, we believe that best 
practices standards can be positive if rigorously enforced, but are not 
a substitute for effective federal and state laws.
    Creditors have also begun to respond to these problems, but in 
contradictory ways that have had more of a negative than positive 
effect so far. For example, instead of contributing a flat amount to 
all agencies, several major creditors now link the amount of their 
contribution to the fulfillment of multiple requirements by agencies. 
In conjunction with lowering Fair Share contributions and making them 
more conditional, creditors have begun imposing restrictive standards 
that agencies must meet before they will accept proposed DMPs. Some of 
these new creditor-imposed conditions and requirements could help limit 
some of industry abuses. This is most likely to occur if these 
requirements are focused on increasing the affordability and range of 
options that are available to consumers and the quality of credit 
counseling. For example, conditioning creditor contributions on 
agencies' willingness to charge reasonable fees could lead some 
agencies to lower their fees, benefiting both consumers and creditors. 
However, until very recently, creditors have focused only on their 
bottom line costs by making deep, across-the-board funding cuts. 
Despite that fact that creditors have abandoned this unilateral 
approach and say that they are trying to properly fund effective 
agencies, the overall trend in the Fair Share has been down. This trend 
hurts the good agencies and the consumers who need access to quality 
credit counseling.
    Moreover, creditor policies have increased administrative overhead 
and reduced options at counseling agencies. In addition, creditor 
requirements have tended to reward the agencies that provide a high 
number of DMPs at low cost. This has helped to fuel the growth in high-
cost, low-quality ``mills'' that are focused only on getting as many 
people as possible into DMPs.\21\
---------------------------------------------------------------------------
    \21\ This attitude is exemplified by the comments of Fritz 
Elmendorf of the Consumer Bankers Association to the Chicago Tribune: 
``There have been cutbacks by some banks, particularly related to 
general budget tightening, but also because the services were not seen 
as providing a direct return by lowering credit losses. At the same 
time there are payment plan `mills' coming in with lower fees than the 
traditional fair-share arrangements. They're trying to gain market 
share. They help you rehabilitate the customer, and it costs you 
less.'' Janet Kidd Stewart, ``Debt Management and Counseling Services 
Are Multiplying as Consumer Loans Mount, But Not All Are Working in the 
Clients' Best Interest'', Chicago Tribune, February 23, 2003.
---------------------------------------------------------------------------
    In addition to these existing responses, much more needs to be 
done. It is particularly critical that the I.R.S. and state charitable 
regulators follow up on the October 2003 advisory and take disciplinary 
action against offending agencies, including, if necessary, revoking 
agencies' non-profit status. Only through proper enforcement can a 
legitimate non-profit credit counseling sector flourish.
    We believe that credit counseling can be a viable choice for many 
consumers. We also believe that scrupulous credit counseling agencies 
can properly meet non-profit standards. However, these goals will not 
be reached by federal and state regulatory enforcement alone. Agencies 
and creditors must also work to preserve the credibility of credit 
counseling and non-profit credit counseling in particular. Among other 
changes, non-profit credit counseling agencies must avoid undue 
reliance on creditor funding. Agencies can and are diversifying 
funding. Many receive funding from HUD or from foundations to provide 
housing counseling to first-time homebuyers and homeowners in 
distress.\22\ Others receive local funding to help seniors, for 
example, understand long-term care options and how to budget on a fixed 
income.
---------------------------------------------------------------------------
    \22\ Housing counseling funding, in particular, is limited and 
credit counseling agencies are in competition with non-profit HUD-
certified housing counselors. Traditional housing counseling agencies, 
for the most part, do not receive Fair Share funding and generally do 
not charge for services.
---------------------------------------------------------------------------
    The fact that agencies are funded by creditors is not intrinsically 
a violation of I.R.S. rules. The key question is whether the agencies 
are working primarily for the creditors or for the consumers. As one 
way of addressing this very real conflict in the industry, we recommend 
that new laws regulating credit counseling place an explicit fiduciary 
duty on agencies to their consumer clients.
    In addition, it is important to emphasize that legitimate non-
profit credit counselors can charge fees in some cases. However, these 
fees must be reasonable and imposed without undermining the charitable 
purposes of the agency. Whenever possible, agencies should strive to 
charge fees on sliding scales so that the neediest consumers can still 
receive assistance.
    In order to restore consumer confidence in the industry, it is also 
critical that the agencies and creditors operate more transparently. 
Financial arrangements, including Fair Share, must be disclosed. Fee 
scales should be honestly disclosed and not deceptively described as 
voluntary or donative. Agencies should also disclose their client 
retention rates annually--the proportion of consumers who do not 
successfully complete DMPs. And finally, non-profit agencies must 
counsel clients, provide education, and advise consumers on the full 
range of options.
    The creditor role in bringing about change is just as critical. 
Creditors should immediately take steps to encourage the improvement 
and expansion of effective credit counseling options for consumers who 
would not benefit from a DMP. This step alone will insure that agencies 
are meeting the educational requirements that non-profit status 
demands. Creditors should also increase financial support to credit 
counseling agencies, especially to improve credit counseling options 
for consumers who are unlikely to benefit from a DMP.
    Citigroup took a hopeful step in this regard when it notified 
agencies on November 4th that it will be replacing its Fair Share 
donation with lump sum charitable donations, which could be used for 
counseling and client education.\23\ This could have the positive long-
term effect of decreasing a major incentive for agencies to 
inappropriate enroll consumers in DMPs. However, this move could also 
prove to be hollow and counterproductive if Citigroup doesn't increase 
the actual amount it provides to effective agencies, allowing these 
agencies to hire additional staff to assist in providing and increasing 
counseling efforts. Otherwise, the agencies will be stuck simply trying 
to process DMPs and maintain the status quo, especially over the short-
term.
---------------------------------------------------------------------------
    \23\ Letter from Citigroup, November 4, 2003. On file with the 
Consumer Federation of America and the National Consumer Law Center.
---------------------------------------------------------------------------
    Creditors should also reverse the current trend toward reducing the 
concessions they offer to consumers who enter a DMP, especially 
regarding lower interest rates. This will help improve the retention 
rates in credit counseling and decrease the number of former DMP 
clients who end up in bankruptcy. Creditors should also work together 
to develop consistent administrative and payment requirements, thus 
reducing agency overhead and ensuring that more funds are used to 
assist consumers. In addition, creditors should immediately stop 
providing funding to agencies that charge high fees or are employing 
deceptive or misleading marketing practices.
    Finally, to promote these goals, there is a need for greater 
regulation to ensure that consumer rights are protected and that 
victims can seek redress in the courts. We are in the process of 
developing detailed recommendations.
    Among other provisions, we call for a limited registration system 
requiring an agency to register as a debt management or debt settlement 
provider in each state where it is doing business. Only agencies that 
are properly registered should be allowed to perform services in that 
state. At the time of filing for registration, all agencies should be 
required to furnish a cash or surety bond.
    We also recommend that the following written disclosures be given 
to consumers before initial enrollment for any service with the agency:

     Percentage and amount of funding the agency receives from 
creditors (as defined).
     Disclosure of any other financial arrangement the agency 
has with any lender or other provider of financial services.
     Disclosure of the various types of services offered by 
the agency.
     A statement that debt management and debt settlement 
plans are not suitable for everyone and that consumers can request 
information about other options, including bankruptcy. (This disclosure 
must appear in all advertisements as well.)
     A statement that debt management and debt settlement 
plans do not include secured debt, including a brief description of the 
most common types of secured debt such as mortgages and car loans.
     Existence of the surety bond.
     Statement that the agency cannot require donations. (This 
statement must appear in all advertisements as well.)

    We recommend that the following disclosures be given to all 
consumers before initiating debt management or debt settlement 
services:

     Full disclosure of all services to be provided and any 
up-front and ongoing fees to be charged for services (``fees'' includes 
both mandatory and voluntary fees).
     An estimate of the length of time required to complete 
services, the types of concessions offered by major creditors, and 
estimated amounts of concessions throughout the entire period of the 
plan.
    Agencies should be required to give consumers enrolling in debt 
management plans copies of written contracts that include certain 
critical information. Among other substantive provisions, we recommend 
that all contracts contain a right to cancel without obligation within 
a prescribed period of time after initial enrollment. A separate notice 
of the right to cancel must be provided at the time the contract is 
signed. In any case, either party should be allowed to cancel with 
proper notice. In addition, we believe that all contracts must include 
a full disclosure of services to be provided and all fees that will be 
charged.
    We believe the law should include strong standards to ensure that 
only consumers that can benefit from a DMP are enrolled. In order to 
make this assessment, agencies should be required to evaluate the 
consumer's household budget, including types and amounts of debt.
    New regulations should also specify minimum requirements for 
counselor training and reasonable fee limits for services. It is 
important to require agencies to maintain consumer funds in separate 
trust accounts and not commingle these accounts with operating 
accounts.
    At a minimum, the recommended prohibition of the following 
practices:

     False and/or deceptive advertising.
     Agencies should be prohibited from paying referrals to 
customers who bring in new customers.
     Agencies should be prohibited from purchasing debts from 
consumers and other third parties.
     Agencies should be prohibited from making loans to 
consumers and from profiting in any way or receiving any compensation 
from referring consumers to lenders and other creditors.
     Agencies should be prohibited from compensating employees 
or contractors based on any formula that provides commissions or 
incentives tied to the numbers of consumers enrolled in debt settlement 
or debt management plans.

    In order to ensure that these laws are meaningful, we call for 
strong remedy provisions including the voiding of contracts that are 
not in compliance and a private right of action for consumers to 
enforce the law, including provision for actual damages, treble or 
appropriate statutory damages, attorney's fees, and injunctive relief. 
Record keeping requirements are also critical to ensure that regulators 
can track trends in the industry and address abuses.
    In a time of economic uncertainty and growing debt, it is 
increasingly important to preserve credit counseling as an option to 
help consumers deal with debilitating debt problems. The services are 
not appropriate for all consumers, but can provide a much-needed safety 
net for many. This vision of a thriving credit counseling sector is 
possible only as long as the services provided are quality services, 
appropriate services, and to the extent offered by non-profit 
organizations, truly charitable and educational in nature.
    Thank you for the opportunity to testify today.

                                 

    Chairman HOUGHTON. Thank you very much, Ms. Loonin. Mr. 
Boisclair.

    STATEMENT OF W. PATRICK BOISCLAIR, PRESIDENT AND CHIEF 
EXECUTIVE OFFICER, CONSUMER CREDIT COUNSELING SERVICE OF MIDDLE 
   GEORGIA, MACON, GEORGIA, AND CHAIRMAN, BOARD OF TRUSTEES, 
NATIONAL FOUNDATION FOR CREDIT COUNSELING, INC., SILVER SPRING, 
                            MARYLAND

    Mr. BOISCLAIR. Good afternoon, Chairman Houghton and 
distinguished Members of the Subcommittee. I am Pat Boisclair, 
and I am pleased to speak to the Subcommittee today as Chairman 
of the Board of Trustees for NFCC. The NFCC is the Nation's 
longest serving and largest credit counseling organization, 
with 135 nonprofit members who collectively operate more than 
1,000 community-based offices nationwide, mostly known as 
consumer credit counseling services.
    Since 1977, I have also served as President and Chief 
Executive Officer of Consumer Credit Counseling Service of 
Middle Georgia, a nonprofit community-based agency which has 
been a member of the NFCC since 1971--as the Nation's original 
nonprofit credit counselors. We have witnessed a great deal of 
undisciplined change in the credit counseling industry, some of 
which has already been described today by the FTC, IRS, and 
NCLC.
    Some of these changes have brought service delivery 
improvements to the industry. Other changes have paved the way 
for unprecedented abuses of consumers by some of the new debt 
service operators. Yet amidst the marketplace confusion and 
current abuses within the service sector, the NFCC continues to 
govern its members through rigorous certification and 
accreditation standards that require our members to live up to 
their nonprofit status, and serve the consumers professionally, 
and with compassion. Members of NFCC offer free, low-cost 
education and counseling services to help consumers learn 
better money management and credit management skills.
    Our community service model also allows for interaction and 
cross-referrals with other local support services, such as 
family counseling, crisis lines, and legal aid, to help our 
clients with other underlying issues that may affect their 
finances. Only consumers in need of intervention with creditors 
are recommended for formal debt repayment plans, including 
concessions such as reduced monthly payments, waived late fees, 
and lowered interest rates. This has been, and continues to be, 
the holistic approach to service that NFCC members offer 
consumers who contact their offices.
    Over the past decade, we have seen some unsavory results 
from the unbridled changes in the credit counseling arena. Now, 
consolidated telemarketing phone centers have led to 
centralized, single-focus, debt prorating companies, some of 
whom masquerade as nonprofit credit counseling agencies. 
Instead of a holistic approach to counseling, these 
organizations have focused only on the revenue-generating 
aspects of our service sector--debt repayment plans.
    What they offer is a simple 15-minute, quick-fix question 
and answer session touted as a cure for consumers' ailing 
fiscal health. Many consumers are talked into debt repayment 
plans loaded with high fees. The more people these agencies 
sign up in debt plans, the more money they make. In some cases, 
basic budget counseling should have shown a consumer how to 
solve their own problems, but they were not offered that 
advice. These new providers play by their own rules not 
governed by local and independent boards of directors. For 
them, there are no checks and balances to ensure that their 
practices are fair, consumer-focused, and untainted by improper 
relationships, and shell transactions that enrich their 
executives and related for-profit companies.
    We are pleased that government officials and consumer 
advocates are beginning to realize what we have witnessed for 
sometime: that these unscrupulous players have declared open 
season on consumers. Members of NFCC believe that it is 
ethically and morally wrong to take advantage of vulnerable 
consumers, and to violate an organization's nonprofit status by 
failing to offer financial education and counseling. We are 
committed to our mission of improving the financial knowledge 
and money management skills of consumers.
    We also believe that the creditor community should share in 
the social responsibility, and should continue to provide 
resources to help support financial rehabilitation of our 
shared customer--the consumer. Yet given the current state of 
the industry, we also need the intervention of consumer 
advocates, government legislators, and regulators, to help 
protect consumers and preserve reputable credit counseling 
agencies.
    Our members, who serve small and large communities across 
the country, have for more than 50 years provided valuable 
service that has held families together through job losses, 
medical emergencies, domestic disputes, and other critical 
times. With your support, we hope to be around for years to 
come. Thank you once again for the opportunity to represent the 
NFCC here today.
    [The prepared statement of Mr. Boisclair follows:]

    Statement of W. Patrick Boisclair, Chairman, Board of Trustees, 
    National Foundation for Credit Counseling, Inc., Silver Spring, 
   Maryland, and President, Chief Executive Officer, Consumer Credit 
          Counseling Service of Middle Georgia, Macon, Georgia

    Good afternoon to the Honorable Chairman of the Committee on Ways & 
Means Subcommittee on Oversight Congressman Amo Houghton and to all of 
the distinguished Members of the US House of Representatives who are 
represented on this Subcommittee. I, W. Patrick Boisclair, am pleased 
to come before this Subcommittee today as Chairman of the Board of 
Trustees for the National Foundation for Credit Counseling, Inc., 
which I will refer to as the NFCC throughout my testimony. I am also 
pleased to join you as a practitioner, having served since 1977, as 
President & CEO of Consumer Credit Counseling Service of Middle 
Georgia, also known as CCCS of Middle Georgia, a nonprofit community-
based agency which has been a member of the NFCC since 1971.
    I am pleased to represent the nation's original and largest credit 
counseling organization, NFCC and its 135 nonprofit members who 
collectively operate more than 1,000 community-based offices 
nationwide. I am also here to represent the interests of the many 
consumers in need of financial education and debt relief who live in 
our communities and your congressional districts. Through my testimony 
over the next five minutes, I hope to provide you with greater insight 
on the undisciplined changes in the credit counseling industry. I also 
hope to share with you the impact of these changes on consumers who are 
seeking help to regain control of their financial situation and the 
reputable nonprofit credit counseling agencies that provide them with 
responsible, quality services.
    As many of you know, consumer credit has been one of the major 
fuels of our economy since the post World War II era, when it was 
introduced as a means of addressing some of the financial and social 
problems that existed for military families. But some of the 
originators of this financial tool soon realized that many people did 
not know how to properly use credit, and families and individuals began 
to default on their debts. Their remedy was the creation of the NFCC, 
which was established in the 1950's as the National Foundation for 
Consumer Credit. For clarification purposes, the NFCC changed its name 
in 2000 to the National Foundation for Credit Counseling.
    The NFCC initially monitored legislative and regulatory activity 
for its retail credit members, such as J.C. Penney and Sears. The NFCC 
also conducted public awareness campaigns on credit and provided 
children and families with educational classroom materials to help them 
understand the proper use of credit as a family financial planning 
tool.
    During the early 1960's, the increasing use of credit resulted in 
the establishment of NFCC's original nonprofit charter members, known 
as Consumer Credit Counseling Service in their local communities. These 
agencies began to offer educational programs and counseling to 
consumers on managing and overcoming debt. They also ignited a growing 
grassroots movement of agencies, all whom were NFCC members. These 
agencies were also the early pioneers who fought the battles to get 
creditors to help support financial rehabilitation of their clients 
through nonprofit counseling services.
    A decade later the credit industry began to experience radical 
changes as more retailers and banks extended credit to more consumers. 
Industry conditions were further impacted in the 1970's by revisions in 
the Bankruptcy laws and the recession of the 1980's. Many creditors 
responded to these market and legal changes by extending more 
educational services and debt relief resources to their customers 
through the credit counseling industry. For NFCC member agencies this 
increased support brought the creditors and credit counseling agencies 
together to serve the needs of their mutual customer, the consumer. 
There was a shared commitment to customer service between the two 
parties that formed a strong safety net for people who had lost control 
of their financial situations.
    During the 1980's, the strong show of support from creditors came 
in many forms, including assistance to help NFCC agencies 
professionalize, modernize and expand their services. More consumers 
received free financial management advice and educational services to 
help consumers learn better money management skills to get out of deep 
debt on their own and stay of out debt trouble in the future. Consumers 
experiencing issues that our members were not trained to address were 
referred to other local support services to help with underlying issues 
such as unemployment, abuse, addictions, medical issues and bankruptcy 
advice. Only those in need of intervention with creditors were offered 
formal debt repayment plans which sometimes included concessions 
ranging from reduced monthly payments to waived late fees and lowered 
interest rates.
    This has been, and continues to be, the holistic approach to 
service that NFCC members offer consumers who contact their offices. 
These services are provided in-person, by telephone and in some cases 
over the internet and by mail.
    The early1990's ushered in another era of change for the credit 
industry and the credit counseling industry. A decade later, we are 
seeing the unsavory results of the new phenomenon that began to unfold 
as executives from other industries moved into the nonprofit credit 
counseling industry. The deregulation of the telecommunications 
industry aided their cause and the creation of new phone counseling-
only centers.
    Some of these new independent agencies sought to join the NFCC, but 
chose not to live up to our membership standards and we said, thanks 
but no thanks. Consequently several of these agencies sought legal 
redress in the mid-1990's and challenged the relationship between 
creditors and NFCC members--agencies that demonstrated high standards 
and customer success. In the lawsuit, one agency alleged that the 
creditors and the NFCC conspired together to create a monopoly for NFCC 
members and to keep others out of the counseling business. While they 
sued their way into the doors of creditors, they continue to choose not 
to meet our governing standards and we continue to require adherence to 
high standards as a condition for membership.
    The onset of these consolidated telemarketing phone centers has led 
to centralized, single-focused, debt prorating companies, some of whom 
masquerade as nonprofit credit counseling services. Instead of a 
holistic approach to counseling, some have become experts at skimming 
off the most profitable aspect of counseling services; debt repayment 
plans. Their claims: ``and you too can get help in just minutes.'' It 
all starts with a 15-minute, one size fits all, quick-fix counseling 
session touted as a cure for the consumer's ailing fiscal health. Many 
consumers soon learn that they have been talked into a debt repayment 
plan or consolidation loan, loaded with high fees, when in some cases 
the consumer could have solved their own debt situation after receiving 
budget counseling advice.
    Some have abandoned true financial education and counseling 
altogether. Others have changed the quality of service for the worse 
and are driven by quantity, versus quality. The more people they sign 
up on debt repayment plans, the more money they rake in from excessive 
consumer fees and creditor contributions to fatten their bottom lines. 
And since they don't have local offices, consumers who seek customer 
service to resolve account issues are at the mercy of telemarketers and 
telephone recordings. As a result, some consumers can't get through to 
a person to find out why their payments have not been received by their 
creditors.
    This is becoming common practice with many of the new national 
providers that only offer phone services. Many of these agencies are 
not governed by local and independent Boards of Directors who ensure 
that their practices are fair, consumer focused and untainted by 
improper relationships and shell transactions that enrich their 
executives and for-profit companies.
    The abuses and excesses of these alleged nonprofit agencies have 
resulted in the counseling industry's own figures like the Enron's, 
WorldCom's and Tyco's of the for-profit sector, which are now turning 
this industry on its head. Their deceptive practices injure consumers, 
the NFCC and all other reputable credit counseling agencies that 
provide excellent services and that are true to their nonprofit 501 (c) 
(3) designations.
    There are many factors that set NFCC members apart from other 
organizations. To name a few, we believe it is ethically and morally 
wrong to take advantage of vulnerable consumers and to violate one's 
nonprofit status by failing to offer financial education and budget 
counseling services to consumers. Secondly, we have safeguards that 
govern our members' operations and services through membership 
standards, consumer protection standards, third-party accreditation 
services and trained and certified counselors. These protocols govern 
how our members operate and must be followed by any agency that joins 
the NFCC.
    Many of the new debt service providers operate by their own rules 
and don't see the need to practice high standards that protect 
consumers. NFCC members see things differently, and it is our goal to 
bring to the attention of government officials, consumer advocates, 
creditors, and all affected parties, that these unscrupulous players 
have declared open season on consumers. The assaults include multi-
million dollar advertising campaigns that bombard consumers 24-hours-a-
day, excessively high fees that add to a consumer's burden and affect 
payments to creditors, poor or no customer service and no 
accountability for the agencies' operations and services.
    Many of the new players have contributed to marketplace confusion 
and some have even attempted to trade on our NFCC and CCCS trademarks. 
While this is problematic for us, unconscionable harm is being done to 
uninformed consumers who ultimately become the victims of these new 
players' deceptive and irresponsible practices.
    As NFCC members, we are committed to our social responsibility to 
improve the financial knowledge and money management skills of 
consumers. We also believe that the creditor community shares in this 
social responsibility, which can be accomplished through consumer 
education at the point when their customers are facing financial and 
debt problems. But given the current state of the counseling industry, 
we also need the intervention of consumer advocates and government 
legislators and regulators to help protect consumers and to help 
preserve reputable credit counseling agencies.
    We must protect our ability to maintain and grow our agencies. But 
we need the help of government officials to attack the money trail of 
some of these new players and take the excessive profitability out of 
this industry. As a result, some of them will go away. Consumers need 
to know that they can still turn to true nonprofit services for fair 
and objective advice that is appropriate for their situation. We need 
your help to restore the respect and trust of the credit counseling 
industry that NFCC and its members have built over the past 50 plus 
years. Without this help, the true community service agency model will 
not survive and many consumers will suffer.
    Our physical presence in local communities places our members in a 
unique position that allows them to look across the landscape of 
America to see the financial strain of ordinary and sometimes not so 
ordinary people. We're also right there in the heart of your 
congressional districts to see that many students and families get off 
to a good financial start as they prepare to purchase their first 
automobile or home.
    In fact, our members, which serve small and large communities 
across the country, have for more than 50 years, provided valuable 
services that have held families together through job losses, medical 
emergencies, domestic disputes and other critical times. With your 
support, we hope to be around for years to come.
    We look forward to working with Congress, federal and state 
regulators, consumer advocates, creditors and others to help shape a 
national dialogue and to establish policies and guidelines that will 
protect consumers from predatory debt service providers and that will 
sustain the long-standing, reputable credit counseling agencies in our 
industry. Thank you once again for this opportunity to represent the 
NFCC and the consumers we serve.

                                 

    Chairman HOUGHTON. Thank you, Mr. Boisclair. Mr. Jones.

    STATEMENT OF DAVID C. JONES, PRESIDENT, ASSOCIATION OF 
   INDEPENDENT CONSUMER CREDIT COUNSELING AGENCIES, FAIRFAX, 
                            VIRGINIA

    Mr. JONES. Chairman Houghton and Members of the 
Subcommittee, my name is David Jones, and I am the President of 
the AICCCA. I appreciate being asked to appear before you today 
on behalf of the members of our organization. We share your 
goal of assuring that consumers facing serious debt problems 
can consult with a nonprofit credit counseling service with the 
assurance that they will receive responsible and fair 
assistance. The AICCCA provides for self-regulation of its 
members through strict membership standards, and a code of 
practice that is the basis for independent accreditation of 
each agency.
    Further, every counselor must be independently certified by 
the Institute for Personal Finance. These standards, we 
believe, are the most rigorous in the industry today. The 
AICCCA and the NFCC have had effective self-regulation 
standards in place for many years. It is even probable that the 
U.S. Department of Justice's Office of the U.S. Trustee is 
contemplating similar standards for credit counseling under the 
provisions of the pending bankruptcy reform legislation.
    As the availability of unsecured credit has grown over the 
past decade, so have default rates and the demand for credit 
counseling. To meet this demand, there have been many new 
nonprofit credit counseling agencies entering the industry. 
This growth in unsecured debt has led to the same growth in 
consumers repaying their debt through debt management plans 
through credit counseling agencies.
    Credit card issuers have been inundated by delinquencies 
and by debt management plan proposals made to help consumers 
get back on track with their family finances. The numbers of 
consumers seeking debt management plan help have resulted in 
credit grantors being unwilling to continue to provide fair-
share contributions to the credit counseling agencies at the 
level that were common only 10 years ago.
    Fifteen percent fair-share, then, has declined to an 
average of 6 percent today. Agencies could offer responsible 
credit counseling, consumer education, and debt management 
plans when they were needed to consumers, at no cost when they 
received 15 percent from creditors. They find themselves today 
unable to provide these services free at 6 percent. They have, 
therefore, been forced to pass on the costs to the consumer, or 
to reduce services--or both.
    Today, debt management plans are very rarely free to the 
consumer. Credit counseling and education remain largely free 
services, but they are supported almost completely by revenues 
generated by debt management plans. As the demand for credit 
counseling grew, some saw the possibility of providing the 
service largely to generate profit. Some have developed 
services that have required substantial fees or voluntary 
contributions from the consumer.
    While these actions may be entirely legal, some have seen 
them as predatory. As consumers and consumer advocates have 
complained, some have introduced new laws designed to limit 
fees and offer consumer protection. These laws today represent 
a patchwork quilt of regulations across the country; sometimes 
they are even conflicting.
    Although well meaning, some of them are also so severe as 
to actually prohibit the supply of responsible services to the 
citizens that they were designed to protect. The bill, H.R. 
3331, was introduced in the House recently, and the Senate may 
be considering its own bill. The National Conference of 
Commissioners on Uniform State Laws has undertaken the 
development of a consumer debt management act designed to be 
enacted by the States.
    In addition, the bankruptcy reform legislation approved by 
the House in March still awaits Senate action. All of these 
legislative actions, combined with those from the States, 
portend a staggering level of regulation for this industry. The 
AICCCA recognizes the need for strong consumer protection. The 
interests of vulnerable citizens must come first.
    These protections should be considered carefully and 
coordinated with State regulations so that relatively small but 
essential credit counseling services are not driven out of 
existence in the process. The AICCCA stands ready to assist the 
Subcommittee on Oversight as this inquiry continues, and I want 
to thank you very much for allowing me to speak today.
    [The prepared statement of Mr. Jones follows:]

  Statement of David C. Jones, President, Association of Independent 
         Consumer Credit Counseling Agencies, Fairfax, Virginia

    Chairman Houghton and members of the Subcommittee, for the past 
four years I have served as President of the Association of Independent 
Consumer Credit Counseling Agencies (AICCCA). I am the retired 
President of a prominent consumer credit counseling and education 
services company. I have been associated with the credit counseling 
industry for the past seven years. Prior to that, I was President and 
CEO of a software development and consulting company. I spent much of 
my career at Lockheed Corporation and ended my tenure there as Vice 
President of Marketing. I currently dedicate my efforts to improving 
credit counseling and consumer education throughout the industry. I 
hold BS, MBA, and Ph.D. degrees and I am a graduate of the Brookings 
Institution Center for Public Policy Education.
    On behalf of AICCCA's members, I want to thank the Subcommittee for 
inviting me to provide our views to you today. We share and support the 
Subcommittee's goal of assuring that consumers facing substantial debt 
problems can consult with a non-profit credit counseling agency with 
the knowledge that they will receive assistance based on their own best 
interests, and not the best interest of the agency.

                     AICCCA FOUNDING AND STANDARDS

    The AICCCA was formed in May of 1993 to support independent credit 
counseling agencies nationwide. It currently has 50 members serving 
over 750,000 clients repaying their unsecured debts through legitimate 
debt management plans. Together, these agencies annually return over 
$3.2 billion in consumer payments to the nation's creditors. The AICCCA 
has championed fair pricing, stringent ethical guidelines, and consumer 
protection standards governing the activities of its members. Three 
years ago, the AICCCA instituted independent agency accreditation 
requirements through the International Standards Organization. That 
accreditation to ISO-9001 includes thorough annual Code of Practice 
audits and represents the most rigorous, independent, audit-based 
accreditation and oversight in our industry today. Our current Code of 
Practice is attached to this testimony as an Appendix.
    The AICCCA provides for self-regulation of its member agencies 
through strict membership standards and a Code of Practice that is the 
basis for independent accreditation by the International Standards 
Organization under ISO-9001. This independent third-party 
accreditation, combined with an equally independent certification of 
all agency counselors by the Institute for Personal Finance-AFCPE, 
provides significant assurances for consumers needing counseling 
services that they will be treated fairly and competently. The National 
Foundation for Credit Counseling (NFCC) has similar requirements for 
its members. However, the many agencies that do not belong to either of 
these associations are not bound by such rigorous standards.

              AN INDUSTRY FACING UNPRECEDENTED CHALLENGES

    Traditionally, credit counseling has been supplied by non-profit 
agencies that offer debt-burdened consumers family budget counseling 
and personal finance education, as well as direct intervention with 
creditors to obtain their consent to a workout plan to pay down debt on 
an affordable schedule. Only those consumers who would benefit from a 
debt management plan and who were likely to successfully complete it 
were enrolled. This service was supplied largely free to consumers and 
was supported in large part by creditors who routinely returned 15% of 
the funds forwarded to them by the agency as a ``fair share'' 
contribution. As credit cards and other forms of unsecured consumer 
credit proliferated, so did the number of borrowers experiencing 
repayment difficulty. Greater demand for credit counseling spawned more 
credit counseling companies. With a bigger marketplace, some of the new 
agencies began to view the development of debt management plans as a 
source of profit. Consequently, creditors began to see many more 
proposals for debt management plans to the extent that the traditional 
contribution amounts became quite large expenditures.
    With large fair share expenditures beginning to become noticeable 
on their income statements, and with many more questionable debt 
management plans being received, creditors began to reduce the 
percentages paid to the credit counseling agencies. All creditors 
gradually adopted that practice. The result today is an average fair 
share contribution of only about six percent, or about a sixty percent 
reduction over the past seven years. In addition, creditors have cut 
back significantly on interest rate reductions or other concessions to 
borrowers enrolling in debt management plans, making these plans less 
attractive and more difficult to fund for debtors in danger of 
bankruptcy.
    The effect of reduced fair share support has been twofold. To 
survive, credit counseling agencies have had to reduce traditional 
services or they have had to pass more of the costs for providing 
services on to consumers, or both. More recently, creditors have 
increasingly recognized that agencies which emphasize debt management 
plans and charge excessive fees are not operating in the best interests 
of either consumers or creditors and have terminated fair share 
contributions for such agencies. However, these agencies can afford to 
carry on without such creditor support and can stay in business so long 
as they can get their debt management plans accepted. It is not clear 
whether creditors could simply refuse to accept their plans, or whether 
additional regulatory support is required to avoid antitrust issues. 
Meanwhile, consumers who feel dissatisfied with or even exploited by a 
particular credit counseling agency and who switch to another often 
find that federal banking regulations bar them from receiving another 
``re-age'' on their accounts, leaving them hopelessly past due on 
payments and often triggering a bankruptcy filing.
    Compounding the challenges for counseling agencies have been the 
requirements imposed by creditors to use Electronic Funds Transfer, 
electronic transmission of proposals, and a plethora of varying 
creditor performance measurement systems that agencies have to respond 
to so that they can continue to receive fair share contributions. While 
these requirements make sense for individual creditors, they have 
collectively placed a substantial administrative compliance burden on 
counseling agencies; AICCCA is currently holding discussions with major 
creditors regarding the extent to which such requirements can at least 
be made uniform.
    Add to this new set of requirements the legislative actions by 
states that wish to protect their citizens from unscrupulous agencies, 
and the industry is even more overwhelmed. Recent examples are New York 
and Maryland, which have passed well-meaning laws requiring very high 
bonding levels. In New York, a bond of $250,000 is prescribed and in 
Maryland the required bond is $350,000, which can be reduced under some 
circumstances. A medium-sized credit counseling agency usually can't 
get a $250,000 bond, much less afford to pay for it. This is compounded 
by the requirement to post similar bonds in multiple states. This means 
that services from some responsible credit counseling agencies are 
being denied to the very citizens that these laws were meant to 
protect. The agencies that may abuse the trust of these citizens are 
sometimes the only ones who can surmount these bonding hurdles and 
therefore their services are the only ones available for many of those 
consumers; some have become the largest agencies in the country.
    These borderline agencies concentrate their efforts where they can 
receive the most profit: enrolling consumers in debt management plans. 
Some pay little attention to the need for effective credit counseling 
and consumer education. Consumers who don't need or can't qualify for a 
debt management plan may get little if any help in these cases--or 
worse, they may be enrolled in a debt management plan that they cannot 
complete. Some of these agencies have also established for-profit 
entities that provide ``back office'' services to the non-profit. In 
some cases, the principals of the non-profit may be principals of the 
for-profit. Such agencies also usually have large advertising budgets 
designed to provide an ample stream of prospects for their services. In 
many cases, their fees or requested (but often required) voluntary 
contributions are very large, sometimes equal to the client's total 
first month's payment to all creditors. Continuing monthly maintenance 
fees are also frequently high by industry standards. These initial and 
monthly fees or contributions from consumers obviate the need for 
support from creditors and are sufficient to fuel the advertising costs 
as well as the services expense for the associated for-profit. While 
these practices depart significantly from traditional ethical industry 
practices, they may not be considered illegal in many jurisdictions. 
They also may or may not violate IRS standards that govern their non-
profit status.
    The reduction of fair share contributions from creditors combined 
with increasing operational costs has led to the industry-wide need for 
additional monetary support directly from consumers in order to 
continue to offer credit counseling services. The need for the 
availability of quality credit counseling to debt-burdened consumers 
continues to increase as evidenced by unprecedented levels of personal 
bankruptcy filings. Very low interest rates and the availability of 
affordable second mortgages or home refinancing have allowed consumers 
to take the equity from their homes to consolidate their other bills. 
This situation, which appears to be advantageous for consumers today, 
could bode ill for the future if many find themselves in difficulty 
again due to poor spending and saving habits that result in even larger 
levels of debt. Some of these consumers will not only be debt-burdened 
yet again but will be at risk of losing their homes to foreclosure and 
even more vulnerable to the practices of some predatory credit 
counseling agencies.

                           REGULATION IN FLUX

    The current regulatory landscape represents a patchwork quilt of 
differing and sometimes conflicting laws in some states. The industry, 
almost completely non-profit due to state law requirements, is subject 
to FTC regulations and IRS scrutiny. AICCCA believes it is important to 
maintain the industry's non-profit status. Allowing for-profit agencies 
to operate would place even more emphasis on income-generating 
activities while abandoning traditional education and counseling--
unless pervasive regulation and supervision were put in place to assure 
that consumers' best interests were served.
    The state regulations are not generally well administered, leaving 
law-abiding agencies to strain for compliance while those who ignore 
the law operate without penalty, and apparently sometimes even without 
official notice or sanction. The IRS oversight may also be lax, as many 
borderline agencies appear to be continuing practices that may be in 
conflict with tax-exempt regulations. This situation has not escaped 
the notice of the press, the U.S. Congress, and some state legislators. 
New laws have been introduced in Maryland, California, and Maine, and 
increased state administration efforts have been noted in other states. 
However, many state laws seek to strictly and unrealistically limit 
fees and impose unreasonable surety bonding requirements. These well-
meaning statutes often serve to reduce the ethical services available 
to their citizens rather than protect them. As previously noted, 
bonding levels are so high in some states that the majority of credit 
counseling agencies cannot secure them. Large borderline agencies can 
secure them and questionable practices such as selling useless add-ons 
or referring the consumer to a loan company allow them to operate 
within fee guidelines if they decide to comply with the statutes. Some 
continue to operate outside of the statutes in defiance of them and go 
undetected, or at least unpunished.
    This situation has attracted the attention of the National 
Conference of Commissioners on Uniform State Laws (NCCUSL). A new 
committee to draft a uniform Consumer Debt Management Act was convened 
last week in Chicago, and I attended that initial meeting. This 
drafting effort is intended to erase the consumer abuses by some 
agencies while not harming those agencies that seek to serve consumers 
appropriately. At its base is a rigorous licensing requirement designed 
to ensure consumer protection, and hopefully this process will produce 
a uniform state law proposal that meets that goal without placing undue 
burdens on ethical non-profit counseling agencies. This committee is 
led by Judge William C. Hillman of the United States Bankruptcy Court 
in Boston and is supported by prominent commissioners from across the 
country. Such a uniform statute, if enacted by the states, could 
provide the consumer protections that are badly needed. Thoughtful 
federal legislation could very well accomplish the same end. This 
Subcommittee may find discussions with Judge Hillman and the drafting 
committee helpful. What would not be helpful to the credit counseling 
industry would be to move from a situation of weak and inadequately 
enforced state regulation to one of excessive, duplicative and 
conflicting state and federal regulation.
    The recent introduction of HR 3331 by Congresswoman Julia Carson is 
an attempt to control counseling industry abuses. However as this 
legislation is not pre-emptive, the burden of dual state and federal 
regulation should this bill be enacted would be staggering. In 
addition, rather than providing for regulatory control of industry 
practices, HR 3331 specifies a variety of litigation causes of action 
and penalties that could bankrupt the industry altogether. Federal 
legislation may or may not be required depending upon state actions and 
strict enforcement and oversight activity by the IRS. It must also be 
remembered that the pending bankruptcy reform legislation, passed by 
the House in March and awaiting Senate action, would have the 
beneficial effect of empowering the Department of Justice's Executive 
Office of U.S. Trustee to establish minimum standards for agencies 
approved for bankruptcy pre-counseling for the Nation's most needy 
consumers.

                               CONCLUSION

    We recognize the need for strong consumer protections in the credit 
counseling industry. The interests of these vulnerable citizens must 
come first and must not be overshadowed by the for-profit interests of 
a few who seek to take undue advantage of their personal financial 
situations. But Congress should not rush to impose new federal 
regulation until effective enforcement of existing law has been tried. 
And any federal intervention must be carefully coordinated with the 
rapidly evolving state regulatory regime to avoid driving small but 
beneficial agencies out of existence.
    The AICCCA stands ready to assist the Oversight Subcommittee as 
this inquiry continues. Thank you again for this opportunity to testify 
today.
                                 ______
                                 

               Appendix--Current AICCCA Code of Practice

Code of Practice
Addendum to the ISO 9001:2000 Standard
for
Consumer Credit Counseling Agencies
October 8, 2003
CODE OF PRACTICE ADDENDUM TO ISO 900
Consumer Credit Counseling Code of Practice
1. INTRODUCTION
    This document has been produced in cooperation with BVQi-NA and the 
Association of Independent Consumer Credit Counseling Agencies 
(AICCCA), with the knowledge and review of major creditors to provide a 
universal Code of Practice for Consumer Credit Counseling Agencies. 
This Code of Practice is viewed as a customer specific requirement and 
shall be an integral part of the audit for those seeking ISO 9001 
certification under its requirements. The document is intended to 
comply with credit lenders certification requirements. Consumer credit 
counseling agencies seeking this endorsement must achieve ISO 9001 
certification and satisfy the requirements of this Code of Practice.
    ISO Registration to this Code of Practice. Any ISO-certified 
independent registrar must agree to audit all consumer credit 
counseling agencies seeking their registration services to this Code of 
Practice regardless of their affiliation to any association and will 
refuse to issue certificates to such credit counseling agencies without 
their compliance to this Code of Practice.
    This Code of Practice document has been created by AICCCA in 
conjunction with major creditors and an ISO registrar. The AICCCA Board 
of Trustees maintains proprietary responsibility for the control, 
ownership, and approval of this document and any subsequent revisions.
    Where a service directly affecting the critical elements of the 
counseling function and/or the Debt Management Program is to be 
subcontracted, that subcontractor shall comply with this Code of 
Practice. If non-counseling elements are subcontracted, those vendor 
subcontracts will be audited to ensure that the contractual 
relationship embodies adequate controls with respect to the 
requirements of this Code of Practice. Critical credit counseling 
elements must be performed by a non-profit entity and are defined as 
all activities that are performed by qualified counselors and client 
service activities that are not specifically related to payment 
processing.
    This Code of Practice does not apply to Debt Settlement activities 
that may be performed by a credit counseling agency.
    Compliance with the principles included within this Code of 
Practice does not absolve the individual consumer credit counseling 
organization from meeting and/or exceeding their legal responsibilities 
and the requirements of all state and federal laws relevant to the 
services or products offered.
2. REFERENCES
    Reference shall be made to the following documents and all relevant 
updates and amendments as applicable:

     ISO9001--Quality Management System requirements.
     IRC 501 (c)(3)--Internal Revenue Code of the United 
States.
     All state and local regulations, codes, and other legal 
and customer requirements governing the conduct of business and 
consumer credit counseling agencies' activities.
3. INDUSTRY DEFINITIONS
    The following definitions apply to this Code of Practice In 
addition to the definitions given in the ISO 9001 standard:

Industry

Consumer credit counseling agencies, clients, credit lending 
organizations, trade associations, and subcontractors.

Agency

The entity seeking registration pursuant to this Code of Practice.

Business Day

Any day that the nation's banks are open for business.

Client

The customer for whom a consumer credit counseling agency provides 
service.

Creditor

The credit lending entities.

Critical Credit Counseling Activities (performed by non-profit 
entities)

All activities that are performed by qualified counselors and client 
service activities that are not specifically related to payment 
processing (see Non-Critical Credit Counseling Activities below). These 
activities are subject to full ISO audit.

Non-Critical Credit Counseling Activities (may be performed by 
subcontract)

Activities that need not be performed by qualified counselors or client 
services personnel such as payment processing (i.e., proposal 
processing, client payment receipt and distribution, changes to client 
payments, creditor payment receipt, and answering creditor issues about 
client payments) or other vendor relationships (e.g., telephone 
service, software, payroll, etc.). These activities, if subcontracted, 
are subject to ISO audit of the contract only. If not subcontracted, 
these activities are subject to a full ISO audit.

Counselor

Certified consumer credit counseling agency personnel who provide 
guidance and assistance to the client.

Education

Any service or product provided to improve the consumer's knowledge of 
personal financial management that is provided over--and-above the 
enrollment process, whether the benefiting consumer actually enrolls in 
a debt management program or not.

Service

The counseling and coordination and other support provided by the 
consumer credit counseling agency on behalf of the client and creditor.

Standard

Refers to the ISO 9001 Quality Standard

Subcontractor

A third party who has been contracted by a consumer credit counseling 
agency to provide a service, product, or support to the agency.

4. CODE OF PRACTICE REQUIREMENTS
    The sub-clause numbers of this Code of Practice are not related to 
the sub-clause numbers of ISO 9001. Each sub-clause requirement is in 
addition to the ISO 9001 standard shall be complied with and be 
integral to the ISO 9001 Quality System and applies to all 
organizations seeking compliance to the Code of Practice. Procedures 
must be controlled and processes must be audited to demonstrate 
conformance to this Code of Practice.
    This Code of Practice requires that documentation of the 
interaction and sequence of processes include those processes that are 
subcontracted except for those defined as Non-Critical Credit 
Counseling Activities. This documentation shall include a description 
of services that are provided and the legal description of the company 
providing those services.

5. ACCESS TO SERVICE
    The consumer credit counseling agency's management shall define and 
document its policy and procedures for a client's access to service. 
There shall be objective evidence of conformance to demonstrate the 
following:

    A. The consumer credit counseling agency stands ready to serve all 
clients who seek service regardless of:
                1. A client's ability to pay
                2. The creditors owed
                3. The dollar amount owed.
    B. The consumer credit counseling agency shall provide service, or 
at minimum acknowledgement of the request for service, within two 
business days of receipt of the request, service at times convenient to 
the client, and service through means that are convenient to potential 
and existing clients.

6. COMMUNITY EDUCATION
    The consumer credit counseling agency shall establish and maintain 
records of activities which address the support of or conduct of 
community education on issues related to consumer credit and money 
management. Records shall be maintained documenting the extent to which 
community education has been delivered.

7. COUNSELOR TRAINING
    The consumer credit counseling agency shall establish and maintain 
documented records in accordance to ISO standards which address the 
qualifications and training of counselors. The consumer credit 
counseling agency shall be able to demonstrate that counselors are:

    A. Adequately trained to meet the needs of the organization
    B. Certified by a qualified independent authority as identified by 
AICCCA or the National Foundation for Credit Counseling (NFCC)
    C. Each counselor must begin the certification process within six 
months of hire and complete it within 12 months of hire.

8. SERVICE RESOURCES
    The consumer credit counseling agency shall determine and provide 
the resources needed to:

    A. Fulfill the client's service requirements
    B. Fulfill the creditor's service requirements.

9. SERVICE REQUIREMENTS
    The consumer credit counseling agency shall be able to demonstrate 
that:

    A. Counselors conduct comprehensive interviews, to include, at a 
minimum:
                1. The client's complete financial position (e.g. 
                assets, liabilities, income, and expenses)
                2. Identify and explore the root cause of the client's 
                financial situation.
    B. Counselors develop a solution which is optimum for both the 
client and the creditors, to include:
                1. Possible alternatives such as liquidation or 
                leveraging of assets
                2. Financial counseling to clients who do not need 
                payment assistance
                3. Providing a DMP to clients as an alternative to 
                bankruptcy
                4. Advise client to close all credit lines with 
                consideration for business or employment related 
                purposes
                5. Encouragement to avoid additional debt while the 
                client is improving their financial situation
                6. Communicate the consequences that obtaining new 
                revolving debt has on the success of the DMP
                7. Identification of additional relevant community 
                resources, which may include: family counseling, mental 
                health counseling, and/or addiction treatment and 
                counseling.
    C. Provide the client with a documented evaluation of his/her 
financial status to include a recommended plan of action which 
addresses the identified issues.
    D. Service shall be provided with documented disclosure to clients 
regarding the:
                1. Fee structure for services provided: if a fee is 
                not charged for the service, then any contribution 
                requested by the agency from the client must be clearly 
                identified and noted that it is voluntary
                2. Creditors support of the consumer credit counseling 
                agency through fair share contributions
                3. Potential impact on the client's personal credit 
                report
                4. Client's responsibility to monitor financial 
                statements/reports from creditors and the consumer 
                credit counseling agency, to verify their accuracy, and 
                to detect and report discrepancies.

10. COMPENSATION AND FEES
    The consumer credit counseling agency shall maintain documented 
evidence that demonstrates its ability to maintain a low fee structure 
for services, with specific focus upon:

    A. Compensation is not paid to the counselor based upon the 
outcome of the counseling process.
    B. Fees, voluntary contributions, or requested donations from 
clients for the enrollment into a Debt Management Plan (DMP) do not 
exceed the lesser of $75 or the maximum fee allowed by law in the state 
of residence of the client
    C. Fees, voluntary contributions, or requested donations from 
clients for the maintenance of a DMP do not exceed the lesser of $50 or 
the maximum fee allowed by law in the state of residence of the client
    D. Fairshare payments to the agency are voluntary contributions 
directly from creditors and are not considered part of B. and C. above.

11. FISCAL INTEGRITY
    The consumer credit counseling agency shall define, document and 
demonstrate procedures regarding their policies on financial 
disciplines and fiscal integrity to include, at a minimum:

    A. An annual certified audit by an independent certified public 
accountant is conducted of all trust and operational books and records
    B. Accurate accounting and records of all clients' deposits and 
debits to creditors are maintained throughout the life of the DMP
    C. Funds received from clients for a DMP must be disbursed to the 
creditors no later than 15 days from receipt of valid funds, or by 
scheduled disbursement date, whichever is later.

12. LEGAL STATUS AND GOVERNANCE
    The consumer credit counseling agency shall define and document 
their legal status, such that:

    A. The consumer credit counseling agency is a non-profit 
organization which complies with Internal Revenue Code of the United 
States, IRC 501(c)(3) requirements
    B. The consumer credit counseling agency is licensed in all states 
in which it conducts business as required by law
    C. The consumer credit counseling agency has a diverse governing 
Board, the composition of which represents the interests of all its 
constituents
    D. The consumer credit counseling agency shall have a majority of 
members of their governance Board who are not employed by the agency; 
will not benefit financially, directly or indirectly, from the outcomes 
of counseling sessions with clients; and who are not related by blood 
or marriage to other board members or employees of the consumer credit 
counseling agency.

13. COMPLAINT/CONFLICT RESOLUTION
    The consumer credit counseling agency shall respond to all consumer 
complaints within five (5) business days and will take necessary action 
to resolve the complaint in a timely manner. Records of the complaint 
and disposition shall be maintained.

                                 

    Chairman HOUGHTON. Thank you, Mr. Jones. Mr. Hall.

STATEMENT OF MICHAEL HALL, FOUNDER AND CHIEF EXECUTIVE OFFICER, 
          TAKE CHARGE AMERICA, INC., PHOENIX, ARIZONA

    Mr. HALL. Thank you, Mr. Chairman, Members of the 
Subcommittee. I appreciate very much the opportunity to appear 
before you today, and I am honored to be here. My name is 
Michael Hall. I am the founder and chief executive officer of 
Take Charge America, Inc., one of the Nation's oldest and 
largest nonprofit credit counseling agencies. It is a member in 
good standing of the American Association of Debt Management 
Organizations (AADMO), and the AICCCA. Take Charge America 
provides credit counseling and/or debt management services and 
educational programs to nearly 200 American households 
annually. In addition, through the management of nearly 65,000 
debt management programs, the company returns over $500 million 
annually to the national economy.
    The cornerstones of the company are consistent excellence 
in customer service, unwavering integrity, and leading-edge 
technology in educational programs. Our 428 employees are fully 
dedicated to our charitable mission of helping consumers become 
financially literate, financially stable, and ultimately 
financially independent. Millions of dollars are committed to 
our educational endeavors each year, and we believe that the 
reach and depth of our program is unsurpassed in the industry. 
Our offerings include a wealth of web-based articles and 
materials, and our Take Charge America software, which we 
believe is basically the best financial software available 
anywhere.
    We have established and endowed the Take Charge America 
Institute for Consumer Financial Education and Research, at the 
University of Arizona, for the purpose of developing research-
based financial education programs. Through a series of grants 
to Montana State University, we have developed a model 
financial literacy program for high school students and 
teachers. We sponsored university-based credit counseling 
centers for college students, a nationwide intercollegiate 
competition, and personal financial management. Our own budget 
doctor makes personal appearances at schools and before 
community groups--and the list goes on.
    My purpose in testifying here today is fourfold. First, I 
hope to shed some light on the problem contributing to the 
current state of our industry. Second, I am here to carry the 
message to the Subcommittee that the nonprofit model is the 
correct model for our industry. Third, I strongly encourage the 
continuous, aggressive IRS oversight of the industry's 
nonprofit charitable activities. Finally, I support the 
strengthening of consumer protection laws that would provide 
strong deterrence to agencies violating consumer trust.
    The vast majority of nonprofit credit counseling agencies 
are doing a good job. Undeniably, there are a number of 
companies operating on the ethical fringes that do not share 
our commitment to charitable service. These companies are 
sometimes characterized by questionable advertising practices, 
by initial fees that amount to hundreds or even thousands of 
dollars, and by the practice of contracting customer service to 
for-profit backend servicing organizations that leave nonprofit 
entities as little more than a front for obtaining weary 
customers.
    Fortunately, recent actions by the FTC and the IRS have 
forced several of the biggest offenders to consider their 
practices. Yet offenders still exist, and their lack of ethics 
has left consumers confused and distrustful of all credit 
counseling agencies. Nonprofit credit counseling agencies 
provide a low-cost opportunity for distressed consumers to keep 
their promises to creditors, reduce their debt, and restore 
their self-esteem and creditworthiness. More importantly, 
however, nonprofit status of credit counseling agencies 
provides the motivation and financial resources for the most 
essential and long-lasting of our contributions: education and 
financial literacy for all Americans who seek our assistance.
    In the for-profit environment, the emphasis on education 
would be lost, as most for-profit agencies would seek to 
discontinue educational programs altogether or charge fees for 
such services that are beyond what most financially stressed 
households are able to bear. In contrast, Take Charge America 
is able to provide budget planning advice, access to 
educational materials on matters related to personal finance, 
and a copy of our Take Charge America personal financial 
management software to over 100,000 financially distressed 
American households each year--totally free of charge.
    We are also able to waive the normally modest fees charged 
for debt management plans for consumers who are simply unable 
to pay. We do these things to fulfill our nonprofit mission. 
For-profit entities cannot be expected to view the needs of 
consumers with the same charitable outlook.
    In conclusion, we commend the inquiries of this 
Subcommittee, the IRS, and other Federal agencies involved in 
the effort to fix the shortcomings of the nonprofit credit 
counseling industry. Continued recognition of the nonprofit 
status of credit counseling agencies meeting the requirements 
of 501(c)(3) is crucial for the millions of financially 
distressed American households who turn to the credit 
counseling agency to provide affordable assistance in finding 
ways to avoid personal bankruptcy, restore financial stability, 
and honor their financial commitments.
    We encourage the IRS to expand its audit of the charitable 
activities of credit counseling organizations, thereby 
discouraging the uncharitable and predatory practices of some 
industry members. Aggressive scrutiny by the IRS will 
strengthen our industry and improve access of financially 
troubled consumers to affordable and consistently reliable 
financial literacy education, and other financial counseling 
and debt management solutions. Thank you very much for allowing 
me to be here today.
    [The prepared statement of Mr. Hall follows:]

 Statement of Michael Hall, Founder and Chief Executive Officer, Take 
                 Charge America, Inc., Phoenix, Arizona

    Mr. Chairman, Members of the Subcommittee:
    Thank you very much for inviting me to appear before you today. I 
am honored to be here.
    My name is Michael Hall and I am the founder and CEO of Take Charge 
America, Inc., (TCA) one of the nation's oldest and largest nonprofit 
credit counseling agencies. Our 428 employees provide financial 
counseling and financial literacy educational programs free of charge 
to any consumer who seeks our assistance. Known until recently as 
Credit Counselors of America, Inc., TCA provides credit counseling and/
or debt management and educational services to nearly 200,000 American 
households annually. In addition, through the management of nearly 
65,000 debt management programs, the company returns nearly $500 
million annually to the national economy. The cornerstones of the 
company are consistent excellence in customer service, unwavering 
integrity, and leading edge technology and educational programs.
    We are fully dedicated to our charitable mission of helping 
consumers become financially literate, financially stable, and 
ultimately, financially independent. Millions of dollars are committed 
to our educational endeavors each year and we believe that the reach 
and the depth of our programs is unsurpassed in the industry. Our 
offerings include a wealth of web-based articles and materials and our 
Take Charge America software, which we believe is simply the best 
personal financial management software available anywhere.
    In furtherance of our universal goal of financial literacy for all 
consumers, we have established and endowed the Take Charge America 
Institute for Consumer Financial Education and Research at the 
University of Arizona, which we expect to become the preeminent center 
in the nation for the development of research-based financial education 
programs. Through a series of grants to Montana State University, we 
have developed a model financial literacy program for high school 
students and teachers. We sponsor a university-based credit counseling 
center for college students and a nationwide intercollegiate 
competition in personal financial management. Our own Budget Doctor 
makes personal appearances at schools and before community groups. In 
collaboration with a nationally known video production group, we are 
developing a video series in personal financial management for high 
school and college students, and the list goes on and on.
    My purpose in testifying here today is four-fold:

     First, I hope to shed some light on the problems 
contributing to the current state of our industry;
     Second, I am here to carry the message to the 
subcommittee that the nonprofit model is the correct model for the 
industry;
     Third, in order to protect consumers as well as the 
genuine nonprofit activities of the many credit counseling agencies 
that are truly committed to the charitable purpose of improving 
financial literacy for all Americans, I strongly encourage the 
continuous aggressive IRS oversight of the industry's nonprofit 
charitable activities; and
     Finally, I support the strengthening of consumer 
protection laws that would provide strong deterrents to agencies 
violating the consumers' trust.
The Problems of the Nonprofit Credit Counseling Industry
    The vast majority of nonprofit credit counseling agencies are doing 
an admirable job. Undeniably, there are a number of companies operating 
on the ethical fringes that do not share our commitment to charitable 
service. These companies are sometimes characterized by questionable 
advertising practices, by initial fees that amount to hundreds or even 
thousands of dollars, and by the practice of contracting customer 
service to for-profit servicing shops that leave the nonprofit entity 
as little more than a front for obtaining unwary customers. The 
existence of these practices has led to much of the public criticism of 
our industry, which in many cases, is well deserved. Fortunately, 
recent actions by the FTC and the IRS have forced several of the 
biggest offenders to reconsider their practices. Yet, offenders still 
exist and their lack of ethics has left consumers confused and 
distrustful of all credit counseling agencies.

Preserve the Nonprofit Model for Qualifying and Conforming Credit 
        Counseling Agencies
    I believe that the IRS initially granted nonprofit status to the 
credit counseling industry with the following specific goals in mind:

    1. To create a mechanism through which financially distressed 
consumers could obtain affordable financial counseling, budget 
counseling and debt management services;
    2. To provide financially distressed consumers with an alternative 
to bankruptcy and thereby facilitate the annual return of billions of 
``at risk'' dollars to the national economy that translate into 
substantial tax revenues for the U.S. Treasury; and
    3. To provide a financial incentive to counseling agencies 
qualifying for nonprofit status to invest in the development of 
financial literacy programs and educational materials, and to 
subsequently provide these programs and materials to financially 
distressed consumers, students of all ages and the general public.

    In light of the economic downturn over the past few years, these 
goals are more appropriate than ever. Revolving consumer debt exceeded 
$700 billion at the conclusion of 2002. Over the last 12 months, 
consumer bankruptcy filings have increased by about 10% over the 
record-setting pace of the prior year.
    Nonprofit credit counseling agencies provide a low-cost opportunity 
for distressed consumers to keep their promises to creditors, reduce 
their debt and restore their self-esteem and credit worthiness. More 
importantly, however, the nonprofit status of credit counseling 
agencies provides the motivation and financial resources for the most 
essential and long-lasting of our contributions--education and 
financial literacy for all Americans who seek our assistance.
    In a for-profit environment, the emphasis on education would be 
lost as most for profit agencies would either seek to discontinue 
educational programs altogether or would, in an attempt to turn 
educational services into corporate profit centers, charge fees for 
such services that are beyond what most financially distressed 
households are able to bear. Indeed, in a for profit environment, 
households most in need of educational opportunities are those who are 
least likely to be able to pay for such services.
    In contrast, because of the financial capacity enabled through its 
tax-exempt status, TCA is able to provide budget planning advice, 
access to educational materials on matters related to personal finance, 
budgeting and the wise use of credit, along with a copy of the TCA 
personal financial management software to over 100,000 financially 
distressed American households each year, totally free of charge. We 
are also able to waive the normally modest fees charged for debt 
management plans for those consumers who are simply unable to pay. We 
do these things to fulfill our non-profit mission. For profit entities 
cannot be expected to view the needs of consumers with the same 
charitable outlook.
Strengthen Consumer Protection Laws
    As industry leaders, we are strong proponents of consumer friendly 
federal legislation, directed specifically at protecting the interests 
of vulnerable, financially distressed American households and 
furthering the ability of the non-profit credit counseling community to 
deliver meaningful, life-changing educational and counseling services 
to those households.
Conclusion
    We commend the inquiries of this subcommittee, the IRS and other 
federal agencies involved in the effort to fix the shortcomings of the 
non-profit credit counseling industry.
    Continued recognition of the non-profit status of credit counseling 
agencies meeting the requirements of Section 501 (c)(3) of the Internal 
Revenue Code is crucial for the millions of financially distressed 
American households who turn to credit counseling agencies to provide 
education on matters related to personal financial management and 
provide affordable assistance in finding ways to avoid personal 
bankruptcy, restore financial stability and honor their financial 
commitments.
    We believe that the existing legislative and regulatory framework 
is more than adequate for assessing the legitimacy of individual agency 
501 (c)(3) status. We encourage the IRS to expand its audits of the 
charitable activities of credit counseling organizations, thereby 
discouraging the uncharitable and predatory practices of some industry 
members.
    Inasmuch as creditors typically require tax-exempt status as a 
condition of accepting an agency's debt management proposals, the 
revocation of this special status for the few abusive organizations 
would permanently discourage unscrupulous industry practices. 
Aggressive scrutiny of charitable status by the IRS will strengthen our 
industry and improve access of financially troubled consumers to 
affordable and consistently reliable financial literacy education and 
other financial counseling and debt management solutions.
    Thank you for allowing me to address you on this critically 
important subject.

                                 

    Chairman HOUGHTON. Thank you, Mr. Hall. Mr. Illingworth.

  STATEMENT OF MONTIETH M. ILLINGWORTH, SPOKESMAN, CAMBRIDGE 
CREDIT COUNSELING CORP., AGAWAM, MASSACHUSETTS; ACCOMPANIED BY 
    CHRIS VIALE, CHIEF OPERATING OFFICER, CAMBRIDGE CREDIT 
                        COUNSELING CORP.

    Mr. ILLINGWORTH. Thank you, Mr. Chairman. On behalf of 
Cambridge Credit Counseling Corporation, I want to express my 
appreciation to you, Mr. Chairman, and to the Subcommittee, for 
this opportunity to appear before you today and offer our 
insights on credit counseling industry reform. We have been 
calling for this kind of open, balanced, and fair-minded dialog 
for at least a year now, and, to be frank, it has sometimes 
been a solitary mission.
    We see ourselves as not only up against an 
institutionalized monopoly with a firm grip on the industry, 
but also against an old-style monopolistic thinking that seeks 
to squash all competition, limit consumer choice, and exclude 
new innovative solutions to the growing problem of 
indebtedness. In that mindset, is the view that any company in 
this business that has had financial and client success 
providing education and credit counseling services must be 
doing something wrong.
    Hopefully, then, today's opportunity to share with you why 
our success on behalf of our clients is in fact a best-
practices model for reform. Hopefully, we will be able to 
demonstrate that because Cambridge Credit Counseling Corp. and 
its families of companies are licensed, regulated, and annually 
examined in four States--including the State of New York--our 
best-practices model has repeatedly stood the test of both 
time, and regulatory oversight. Hopefully, today we will mark 
the beginning of the end of the monopoly.
    It is what we call the ``credit counseling trust,'' and to 
us that means it is a new future for consumers--to empower them 
if we can achieve that. What we would like to do at this point, 
is walk you through the life and times of a best-practices 
credit counseling provider. We would also like to suggest that 
we keep our eyes on the real prize here, which is empowering 
consumers and serving the consumers. So, let's begin with our 
mission to educate consumers. We have done that by advocating 
on consumers' behalf, and we have done that through an ad 
campaign, and our supporting documents. We have the first of 
those ads, and we will be running another one next week on the 
issue of the monopoly. In this advocacy, we have not always 
been met with open minds.
    There has been a focus on the bad apples in this industry, 
and rightfully so. Those must be isolated, stopped, and, if 
possible, brought into conformity with a new set of rigorous 
laws to protect consumers. Yet there has also been wholesale 
criticism of our organization, because we do not look, act, 
think, or function like the monopoly that rules this industry; 
and that monopoly is the NFCC, the AICCCA, the Consumers 
Federation of America, and the NCLC. That criticism has fixed 
on the salaries paid to our executives, on the relationship 
between our nonprofit and for-profit businesses, and how we 
market ourselves.
    We are happy to answer any questions on any one of those 
issues today, but in our advocacy program, we respectfully ask 
you--do not let those issues distract you from the real issue 
of achieving responsible reform. Our core mission is to educate 
consumers, providing the guidance and tools they need to assess 
their financial situation, and make the right decision for 
themselves on how to become debt free. Since we began 
operations in 1993 in a storefront, Mr. Puccio, a second or 
third-generation Italian American, built that business by the 
sweat of his brow--and we will come back to that later. He 
began in a storefront and he provided educational assistance 
and counsel to 2 million consumers. Of those, 1.8 million were 
provided free--I repeat, free--counsel. Very often these were 
people who did not qualify for the debt management program, and 
Mr. Viale will explain to you why not.
    Today, we continue to receive around 358,000 calls per 
month--of which we help educate and counsel 31,000 people for 
free, and enroll a mere 10 percent--a mere 10 percent. So, 
today we have approximately 90,000 active clients. The success 
of these programs is clearly demonstrated by the numbers. 
Thirty-two percent of our clients succeed; they pay off their 
debts. I defy any organization in this country to match that 
number. Success is also in the fact that only 2.63 percent of 
all the clients served have filed for bankruptcy. Our complaint 
rate of 2 million people counseled is only 574--that is 0.0287 
percent, which is probably lower than the local bank in the 
corner of your town, sir. So, we also provide consumers with a 
2.5-hour educational series, workbooks, and a quarterly 
newsletter. The counseling continues every time the client 
calls, and that goes on for many, many hours over the life of a 
program. Mr. Viale can explain to you precisely what happens. 
Before people enroll in the management program, we also fully 
disclose our fees verbally and in writing. We provide an 
example of a contract, and you can see how that is clearly 
spelled out.
    We also believe that if you provide people with incentives 
for success, they will be more likely to succeed. Our program, 
the only one of its kind in this country, not duplicated by 
anyone in this industry, gives back half of all the money 
received from creditors to our clients, who make six 
consecutive payments. It is inspiration for them. It is 
discipline. It works. This can significantly offset the fees 
that are charged. We have given back $12 million to consumers--
$12 million. No one else has done this. Which brings us to the 
issue of the monopoly. The NFCC, the consumer credit counseling 
member companies, and the AICCCA control this industry. Their 
core business rests on a conflict of interest that has taken 
power from the consumer. The monopoly relies almost solely on 
fair-share payments from the creditor banks to pay for the 
services. When their paychecks come from the creditors and not 
from the consumer, who do you think they are beholden to?
    Our business model challenges that monopoly. Mr. Puccio, 
who came up with this business model, challenges that and 
shifts the power back to consumers. We empower consumers, not 
the creditors, to decide for themselves what they are willing 
to pay in order to achieve their debt management goals. So, we 
would also like to say this: the choice before us today is not 
just between understanding who are the good credit counselors 
and who are the bad ones. In our mind, that is easy to do. The 
hard part is deciding whether we are going to provide the 
consumer with a real choice in providers, whether we believe in 
competitive markets or not, and whether we are going to do 
everything we can to empower the consumer to succeed with debt 
management, or dictate to the consumer that all they deserve is 
what amounts to a social service not much different from when 
it was started 50 years ago. Our clients tell us that they are 
tired of being treated like welfare cases. They want respect, 
they want the tools to succeed, and they are willing to pay for 
it.
    Finally, we would like to call for a summit meeting on the 
issue, the issue of reform, and bring together all the voices, 
all the points of view. Frank, open, and fair discussion is far 
better than the sniping that has been going on in the press, 
and in the disguise of industry reports that are supposed to be 
fair and objective. This is a higher public policy, calling to 
all of us, than the specter of the witch hunt that we see 
coming over the horizon. Thank you very much for your time and 
attention.
    [The prepared statement of Mr. Illingworth follows:]

   Statement of Montieth M. Illingworth, Spokesman, Cambridge Credit 
 Counseling Corp., Agawam, Massachusetts; accompanied by Chris Viale, 
       Chief Operating Officer, Cambridge Credit Counseling Corp.

    On behalf of Cambridge Credit Counseling Corp., I first want to 
express my appreciation to Representative Houghton and to the 
Subcommittee for this opportunity to appear before you today and share 
with you our insights into the reform of the credit counseling 
industry.
    We have been calling for this kind of open, balanced and fair-
minded dialogue between the public and private sectors on the issue of 
industry reform for over a year now. To be frank, it has sometimes been 
a solitary mission. We see ourselves as not only up against an 
institutionalized monopoly with a firm grip on this industry, but also 
against old style monopolistic thinking that seeks to squash all 
competition, to limit consumer choice and exclude new, innovative 
solutions to the growing problem of consumer indebtedness--a problem 
which today impacts around 35 million American households.
    In that mindset is the view that any company in this business that 
has had financial and client success providing education and credit 
counseling services to consumers MUST be doing something illegal or 
unethical.
    Hopefully, then, today is our opportunity to share with you why 
Cambridge Credit Counseling's success is, in fact, a best practices 
model for industry reform.
    Hopefully, we will be able to demonstrate to you that Cambridge and 
its family of companies are licensed, regulated and annually examined 
in four states--including New York which has the most stringent 
regulations governing financial services in this country--our best 
practices model has repeatedly stood the test of both time and 
regulatory oversight.
    Hopefully, we will show you that we have found the ``secret sauce'' 
for delivering consumer benefit at a fair and reasonable cost--proven 
by the fact that to date over 200,000 consumers have chosen Cambridge 
Credit Counseling to help them get out of debt and enjoyed some $12 
million in funds that we rebate back to them through our unique Good 
Payer program.
    And hopefully, today will mark the beginning of the end of the 
monopoly--what we call the ``Credit Counseling Trust''--and a new 
future for consumers desperate for empowerment to become debt free.
    What we would like to do at this point is walk you through the life 
and times of a best practices credit counseling provider. We also want 
to suggest keeping our eyes on the real prize here--how we can all best 
serve consumers. The success of our organization should therefore not 
be the issue today. The success and empowerment of our clients and how 
we helped enable that is the issue.
    Let's begin with the commitment to our mission to educate 
consumers. Most recently that has meant advocating on consumers' 
behalf. For over a year now we have called for responsible reform by 
reaching out to government and to consumer and public interest groups 
and in a series of ads placed in The New York Times, The Washington 
Post, American Banker and USA Today.
    In our advocacy we have not always been met with open minds. There 
has been a focus on the ``bad apples'' of this industry, and rightfully 
so. Those ``worst of class'' providers must be isolated, stopped and if 
possible brought into conformity with a newly formed set of rigorous 
laws and regulations protecting the consumer. But there has also been 
wholesale criticism of our organization because we don't look, act, 
think or function like the dominant providers controlled by the 
``Credit Counseling Trust'', namely, the National Foundation for Credit 
Counseling, the Association of Independent Credit Counseling Companies 
Agencies, Consumer Federation of America and the National Consumer Law 
Center.
    That criticism has fixed on the salaries paid to our executives, on 
the relationship between our non-profit and for profit businesses, and 
how we market our services. We are happy to answer any questions on 
those subjects. But our advocacy program, and our appearance here, 
respectfully asks that you not let that distract you from the real 
issues of achieving responsible reform. We think they are ``best 
practices'' for the future of this industry. And it's these best 
practices we want to focus on next.
Cambridge Credit Counseling's Best Practices
    Our core mission is to educate consumers with the guidance and 
tools they need to assess their financial situation and make the right 
decision on how to become debt free.
    Since we began operations in 1993 in a storefront we have provided 
educational assistance and counsel to some 2 million consumers. Of 
those, 1.8 million were provided FREE--I repeat FREE--counsel. Very 
often these are people who didn't qualify for a debt management 
program.
    Today, we continue to receive around 35,000 calls per month of 
which we help educate and counsel around 31,000 people for free and 
enroll a mere 10 percent. And so, today we have approximately 90,000 
active clients in debt management programs.
    The success of those programs is clearly demonstrated by the 
numbers:

     The success is also in the fact that only 2.63 percent of 
all the clients served have filed for bankruptcy. And do know that we 
do everything we can to prevent people from falling into bankruptcy, 
which includes a special ``Hardship Program'' that helps when clients 
can't pay on time or afford the monthly amount due.
     And the success is in the fact that out of the close to 2 
million people counseled there have only been 574 complaints--a rate 
of.0287 percent--lower than your average commercial bank we would 
venture.

    The education and counseling doesn't end at the point of 
enrollment. We provide consumers with a two and one half hour 
educational series, with workbooks along with a quarterly newsletter. 
And the counseling continues every time a client has a question or 
concern, of which there are many, and our trained and certified 
counselors are there to help them. We invite any and all of you to walk 
through our Agawam, Massachusetts office any day of the week and listen 
to the counselors and you'll see what we mean--often it is a problem 
with a creditor or a bill collector.
    Before people enroll in a debt management program we fully disclose 
all fees and charges, verbally and in writing.
    We also believe that if you provide people incentives for 
succeeding they'll be more motivated to succeed. Our Good Payer 
program, the only one of its kind in the country, gives back fully half 
of all the monies we collect from creditors to our qualified clients 
when they make six consecutive payments. These rebates also can 
significantly offset the fees we charge--a subject that we know is of 
likely concern to you today.
    Cambridge Credit Counseling charges a program design fee equal to 
one month's payment. Much of that is offset by the Good Payer rebate. 
As such, in an industry study we commissioned with Economists Inc. of 
Washington DC, our fees were found to ``fall within the range'' of 
other credit counseling companies and in several cases were lower. The 
report went on the say that because of the ``many additional services'' 
we provide consumers Cambridge Credit will ``increase competition'' 
which may lead to ``lower prices and/or higher quality services for 
consumers.''
    Which brings us to how we acquire our clients. On average, 1,500 
consumers a month call us looking to switch from other credit 
counseling agencies. Their number one compliant is poor service. 
Referrals from current clients, very happy ones, result in 30% of new 
clients most months. Another 25% come from our extensive educational 
outreach programs and debt management seminars we hold with groups as 
the Basketball Hall of Fame and College Bowling USA and with numerous 
high schools, community centers and colleges such as Amherst and the 
University of Massachusetts all at a cost of over one million dollars 
this year. The remaining 50% come from our own marketing 
communications.
    There is a lot of aggressive marketing going on and we're sure you 
want to ask us about that today. First, please know that we don't 
telemarket. We have an awareness campaign on television and in print 
that leaves it up to the consumer to call us. Second, and most 
importantly, please know that not one creditor bank or government 
agency refers business to us. We mention this because dozens upon 
dozens of banks and government entities refer consumers to the Credit 
Counseling Trust who monopolize this industry.
    Which brings us to the issue of that monopoly. The NFCC, their 
Consumer Credit Counseling member companies and the AICCCA, together 
control this industry. But their core business model rests on a 
conflict of interest that has taken power from the consumer. The 
monopoly relies almost solely on fair share payments from the creditor 
banks to pay for their services. When their paychecks come from the 
creditors, and not the consumer, to whom do you think they are 
beholden? Our business model challenges that monopoly and shifts power 
back to consumers. We empower consumers--not the creditors--to decide 
themselves what they are willing to pay for in order to achieve their 
debt management goals. For the many thousands of consumers who have 
chosen Cambridge Credit it is clear that they are voting for freedom 
both from their debts and from the monopoly.
    We have provided the Subcommittee an accompanying document that 
provides far more detail on all of these points and on the best 
practices they represent. We hope you will find that of interest.
    We would like to say this: the choice before us today is not just 
between understanding who are the good credit counselors and the bad 
ones. In our mind that's easy to do. The hard part is deciding if we're 
going to provide the consumer a real choice in providers, whether we 
believe in competitive markets or not. And it's whether we're going to 
do everything we can to empower the consumer to succeed with debt 
management or dictate to the consumer that all they deserve is what 
amounts to a social service not much different in form or content than 
it was when it started 50 years ago. What our clients tell us is that 
they are tired of being treated like welfare cases. They want respect, 
they want the tools to succeed, and they are willing to pay for it.
    Finally, we would like to call for a summit meeting on the issue of 
reform and bring together all voices, all points of view, to air and 
debate the issues. Frank open and fair discussion is far better than 
the sniping that has been going on in the press and in the disguise of 
``industry reports.'' This is a higher public policy calling for all of 
us than the specter of the witch-hunt we see coming over the horizon.
    Thank you for your time and attention.

                                 

    Chairman HOUGHTON. Thank you, Mr. Illingworth. Also, thank 
you, Ms. Loonin, and gentlemen, for your testimony. The reason 
we are here is that there are a couple of sour apples, and we 
are not trying to criticize the credit counseling industry. It 
is a good industry. There are fine people, like yourselves, and 
we appreciate you being here. It does not do us any good just 
to wink at these practices and do nothing about them, so what 
we are trying to do is to understand what we in Congress can 
do. Do we lean on the IRS? Is that an administrative function? 
Or do we create legislation?
    Now, let me just ask you a specific question--I have it 
written down here, Mr. Illingworth, and I am quoting from 
numbers that we have researched. In 2001, the IRS Form 990 
indicates that you had about $54 million in total revenue. Of 
this, $18 million was paid by clients for initial registration 
fees, about $23 million was paid by clients for monthly service 
fees, and about $12 million was paid by creditors based on the 
money you collected from clients for them. Yet your expenses, 
including salaries and advertising for debt management and 
other services, totaled $45 million. So, what this resulted in, 
is an excess of $8.5 million for just 1 year. Adding this to 
prior amounts for July 2002, your total net assets or fund 
balance total about $26 million. So, the question really is: 
the recipients of your services are essentially supporting the 
nonprofit through fees. Why don't you charge your clients less 
instead of operating as a charity, with millions of dollars in 
gains, at their expense?
    Mr. ILLINGWORTH. Sir, the question is, why don't we charge 
them less?
    Chairman HOUGHTON. Right. Why don't you charge your clients 
less instead of operating as a charity?
    Mr. ILLINGWORTH. We understand that our core mission is 
education, and that our vision is charitable. It involves 
education and counsel. In order to provide that, plus all of 
the services that need to be involved in fulfilling that 
mission, requires a certain amount of infrastructure--
infrastructure that is covered by the fees that are charged. 
The fees that are charged have been found fair and reasonable 
by all the regulatory authorities that govern us in those 
States. This is including the IRS, who in all of our 
submissions--and we have done outside studies as well, sir, 
with an organization here in Washington--has found, 
particularly with our rebates, that our fees fall within the 
range in this industry. So, we think our fees are at a fair, 
reasonable level, and help us execute our mission.
    Chairman HOUGHTON. Well, it just seems the proportions are 
rather strange. Now, I am not part of this business--I used to 
be part of another type of business--but you have basically $52 
million paid in by clients for monthly services, for creditors 
as fees, and yet you have very high expenses. I just do not 
understand that relationship.
    Mr. ILLINGWORTH. The relationship between what and what, 
sir?
    Chairman HOUGHTON. In terms of the fees paid in, and also 
the education of the services, totaling about $45 million.
    Mr. ILLINGWORTH. I am sorry, I do not mean to be obtuse, 
but----
    Chairman HOUGHTON. Well, no, it just gets to the excess of 
$8.5 million for 1 year.
    Mr. ILLINGWORTH. The counsel we have been given by our 
accountants is, to have a reserve is very wise for a nonprofit. 
We have with us today our counsel from BDO Siedman, and you can 
pursue that with him if you would like--frankly, that is his 
area of expertise. So, I would like to suggest that if we are 
going to delve deeply into this document, the counsel we have 
been given is to have an excess--to have a reserve is wise, it 
is responsible to our clients. If you are looking at the degree 
of excess, I believe the gentleman from the IRS would say, and 
I believe he did say, that it is not against the law to have 
more revenues than expenses within the IRS guidelines, and we 
have reported this every year since our inception.
    Chairman HOUGHTON. Could you give me a feeling for the 
percentage of the revenues that are spent on education? Also, 
do you charge for any educational counseling services or 
materials?
    Mr. ILLINGWORTH. The first answer is, we do not charge for 
any of the education we provide. As I mentioned in my 
testimony, of the 1.8 million people, many hundreds of 
thousands have been provided counseling and education for free. 
We also sent those people the video, they can participate in 
the newsletter, and they can come to our websites. This year, I 
believe we will--or have--spent $1 million of hard money on a 
series of educational outreach programs which Mr. Viale can 
detail for you if you would like.
    Chairman HOUGHTON. Okay. Well, thank you very much. Now, we 
will turn to Mr. Pomeroy.
    Mr. POMEROY. Thank you, Mr. Chairman. Mr. Illingworth, are 
you a member of the firm, Cambridge Credit Counseling Corp.?
    Mr. ILLINGWORTH. I am not, sir.
    Mr. POMEROY. What do you do?
    Mr. ILLINGWORTH. I am an executive at the public relations 
firm of Ruder Finn in New York.
    Mr. POMEROY. So, you are a hired public relations guy 
talking on behalf of the company?
    Mr. ILLINGWORTH. I am a passionate advocate for my client, 
and I am also in public relations.
    Mr. POMEROY. Now, do you know this Richard Puccio?
    Mr. ILLINGWORTH. Yes, I do.
    Mr. POMEROY. Can you tell us something about the action 
taken against him by the Securities and Exchange Commission 
(SEC) which resulted in him being barred for 5 years from the 
securities industry in 1996?
    Mr. ILLINGWORTH. Of course I am aware of that, and the 
details of that have been represented to me by my client. I am 
not an expert on precisely what happened, and I think----
    Mr. POMEROY. Would you say that it had something to do with 
the high-pressure, fraudulent sales tactics in disregard of his 
obligations to customers and their welfare? Was that language 
from the action taken by the SEC?
    Mr. ILLINGWORTH. I recall it is something similar to that, 
yes.
    Mr. POMEROY. Now, the issue of salaries relates somewhat to 
whether or not we have nonprofits functioning as nonprofits. 
When compensation levels get to certain points, it appears that 
it is being run for the proprietary benefit of the individuals 
receiving compensation. I earlier asked the Commissioner of the 
IRS about the suspicious $624,000 being paid to John Puccio. 
Really I misstated it, in some respects, because there are 
other extremes of income from a related entity that produced 
yet an additional income stream on this 2001 Form 990, leaving 
the Puccio brothers with $962,000, roughly, in annual 
compensation that year. Now, do you acknowledge that that is 
going to trigger at least an appearance that it should not be 
fitting under the normal tax-exempt, nonprofit classification 
under the IRS Code?
    Mr. ILLINGWORTH. This is a question for the IRS, sir, not 
me. The business structure we have, the levels of income that 
are realized by the senior executives, are all reviewed. They 
are approved by the regulatory authorities and the States in 
which they are licensed, and by the IRS, and they have not told 
us--so, at this point in time----
    Mr. POMEROY. Well, I think the Commissioner is rather 
interested in that level, but he, of course, was circumspect 
about identifying whether or not particular action of the IRS 
attaches to any particular individual or firm--as would not be 
right under confidentiality of the IRS operations. Now, Mr. 
Viale, you are on the staff, apparently, of Cambridge Credit 
Counseling Corp.?
    Mr. VIALE. I am the Chief Operating Officer.
    Mr. POMEROY. On this 2000 filing, it says you were paid 
$374,000. Is that in the range of your present compensation?
    Mr. VIALE. That is correct.
    Mr. POMEROY. Mr. Hall, your entity--what is the present 
name of your entity?
    Mr. HALL. Take Charge America.
    Mr. POMEROY. Take Charge America.
    Mr. HALL. Yes, sir.
    Mr. POMEROY. That was previously the Credit Counselors of 
America?
    Mr. HALL. That is correct.
    Mr. POMEROY. Now, in 1999, the report shows that you 
received compensation of $371,000 from Take Charge America?
    Mr. HALL. Correct.
    Mr. POMEROY. Now, that was 4 years ago. Would the Form 990 
reflect that at roughly the present level of your compensation?
    Mr. HALL. I believe our current Form 990, our most current 
one, would reflect about $440,000. I might point out to you, 
Congressman Pomeroy, that we have a corporate governance policy 
which takes me out of that process.
    Mr. POMEROY. Are you concerned though, as the proprietor of 
this firm, that this board that is setting your salary might be 
setting you up for investigation where you could lose your 
501(c)(3) status, because----
    Mr. HALL. In setting those salaries--we have a very big 
company. I have 428 employees. We manage over $500 million a 
year in public funds.
    Mr. POMEROY. Your testimony, Mr. Hall, states that for-
profit entities cannot be expected to view the needs of 
consumers with the same charitable outlook as yours, a 
nonprofit commission.
    Mr. HALL. Correct.
    Mr. POMEROY. I want to explore the structure you use, 
because, as I understand it, you also do business in 
conjunction with for-profit entities that are part of the 
operation of Take Charge America. Does your credit counseling 
organization pay another for-profit company to assist you, to 
help process the debt repayment programs of your clients?
    Mr. HALL. Absolutely not. We have never used any back-end 
operations to provide support to us. We do all of our own 
customer service and would never consider handing our customer 
service process over to anybody else.
    Mr. POMEROY. Okay, I am going to name several for-profit 
companies and ask whether your company has ever had any 
relation to them: Michael A. or Mary E. Hall Family, Limited 
Liability Co. (LLC); Credit Counseling Information Systems, 
LLC; Orion Network Enterprises, LLC; Frank and Marilyn Muggeo 
(M&M) Leasing, Inc.; or Michael A. Hall, Inc.? Have you had 
dealings with any of those entities?
    Mr. HALL. Only with one of them.
    Mr. POMEROY. Which one is that?
    Mr. HALL. That would be Credit Counseling Information 
Systems. I had been in the credit counseling business for 40 
years, spanning a period of five decades, and for the first 27 
years of that period of time, I was involved in the for-profit 
side of the industry. During that period of time, I developed 
enterprise software for the credit counseling industry. I 
developed educational materials and educational software for 
the industry that preexisted the creation of Credit Counselors 
of America, which is now Take Charge America. Having good data 
systems is essential to the operation of our business. The 
reason that we dealt with Credit Counseling Information 
Systems, is because of the fact that it was the only provider 
that had the type of data systems that we needed to accomplish 
our goals.
    Mr. POMEROY. So, do you or your family members have an 
ownership position in Credit Counseling Information Systems?
    Mr. HALL. We do.
    Mr. POMEROY. You do.
    Mr. HALL. Yes, sir.
    Mr. POMEROY. So, as the nonprofit Take Charge America pays 
Credit Counseling Information Systems, is that to your 
financial benefit?
    Mr. HALL. It is.
    Mr. POMEROY. What are the amounts of payment that you made 
to Credit Counseling Information Systems this past year?
    Mr. HALL. Approximately $750,000.
    Mr. POMEROY. Now, I understand that you have about 100,000 
clients, is that correct?
    Mr. HALL. We have 65,000 clients--about 63,000 clients 
currently enrolled in debt management plans. We do interview an 
additional 120,000 to 130,000 families a year--put them through 
full interviews. These are not 10- or 15-minute sessions. These 
are 
1-, 2-, or 3-hour sessions, totally free of charge.
    Mr. POMEROY. So, you have 63,000 clients and you interview 
another--how many?
    Mr. HALL. Approximately 120,000 to 130,000 households seek 
out our service.
    Mr. POMEROY. You have how many employees?
    Mr. HALL. At the current time, 438 employees.
    Mr. POMEROY. Now, is your organization paid with checks 
from your nonprofit, or do you hire that service out?
    Mr. HALL. We do not hire any services out.
    Mr. POMEROY. So, they come directly from Take Charge 
America?
    Mr. HALL. Correct.
    Mr. POMEROY. What kind of time are these clients getting? 
Now, as I counted, if you have 63,000 active clients and 
120,000 others, that is almost 200,000 coming to your 
enterprise--and you have 438 staff, period. Are you able to 
give them the kind of individualized counseling that your 
people are hoping for?
    Mr. HALL. Absolutely. We are able to service the volume 
based on the number of employees that we do have, yes.
    Mr. POMEROY. What would be the average time commitment per 
client?
    Mr. HALL. We spend anywhere from a minimum of approximately 
45 minutes, to an hour, to a maximum of 2 to 3 hours, depending 
upon the complexity of the situation.
    Mr. POMEROY. I have no more questions at this time, Mr. 
Chairman. Thank you.
    Chairman HOUGHTON. Thank you. Mr. Kleczka.
    Mr. KLECZKA. Thank you, Mr. Chairman. A couple of 
questions. Mr. Jones, if I wanted to become a credit counselor, 
how much schooling would I need? What would I have to do to get 
the certification--whatever you guys handout?
    Mr. JONES. It typically takes somebody about 6 months to 
pass the test for personal finance.
    Mr. KLECZKA. So, you actually give the person a test?
    Mr. JONES. Oh, absolutely. It is an independent test, yes.
    Mr. KLECZKA. How many pages is this test? Is it true or 
false?
    Mr. JONES. No. There are true or false questions on the 
test, but there are a number of essay-type questions on the 
test as well.
    Mr. KLECZKA. Then who grades the test? Somebody from your 
operation?
    Mr. JONES. The Institute for Personal Finance.
    Mr. KLECZKA. Which is your operation?
    Mr. JONES. No, that is an independent certifying body. They 
use the Association for Financial Counseling and Planning 
Education.
    Mr. KLECZKA. I do not know anything about them, and that is 
fine. How much am I charged once I am a full-fledged counselor?
    Mr. JONES. Sorry?
    Mr. KLECZKA. How much are you charged once I am a full-
fledged counselor?
    Mr. JONES. For the test?
    Mr. KLECZKA. For the test, or for the license--or whatever 
I get.
    Mr. JONES. Typically, the agency pays for their counselors 
to take the test.
    Mr. KLECZKA. The employing company, okay.
    Mr. JONES. I think $125.
    Mr. KLECZKA. Do I have to have an annual certification or 
license----
    Mr. JONES. You have to have continuing education credits, 
yes.
    Mr. KLECZKA. Mr. Hall, which of these two organizations are 
you a member of?
    Mr. HALL. I am a member of AICCCA and AADMO.
    Mr. KLECZKA. God love you. I do not know what any of those 
are. Mr. Jones, are you the AAICIO?
    Mr. JONES. I represent the AICCCA members.
    Mr. KLECZKA. Ah, the AICCCA--I am sorry. Okay, so then you 
are a member of his organization, Mr. Hall?
    Mr. HALL. I am.
    Mr. KLECZKA. Okay, good. I was surprised when the Chairman 
indicated that Mr. Illingworth, your client, ended up with a 
profit of $8.5 million. Is that last year? You indicated that 
it was reserves, and not profit. I just want to give you two 
examples, and I think I might put into perspective what we are 
talking about here. Number one, if my church at the end of the 
year came out with their annual report and indicated 
contributions were ``x'' amount, and expenses for hosts and 
wine and electricity was this amount, and at the end of the 
year we had $8 million, do you know what would happen? The 
contributions would drop like a rock.
    Another example is United Way of Milwaukee, Wisconsin. If 
they indicated to any of us when they started their annual 
appeal that we really need to go out and raise $53 million this 
year because there are so many hardship cases in Milwaukee--if 
they said, we got to do so many good things, and by the way, we 
have $8 million left over from last year--their appeal would 
drop like a rock. The reason I bring those two examples up is 
to question how much of a nonprofit you guys really are, okay? 
Why do we have to go through this guise of nonprofit? The 
Commissioner of the IRS told us that what you folks are doing 
is asking for a contribution. The contribution from your 
clients is mandatory, not really disclosed, and basically is a 
fee, all right? So, why do we go through this whole sham of 
calling you guys nonprofit, when we know you ain't really 
nonprofit?
    I thought, maybe, for a while--and that is when I asked the 
FTC a question--maybe it has to come under the umbrella of the 
phone marketing, maybe that was the reason to do that. He said, 
``No, there has been no jump in these types of groups forming 
so they could make antagonizing calls to Americans at 6:00 
p.m.,'' and so it just blows my socks. Why do you not just call 
yourselves what you are: a for-profit business which gets great 
income for charging fees to poor people who have credit 
problems. You get a big kickback from the credit companies. You 
run it like a business, and after you pay your taxes and do 
things above-board, I do not give two rats whether you are 
getting $600,000 a year, or $6 million a year.
    You are a business like Allen-Bradley, Johnson Controls, 
Inc., and Boeing. So, why are we doing these machinations and 
twisting--and now we have got a couple that are under 
indictment or are being charged? Let's just call a spade a 
spade, and let's do it right. I know, Ms. Loonin, you are ready 
to pounce in on this question. You have been chomping at the 
bit. Respond to me--why don't we do it the right way?
    Ms. LOONIN. Well, I certainly agree with wanting to do it 
the right way. What I would suggest, though, is that 
theoretically, it is possible to have a complementary sector 
where you have for-profit businesses that do credit counseling. 
I am not sure exactly how that would work, given the way the 
fair-share is structured now, and that sort of thing. What we 
want to emphasize is that keeping a thriving, legitimate, 
nonprofit sector is also critical. I know you are not 
suggesting this, but some have suggested actually, instead----
    Mr. KLECZKA. Well, if it is a bona fide nonprofit, I would 
probably be supportive--but if it is done under a kind of guise 
or cloak, what is the sense?
    Ms. LOONIN. Right. The other point I want to make is, in 
some cases where maybe we are distracted by the nonprofit 
versus the for-profit status, that is not the only issue. If 
there is deception and abuse going on, which is also going on 
in how we are talking about fees, what the agencies are saying 
they can give to consumers--that is deception or abuse whether 
it is in the nonprofit sector or the for-profit sector. So, we 
have to watch that regardless of who is doing it.
    Mr. KLECZKA. Thank you very much.
    Chairman HOUGHTON. Okay. Mr. Sandlin.
    Mr. SANDLIN. Thank you, Mr. Chairman. To start, Mr. 
Boisclair, you have a presence in my district: in Paris, in 
Greenville, in Texarkana, in Mount Pleasant, in Longview--and 
possibly in other places. I appreciate what you do for folks 
there. We have nothing but good reports from those citizens. 
Mr. Hall, I noticed that with your company, you set up debt 
management plans for consumers, is that correct?
    Mr. HALL. That is part of our business, yes, sir.
    Mr. SANDLIN. Now, you also do work for creditors, do you 
not?
    Mr. HALL. Oh, yes, as part of the service we provide to our 
customers.
    Mr. SANDLIN. So, what you are telling me is that the only 
work you do for them is, by working with consumers, they get a 
benefit, and that is all the work that you do for creditors?
    Mr. HALL. That is correct.
    Mr. SANDLIN. So, when you filed your Form 990, when you say 
you will provide creditors a collection process for otherwise 
uncollectible balances, that would be in error?
    Mr. HALL. No. That has always been a vital function of the 
debt management industry, Mr. Congressman.
    Mr. SANDLIN. So, one of the things that you do is, you act 
as a collection agency for credit groups, is that correct?
    Mr. HALL. We provide, in effect, recovery services. That is 
part of the plan that anyone in this industry provides.
    Mr. SANDLIN. That would not be a tax-exempt function, would 
it?
    Mr. HALL. That is correct, and that is certainly not the 
focus of our----
    Mr. SANDLIN. It is one thing that you do.
    Mr. HALL. It is one thing that all of us do.
    Mr. SANDLIN. Now, is your company one of the companies that 
receives a donation or contribution from consumers?
    Mr. HALL. No, sir.
    Mr. SANDLIN. So, all of the money that you receive from 
them is shown as a fee?
    Mr. HALL. Absolutely.
    Mr. SANDLIN. What do they get for that fee?
    Mr. HALL. The fee is basically intended to help offset 
operating costs related to the services that are provided.
    Mr. SANDLIN. How is that initial fee figured?
    Mr. HALL. The initial fee is actually stratified. Since a 
variety of State laws that are out there--we charge a different 
range of fees.
    Mr. SANDLIN. The fee is basically a payment to you.
    Mr. HALL. It is disclosed as such, and we do not try to 
veil it as a voluntary contribution. We never have done that. 
We always quoted our fees as fees, and disclosed them up front.
    Mr. SANDLIN. Well, I noticed--and I appreciate that. You 
show that as taxable income, do you not?
    Mr. HALL. Correct.
    Mr. SANDLIN. I notice that in 1997, 1998, 1999, and 2000, 
you show fees, which would be the money that folks send to you. 
You show a total of over $28 million, and the gross receipts 
for the services performed at only $42 million. In 2000, it is 
$12 million, and I am rounding this off as $12,446,630, but $12 
million in membership fees and $17 million in receipts for 
services performed. So, are you telling me that you take out of 
this total, you take this money, and $28 million out of $42 
million goes to you--you only use the balance, which would be 
$14 million, for the services that you provide to the consumer? 
Is that what you are telling me?
    Mr. HALL. Sir, I do not recognize those figures as being 
accurate.
    Mr. SANDLIN. I would think that your Form 990 that you 
filed with the government for 2001 would be accurate.
    Mr. HALL. I do not have a copy in front of me, sir. I guess 
it would be accurate.
    Mr. SANDLIN. It would be accurate, okay. That is what the 
numbers show.
    Mr. HALL. The fees are distributed--when we say fees, those 
are user fees paid by consumers to our company.
    Mr. SANDLIN. That is right.
    Mr. HALL. The other is fees paid as fair-share by creditors 
for the services----
    Mr. SANDLIN. The money sent to you by consumers as fees is 
not paid on their debt, is it?
    Mr. HALL. That is correct.
    Mr. SANDLIN. It is not sent to credit card companies?
    Mr. HALL. That is correct.
    Mr. SANDLIN. It is not sent to other folks. It is paid to 
you?
    Mr. HALL. That is correct.
    Mr. SANDLIN. So, you received $42.9 million for those 
years, and $28 million went to your company. Now, I was 
interested in what Mr. Pomeroy asked you. In this last report, 
of course, when times were a little tougher, you only made 
$381,000. You said this next report would show $440,000 to you, 
but last time you showed $381,000 to you for last year, 2001. 
Mary Hall, I assume, is your wife?
    Mr. HALL. Yes.
    Mr. SANDLIN. Another $127,000. So, that is $508,000 to you. 
Norm Hall, $116,000; Kevin Hall, $118,000; Terry Hall, 
$116,000; and John Hall, $5,000. That totals $355,000. So, the 
Hall family got $863,000 out of your company, is that correct?
    Mr. HALL. Yes, sir. The Hall family has been involved in 
providing these kinds of services for over 30 years. All the 
people that you have mentioned there have been involved in our 
company for 20 years.
    Mr. SANDLIN. That is a very good point. The point is, this 
is not $863,000 divided by 30; this is $863,000 for 1 year, 
correct?
    Mr. HALL. That is correct.
    Mr. SANDLIN. Now, do you also have people working for you, 
not named Hall, who are related to you?
    Mr. HALL. No, I do not.
    Mr. SANDLIN. You do not have any sons-in-law.
    Mr. HALL. Actually, I have two sisters working for me that 
are not named Hall, yes.
    Mr. SANDLIN. Are they paid by your company?
    Mr. HALL. They are.
    Mr. SANDLIN. So, the Hall family would get the $863,000 
that year, plus whatever salaries those folks got.
    Mr. HALL. That is correct.
    Mr. SANDLIN. Now, I was also interested in answering Mr. 
Pomeroy. He listed off the names, I wrote them down, of various 
companies--for-profits. He listed: Michael A. and Mary Hall 
Family, LLC; Credit Counseling Information Systems; Orion 
Network Enterprises; M&M Leasing; and Michael A. Hall, Inc. 
Correct?
    Mr. HALL. Yes.
    Mr. SANDLIN. You said you had absolutely no relationship 
with any of them except Credit Counseling Information Systems, 
is that correct?
    Mr. HALL. All of those corporations preexisted the 
existence of Take Charge America.
    Mr. SANDLIN. That was not the question.
    Mr. HALL. We do not have any relationships with any of 
them, no, sir. I do not even know who Orion is.
    Mr. SANDLIN. Orion would not appear in any of your tax 
returns?
    Mr. HALL. I have nothing to do with Orion.
    Mr. SANDLIN. I said would Orion appear anywhere in any of 
your tax returns?
    Mr. HALL. No.
    Mr. SANDLIN. How about Walking Eagle Communications, Inc.?
    Mr. HALL. Yes, it would. That is the survivor to Credit 
Counseling Information Systems. They were merged a couple of 
years ago.
    Mr. SANDLIN. That is owned by your family, is it not?
    Mr. HALL. Correct.
    Mr. SANDLIN. Now, among these companies that you say you 
have no relationship with, would there be any payments to or 
from those companies--Michael E. Hall, M&M Leasing, Orion, or 
Michael A. and Mary E. Hall? Would there be any payments to and 
from those companies to Take Charge America?
    Mr. HALL. No, there never has been.
    Mr. SANDLIN. Never.
    Mr. HALL. Again, I do not know who Orion is.
    Mr. SANDLIN. They would not appear on any of your records, 
or any of your tax returns?
    Mr. HALL. No.
    Mr. SANDLIN. Would there be any overlapping officers, 
principals, or key employees between those groups that I just 
listed?
    Mr. HALL. None other than myself.
    Mr. SANDLIN. None other than yourself. Are you an officer 
in Michael A. Hall, Inc.?
    Mr. HALL. Michael A. Hall, Inc. is a defunct company. That 
is when I operated in the for-profit industry from 1971 to 
1997--Michael A. Hall, Inc., American Financial Services. We 
closed that company when I became involved full-time with----
    Mr. SANDLIN. Would you have any relationship with M&M 
Leasing?
    Mr. HALL. We do not.
    Mr. SANDLIN. Are you an officer or principal, or do you 
share officers, principals, or employees with that company?
    Mr. HALL. Again, M&M Leasing is also a defunct corporation. 
It served as an auxiliary to the for-profit industry.
    Mr. SANDLIN. Those are good comments. Are there any shared 
officers between those corporations and Take Charge America, 
Inc.?
    Mr. HALL. Those corporations do not exist any longer, Mr. 
Congressman.
    Mr. SANDLIN. I understand that.
    Mr. HALL. Only myself.
    Mr. SANDLIN. You already said you never heard of Orion?
    Mr. HALL. Correct.
    Mr. SANDLIN. Credit Counseling Information Systems--you do 
have shared officers there--employees, agents; is that correct?
    Mr. HALL. I do have--there are employees who are employed 
by Walking Eagle Communications.
    Mr. SANDLIN. How many employees would that be?
    Mr. HALL. We presently have about 13 or 14 employees 
involved in enterprise systems development and other software 
products that are totally unrelated to the business conducted 
by Take Charge America.
    Mr. SANDLIN. You share those employees with Take Charge 
America?
    Mr. HALL. Not in the sense that they would perform work.
    Mr. SANDLIN. The employees that you are listing are shown 
as employees of Take Charge America and Walking Eagle 
Communication?
    Mr. HALL. No. It is a completely different entity.
    Mr. SANDLIN. I did not ask if it is an entity. The names, 
the people--did the people work for both of those 
organizations?
    Mr. HALL. No, sir, they did not.
    Mr. SANDLIN. Okay. Do you share any office space, staff, 
computers, or things like that between any of these entities 
that I just listed, without going through them again?
    Mr. HALL. We do, in some cases under contract, employ 
people to do development work for which Take Charge America is 
reimbursed.
    Mr. SANDLIN. You share what sort of relationship there? 
With whom? With any of these companies, Michael A. and Mary E. 
Hall Family----
    Mr. HALL. Only Walking Eagle Communications, Mr. 
Congressman.
    Mr. SANDLIN. Okay. Are you involved in any sale of land 
between any of the corporations or groups that I mentioned--to 
or from Take Charge America?
    Mr. HALL. None whatsoever.
    Mr. SANDLIN. None whatsoever. Never have been?
    Mr. HALL. No.
    Mr. SANDLIN. Are there any loans or leases between those 
parties that I mentioned for property, equipment leases, or 
anything like that from a Hall family business to the 
nonprofit?
    Mr. HALL. There are not.
    Mr. SANDLIN. None whatsoever.
    Mr. KLECZKA. Would the gentleman yield?
    Mr. SANDLIN. Certainly.
    Mr. KLECZKA. Something has been bugging me since you 
mentioned all the Hall salaries, Mr. Sandlin. Could you give me 
the name of the Hall that is at $5,000?
    Mr. HALL. That is John Hall.
    Mr. KLECZKA. John? Well, if John's watching us on 
television, he is going to have a real problem, because 
everyone else is $116,000, $118,000, or $127,000. Then there is 
poor old John at $5,000. How old is John?
    Mr. HALL. John is about 60.
    Mr. KLECZKA. Sixty?
    Mr. HALL. Yes.
    Mr. KLECZKA. Oh, come on, John.
    Mr. HALL. I do not really know what that is, because he is 
not an employee of the company.
    Mr. KLECZKA. Well, if you could help John out at 60, 
because the rest of them are getting much more.
    Mr. SANDLIN. Mr. Chairman, I believe my time is over and I 
appreciate your allowing me to go over. Thank you very much.
    Chairman HOUGHTON. No, not a bit. I would like to ask Mr. 
Boisclair and Mr. Jones a question. This gets back to the 
question we had with Mr. Illingworth about Cambridge Credit 
Counseling Corporation, and I am really interested in the 
proportions. What I see--and I could be wrong here--is an 
industry that started out as really a counseling and 
educational industry, going into the debt management industry, 
moving away percentage-wise from those things they were 
originally set up to do, moving toward an entirely different 
concept.
    The program service revenue for Cambridge Credit Counseling 
Corporation--and this comes out of the Form 990, the last one, 
which is from August 2001--was $53 million. The excess or the 
profit was $8.5 million. Also, the carryover from previous 
years was $17 million. So, you got $53 million coming in, you 
got a profit of $8.5 million, and you got a carryover from 
other years that is $17 million. That looks pretty hefty for a 
nonprofit organization. Explain this to me, will you?
    Mr. BOISCLAIR. Well, I cannot explain that. I can tell you 
that I think it is proper for any nonprofit that can, to 
function with reserves, but there is a point where reserves 
become excessive. The true nature of a nonprofit, as our 
members would define it and as I define it personally, would be 
if we continued to have excess revenues in--well, we are not 
going to have those levels anyway. However, if we had excess 
revenues we would, in our case, reinvest them in the community, 
in other programs, so that we could reach more people, and 
maybe even create new programs that we could----
    Chairman HOUGHTON. So, you would not be plowing another 
$8.5 million on top of the $17 million, and putting it in 
further reserves for next year?
    Mr. BOISCLAIR. You are asking me that as the CEO of the 
nonprofit? No, we would not.
    Chairman HOUGHTON. Do you have any comments, Mr. Jones?
    Mr. JONES. Well, I would say that that would certainly not 
be typical of the members of our association at all. Those are 
very high numbers. I do not know whether they relate to success 
or not, but this money is the people's money--it belongs to the 
people of the United States, and it should be used for them. 
So, I believe our members, if they had those kinds of reserves, 
would attempt to do just that--either to reduce fees, or 
provide more services to them. I do not believe our members 
typically have those kinds of reserves.
    Chairman HOUGHTON. Again, getting back to the original 
question, in terms of the inside arithmetic in the company, do 
you see that there is a trend away from the original intent of 
education and counseling into the debt management process?
    Mr. JONES. It certainly appears so, based on those numbers, 
yes.
    Mr. ILLINGWORTH. Sir, if I can jump in. I think the one 
thing that is important to consider besides the money and time 
spent on education and the educational programs for the 
basketball hall of fame, College Bowl, Emory University, the 
University of Massachusetts, and the high schools we work in--
we are always looking for new ways to invest in education and 
counseling, in order to further fulfill our mission as a 
501(c)(3) corporation. Mr. Viale can explain to you what new 
things we have on the books, in our planning, in order to do 
that.
    I think the other thing is, part of our mission--part of 
our responsibility to our clients--is to be there next year for 
them, and not to disappear. Sir, there are people at this table 
whose organizations, whose companies, are failing. There are 
failing credit counselors in the State of California, in the 
State of Maryland, and all over this country, who cannot 
fulfill their mission. With fair-share declining as well--which 
a lot of people are suffering from, including the consumer--God 
help us that we have this reserve in order to do that. We fully 
intend to deploy it in this matter.
    Chairman HOUGHTON. No, I have been around that barn for 40 
years--I understand it. Yet I have not been a part of a 
nonprofit organization. I have been a part of a for-profit 
organization. You can build up the reserves, build up the 
profitability, as long as you are servicing your customer, and 
they are the people who are determining it. When you are a 
nonprofit, it is a different element. That is the thing that 
has concerned all of us. Well, look, you have been nice to be 
here. I appreciate your wisdom, and I want to thank you very 
much for taking the time.
    I do not know whether I speak for you, Mr. Pomeroy, or you, 
Mr. Sandlin, but I think we are all concerned about what we 
have heard today. Consumers need to be treated fairly, as we 
all know, and the IRS and the FTC need to monitor the 
activities of these groups. So, therefore, I think that Mr. 
Pomeroy and myself are going to ask the IRS and the FTC to 
report back to us in 6 months on their continued activities to 
ensure the proper conduct of credit counseling agencies. We 
hope they will be aggressive in their review of this matter. 
So, I thank you, again, very much. I appreciate your time.
    Mr. ILLINGWORTH. Thank you.
    Chairman HOUGHTON. Hearing adjourned.
    [Whereupon, at 4:35 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

    Statement of Michael Barnhart, Coalition for Responsible Credit 
                               Practices

    On behalf of the Coalition for Responsible Credit Practices, I want 
to thank the Subcommittee for this opportunity to share with you our 
insights on consumer credit and the credit counseling industry.
    The Coalition for Responsible Credit Practices is a newly formed, 
nationwide group of consumer credit counseling agencies and supporting 
businesses working together for a robust, consumer-friendly credit 
counseling industry. The Coalition's mission is to promote a vigorous, 
pro-consumer credit counseling industry that protects consumers from 
unethical practices and unnecessary bankruptcy. The Coalition wants to 
make sure that as the credit counseling industry continues to grow, it 
stays strong, competitive, balanced, professional and, above all, 
beneficial for American consumers.

Putting Consumers First: Broad Review from the Consumer's Perspective
    The credit counseling industry needs reform. However, reform that 
puts consumers first cannot be developed in a vacuum or by a narrow 
gauged inspection of industry practices and government regulation that 
ignores how Americans are living, working and borrowing. It cannot be 
done piecemeal without looking at the parts of the industry including 
creditor practices.
    Pro-consumer changes to current legal and regulatory practices 
require a broad understanding of the comprehensive consumer experience 
in securing and managing credit. It is impossible to identify necessary 
and effective reforms in helping consumers without examining how and 
why some consumers get into credit trouble in the first place.
    One cannot truly understand the credit counseling industry without 
understanding the integral roles played by consumers, creditors (large 
and small) and credit counselors.
    Solutions that put consumers first must be holistic--helping 
protect consumers from unethical practices and unnecessary bankruptcy.
    The Coalition for Responsible Credit Practices appreciates the 
opportunity to present issues and solutions from the perspective of 
what best benefits consumers.

The 1990s: Booming Economy--Booming Debt
    During the booming economy of the 1990s consumer debt skyrocketed. 
In 1990, the average household non-mortgage debt was $8,500. By 2000, 
it had increased sharply to $14,500. Incredibly, the portion of that 
related to credit card debt nearly tripled, from $2,985 to over $8,100 
per household.
    Clearly, the commonly held notion that debt is the product of ``bad 
times'' is wrong. Equally clear, something else is going on.
    Obviously, consumers are borrowing large amounts of money. 
Outstanding consumer debt rose from $355 billion in 1980 to a 
staggering $1.65 trillion in 2001. Consumers owe money to hundreds of 
thousands of small creditors --doctors, dentists, `rent to own' 
furniture outlets and department stores--as well as to a few relatively 
large national banks and credit card companies.
    In his book ``Credit Card Nation,'' author Robert Manning likens 
the expansion of consumer credit debt in the 1990s to personal ``junk 
bonds.'' And how are consumers managing their debt load? The evidence 
suggests that some are not managing it well.
    U.S. credit card debt today totals about $700 billion. Late payment 
fees to creditors have risen from $1.7 billion in 1996 to $7.3 billion 
in 2002, making them the third largest source of revenue for credit 
card companies, trailing only interest and merchant fees.
    Today, the average American family is paying about $1,100 a year in 
interest on its credit cards. Interest rates on bank issued cards range 
from 4.75% to 35% when the Federal Funds Rate is at 1%, an historic 45-
year low.
    Paradoxically, credit card issuers mailed five billion card offers 
in 2001, a 20% increase from 2000. Manning notes that throughout the 
1990s, ``aggressive marketing of consumer credit'' posed serious 
personal and credit problems for small businesses and for college 
students. In fact, in 1999, the Consumer Federation of America 
conducted a major news conference about the terrible impact of crushing 
credit card debt on students, revealing that several even turned to 
suicide and tragically ended their own lives. Jean Braucher, author of 
``Options In Consumer Bankruptcy: An American Perspective'' concludes 
that if ``creditors persist in aggressive marketing to high-risk 
debtors, effective legal and social reforms should include better 
disclosure, financial education in secondary school and, perhaps, even 
direct regulation of risky creditor practices.'' (A copy is enclosed.)
    Significant and important research is being done on consumer 
credit. The Coalition strongly recommends that the committee and staff 
review the important data being reported in works such as: ``As We 
Forgive Our Debtors, Bankruptcy and Consumer Credit in America;'' ``The 
Fragile Middle Class;'' and ``Credit Card Nation.'' (A bibliography has 
been enclosed for the Committee's reference and convenience.)
    Especially helpful is research published by Demos Public Policy 
research titled: ``Borrowing To Make Ends Meet: The Growth of Credit 
Card Debt in the '90s.'' (Copy enclosed.) This article describes 
numerous practices of creditors that generate increasing consumer debt, 
including:

     Disclosures that emphasize low introductory interest 
rates and fail to fully apprise consumers of the true interest and 
penalty structures of the credit being offered, see id. at 41; 
     Drastically increasing fees and penalties, including late 
fees, over-the-limit fees, balance transfer fees and cash advance fees, 
which are generally borne by the consumers that are least able to 
handle them, see id. at 35-37; 
     Indiscriminate and aggressive credit card marketing and 
solicitation, rising to the level of 5.01 billion credit card 
solicitations in 2001, see id. at 37; and, 
     The reduction of minimum payment requirements to very low 
levels, generally around 2% to 5% of the balance owed, which creates 
increasing consumer debt and extends the length of time it takes 
consumers to pay off their credit card debts, while simultaneously 
generating greater interest income to the credit issuers, see id. at 
37. As reported in the Demos article, it would take a consumer an 
astonishing 56 years to pay off a $10,000.00 credit card balance at 18% 
interest by making only the required minimum monthly payments of 2% of 
the balance, see id. at 13.

Consumers in Debt Crisis Need Choices
    Consumers experiencing debt crisis have limited alternatives. Some 
may seek attorneys to aid them with Chapter 7 (debt discharge) or 
Chapter 13 (repayment plan) bankruptcy. Yet others may borrow against 
their future by securing a home equity loan. Some consumers are lucky 
enough to have a family member willing to help. A fraction simply are 
able to ``pull themselves up by their bootstraps'' but, unfortunately, 
most cannot. Consumers being pursued by collection agencies usually 
find ``self help'' in coping with their creditors is impossible.
    Thousands of American families live better lives because they have 
the option of choosing to use credit counseling services--resources 
that serve as many consumers' protection from collection letters and 
harassing phone calls. Most consumers in debt crisis simply want the 
phone to stop ringing. Credit counseling is an essential and valuable 
service. Public policy makers and the industry should work together to 
ensure that consumers are able to use this vital credit counseling 
resource.
    Credit counseling agencies (CCAs) are now assisting over 1.5 
million American households a year manage their debt, save money and 
avoid bankruptcy. America's credit counseling industry has more than 
tripled in size within the past decade, and must grow another 40% just 
to fulfill the requirements of the proposed Federal Bankruptcy Bill.
    The credit counseling industry provides services that offer real 
value to consumers that include debt counseling and debt management 
plans (DMPs). Agencies provide consumers with valuable expertise on 
what creditors are willing to accept and what benefits can be achieved. 
And, they offer efficient, effective ways for consumers to repay debt. 
The consumer usually deals directly with the CCA and does not 
understand the creditors' role in the process. As a result, when 
something goes wrong, even when the consumers' creditor is the cause, 
the consumer blames the CCA.
    Increasingly, consumers are demanding more ``customer focus'' from 
credit counseling agencies. Consumers expect CCAs to be as consumer 
friendly as other businesses and to offer such services as telephone 
counseling, Internet access, computerized payments and evening and 
weekend hours. Many traditional CCAs have been slow to meet new 
customer demands because they are revenue bound by declining ``fair 
share'' contributions from the largest creditors.
    ``Non-profit'' CCAs frequently act as agents of banks and credit 
card companies and hence are creditor driven instead of consumer 
focused. Many have executives from creditors sitting on their board of 
directors. In fact, the Federal Trade Commission determined that NFCC 
affiliated, non-profit CCAs must disclose to consumers that these non-
profit CCAs represent the very banks and credit card companies 
consumers may be seeking protection from. (www.ftc.gov/opa/1997/03/
nfcc.htm)
    It should be noted that there are literally hundreds of thousands 
of creditors. Very few creditors, i.e., the largest 100 creditors, 
account for approximately 98% of all ``fair share'' paid by creditors 
to non-profit CCAs. Significantly, though, these few large creditors 
refuse to pay ``fair share'' to for-profit CCAs, but also refuse to 
give debt management benefits to consumers choosing for-profit CCAs. 
Unsurprisingly, no for-profit CCA exists today because of this industry 
practice. Also troubling, many CCAs are also finding themselves 
situated in a position to take the blame for consumer issues that are 
actually the faults of the consumers' creditors. (Please see enclosed 
memorandum detailing these issues.)
    In an environment of shrinking support from creditors and 
increasing demand, it is very likely that the non-profit business model 
is not long for the world.
    Few dispute that credit counseling is valuable and positive. Credit 
counseling agencies not only help consumers manage their debt, save 
money and avoid bankruptcy, but a recent study indicates that CCAs also 
help consumers improve their budgeting skills, their ability to afford 
a new home and their overall financial status, as well as their credit 
profiles.
    According to a Georgetown University study, consumers who received 
credit counseling reduced their total dollar amount of debt, their 
total dollar amount of non-mortgage debt and the number of accounts 
with unresolved balances. Most of them also diminished their use of 
bank card credit limits and experienced fewer delinquencies.
    ``And, the large majority of counseled borrowers had significantly 
fewer accounts, lower debt and fewer delinquencies relative to other 
borrowers--behavior consistent with the advice provided in credit 
counseling.''
    Today, personal debt is spiraling and personal bankruptcies are 
following suit. Credit counseling agencies are attempting to meet the 
needs of American consumers. More and more consumers need unbiased 
credit advice and want a full range of consumer friendly counseling 
options that include the latest in telephone and Internet counseling.
    It is crucial that we preserve credit counseling as an option to 
help consumers get out of debt as quickly as possible.
    The future of the traditional, non-profit CCA is, frankly, dim. The 
traditional credit counseling agency is too dependent on creditors to 
give consumers unbiased advice and too revenue strapped to modernize 
practices and services to meet demand as a true business would to serve 
and retain customers. For example, most CCAs don't even advertise their 
services, leaving many consumers unaware that this significant resource 
is available.

Pro-Consumer Credit Counseling: Consumer Choice, Competition and 
        Federal
        Regulation
    Traditional CCAs are losing market share to the independent 
agencies. Most of the growth among CCAs is among independent agencies.
    Simply put, the non-profit model is no longer viable. It is being 
rejected by consumers and suffocated by creditors who are investing 
less and less. There are several crucial steps that must be taken to 
preserve CCAs and the benefits they bring to consumers and taxpayers:

    1. CCAs must become consumer focused and operate like true 
businesses.

                  Competition for consumers among for-profit and non-
                profit CCAs would provide consumers choice and the 
                industry with incentives to provide consumer focused--
                not creditor driven--consumer credit counseling.
                  The traditional players in the credit counseling 
                industry, such as the consumer credit counseling 
                service members of the National Foundation for Consumer 
                Credit (``NFCC'') were created and remain heavily 
                influenced by creditor organizations and are highly 
                dependent upon ``fair share'' payments from creditors. 
                See Stephen Gardner, Consumer Credit Counseling 
                Services: The Need for Reform and Some Proposals for 
                Change, Fall 2001/Winter 2002, at 31, 32. Because of 
                their close relationships with creditors, the advice 
                provided to consumers by traditional NFCC member 
                entities is likely to be limited and may be ``improper 
                . . . [and] to the direct benefit of some creditors.'' 
                See id. at 31, 33. For instance, organizations that are 
                NFCC members may ``not adequately disclose the[ir] 
                collection agency role to consumers who seek and obtain 
                counseling,'' and often ``it is the set policy of some 
                [of these] organizations that they never refer debtors 
                to bankruptcy.'' See id. at 31. It has been alleged 
                that the control of creditors over the NFCC member 
                entities is so great that some creditors will work only 
                with credit counseling agencies that are members of the 
                NFCC and that the NFCC and its member entities have 
                engaged in anti-competitive behavior in violation of 
                antitrust laws. See In re: Consumer Credit Counseling 
                Services Antitrust Litigation, No. MDL 97MS233, 1997 
                U.S. Dist. LEXIS 19669, at *4--*7, 1997 WL 755019, at 
                *2 (D.D.C. Dec. 4, 1997).
                  A recent report published by the Consumer Federation 
                of America and National Consumer Law Center highlights 
                the need for the credit counseling industry to elevate 
                its standard of professionalism, and embrace ``best 
                practices'' that increase consumer benefits and improve 
                customer service and satisfaction. We agree and we 
                believe that regulators, creditors, CCAs and consumer 
                advocates need to work together to find a funding 
                solution that will work for everyone--especially 
                consumers--while helping the industry continue to grow 
                and flourish.

    2. Competition between ``non-profit'' and market based CCAs would 
benefit consumers.

                  The ``non-profit'' CCA is only as viable as the level 
                of support they receive from creditors. Without a 
                creditor subsidy, consumers must forgo counseling or 
                pay reasonable fees. Large banks and credit card 
                companies created the credit counseling industry a 
                half-century ago as an alternative way to collect debt 
                from consumers who might otherwise file for personal 
                bankruptcy and gain release from the obligation of 
                repayment. These large creditors created and funded 
                CCAs by providing a subsidy of approximately 15%--
                allowing CCAs to present themselves as `non-profits.' 
                In the meantime, American debt is soaring.
                  The large creditors are now drastically reducing or 
                eliminating their financial ``fair share'' support to 
                CCAs, reducing it, on average, to less than 4% of the 
                amounts repaid. There is a vast contingency of smaller 
                creditors who do not pay any fair share--encompassing 
                doctors, lawyers, collection agents, loan companies, 
                local banks, student loan companies, utility companies, 
                credit unions, and small retail stores, just to name a 
                few. And since most smaller creditors pay no fair 
                share, non-profit CCAs are not a sustainable business 
                model. A myriad of differing state laws are causing the 
                cost of compliance to skyrocket while, simultaneously, 
                fees are being ``capped'' by states. Without 
                competition from market-based companies, consumers will 
                be left on their own to negotiate against some of the 
                largest credit card companies and banks in the world. 
                And, with no revenues being generated by consumers who 
                pay for the services they receive, consumers will not 
                be able to get the key services they need.
                  In June of 2003, Howard Beales, Director of the 
                Bureau of Consumer Protection at the FTC, praised the 
                modernization of the consumer credit granting industry 
                from the old model of in-person visits to a local 
                banker. Likewise, modernization in the credit 
                counseling industry is desperately needed in allowing 
                competition among for-profit and non-profits in the 
                best, most efficient manner of financing modern credit 
                counseling services. Creditors--both for-profit and 
                non-profit--have dramatically changed over the last 
                half century. The same cannot be said for the credit 
                counseling industry because for-profits have been 
                banned.

    3. Fair Federal regulation that preempts the confusing 50-state 
patchwork status quo would benefit consumers.

                  Practical, consistent federal regulation of CCAs 
                would benefit consumers, creditors and counselors. 
                National rules will protect consumers across the 
                country with consistent standards while providing 
                incentives for industry investment. In some states 
                credit counseling is illegal. Georgia just this year 
                changed their statute outlawing credit counseling. In 
                Kansas, it is still illegal. Federal regulation would 
                be vastly more effective and efficient by overriding 
                the confusing, inconsistent, and unnecessarily 
                expensive state patchwork of laws and creditor 
                mandates.

    The Coalition for Responsible Credit Practices believes the 
industry should hold itself to high standards and employ industry 
``best practices.'' This can be achieved through several mechanisms, 
specifically:

    1. Practical, consistent federal regulation.

                  National rules would protect consumers across the 
                country and provide incentives for industry investment, 
                while overriding the confusing, inconsistent state 
                patchwork of laws and creditor mandates.

    2. Industry-wide adoption of Best Practices.

                  Industry trade associations should lead the industry 
                in developing and enforcing policies, and implementing 
                clear, dependable procedural and operating standards, 
                including:

                         Thorough, regular training and 
                        certification.
                         Approved, documented standards for 
                        proposal processing and program enrollment.
                         Honest, accurate advertising.
                         Full disclosure of funding sources, 
                        including percentage from creditor.

    3. Further resources pledged to customer service.

                An even legal and regulatory playing field for 
                nonprofit and market-priced credit counseling agencies 
                alike will boost competition within our industry, 
                ultimately benefiting consumers through agency 
                investment in new products and services, such as:

                         Improved efficiency through superior 
                        third-party vendors.
                         Faster, easier electronic payment 
                        options for consumers and creditors.
                         More convenient counseling services 
                        for consumers, like interactive voice response 
                        and Internet.

    It is also extremely important that creditors make a stronger 
commitment to customer satisfaction. As previously noted, many consumer 
complaints about credit counseling are actually the fault of the 
creditors and beyond the control of the CCA. CCAs and creditors must 
work together, employing the latest business methods and technological 
innovations will help the industry exceed consumer expectations.

                         Creditors must give full benefits of 
                        debt-management plan promptly, including waiver 
                        of late fees, within first week of program 
                        enrollment.
                         CCAs must provide effective, 
                        efficient, time flexible counseling sessions.
                         Creditors should discontinue 
                        collection calls within the first week of 
                        program enrollment.
                         Creditors must provide timely 
                        responses to payment proposals and payment 
                        postings.
                         Creditors should provide greater 
                        availability of creditor representatives.
                         CCAs owe consumers unbiased 
                        counseling advice.
                         Creditors should ensure that credit 
                        card statements reflect changes upon debt-
                        management plan enrollment.

    The Coalition is committed to preserving and promoting this 
valuable, vital industry. We hope the Coalition's work will ultimately 
help millions more Americans manage their credit card debt, save money 
and avoid bankruptcy. On behalf of our membership, I want to thank the 
Oversight Subcommittee and offer our assistance in working together for 
a strong and consumer-oriented service.
    Thank you again for this opportunity to submit testimony.
                                 ______
                                 

                              Bibliography

    ``Credit Card Nation: The Consequences of America's Addiction to 
Credit.'' Robert D. Manning. Basic Books, 2000.
    ``The Fragile Middle Class.'' Teresa A. Sullivan, Elizabeth Warren, 
Jay Lawrence Westbrook, Yale University Press, 2000.
    ``As We Forgive Our Debtors: Bankruptcy and Consumer Credit in 
America.'' Teresa A. Sullivan, Elizabeth Warren, Jay Lawrence 
Westbrook, Beard Books, 1999.
                                 ______
                                 

    Summary of Written Statement of Michael Barnhart, Coalition for 
                      Responsible Credit Practices

    The Coalition for Responsible Credit Practices is a newly formed, 
nationwide group of consumer credit counseling agencies and supporting 
businesses working together for a robust, consumer-friendly credit 
counseling industry.
Putting Consumers First: Broad Review from the Consumer's Perspective
    The credit counseling industry needs reform. However, reform that 
puts consumers first cannot be developed in a vacuum or by a narrow 
gauged inspection of industry practices and government regulation that 
ignores how Americans are living, working and borrowing.
Booming Debt
    During the booming economy of the 1990s consumer debt skyrocketed. 
In 1990, the average household non-mortgage debt was $8,500. By 2000, 
it had increased sharply to $14,500. Incredibly, the portion of that 
related to credit card debt nearly tripled, from $2,985 to over $8,100 
per household.
    U.S. credit card debt today totals about $700 billion. Late payment 
fees to creditors have risen from $1.7 billion in 1996 to $7.3 billion 
in 2002, making them the third largest source of revenue for credit 
card companies, trailing only interest and merchant fees.
    Today, the average American family is paying about $1,100 a year in 
interest on its credit cards. Interest rates on bank issued cards range 
from a 4.75% to 35% when the Federal Funds Rate is at 1%, an historic 
45-year low.
    Paradoxically, credit card issuers mailed five billion card offers 
in 2001, a 20% increase from 2000.
Consumers in Debt Crisis Need Choices
    Consumers experiencing debt crisis have limited alternatives. Some 
may seek attorneys to aid them with Chapter 7 (debt discharge) or 
Chapter 13 (repayment plan) bankruptcy. Yet others may borrow against 
their future by securing a home equity loan. Some consumers are lucky 
enough to have a family member willing to help. A fraction simply are 
able to ``pull themselves up by their bootstraps'' but, unfortunately, 
most cannot.
    Credit counseling is an essential and valuable service. Public 
policy makers and the industry should work together to ensure that 
consumers are able to use this vital credit counseling resource. Credit 
counseling agencies (CCAs) are now assisting over 1.5 million American 
households a year manage their debt, save money and avoid bankruptcy.
    Increasingly, consumers are demanding more ``customer focus'' from 
credit counseling agencies. Consumers expect CCAs to be as consumer 
friendly as other businesses and to offer such services as telephone 
counseling, Internet access, computerized payments and evening and 
weekend hours. Many traditional CCAs have been slow to meet new 
customer demands because they are revenue bound by declining ``fair 
share'' contributions from the largest creditors.
    ``Non-profit'' CCAs frequently act as agents of banks and credit 
card companies and hence are creditor driven instead of consumer 
focused. There are literally hundreds of thousands of creditors. In 
contrast, very few creditors, i.e., the largest 100 creditors, account 
for approximately 98% of all ``fair share'' paid by creditors to non-
profit CCAs. The traditional CCA is too dependent on creditors to give 
consumers unbiased advice and too revenue strapped to modernize 
practices and services.
    The ``non-profit'' business model is obsolete.
Pro-Consumer Credit Counseling: Consumer Choice, Competition and 
        Federal Regulation
    There are several crucial steps that must be taken to preserve CCAs 
and the benefits they bring to consumers and taxpayers:

    1. Creditor Commitment to Consumer Satisfaction. It is extremely 
important that creditors make a stronger commitment to customer 
satisfaction. Many consumer complaints about credit counseling are 
actually the fault of the creditors and beyond the control of the CCA. 
CCAs and creditors must work together, employing the latest business 
methods and technological innovations to help the industry exceed 
consumer expectations.
    2. Modernization of Traditional CCAs. CCAs must become consumer 
focused and operate like true businesses. Competition for consumers 
among for-profit and non-profit CCAs would provide consumers choice and 
the industry with incentives to provide consumer focused--not creditor 
driven--consumer credit counseling.
    3. Competition Between ``Non-Profit'' and Market-Based CCAs. 
Injecting competition would benefit consumers. Without a creditor 
subsidy, consumers must forgo counseling or pay reasonable fees. 
Without competition from market based companies, consumers will be left 
on their own to negotiate against some of the largest credit card 
companies and banks in the world.
    4. Fair Federal Regulation. The federal government must establish 
national regulation that preempts the confusing 50-state patchwork 
status quo would benefit consumers. Practical, consistent federal 
regulation of CCA would benefit consumers, creditors and counselors.

    [Additional attachments are being retained in the Committee files].

                                 

  Statement of Dewey T. Matherly, Consumer Credit Counseling Service, 
                     Inc., Gastonia, North Carolina

    Our position on the state of the credit counseling industry 
is some of the companies have hurt the accredited agencies by 
practicing services that are not for the good of the client, 
such as charging outrageous fees and soliciting clients by 
phone. Our clients are now questioning our practices because of 
the unscrupulous agencies and we have always been above board 
and offered budgeting classes and other services that help our 
clients even if we do not sign them up for debt management. Our 
revenues continue to decrease because creditors have not been 
able to distinguish between reputable companies and companies 
out to make a quick dollar and not provide their clients with 
all the services they need. Our agency feels that all agencies 
should have the same regulations and be held to the same 
standard. We are a part of a committee that is trying to 
establish a way to regulate the credit counseling industry in 
our state.

                                 

  Statement of Jane E. McNamara, GreenPath Debt Solutions, Farmington 
                            Hills, Michigan

    GreenPath Debt Solutions, a non-profit consumer credit 
counseling organization headquartered in Farmington Hills, 
Michigan, appreciates the opportunity to submit this statement. 
GreenPath applauds the recent actions of the IRS and FTC and of 
Chairman Houghton and this Subcommittee to combat abuses by so-
called credit counseling organizations that misuse their non-
profit status, offer consumers bad advice, and engage in 
unconscionable and deceptive trade practices. We at GreenPath 
are your allies in this effort.
    GreenPath operates 38 full-time branch offices in Michigan, 
New York, Wisconsin, Illinois, and Arizona and is authorized to 
conduct business throughout most of the United States. Since 
its establishment in 1961, GreenPath has sent nearly $1.2 
billion to creditors on behalf of more than 200,000 debt 
management clients. We are accredited by the Council on 
Accreditation and are members of the National Foundation for 
Credit Counseling (the ``NFCC'') and the Better Business 
Bureau. GreenPath is also a HUD-approved Housing Counseling 
Agency.
    The credit counseling industry is, quite frankly, at a 
turning point. Now is the time to comprehensively and 
aggressively address the unconscionable trade practices of 
phone-based debt prorating companies masquerading as credit 
counselors, including abuse of their non-profit status. Failure 
to act could result in an industry dominated by entities more 
interested in their own well-being than the well-being of 
vulnerable individuals who turn to credit counseling to avoid 
financial ruin.
    GreenPath, like all members of the NFCC, adheres to 
rigorous certification and accreditation standards that require 
us to live up to our nonprofit status and to serve consumers 
professionally and with compassion. For example, GreenPath 
offers free and low cost education and counseling services to 
help consumers learn better money and credit management skills. 
We work with other local support services, such as family 
counselors, crisis lines, and legal aid, to help our clients 
with other underlying issues that may affect their finances.
    Most importantly, only consumers who can benefit from 
intervention with creditors are recommended for formal debt 
repayment plans, and those plans cover both secured and 
unsecured debt and include concessions like reduced monthly 
payments, waived late fees, and lowered interest rates. 
GreenPath is governed by a local and independent Board of 
Directors, which helps ensure that our practices are fair, 
consumer-focused, and untainted by improper relationships and 
shell transactions that enrich executives and inure to the 
benefit of for-profit companies.
    This has been, and continues to be, the holistic approach 
to debt management that GreenPath offers consumers who contact 
its offices.
    Unfortunately, as Mr. Boisclair indicated in his testimony 
on behalf of the NFCC, there has been recently a disturbing 
proliferation of unsavory entities calling themselves credit 
counselors, that are in fact single-focus, debt prorating 
companies. These entities are not governed by local and 
independent Boards. Instead of a holistic approach to 
counseling, these organizations focus only on the revenue 
generating aspect of our business: debt repayment plans. They 
relentlessly advertise quick fixes, promise no or low fees, and 
use the not-for-profit designation to attract or entice 
unsuspecting consumers.
    What they really offer is a brief, quick-fix telephone 
question and answer session that is touted as a cure for a 
consumer's ailing fiscal health. Many consumers are talked into 
a debt repayment plan loaded with high fees, and those plans 
cover only credit card and unsecured debt, because creditors do 
not typically pay compensation for payments on auto loans, 
mortgages, utilities, and other secured debt. The more people 
these agencies sign up on debt plans, the more money they make. 
In some cases, basic budget counseling is all consumers need to 
solve their problems, but that advice is not offered.
    GreenPath strongly believes that credit counseling 
organizations must provide real counseling in order to educate 
consumers and enhance their financial management skills. A 
recent study by Georgetown University found that consumers who 
received credit counseling, but did not enroll in a debt 
management program, significantly improved their credit score 
and payment behavior over the next three years (relative to 
consumers who had similar credit risk profiles but did not 
receive counseling). Counseled consumers: 

     Were 38 percent less likely to suffer an account 
charge-off or file for bankruptcy;
     Averaged 11 fewer delinquencies in the last year 
of the observation period;
     Increased credit scores by an average of 36 
points more than the comparison group; and
     Lowered non-mortgage debt by an average of 
$14,400 more than the comparison group.

    At GreenPath, all our clients receive 60 to 90 minutes of 
credit counseling by accredited, college educated individuals, 
including a personal budget and action plan, regardless of 
whether they enroll in a debt management program. In fact, 
unless GreenPath concludes it is a viable alternative, a 
consumer is not even offered a debt management program. We 
understand that counseling is all that is needed by some 
consumers and that others lack the income to make a debt 
management program workable.
    For those individuals whose financial situation dictates a 
debt management program, GreenPath negotiates with all 
creditors and includes all types of debt on the management 
program. Unlike single-focus, debt prorating companies, we 
assist our clients with all their debts to help them avoid 
foreclosure on their homes, repossession of their cars, and 
shutoff of their utilities. We do this even though we receive 
no additional fee from the consumer and creditors do not 
provide any financial incentives for handling secured debt. 
GreenPath paid 11,318 creditors in 2002, and only 1,694 of 
those creditors contributed funding.
    Moreover, unlike national single-focus, debt prorating 
companies whose toll-free number is the only point of debtor 
contact, GreenPath provides face-to-face credit counseling 
service in its local communities. The availability of in-person 
counseling can be critical. At GreenPath, we have found that 
the success rate for consumers counseled face-to-face is about 
35% higher than for those counseled over the phone.
    We are active members of our communities in other ways too. 
Over the past 12 months, GreenPath counselors have conducted 
473 free community education presentations for 4,862 attendees 
in schools, businesses, churches, and other community 
organizations. Our local offices have relationships with 
neighborhood credit unions and banks that enable them to pass 
on greater benefits to our clients.
    Unfortunately, to a debtor in financial straights, all non-
profit credit counselors look and sound alike. So by staying 
true to our values, which include free financial consultations, 
community involvement, and fully-staffed branch offices, 
GreenPath is at a severe competitive disadvantage with respect 
to companies that are little more than debt management program 
mills staffed by people who provide little or no true 
counseling. Obviously, our cost structure is much higher than 
that of a call center, and true credit counselors like 
GreenPath cannot spend enough on advertising to compete with 
these operations. It is the consumer who suffers.
    GreenPath welcomes government intervention to rid the 
industry of entities that misuse their nonprofit status to 
attract customers and charge high fees. Indeed, GreenPath has 
already aggressively lobbied on a state level toward the same 
goal. In New York, where GreenPath has been licensed since 
1995, we successfully worked with the state legislature and 
executive branch to close a licensing law loophole which 
allowed out-of-state credit counselors that did not have a 
physical presence in New York, including those targeted by the 
FTC and IRS, to do business without a license. Unlike licensed 
credit counselors, the State Banking Department had no 
jurisdiction over the out-of-state entity's business and could 
not impose disclosure requirements, regulate fees, or monitor 
the process by which payments are actually made to creditors.
    The 2002 law strengthened the Banking Department's ability 
to protect consumers by giving it jurisdiction over any entity 
that solicits budget planning business in New York and enters 
into a budget planning agreement with a New York resident, 
regardless of its physical location.
    The new law also provides the Banking Superintendent with 
the authority necessary to appropriately oversee all budget 
planners who do business with New Yorkers. Included among the 
important enforcement and regulatory tools are requirements 
that:

     licensees post a bond or deposit of at least 
$250,000;
     licensees annually submit an independently 
audited financial statement;
     licensees promptly notify the superintendent of 
new officers and directors and provide such other information 
that she may require;
     a budget planner license may be revoked based on 
a criminal conviction involving moral turpitude or fraud or a 
civil action involving fraud, misrepresentation or deceit;
     contracts between a planner and debtor must 
contain certain consumer protection provisions;
     prohibit deceptive advertising and the 
commingling of monies received from debtors; and
     the superintendent may direct a licensee to 
adjust unreasonable fees.

    Mandated measures such as these, fairly applied to all 
businesses that hold themselves out to the public as credit 
counselors, are the best way to rid the industry of those who 
would exploit vulnerable debtors. Similar enforcement and 
regulatory tools may serve as a model for the entire country.
    GreenPath is dedicated to helping people resolve financial 
problems and promotes the wise use of credit through counseling 
and education. Our mission statement says it all: ``Through 
financial knowledge and expertise, we enable people to enjoy a 
better quality of life. ''
    Like the NFCC, we look forward to working with Congress, 
federal and state regulators, consumer advocates, creditors and 
others to help shape a national dialogue that will establish 
policies and guidelines to protect consumers from predatory 
debt service providers and that will sustain the long-standing, 
reputable credit counseling agencies in our industry. Thank you 
for this opportunity to present our views.

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