[Senate Hearing 108-545]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 108-545




                               before the


                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION


                             MARCH 24, 2004


      Printed for the use of the Committee on Governmental Affairs

                                                        S. Hrg. 108-545




                               before the


                                 of the

                              COMMITTEE ON
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION


                             MARCH 24, 2004


      Printed for the use of the Committee on Governmental Affairs

93-477                      WASHINGTON : DC
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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                   SUSAN M. COLLINS, Maine, Chairman
TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas

           Michael D. Bopp, Staff Director and Chief Counsel
      Joyce A. Rechtschaffen, Minority Staff Director and Counsel
                      Amy B. Newhouse, Chief Clerk



                   NORM COLEMAN, Minnesota, Chairman
TED STEVENS, Alaska                  CARL LEVIN, Michigan
GEORGE V. VOINOVICH, Ohio            DANIEL K. AKAKA, Hawaii
ARLEN SPECTER, Pennsylvania          RICHARD J. DURBIN, Illinois
ROBERT F. BENNETT, Utah              THOMAS R. CARPER, Delaware
PETER G. FITZGERALD, Illinois        MARK DAYTON, Minnesota
JOHN E. SUNUNU, New Hampshire        FRANK LAUTENBERG, New Jersey
RICHARD C. SHELBY, Alabama           MARK PRYOR, Arkansas

       Raymond V. Shepherd, III, Staff Director and Chief Counsel
                         Steven Groves, Counsel
                       Katherine English, Counsel
        Elise J. Bean, Minority Staff Director and Chief Counsel
                     Mary D. Robertson, Chief Clerk

                            C O N T E N T S

Opening statements:
    Senator Coleman..............................................     1
    Senator Levin................................................     7
    Senator Akaka................................................     9
    Senator Dayton...............................................    11
    Senator Pryor................................................    29
Prepared statements:
    Senator Durbin...............................................    85
    Senator Lautenberg...........................................    87

                       Wednesday, March 24, 2004

Raymond Schuck, Victim, Cambridge Credit Counseling Corp., Lima, 
  Ohio...........................................................    12
John Pohlman, Former Employee, Cambridge Credit Counseling Corp., 
  East Granby, Connecticut.......................................    14
Jolanta Troy, Victim, AmeriDebt, Inc., Carlisle, Pennsylvania....    16
Johnpaul Allen, Former Employee, AmeriDebt, Inc., New Market, 
  Maryland.......................................................    17
Chris Viale, General Manager, Cambridge Credit Counseling Corp., 
  Agawam, Massachusetts..........................................    32
Matthew Case, Chief Operating Officer, AmeriDebt, Inc., 
  Germantown, Maryland...........................................    34
Cuba M. Craig, Chief Executive Officer, American Financial 
  Solutions, Seattle, Washington.................................    35
James Kroening, Director, FamilyMeans Consumer Credit Counseling 
  Service, Stillwater, Minnesota.................................    37
Andris Pukke, President, DebtWorks, Inc., Germantown, Maryland, 
  accompanied by John Williams...................................    62
Michael Malesardi, Chief Financial Officer, The Ballenger Group, 
  LLC, Frederick, Maryland.......................................    63
Bernaldo Dancel, Chief Executive Officer, Amerix Corporation, 
  Columbia, Maryland.............................................    65
Mark W. Everson, Commissioner, Internal Revenue Service..........    78
Thomas B. Leary, Commissioner, Federal Trade Commission..........    80

                     Alphabetical List of Witnesses

Allen, Johnpaul:
    Testimony....................................................    17
    Prepared statement...........................................    95
Case, Matthew:
    Testimony....................................................    34
    Prepared statement...........................................   127
Craig, Cuba M.:
    Testimony....................................................    35
    Prepared statement...........................................   142
Dancel, Bernaldo:
    Testimony....................................................    65
    Prepared statement...........................................   175
Everson, Mark W.:
    Testimony....................................................    78
    Prepared statement with attachments..........................   181
Kroening, James:
    Testimony....................................................    37
    Prepared statement...........................................   150
Leary, Thomas B.:
    Testimony....................................................    80
    Prepared statement...........................................   193
Malesardi, Michael
    Testimony....................................................    63
    Prepared statement with attachments..........................   153
Pohlman, John:
    Testimony....................................................    14
    Prepared statement...........................................    91
Pukke, Andris:
    Testimony....................................................    62
Schuck, Raymond:
    Testimony....................................................    12
    Prepared statement...........................................    89
Troy, Jolanta:
    Testimony....................................................    16
    Prepared statement...........................................    93
Viale, Chris:
    Testimony....................................................    32
    Prepared statement...........................................    97
    Supplemental written submission with attachments.............   102


Staff Report entitled ``Profiteering in a Non-Profit Industry: 
  Abusive Practices in Credit Counseling''.......................   203


 1. Corporate Chart of Cambridge-Brighton.......................   240

 2. Corporate Chart of DebtWorks-Ballenger Group................   241

 3. Corporate Chart of Ascend One-Amerix........................   242

 4. Service Agreement between Raymond Schuck and Cambridge 
  Credit Counseling Corp., dated June 29, 2001...................   243

 5. $1,946 check sent by Raymond Schuck to Cambridge Credit 
  Counseling Corp. for enrollment in his debt management plan, 
  dated July 13, 2001............................................   248

 6. Client Financial Disclosure of Raymond Schuck, dated October 
  12, 2001.......................................................   249

 7. Correspondence between AmeriDebt and Better Business Bureau, 
  dated December 26, 2002, regarding Jolanta Troy's enrollment in 
  debt management plan...........................................   250

 8. AmeriDebt Debt Management Plan Agreement, page 5............   251

 9. Flow Chart prepared by AmerDebt for employee training.......   252

10. Debt Relief Clearinghouse solicitation letter...............   254

11. AmeriDebt document outlining procedure for forwarding leads 
  for home equity loans to Fidelity & Trust Mortgage, Inc. and 
  outlining compensation received by AmeriDebt counselors for 
  such lead......................................................   255

12. Get Excited employee training document prepared by AmeriDebt   258

13. Tip Sheet on telephone sales skills for AmeriDebt employee 
  training.......................................................   259

14. Portion of AmeriDebt script pertaining to ``voluntary'' 
  contribution...................................................   260

15. AmeriDebt September 2001 Company Notes......................   261

16. How Do You Respond When Explaining Questions Regarding The 
  Contribution, prepared by DebtWorks............................   262

17. Was The Client Forced To Sign The Agreement?, prepared by 
  DebtWorks......................................................   263

18. Deposition of John Puccio conducted by the Permanent 
  Subcommittee on Investigations, July 1, 2004...................   264

19. Statement for the Record of Preston O. Duppins, Jr., 
  President and Chief Executive Officer, Genesis Financial 
  Management, Inc................................................   322

20. Statement for the Record of David C. Jones, President, 
  Association of Independent Consumer Credit Counseling Agencies.   327

21. Responses to suplemental questions for the record submitted 
  by Senator Frank Lautenberg to:

      a. The Honorable Mark W. Everson, Commissioner, Internal 
      Revenue Service............................................   338

      b. The Honorable Thomas B. Leary, Commissioner, Federal 
      Trade Commission...........................................   339

      c. Chris Viale, General Manager, Cambridge Credit 
      Counseling Corp............................................   341

      d. James Kroening, Director, FamilyMeans Consumer Credit 
      Counseling Service.........................................   343

      e. John Pohlman, Former Employee, Cambridge Credit 
      Counseling Corp............................................   344

      f. Raymond Schuck, Victim, Cambridge Credit Counseling 
      Corp.......................................................   345



                       WEDNESDAY, MARCH 24, 2004

                                       U.S. Senate,
                Permanent Subcommittee on Investigations,  
                  of the Committee on Governmental Affairs,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 9:04 a.m., in 
room 342, Dirksen Senate Office Building, Hon. Norm Coleman, 
Chairman of the Subcommittee, presiding.
    Present: Senators Coleman, Levin, Akaka, Dayton, and Pryor.
    Staff Present: Raymond V. Shepherd, III, Staff Director; 
Joseph V. Kennedy, General Counsel; Steven Groves, Counsel; 
Katherine English, Counsel; Leland Erickson, Counsel; Mark 
Greenblatt, Counsel; Jay Jennings, Investigator; Mary D. 
Robertson, Chief Clerk; Kristin Meyer, Staff Assistant; 
Katherine Russell, Detailee, FBI; Bill Winne, Professional 
Staff; Andrew Plehal, Intern; Elise J. Bean, Democratic Staff 
Director/Chief Counsel; Laura Stuber, Counsel to the Minority; 
Marianne Upton (Senator Durbin); Tate Heuer and Gita Uppal 
(Senator Pryor); Joyce Nicolas (Senator Akaka).


    Senator Coleman. This hearing of the Permanent Subcommittee 
on Investigations is called to order. Good morning and welcome 
to today's hearing. We are holding this hearing to address the 
continuing ongoing problems with the credit counseling 
    Consumer debt has more than doubled in the past 10 years. 
The Nation's credit card debt current tops $735 billion, or an 
average of nearly $7,000 per household. Since 1996, more than 
one million consumers have filed for personal bankruptcy each 
year and a record 1.7 million new filings in 2003.
    Since the 1960's, consumers with credit card debt regularly 
turned to their local non-profit credit counseling agency for 
advice and financial education. Consumers were given face-to-
face counseling sessions with trained counselors. Credit 
counselors conducted a detailed budget analysis with a 
consumer, analyzed their spending habits, determined why the 
consumer was in debt, and educated the consumer in how to avoid 
falling back into debt.
    One such agency, FamilyMeans Consumer Credit Counseling 
Service, will testify about how the industry has run 
successfully for all these years. Even today, FamilyMeans 
provides an in-depth analysis of each consumer who comes to 
them for help, gives them proper counseling and education, and 
only when the consumer needs intercession with their creditors 
enrolls them in a debt management plan. They provide these 
services free of charge or at minimal expense to the consumer.
    FamilyMeans is by no means the only credit counseling 
agency that takes a comprehensive and holistic approach to each 
consumer they provide services to. The agencies organized under 
the National Foundation for Credit Counseling and the 
Association of Independent Consumer Credit Counseling Agencies 
require their members to adhere to strict standards of practice 
and restrict the cost that customers may be required to cover. 
Those associations prove that self-regulation can be an 
effective means of keeping this industry consumer-friendly.
    Under traditional social service models, consumers who 
could not afford to make all their monthly credit card payments 
often enrolled in a debt management plan, or DMP for short, 
which allowed them to consolidate their debts from several 
credit cards, reduce their monthly payments, and lower their 
interest rates. The traditional credit counseling agencies 
provided counseling, education, and debt management plans free 
of charge or for minimal contributions. To cover operational 
costs, creditor banks paid credit counseling agencies a 
percentage of the money that was collected from consumers 
through debt management plans. The credit counseling industry 
successfully operated in this manner for several decades.
    Over the past several years, however, the credit counseling 
agency has undergone significant changes. New and aggressive 
credit counseling agencies have changed the manner in which 
consumers are treated. These changes have resulted in consumer 
complaints about excessive fees, pressure tactics, nonexistent 
counseling and education, promised results that never come 
about, ruined credit ratings, poor service, in many cases being 
left in worse debt than before they initiated their debt 
management plan.
    We will hear testimony today from two insiders who worked 
for two of the Nation's largest non-profit credit counseling 
agencies. They describe the organizations at these non-profits 
as telemarketing sweatshops designed to take advantage of 
thousands of people in bad financial positions. One of the 
insiders describes this scene as ``it was a boiler room 
mentality. There was a large board at the front of the room 
that reminded me of the leader board at a golf tournament. It 
had the names of counselors who had the top sales for the month 
in red and yellow lights.'' Make no mistake, these credit 
counseling agencies were designed to sell a product, the debt 
management plan, not primarily to deliver a service of 
education and counseling.
    The Federal Trade Commission and the Attorney Generals of 
Illinois, Maryland, Minnesota, Missouri, and Texas have taken 
action against AmeriDebt, DebtWorks, and their related 
partners. The Internal Revenue Service has initiated audits of 
over 50 credit counseling agencies. Several class action 
lawsuits are currently pending against several of the new 
    Clearly, something is wrong with the credit counseling 
industry. So what has gone wrong and what has happened? It 
would seem that money is the root cause of these problems. Many 
of these new entrants in the credit counseling industry have 
developed a business model which is based on generating revenue 
rather than providing counseling to indebted consumers.
    This new for-profit model is designed so that credit 
counseling agencies generate massive revenues to fund 
advertising, marketing, executive salaries, and any number of 
other activities beyond actual credit counseling. The new model 
looks to the consumer to provide these revenues.
    When profit motive is injected into a non-profit industry, 
it should come as no surprise that harm to the consumers will 
follow. Indeed, the primary effect of the for-profit model has 
been to corrupt the original purpose of the credit counseling 
industry, which was to provide advice, counseling, and 
education to indebted consumers free of charge or at minimal 
charge and place consumers on debt management plans only if 
they are otherwise unable to pay their debts.
    Some of the new entrants now reverse the practice. They 
provide no bona fide education and counseling and place every 
possible consumer into a debt management plan charging 
unreasonable or even exorbitant fees.
    For the past several months, Subcommittee staff has 
conducted interviews of individuals, agencies, and for-profit 
corporations to play a role in the credit counseling industry, 
including credit counseling agencies, major creditor banks, 
State and Federal officials, and consumer advocates. Thousands 
of documents were reviewed. Over 500 consumer complaints were 
examined and we spoke with over 50 consumers about their 
experiences with several different credit counseling agencies. 
We have also spoken to over 40 current and former employees of 
credit counseling agencies in order to see how these agencies 
operate from the inside.
    Today's hearing presents the results of our investigation. 
As I stated earlier, it would seem that money is at the root of 
the problems currently facing the credit counseling industry. 
The affiliation between non-profit credit counseling agencies 
and for-profit businesses is at the core of that problem. A 
review of the tax returns for both the non-profit and for-
profit entities reveals that the vast majority of the fees and 
contributions made to the credit counseling agency are siphoned 
off by the for-profit partners.
    Our hearing today focuses on three particular credit 
counseling conglomerates, and I say conglomerates because these 
new entrants often consist of a complex network of interrelated 
companies who are organized and operated for a common purpose, 
to generate revenue by charging fees to consumers for enrolling 
in debt management plans. The business practice of these new 
entrants constitute a potential abuse of the 501(c)(3) tax-
exempt status granted to the credit counseling agencies by the 
IRS. The misrepresentations made by these agencies to consumers 
regarding fees and what education will be provided may likely 
violate the Federal Trade Commission Act.
    Our investigation has revealed the common patterns of 
improper conduct by the new entrants. Each new entrant has been 
established and organized for the specific purpose of 
generating profits for one or more insider beneficiaries. The 
insiders of the new entrants have engaged in questionable 
transactions for the purposes of turning the non-profit agency 
into a profit-generating business.
    The new entrants, through their affiliated agencies, have 
generated massive revenue for themselves by charging excessive 
fees for initiating and managing a debt management plan and/or 
siphoning off such fees to related for-profit companies. 
Multiple non-profit counseling agencies have been organized by 
the insiders to provide multiple streams of revenue for the 
for-profit back-office processing companies.
    Regardless of what business model is used, debtors received 
little or no actual credit counseling or education as was 
contemplated by granting them tax-exempt status. Employees are 
routinely given bonuses based on their ability to enroll 
debtors in debt management plans, evidencing an intent to 
generate revenue rather than to provide relevant counseling and 
    The new entrants that we have investigated engage in most, 
if not all, of these practices. One of the conglomerates we 
have invited to testify today is the Cambridge-Brighton family 
of companies. Cambridge-Brighton consists of three credit 
counseling agencies and three for-profit affiliates. Cambridge-
Brighton is owned and operated by two brothers, John and 
Richard Puccio, who control each of the five entities in the 
conglomerate. All revenues for this family of companies come 
directly from the consumers. The vast majority of revenue that 
comes into the three credit counseling agencies from consumers 
is channeled to the three for-profit affiliates.
    At the top of the pyramid is the for-profit Brighton Credit 
Corporation of Massachusetts, now known as Brighton Debt 
Management Services, which does the account processing for the 
debt management plans generated by the three credit counseling 
agencies. Since 1998, this entity realized gross revenues in 
excess of $40 million.
    Debt Relief Clearinghouse is the for-profit company that 
produces infomercials, promotional videos, and other marketing 
materials for the conglomerate. Between 2000 and 2002, Debt 
Relief Clearinghouse has been paid in excess of $25 million.
    A third for-profit company, Cypress Advertising and 
Promotions, serves as an advertising broker and has been paid 
over $6.5 million since 1999.
    In total, the Cambridge-Brighton for-profit companies 
boasts over $71 million during that time period, all as a 
result of consumers being enrolled in debt management plans.
    From where did all this money originate? It comes from 
consumers who look to Cambridge for assistance with their 
debts. Where some credit counseling agencies charge $25 or no 
fee at all to set up a debt management plan, the Cambridge-
Brighton agencies charge a full month's payment as an up-front 
fee. Raymond Schuck will testify as to how he was charged close 
to $2,000 just to enroll in a debt management program. That fee 
did not go to Mr. Schuck's creditors. It went into Cambridge's 
coffers. Mr. Schuck's counseling and education consisted of two 
phone calls lasting a total of 20 minutes. Unfortunately for 
Mr. Schuck, the Cambridge debt management plan left him in 
worse financial condition than when he started and he 
ultimately declared bankruptcy.
    The second conglomerate that is testifying today consists 
of AmeriDebt and its for-profit affiliate, DebtWorks, now known 
as The Ballenger Group. The credit counseling agency known as 
AmeriDebt was operated for several years by Pamela Pukke as a 
stand-alone entity enrolling consumers in DMPs and doing all 
the necessary processing for the accounts. Then in 1999, 
AmeriDebt decided to simply split itself into two companies, 
one non-profit to enroll customers onto DMPs and one for-profit 
company to perform the DMP processing function. The new for-
profit was called DebtWorks and was wholly owned and controlled 
by Pamela Pukke's husband, Andris Pukke.
    Employees who had been trained at AmeriDebt fanned out to 
form additional credit counseling agencies which provide 
additional streams of revenue for DebtWorks. DebtWorks and Mr. 
Pukke assisted in the formation and organization of new credit 
counseling agencies with start-up loans and legal assistance. 
In return, these new agencies also contracted with DebtWorks 
for DMP processing and referred consumers to Mr. Pukke's other 
for-profit entities, Infinity Resources Group, Fidelity and 
Trust Mortgage, and F&M Mortgage.
    The non-profit credit counseling industry was very 
profitable for DebtWorks. Between 1999 and 2002, DebtWorks 
grossed in excess of $108 million. Again, it was the consumer 
who paid all the money.
    AmeriDebt's price for enrolling in a debt management plan 
is 3 percent of the consumer's total debt, so if the consumer 
is $25,000 in debt, the price of their plan with AmeriDebt 
would be $750. Jolanta Troy will testify today about how she 
thought her first payment to AmeriDebt of $783 was going to be 
sent to her creditors, only to find out that AmeriDebt actually 
kept the money. She had specifically told AmeriDebt she could 
not afford to make the large up-front contribution. Mrs. Troy 
wrote to AmeriDebt asking for the money to be returned, but 
AmeriDebt flatly refused. Mrs. Troy received no actual 
counseling and education. She was simply enrolled in a debt 
management plan and left to her own devices. Like Mr. Schuck, 
Mrs. Troy was left worse off by her debt management plan than 
she was before and had to declare bankruptcy.
    The final conglomerate we have invited to testify today is 
the Ascend One conglomerate. The Ascend One conglomerate began 
like AmeriDebt, as a single credit counseling agency called 
Genus Credit Management. It was operated by Bernaldo Dancel. 
Like AmeriDebt, Mr. Dancel simply split his agency into two 
parts, naming his new for-profit company Amerix Corporation. 
Amerix then set out across the country in an effort to form 
additional credit counseling agencies. Amerix assisted in the 
formation of five credit counseling agencies, all of which 
currently contract with Amerix for DMP processing services.
    As with the prior two conglomerates, the Ascend One-Amerix 
group of companies is funded by consumer fees and 
contributions. The credit counseling agencies in this 
conglomerate are contractually obligated to remit between 50 
and 85 percent of all their revenue to Amerix. In all, between 
1998 and 2002, Amerix received gross revenues in excess of $386 
million, all generated by the debt management plans. Other 
revenues realized by Ascend One come from consumers who were 
referred by the affiliated credit counseling agencies to its 
wholly-owned for-profit subsidiaries, FreedomPoint Corporation 
and FreedomPoint Financial. These companies market mortgage 
broker services and other projects to highly leverage 
    Consumers who contact credit agencies affiliated with the 
Ascend One receive little counseling or education. In fact, 
consumers were permitted to enroll in a debt management plan 
entirely over the Internet without having spoken to a credit 
counselor. This practice apparently removes the expense 
associated with the counselor actually spending time to give 
advice and education to consumers.
    We will also hear testimony today from the Federal agencies 
responsible for regulating and enforcing the laws in this area, 
the Internal Revenue Service and the Federal Trade Commission. 
Each of these agencies have taken modest steps to enforce the 
tax code and consumer protection laws within this industry. I 
am heartened to hear that Commissioner Everson has initiated 
over 50 audits of credit counseling agencies. However, where 
consumers are being victimized by supposed non-profit agencies 
they trust to help get them out of debt, it is incumbent upon 
the Federal Government to do more.
    I look forward to hearing from our panelists this morning 
and I know we will all learn a great deal. I am committed to 
discovering the causes of the problem plaguing this once 
consumer-friendly industry. I am equally committed to finding 
solutions either by additional enforcement or legislation to 
remedy these problems.
    That was a rather lengthy statement, but due to the 
complexity of what we are looking at today, I thought it was 
the right thing to do.
    As we have this hearing, I don't want to paint every credit 
counseling agency with a broad brush here and say that all 
consumers are being abused. But we had a system that was set up 
to help people in debt and to provide them with counseling and 
education and afterwards, if necessary, enroll in debt 
management plans. It appears from our investigation that what 
has happened in debt management plans for some of the new 
entrants in this market have become a product, a product to 
simply be marketed and to be sold. The person who loses out on 
that is the person who needs help, who is reaching out for 
help, who believes that they are going to a non-profit and 
finds out in the end that, in fact, they are not getting the 
counseling and the education that they need.
    In addition, who is hurt are the other agencies out there. 
I believe the best welfare program is a job. I want business to 
prosper. But if I am a consumer out there, I am not going to 
know who to call today. There are the NFCC and AICCCA, some of 
the organizations that work with these agencies, have done, in 
my opinion, a good job of working with their members, but it is 
going to become difficult to distinguish between who is doing 
the good job and who isn't and I think that is unfortunate. We 
all get hurt by the actions of a few, and in this area, there 
is a lot of money being made and it certainly caused this 
Subcommittee to have a lot of concern.
    I look forward to the hearing today, and with that, I will 
turn it over to my distinguished colleague and Ranking Member, 
Senator Levin.


    Senator Levin. Thank you, Mr. Chairman, and thank you for 
calling these very important hearings. Your leadership here is 
critically useful and it is going to make a difference.
    The United States is awash in consumer debt. U.S. credit 
card debt alone now exceeds $730 billion. That is even larger 
than the country's deficit at the moment, our annual deficit. 
Much of this consumer debt is owed by working families of 
modest means trying to make ends meet. Part is due to expenses 
associated with a health crisis, a death in the family, legal 
problems, a divorce, or a job loss. For many middle-income 
households, substantial debt is a fact of life and debt 
management is an urgent and a painful necessity.
    The issue that the Subcommittee is examining today under 
the leadership of our Chairman is how to ensure that persons 
who are struggling with debt and who turn to a credit counselor 
for help are protected against abusive credit counseling 
agencies seeking to exploit their financial distress.
    Traditionally, and hopefully in most cases today, credit 
counseling agencies are community-based, truly non-profit 
entities seeking to educate consumers about their finances and 
helping them to get back on their feet. For nominal fees, 
reputable agencies set up formal debt management plans for 
consumers to consolidate their debts, find ways to reduce the 
debts owed, establish a schedule for repaying them, and in many 
cases are able to reduce the interest rates owed.
    Such agencies will contact creditors like a bank or a 
credit card company and arrange for a waiver of late fees and 
penalties, negotiate a reduction in debt in return for a 
debtor's promise to begin a regular repayment schedule. When 
done right, this work can save individuals and families from 
bankruptcy and financial ruin while helping creditors obtain 
some of the monies owed to them.
    The problem is that in recent years, a less benign type of 
credit counseling agency has infiltrated the credit counseling 
industry. These newcomers generally claim to operate as non-
profits but are, in fact, organized to squeeze as much cash as 
possible from debt-laden consumers and then funnel the bulk of 
it to insiders or for-profit affiliates.
    The 6-month Subcommittee investigation of three of the 
largest credit counseling conglomerates in operation today has 
documented a host of disturbing and abusive practices. One key 
abuse involves debtors being charged excessive start-up and 
monthly fees by a non-profit credit counseling agency to set up 
and administer a debt management plan. For example, instead of 
start-up and monthly fees of $23 and $14, the average charged 
in 2002 by credit counseling agencies who are members of the 
reputable National Foundation for Credit Counseling, the 
investigation found some agencies charging hundreds or even 
thousands of dollars per debtor.
    Consumers have also complained of being misled about their 
initial payment, believing it would go to their creditors when 
instead the money was kept by the credit counseling agency as a 
fee. The investigation also found that some agencies were 
providing little or no individualized counseling to their 
clients, instead, simply directing them to standardized debt 
management plans.
    In addition to excessive fees and poor counseling, the 
Subcommittee investigation found a pattern of non-profits 
funneling substantial amounts of cash to affiliated for-profit 
entities under the guise of paying processing costs or other 
charges. While reputable credit counseling agencies typically 
pay monthly processing costs of a dollar to two dollars per 
debt management plan, the monthly processing costs in the three 
case studies investigated by the Subcommittee are dramatically 
larger, typically $25 to $30 or more per plan. In this way, 
significant sums are transferred from the non-profits to an 
affiliated profit-making entity.
    The Subcommittee found, for example, in a one-year period 
between June 2001 and July 2002, one credit counseling agency 
sent over $80 million to its for-profit affiliate. Another for-
profit entity over a 4-year period accumulated gross receipts 
from five different non-profit credit counseling agencies in 
excess of $386 million.
    At the same time, the related owners of the for-profit and 
non-profit companies were paying themselves lucrative salaries. 
At one time, for example, in 2002, the owner and his brother 
each drew salaries of $624,000. This is not how non-profit 
community-based charities are supposed to operate.
    The staff report being released today details three case 
studies of credit counseling conglomerates which manage 
billions of dollars in consumer debt and are suspected of 
engaging in these kinds of abusive practices. All three groups 
will testify today.
    We will also hear from the two Federal agencies with key 
responsibilities for stopping credit counseling abuses. One is 
the Internal Revenue Service which has the power to determine 
whether a tax exempt CCA is acting as a front for a profit-
making enterprise. The second agency is the Federal Trade 
Commission which has the authority to determine whether 
particular businesses are engaged in deceptive or unfair trade 
practices. Both agencies have begun to tackle the mounting 
problems in the credit counseling industry, but much more 
enforcement is needed.
    There is one more group that isn't here today but also has 
an important role in stopping credit card abuses, and that is 
the creditors. This is a third group with a real interest in 
stopping these abuses. Major banks and credit card companies 
often support credit counseling agencies by providing them with 
a percentage of the payments made by the debtors they counsel. 
These so-called fair share payments are a key source of revenue 
for credit counseling agencies. Creditors can and should do a 
better job in screening the credit counseling agencies they 
support to stop abusive practices that hurt debtors and often 
leave them in worse shape after paying their bills. Creditors 
have powerful tools to help clean up the industry if they 
choose to use them. It is clearly in their own financial 
interest that the money owed to them actually reach them and 
not be skimmed by unscrupulous operators.
    Again, I commend Chairman Coleman for taking on this issue 
and for shining a spotlight on credit counseling abuses. Too 
many predatory credit counseling agencies are profiting at the 
expense of debt-laden consumers who are very vulnerable, at 
times leaving these consumers worse off than when they found 
them. It is time to stop these practices before they ruin a 
vitally needed community service sector.
    Again, I thank you, Mr. Chairman, for taking this issue on 
and for protecting America's consumers.
    Senator Coleman. Thank you, Senator Levin. Senator Akaka.


    Senator Akaka. Thank you very much, Mr. Chairman. I will 
make a brief statement and ask that my full statement be placed 
in the record.
    Senator Coleman. Without objection.
    Senator Akaka. I appreciate your conducting this hearing 
today, Mr. Chairman, and all of the work that has gone into 
this thorough investigation of the credit counseling industry.
    Americans are carrying enormous amounts of debt, and let me 
mention some data from the Federal Reserve and Daily Bankruptcy 
News. In 2003, consumer debt increased for the first time to 
more than $2 trillion, according to the Federal Reserve. This 
is a 28 percent increase since the year 2000. According to the 
Daily Bankruptcy News, consumer debt is now equal to 110 
percent of disposable income. Ten years ago, it was 85 percent, 
and 20 years ago, it was 65 percent. These are daunting facts.
    I have placed tremendous importance on the issue of 
economic and financial literacy so that individuals are able to 
make informed financial decisions in today's complex modern 
economy. We must do more to increase financial literacy in our 
country to help people better manage their credit.
    I have sponsored a number of initiatives intended to 
increase the financial knowledge of students, adults, and 
investors, and I will continue to pursue these efforts to 
empower individuals to better manage their finances.
    In addition to education efforts, we must ensure that 
people seeking help in dealing with complex issues, such as 
debt management, are able to locate the assistance they need 
and ascertain the quality of such assistance. More and more 
working families are trying to survive financially and meet 
their financial obligations. They seek out help from credit 
counselors to better manage their debt burdens. It is extremely 
troubling that unscrupulous credit counselors exploit for their 
own personal profit, individuals who are to locate the 
assistance that they need. As debt burdens increase, people 
will need to seek more credit counseling.
    I am concerned that certain credit counseling agencies have 
abused their non-profit tax-exempt status. People believe 
sometimes, mistakenly that they can place blind trust in all 
non-profit organizations and that their fees will be lower than 
those of other credit counseling organizations. Too many 
individuals may not realize that the credit counseling industry 
does not deserve the trust that the consumers often place in 
    Many credit counseling organizations simply lead their 
consumers to debt management plans. This may not be the best 
option for many consumers. Certain credit counseling agencies 
fail to provide consumers with their full range of options and 
recommendations. For some individuals, bankruptcy is 
appropriate for their set of circumstances and they may be 
better off in the long run declaring bankruptcy instead of 
having an ill-suited debt management plan imposed on them.
    This flagrant abuse of individuals seeking assistance to 
help manage their debts by certain credit counseling 
organizations is appalling. I intend to introduce legislation 
that will increase fee disclosures and prohibit certain unfair 
practices so that consumers are adequately protected. We must 
act to ensure that vulnerable individuals have access to 
financial education and counseling that they need. Consumers 
must be better informed about credit counseling fees and the 
possibility that debt management plans may not be appropriate 
for them.
    In addition, relevant financial arrangements with lenders 
or other financial service providers need to be disclosed to 
consumers. In the past, the majority of credit counseling 
organizations provided a reliable and valuable service to 
people in need. We must restore consumer confidence in this 
troubled industry.
    Mr. Chairman, I look forward to working with my colleagues 
and with you to restore trust in the credit counseling 
industry. Thank you very much.
    Senator Coleman. Thank you, Senator Akaka.
    [The prepared statement of Senator Akaka follows:]


    Thank you, Mr. Chairman. I appreciate your conducting this hearing 
today and all of the work that has gone into this thorough 
investigation of the credit counseling industry. Americans are carrying 
enormous amounts of debt. In 2003, consumer debt increased for the 
first time to more than 2 trillion dollars, according to the Federal 
Reserve. This is a 28 percent increase since 2000. The Congressional 
Research Service reports that the percentage of income used for 
household debt payments, including mortgages, credit cards, and student 
loans, rose to the highest level in more than a decade in 2001 and 
remained above 13 percent in 2003. According to the Daily Bankruptcy 
News, consumer debt is now equal to 110 percent of disposable income. 
Ten years ago, it was 85 percent, and 20 years ago, it was 65 percent. 
It is also important to note that when interest rates do eventually 
rise, consumers will be faced with increasing debt obligations. These 
are daunting facts.
    I have placed tremendous importance on the issue of economic and 
financial literacy so that individuals are able to make informed 
financial decisions in today's complex modern economy. We must do more 
to increase financial literacy in our country to help people better 
manage their credit. I have sponsored a number of initiatives intended 
to increase the financial knowledge of students, adults, and investors, 
and I will continue to pursue these efforts to empower individuals to 
better manage their finances. In addition to education efforts, we must 
ensure that people seeking help in dealing with complex issues, such as 
debt management, are able to locate the assistance they need, and 
ascertain the quality of such assistance.
    More and more working families are trying to survive financially 
and meet their financial obligations. They seek out help from credit 
counselors to better manage their debt burdens. It is extremely 
troubling that unscrupulous credit counselors exploit, for their own 
personal profit, individuals who are trying to locate the assistance 
that they need. As debt burdens increase, people will need to seek out 
more credit counseling.
    I am concerned that certain credit counseling agencies have abused 
their nonprofit, tax-exempt status. People believe, sometimes 
mistakenly, that they can place blind trust in all nonprofit 
organizations and that their fees will be lower than those of other 
credit counseling organizations. Too many individuals may not realize 
that the credit counseling industry does not deserve the trust that 
consumers often place in it. The Consumer Federation of America (CFA) 
found that 46 percent of agencies it surveyed encouraged debt 
management plan (DMP) participants to view their voluntary 
contributions as charitable donations. The representation that these 
fees are voluntary is often misleading and inaccurate.
    In addition, many of the fees imposed by credit counseling agencies 
appear to be excessive. The National Federation of Credit Consumers 
(NFCC) indicates that the average credit counseling organization in 
2001 charged $14 for budget counseling sessions while most banks 
offered this information for free. Furthermore, the average agency 
charged $19 to enroll in DMPs, and $12 monthly to service them. 
Together, these fees equaled $179 in expenses for participants during 
the first year of enrollment. NFCC has sited that some organizations 
are charging sliding and fixed monthly account fees as high as $50 and 
$95, respectively.
    Many credit counseling organizations simply lead their customers to 
debt management plans. This may not be the best option for many 
    However, certain credit counseling agencies fail to provide 
consumers with their full range of options and recommendations. For 
some individuals, bankruptcy is appropriate for their set of 
circumstances and they may be better off in the long run declaring 
bankruptcy instead of having an ill-suited debt management plan imposed 
on them.
    This flagrant abuse of individuals seeking assistance to help 
manage their debts by certain credit counseling organizations is 
appalling. I intend to introduce legislation that will increase fee 
disclosures and prohibit certain unfair practices so that consumers are 
adequately protected. We must act to ensure that vulnerable individuals 
have access to financial education and counseling that they need. 
Consumers must be better informed about credit counseling fees, and the 
possibility that debt management plans may not be appropriate for them. 
In addition, relevant financial arrangements with lenders or other 
financial service providers need to be disclosed to consumers. In the 
past, the majority of credit counseling organizations provided a 
reliable and valuable service to people in need. We must restore 
consumer confidence in this troubled industry. I look forward to 
working with my colleagues to restore trust in the credit counseling 
industry. Again, thank you Mr. Chairman for conducting this hearing.

    Senator Coleman. Senator Dayton.


    Senator Dayton. Thank you, Mr. Chairman. I received a note 
that you are limiting your opening statements to 5 minutes. I 
haven't been here long enough to be allowed to make opening 
statements. [Laughter.]
    This is a novelty for me, so that won't be a problem. But I 
do want to commend you, Mr. Chairman, and this excellent staff 
for this excellent investigation report. It is very troubling, 
what you have uncovered, but it is very important as it 
affects, I am sure, many Minnesotans, whose concerns we share 
as well as others.
    I am mainly looking forward to hearing from the witnesses 
and getting a perspective of that and I want to compliment the 
Ranking Member also for involvement of himself and his staff. 
He has put me to shame, once again. While I was enjoying the 
balmy climes of Minnesota in March, he was in Iraq for the 
second time last week savoring that 115-degree or whatever the 
approximation is this time of year temperature.
    Anyway, thank you again, Mr. Chairman. Congratulations on 
excellent work and I look forward to hearing the witnesses 
    Senator Coleman. Thank you very much, Senator Dayton.
    I would now like to welcome today's first panel. Raymond 
Schuck, a consumer who used Cambridge Credit Counseling 
Corporation's debt management services; John Pohlman, former 
employee of Cambridge Credit Counseling Corporation; Jolanta 
Troy, a consumer who used AmeriDebt's debt management services; 
and Johnpaul Allen, a former employee of AmeriDebt.
    I really do appreciate all of you coming today to tell your 
stories. I want to thank you in advance for your courage in 
testifying. I know it is probably a pretty daunting thing to be 
sitting on that side of the hall here.
    As I mentioned in my opening statement, we are here to 
address problems that are facing the credit counseling 
industry. Mr. Schuck and Ms. Troy, you have had bad experiences 
with credit counseling agencies, and since you have been most 
directly and unfortunately affected by the changes in the 
industry, I appreciate your willingness to share your stories 
with us today. And as former employees of credit counseling 
agencies, Mr. Pohlman and Mr. Allen will enlighten us to the 
inside operations of some of these new entrants.
    Before we begin, pursuant to Rule 6, all witnesses who 
testify before the Subcommittee are required to be sworn in. I 
would ask the witnesses to please stand at this time and raise 
your right hand.
    Mr. Schuck. May I take it by affirmation, please?
    Senator Coleman. Yes. Do you swear that the testimony you 
will give before the Subcommittee will be the truth, the whole 
truth, and nothing but the truth, so help you, God?
    Mr. Schuck. I so affirm.
    Mr. Pohlman. I do.
    Ms. Troy. I do.
    Mr. Allen. I do.
    Senator Coleman. We will be using a timing system today. 
You will see the lights change from green to yellow to red. 
Yellow means time to wrap up. Your full statements will be 
entered into the record in their entirety.
    Mr. Schuck, we will begin with you first, followed by Mr. 
Pohlman, Ms. Troy, and Mr. Allen, and then after we have heard 
all the testimony, we will turn to questions.
    With that, Mr. Schuck, you may proceed.


    Mr. Schuck. Good morning, Mr. Chairman and Members of the 
Subcommittee. Thank you for the opportunity to share my story 
with you. I am Raymond Schuck and I am here today briefly to 
share my experience with you in dealing with Cambridge Credit 
    \1\ The prepared statement of Mr. Schuck appears in the Appendix on 
page 89.
    In the summer of 2001, after retiring from 20 years of 
serving as the director of a museum in Ohio, I found myself in 
a strained financial situation. I was having difficulty 
managing my debt, which had risen to the amount of 
approximately $90,000 distributed among nine credit cards and 
various banking institutions.
    I heard about Cambridge on the radio and I decided to look 
into what this non-profit credit counseling agency could do for 
me to help me manage my debt. I called Cambridge and spoke with 
a credit counselor. The counselor suggested a debt management 
plan. I was promised a considerable reduction in interest rates 
and that Cambridge could handle all my accounts.
    After answering a list of questions about my various credit 
cards, the counselor told me my monthly payment would be 
$1,946. He said that Cambridge could charge me, or would charge 
me 10 percent of my monthly payment for their services, which 
amounted to $194 a month. I thought this was high, but I knew 
very little about the industry and what was appropriate as far 
as a fee goes. Also, I made the apparently naive assumption 
that because it was a non-profit agency, I could trust them.
    The counselor told me to hurry and send my first payment to 
Cambridge to get the program started. I sent in a cashier's 
check and felt optimistic that I was on the right path. I put 
every credit card I could on the program except for one that I 
retained for emergencies. And then I started getting calls from 
some of my creditors. I received calls from three of my 
creditors asking me why I had not made payments. I told them I 
was with Cambridge on a debt management plan. Each of these 
creditors was unaware of this fact and told me that no payments 
had been received on my behalf.
    I called Cambridge to find out what was going on, and 
getting in touch with someone who knew about my debt management 
plan and the status of my payments was an exercise in 
frustration. When I was finally able to speak with someone in 
customer service who could tell me about my account, I was 
informed that the first payment I sent to Cambridge, almost 
$2,000, was a fee for constructing my debt management plan. I 
was absolutely shocked by this information. Had I known this 
policy in advance, I would have reached a different--certainly 
researched and looked into a different credit counseling 
agency. I would not have agreed to give Cambridge $2,000 when 
my money could have gone to my creditors.
    I made numerous attempts to get matters straightened out 
with my creditors on the late status of my accounts. Meanwhile, 
I was receiving no help from Cambridge. In fact, I found out 
that two of my cards actually never received payment from 
Cambridge, even though I had been on their plan for several 
    Taking all this into consideration, I felt obligated to 
file a complaint against Cambridge with the Better Business 
Bureau of Massachusetts. Not only was I disappointed by 
Cambridge's failure to provide any financial counseling or 
assistance to me, but also, I was actually financially worse 
off after dealing with this company.
    My credit rating was completely ruined because of the late 
payments, and in addition, I was even penalized for these late 
payments on my own credit card that I had left off the debt 
management plan. The card raised my interest rate from 9.9 
percent to 24 percent because they saw the late payments on the 
other accounts.
    After the mess of dealing with Cambridge, I went to a local 
credit counseling service. This agency accepted a monthly 
donation. There was no set-up fee like Cambridge. I was on a 
debt management plan with this agency for about 2 months when 
it became clear to me that the only reasonable option was to 
file for bankruptcy, which, in retrospect, I probably should 
have done in the first place.
    It seems to me that if Cambridge had done a reasonable 
analysis of my financial circumstances, the proper 
recommendation would have been to advise me that a debt 
management plan was not a feasible option. Putting me on a debt 
management plan that cost $2,000 plus a high monthly 
maintenance fee seems irresponsible and far from what one 
considers a normal practice for a non-profit agency.
    Having directed a non-profit organization myself for 20 
years, I know that if I had operated my organization the way 
Cambridge operates their organization, my non-profit status 
would have been revoked. I can only conclude that credit 
counseling agencies such as Cambridge are more interested in 
making profits than they are in providing financial advice and 
    Thank you for allowing me to tell my story and I look 
forward to answering any questions that you may have.
    Senator Coleman. Thank you, Mr. Schuck. Mr. Pohlman.


    Mr. Pohlman. Mr. Chairman, Senator Levin, and Members of 
the Subcommittee, it is an honor to be here today to testify 
about working in the credit counseling industry and 
specifically working at Cambridge Credit Counseling.
    \1\ The prepared statement of Mr. Pohlman appears in the Appendix 
on page 91.
    I began working in the credit industry in 1991. I worked 
for two different National Foundation of Consumer Credit 
agencies until I was laid off by Consumer Credit Counseling 
Services of Southern New England, who was downsizing due to the 
state of the market. Large national credit counseling agencies 
were acquiring significant portions of the market, causing 
National Foundation of Consumer Credit agencies to merge 
amongst themselves or to close their offices altogether.
    With this in mind, I decided to look for a job with one of 
those larger organizations, so I applied and was hired as a 
counselor with Cambridge in September 2003. It did not take me 
long to realize that Cambridge's approach to the credit 
counseling industry was fundamentally different from mine. I 
disagreed with most of Cambridge's practices, particularly 
those that related to how they treated, managed, and served 
their customers.
    On the first day at Cambridge, I had to pick a false name. 
I chose my son's name, Daniel. I thought this practice was very 
strange, although most every Cambridge employee uses a fake 
name when they are on the telephone talking to their customers. 
I did not understand why I was unable to use my own name when I 
was dealing with customers. I would always use my own name in 
the past. Even management personnel used different names.
    This, sir, was my first clue that I was about to take a 
trip down a disheartening path. I was immediately uncomfortable 
with the environment at Cambridge. I would describe it as a 
boiler room mentality. All the counselors were in a large room 
with video cameras on us all day long. You had to clock in and 
out to go to the bathroom, to eat lunch, even to make a 
personal call.
    There was an electronic board at the front of the room that 
reminded me of the leader board in a golf tournament. It had 
the names of the counselors who had top sales for the month in 
red and yellow flashing lights. This exhibited an obvious 
emphasis on the sale of debt management plans.
    In addition, I was surprised to learn that Cambridge paid 
commissions to its counselors based on the size of the up-front 
fees that are charged to their customers. A counselor could 
earn 25 percent of this amount. Some counselors were rewarded 
with 2-week sales trips to Florida for high sales volume. This 
was unusual to me, as it was clear it would give the counselor 
motive to enroll consumers on a debt management plan regardless 
of their financial situation.
    Along with positive incentives for sales, Cambridge also 
used negative incentives when a counselor had low sales. On the 
refrigerator in the Cambridge lunchroom, a sign hung on the 
refrigerator saying, ``The two lowest producing counselors will 
be cleaning the refrigerator on Saturdays.''
    Cambridge's overall approach to the consumer was the most 
troubling matter for me. I was entirely dissatisfied with the 
level of scrutiny this company gave to a consumer's financial 
circumstances when making such important decisions as whether 
to go on a debt management plan. There are many options out 
there in addition to the debt management plan--education, self-
budgeting, financial restructuring, and yes, in the worst case, 
bankruptcy. I never heard any of these options discussed by 
anyone at Cambridge. It was focused solely on the debt 
management plan.
    In my experience working at the National Foundation of 
Consumer Credit agencies, I would spend an hour and a half 
working with a consumer and their finances. When I was at 
Cambridge, this process was expected to take roughly 10 to 15 
minutes, all the time that was needed because the only 
information that we got from the consumer was the account 
information. There was no true budget analysis done for the 
consumer. It was just an analysis to determine whether their 
creditors would allow the consumer to enroll in the debt 
management plan.
    I was uneasy with the fact that I did not know anything 
about the person's mortgage payments, health care costs, car 
insurance, etc. How could I recommend this person to go on a 
debt management plan? I knew nothing about them except that 
they were in debt.
    With the time they spent with the consumer so limited, I 
had little confidence that they understood that the first 
payment was kept by Cambridge. In fact, I was trained to tell 
the customer, ``I will be faxing you the paperwork. It is very 
simple and easy to fill out, shouldn't take you more than 10 
minutes.'' But this was a pressure tactic that we were supposed 
to use. It was a goal to authoritatively take them through the 
process of signing up the plan as quickly as possible. I was 
even instructed by one member of management to ``Treat them 
like alcoholics.'' In other words, they need to know they need 
help. Make them get it. Be authoritative and be forceful.
    I truly believe that Cambridge preyed on a consumer's 
desperation. In fact, I was regularly reprimanded for being too 
nice to consumers. I was told to stick to the scripts. There 
was no need for conversation or pleasantries. Words cost money 
and defeat the purpose.
    I only worked for Cambridge for 2 weeks, long enough to 
realize that the practices of companies like Cambridge can give 
the entire industry a bad name. Agencies like Cambridge abuse 
the trust and vulnerable position of financially stressed 
consumers and fail to provide any meaningful counseling or 
    I came here today to help this Subcommittee understand that 
something must be done about the credit counseling agencies 
like Cambridge. The industry must be reformed for the good of 
the American consumer. Thank you.
    Senator Coleman. Thank you very much, Mr. Pohlman. Ms. 

                     CARLISLE, PENNSYLVANIA

    Ms. Troy. Good morning, Mr. Chairman and Members of the 
Subcommittee. My name is Jolanta Troy and it is an honor to sit 
before you this morning to tell you about my experience with 
the company called AmeriDebt.
    \1\ The prepared statement of Ms. Troy appears in the Appendix on 
page 93.
    In 1999, shortly after my divorce, I found myself in a 
terrible financial situation. I am a behavior specialist 
consultant. I work with mentally ill children and children with 
behavior problems. I love working with the kids, but I don't 
necessarily make a lot of money. I have two young children who 
I have been raising by myself since my husband and I split up. 
I had to use my credit cards to help support my children and 
myself. The expenses started adding up and my credit card debt 
reached a level I could not manage. I was $30,000 in debt.
    I was very upset and depressed at this time of my life. I 
was in terrible financial trouble. I was worried about my bills 
and losing my house. I had no family here and nobody to turn to 
to borrow money from or for support.
    I saw a commercial for AmeriDebt on television. They said 
they were a non-profit company, so I called AmeriDebt and I 
spoke with a counselor who told me to go on a debt management 
plan. I wasn't sure what to do and I wanted to think about it 
for a while. After this call, the counselor called me back four 
times, four different times. Every time the counselor called, 
she would tell me how bad my situation was and that I needed to 
do something about it. This counselor also said that AmeriDebt 
was a non-profit organization, like a charity, and that I 
needed their help. She was very pushy and almost degrading. She 
made me feel embarrassed and ashamed, but I eventually decided 
to go on the program.
    The AmeriDebt counselor told me there would be a small 
monthly charge, but since they were a non-profit, I was not 
worried about the fees. The counselor told me to send a money 
order to AmeriDebt right away for $783 so they could start my 
payment program as soon as possible. So I sent AmeriDebt $783 
and believed my debt management program would be set up 
immediately and money would be going to my creditors.
    Then I started receiving calls from the credit card 
companies asking why I had not paid them. I tried to get in 
touch with my counselor at AmeriDebt. I called customer service 
and they told me that AmeriDebt kept the money as a voluntary 
contribution. I knew that I agreed to a monthly charge, but I 
knew nothing about them keeping my first payment as a voluntary 
contribution. This was the first I heard of this.
    I told AmeriDebt that I wanted a refund. They said it was 
too late and they would not give me a refund. I was devastated. 
I wrote to Better Business Bureau, but AmeriDebt still would 
not refund my money. AmeriDebt wrote a letter saying that I had 
agreed to make a contribution. That was not true. They never 
refunded my money to me. I could not afford to give AmeriDebt 
$800. I thought that money would go to my credit cards to pay 
down my balances.
    I did not have any money left over to pay my credit card 
bills that month. I was still getting calls from my creditors. 
They were now charging me late fees because they had not 
received my payments. I was in a worse position than before I 
went to AmeriDebt. I felt that I had no choice but to go to a 
lawyer to help me file for bankruptcy. I wanted to be able to 
pay my bills, but my income only stretched so far.
    I am here today so that no other person has to go through 
what I did. AmeriDebt took advantage of me. They present 
themselves as some kind of charity there to help people. 
Instead, they took almost $800 from me when they knew how bad 
my finances were. This company preyed on me when I was at a 
most vulnerable time, when I was frightened and unsure how to 
manage my finances. I feel like my fears were manipulated by 
AmeriDebt for their own benefit. Something must be done to stop 
companies like AmeriDebt who are making money off good people 
who are just trying to do the right thing.
    Thank you very much.
    Senator Coleman. Thank you, Ms. Troy. Mr. Allen.

                   INC., NEW MARKET, MARYLAND

    Mr. Allen. Mr. Chairman, Senator Levin, and Members of the 
Subcommittee, good morning. My name is Johnpaul Allen. I am 
speaking to you this morning because of my experience as an 
employee with AmeriDebt. I worked at AmeriDebt as a credit 
counselor during the summer of 2003. My experience at AmeriDebt 
was frustrating and disappointing.
    \1\ The prepared statement of Mr. Allen appears in the Appendix on 
page 95.
    I was interested in being a credit counselor because I 
enjoy working with people and helping them. I thought that 
working for a non-profit organization would be a great way to 
interact with people and to actually make a difference in 
somebody's life. What I found at AmeriDebt was nothing short of 
a sweatshop, a telemarketing outfit taking advantage of 
thousands of people in bad financial situations.
    I should have seen a red flag during my interview with 
AmeriDebt when I was asked by my interviewers to sell them a 
stapler to prove that I can make a sales pitch. That is really 
what AmeriDebt is all about, sales. The goal for AmeriDebt's 
counselors was to sell consumers a debt management plan 
regardless of whether they needed it or not. When I was 
training for my position as a counselor, I asked about the 
education provided to consumers on financial matters. I was 
told by management to ``concentrate on getting them on a debt 
management plan.''
    Throughout my time working at AmeriDebt, I was reprimanded 
for spending too much time with consumers on the phone. When I 
was trained, I was told that each call should take no more than 
20 to 25 minutes and I would generally spend at least that long 
with each caller explaining our program. Several times, I was 
instructed to spend less time on each call and that my calls 
should be no more than 15 minutes. This bothered me because I 
didn't want to have to rush through such important things with 
consumers who really needed my help.
    Another thing I was repeatedly reprimanded for was the 
information I was giving to customers. AmeriDebt charges a set-
up fee and a monthly fee, or as they call it, a ``voluntary 
contribution.'' The consumer was supposed to have a choice 
whether they wanted to pay the contributions. I would always 
tell the customer that they did not have to pay the voluntary 
contribution, or if they wanted, they could make the initial 
contribution or the monthly contribution and not necessarily 
both. At least two or three times a week, I would get pulled 
aside by my managers and instructed to make sure that consumers 
paid the voluntary contribution. The managers would say such 
things to me like, ``Do you know that you are letting them 
choose to pay or not to pay your salary?'' Or, ``Think of all 
the money you could make if you collected those voluntary 
    What they were referring to were the bonuses that could be 
made for enrolling people on debt management plans. AmeriDebt 
would pay you a commission every 2 weeks for the number of debt 
management plans you signed up or if you hit a certain amount 
of voluntary contributions.
    The pressure to get people signed up on the debt management 
plan was significant. In fact, the only time we were allowed to 
go off the script on a call was when a customer was not going 
to give the voluntary contribution. We were instructed to say 
things like, ``Don't you want us to be around for the next 
person?'' We would tell them that we were a non-profit 
corporation and thus subject to be audited by the IRS in an 
effort to gain their trust in our fees and their 
reasonableness. These were practices that seemed strange for a 
non-profit organization.
    In addition to feeling like a used car salesman pushing 
these debt management plans, I also had concerns about the 
service that these customers were getting after they set up on 
a plan. I would get calls from people 2 or 3 months after I set 
them up on a plan complaining that their creditors had still 
not received a payment. The only thing I could do was to refer 
them to The Ballenger Group. I did not have access to the 
consumer's payment information.
    One time, I took a special interest in a particular 
client's predicament. This man was named Derek and he kept 
calling me because his creditors were not getting paid. I tried 
several times myself to get in touch with someone over at The 
Ballenger Group so I could help this man, but to no avail. I 
felt helpless and responsible, since it was me personally who 
had enrolled Derek on the debt management plan.
    I made the decision to leave AmeriDebt shortly after that. 
I wanted to help these people, but in the end, I felt I had 
done them a disservice. I can relate to these people. I have 
been through tough financial times myself and have had to file 
bankruptcy several years ago. I know how these people feel. No 
one wants to declare bankruptcy. The average person wants to 
take responsibility and pay their bills. They want to do the 
right thing and AmeriDebt just pulls the rug right out from 
underneath them.
    I am thankful for the opportunity to be heard on the real 
need for change in the practices of the companies like 
AmeriDebt and I thank you for your time.
    Senator Coleman. Thank you very much, Mr. Allen.
    Each of the witnesses talked about non-profit. Ms. Troy, 
you mentioned it twice in your testimony, that it was a non-
profit. Mr. Allen, I think I would describe you as talking in 
altruistic terms, working for a non-profit, wanting to help 
people. For the sales people, was there any doubt in your mind 
that the use of the non-profit was as a vehicle to get the 
trust of the customer?
    Mr. Allen. Without a doubt.
    Senator Coleman. Was there any question about that?
    Mr. Pohlman. No.
    Mr. Allen. If I were to tell you that we were a 501(c)(3) 
corporation subject to be audited by the government every 3 
months, I believe people do put a little trust in that.
    Senator Coleman. Mr. Schuck, you have worked with non-
profits. Did you come in with a preset notion of it being a 
non-profit? What did that mean in the back of your mind? What 
were your expectations of dealing with a non-profit?
    Mr. Schuck. My expectations were that I could trust them. I 
felt they had the fiduciary responsibility as a non-profit to 
take that trust and hold it sacred and, therefore, I felt quite 
comfortable working with them initially until actually I 
started to and then it changed and went the other way.
    Senator Coleman. Both Mr. Pohlman and Mr. Allen--excuse me. 
Ms. Troy, you mentioned that twice. You used the phrase non-
profit. Can you tell me what, in the back of your mind, what 
you were thinking?
    Ms. Troy. Yes. For me, I understood non-profit organization 
as an organization which is getting donations or grants from 
some sources, the State possibly, and I was sure that those 
were trusted sources. I never thought that they might be 
actually making profits. I thought they were designated to help 
    Senator Coleman. Mr. Allen, you made a comment and we have 
a chart there, for the DebtWorks-Ballenger Group.\1\ I think 
DebtWorks is a predecessor to The Ballenger Group, but The 
Ballenger Group then would be where DebtWorks is today. You 
made the comment that you were concerned about one of your 
    \1\ See Exhibit No. 2 which appears in the Appendix on page 241.
    Mr. Allen. Yes, sir.
    Senator Coleman [continuing]. And when you wanted to track 
down what happened, you said you had to check with The 
Ballenger Group? In other words, there wasn't anybody within 
AmeriDebt who could answer those questions?
    Mr. Allen. There was no one at AmeriDebt that could answer 
the questions. I would try to go in to my supervisor, to go to 
my supervisor's supervisor, tried going up the chain as best I 
could to no avail. They didn't have the questions.
    Senator Coleman. Did you understand what the relationship 
was between AmeriDebt and The Ballenger Group?
    Mr. Allen. I did. From the time that we get a consumer's 
information back, it is checked over and then it is sent over 
to The Ballenger Group. The Ballenger Group is the group of 
people that are responsible for setting up the program, 
contacting the creditors, or so we thought. So it seemed 
natural to get a hold of The Ballenger Group to find out what 
is going on with this particular person's case.
    Senator Coleman. Were you aware that DebtWorks or The 
Ballenger Group you dealt with is a for-profit organization.
    Mr. Allen. Yes.
    Senator Coleman. Both of you, to Mr. Pohlman and Mr. Allen, 
talked about the environment. I just want to touch on what is 
probably obvious here, but when you talked about sales and 
bonuses, were there any bonuses for enrolling people in an 
education program? Mr. Pohlman.
    Mr. Pohlman. No, absolutely not.
    Senator Coleman. Mr. Allen.
    Mr. Allen. The only thing I educated people on was how to 
send their payment in.
    Senator Coleman. And the big board, Mr. Pohlman, that you 
talked about, was there any doubt in your mind that board was 
about sales of debt management plans?
    Mr. Pohlman. Oh, absolutely not. You wanted to be there. I 
wanted to see my name up there some day----
    Senator Coleman. What kind of bonuses, were they?
    Mr. Pohlman. Training trips to Florida. There was a 
commission based on the amount of DMPs that we sold, in 
addition to an hourly wage, in addition to health care 
benefits. So it was clear there was an emphasis on putting 
people on the DMP.
    Senator Coleman. Both to Mr. Schuck and Ms. Troy, I want to 
kind of focus again on this education issue. Non-profits are 
supposed to provide education. Mr. Schuck, can you tell us what 
kind of education or what kind of counseling you received from 
    Mr. Schuck. I received absolutely no counseling and 
absolutely no education.
    Senator Coleman. You were asked to make your payment at 
what point in time in this transaction?
    Mr. Schuck. My estimated payment?
    Senator Coleman. When were you asked to make it?
    Mr. Schuck. Oh, when was I asked to make the payment?
    Senator Coleman. Yes.
    Mr. Schuck. Oh, I am sorry. As soon as I had the initial 
contact with a fellow from Cambridge. He asked me to make a 
payment and that the payment should be in the form of a 
cashier's check or a money order, not a personal check, and 
that I should send it out immediately. In fact, before I even 
had signed the contract, he wanted payment.
    Senator Coleman. So you, in fact, sent out a cashier's 
    Mr. Schuck. That is right.
    Senator Coleman. This is before any education, of which 
there was none, any counseling, of which there was little or 
    Mr. Schuck. Oh, yes.
    Senator Coleman. Ms. Troy, you made an attempt to get back 
your money. During the course of this time as you tried to get 
it back, can you talk about the education and the counseling 
that you received from AmeriDebt?
    Ms. Troy. There was no education, absolutely none. It was 
just pushing me to set up a management plan, the bill 
management, debt management plan, and actually to make a 
payment on time because there was a due date, so I sent the 
money Western Union as soon as I got my paycheck. But there was 
absolutely no education, no support of any kind.
    Senator Coleman. Mr. Pohlman and Mr. Allen: One of the 
goals of credit counseling, I presume if you are going to solve 
a problem, is to analyze somebody's financial situation. Can 
you give me a little more information on what kind of budget 
analysis that you were instructed to do for your clients? Mr. 
    Mr. Pohlman. Yes, sir. I was not allowed to give any budget 
analysis to the client. What I was able to do was to give them 
a script. I was to get them to commit to me sending them the 
paperwork. It was seven pages of paperwork. I was told to tell 
them it was very easy to fill out. It would take 10 minutes. 
They would send it back to me via fax and I would have their 
new payment amount later in the day. So there was no budget 
    Senator Coleman. So you were attempting to enroll people in 
the DMPs before any budget analysis?
    Mr. Pohlman. Absolutely.
    Senator Coleman. Is a debt management plan the right path 
for every person in debt?
    Mr. Pohlman. No, absolutely not. There are many other 
areas. There is self-administration. There is referral to other 
non-profit agencies. There is certainly the legal option.
    Senator Coleman. And I presume there are times when you 
simply look at the facts and say that bankruptcy may be the 
option for that person.
    Mr. Pohlman. Of course, particularly in a very large 
deficit and depending on the creditors involved.
    Senator Coleman. But the only bonuses and the only 
incentives that both you and Mr. Allen were given was for 
signing up debt management plans?
    Mr. Pohlman. Exactly.
    Senator Coleman. Mr. Schuck paid a fee of close to $2,000 
dollars. Eleven years in the business, can you assess, in terms 
of the amount of that fee, do you find that unusual?
    Mr. Pohlman. It is appalling. It makes me very upset.
    Senator Coleman. Mr. Schuck, you did sign a contract,\1\ 
and I think we have a copy of that.
    \1\ See Exhibit No. 4 which appears in the Appendix on page 243.
    Mr. Schuck. Yes, I had.
    Senator Coleman. And that contract did provide a disclaimer 
in there about the payment, is that a fair statement?
    Mr. Schuck. You have to find it, but it is in there.
    Senator Coleman. How many pages is that contract?
    Mr. Schuck. I don't recall the exact number, but I know it 
was a multi-page contract.
    Senator Coleman. Is that exhibit a copy of the conract that 
we are looking at now? Is that a copy of the contract?
    Mr. Schuck. Yes, it is. It looks exactly like the one that 
I signed.
    Senator Coleman. Five pages?
    Mr. Schuck. That is right.
    Senator Coleman. But there is on the second page, I do 
note, there is a provision in there that says, summary of 
Cambridge's fee. Monthly payment design fee equals proposed 
monthly payment equals one time only.
    Mr. Schuck. I see that. That is right, yes. And actually, 
it was only later that I realized that was the initial fee. I 
had no reason at all to believe that first payment wasn't going 
to my creditors.
    Senator Coleman. Ms. Troy, did you have any reason to 
believe that you were paying, was it $783----
    Ms. Troy. Seven-hundred-eighty-three dollars, yes.
    Senator Coleman [continuing]. That money was going to the 
credit counseling agency rather than to your creditors?
    Ms. Troy. No. I had no idea until I started to get calls 
from the creditors. I was sure that was going to my monthly 
payments. And then I confirmed with AmeriDebt that they 
received my payment and they said they did, and when I talked 
to the customer service, that is when I found out that the 
first payment is my voluntary contribution.
    Senator Coleman. Mr. Allen, you talked about a script.
    Mr. Allen. Yes, sir.
    Senator Coleman. Mr. Pohlman, did you have a script?
    Mr. Pohlman. Absolutely.
    Senator Coleman. In that script, were there--and I think we 
have a copy,\1\ I am not sure whether it is for Cambridge or 
AmeriDebt--but were you given responses if someone said that, 
``I don't think I want to make a payment now,'' or ``I don't 
want to make a voluntary contribution?'' Would the script 
provide your answers? Mr. Allen.
    \1\ See Exhibit No. 14 which appears in the Appendix on page 00.
    Mr. Allen. There were no set answers given to us from a 
script as to how to deal with that. We were given guidelines, 
suggestions from supervisor, training staff. I believe I made 
mention of it in my statement. We were supposed to make them 
feel guilty, make them ashamed that they weren't going to keep 
us around for the next person.
    Senator Coleman. When you were credit counseling, did you 
have a training manual? Did you ever take a look at that?
    Mr. Allen. Yes, I did.
    Senator Coleman. And in that manual--this purports to be a 
copy of a page from the Credit Counseling training manual.\1\ 
Does that look familiar to you?
    Mr. Allen. Yes, it does.
    Senator Coleman. And at one point, it says for the 
statement, ``I cannot afford a contribution now, but maybe I 
can afford to contribute later,'' and do you have a prepared 
response that you are supposed to give back?
    Mr. Allen. Again, it was something that we were to make up 
on the spot. We were supposed to use our selling techniques.
    Senator Coleman. The idea was to do what?
    Mr. Allen. The idea was, if you can do this later, why 
can't you do this now? What is keeping you from doing it right 
now? It was all about the ``right now.''
    Senator Coleman. Thank you, Mr. Allen. Senator Levin.
    Senator Levin. Thank you, Mr. Chairman.
    First, Mr. Schuck, you were told to send in a cashier's 
check, not a personal check?
    Mr. Schuck. That is right.
    Senator Levin. Why was that? Did they tell you why they 
wanted a cashier's check instead of----
    Mr. Schuck. No, they did not. I only had to surmise that it 
perhaps was safer and that was it. But they did not explain 
why. They just simply said they would not take a personal 
    Senator Levin. And you were told originally on the phone 
that 10 percent of your check would go to them for a fee?
    Mr. Schuck. That is right.
    Senator Levin. Did they distinguish between a monthly fee 
and your original fee?
    Mr. Schuck. Not that I intentionally recall. I know the 
initial payment had to be made because that is what they said, 
they needed to get started. And like I said, in my thoughts, 
thinking my creditors are being paid, and that there would be 
then a monthly fee of 10 percent of every payment that I made 
that would go toward a maintenance fee of the contract for the 
life of the contract period.
    Senator Levin. Did they distinguish between the initial fee 
and the monthly fee?
    Mr. Schuck. Yes, they did, actually.
    Senator Levin. And then what----
    Mr. Schuck. There were two separate----
    Senator Levin. What did you believe the initial fee would 
    Mr. Schuck. Well, I thought the initial fee would go toward 
my creditors. I thought that initial monthly fee was actually 
like what I would consider my first payment, my first fee.
    Senator Levin. So that after that conversation, you 
believed that all of the check you were sending would go to 
your creditors, and from that point on, 10 percent of each of 
your monthly checks----
    Mr. Schuck. Each monthly fee would be the maintenance fee, 
that is right. Actually, I thought the first $196 or whatever 
it was, the 10 percent of that first payment, was actually the 
maintenance and start-up fee. That would be, to me, in my mind, 
that was what their fee would be to run the program, basically, 
and that the $2,000 that I sent or the other amount would be 
the amount that is paid to my creditors. Of that, 10 percent 
would come out for them.
    Senator Levin. How many payments did you make?
    Mr. Schuck. Several payments. I was in the program for, I 
believe, maybe half a year, 7 months, and finally after calls 
and trying to work out some sort of a compromise with them, I 
simply could not and I just simply stopped----
    Senator Levin. There were several payments that were made?
    Mr. Schuck. That is right.
    Senator Levin. As many as three or four?
    Mr. Schuck. Oh, absolutely.
    Senator Levin. Out of the second, third, fourth payments, 
did they retain 10 percent and send the rest of those payments 
to your creditors?
    Mr. Schuck. I can only assume that they had. I did not 
receive something that indicated to me that they might not 
    Senator Levin. So the difficulty you had with creditors was 
over that first payment which did not get to the creditors, not 
over the 10 percent that may have been withheld from your 
second through your fifth or sixth payment?
    Mr. Schuck. I believe that is right, because apparently the 
creditors, when I called them--I remember one day specifically 
where I had called--a creditor called me. I talked with them. 
They said they hadn't received payment. I called Cambridge and 
said they said they hadn't received payment. What is going on? 
They said, ``No, we have paid them.'' And then I called the 
creditor back and they said, no, indeed Cambridge had not paid 
them. And so there seemed to have been more than just that one 
    Senator Levin. And Mr. Pohlman, what did you represent to 
folks about that first payment?
    Mr. Pohlman. We also had scripts at Cambridge that were 
very highly structured. We were not allowed to take the 
employee handbook, or bible, as I called it, home. The idea was 
to get them to commit to the plan. Yes, they were told verbally 
that the first month's fee would be retained by the 
organization, but again, I had to fax the paperwork to them. 
They had to fill it out. They had to send it back.
    So yes, I told them there was a monthly fee up front, but I 
didn't even know what it would be until it came back from the 
Automated Underwriting Department and then I would tell them. 
But by then, they have already forgotten about it or they are 
too excited that someone is going to take all the pain away 
from them. So it was really kind of an illusion, if you will. 
In other words, they were verbally told in a 5 minute 
conversation, perhaps while they were driving, that, yes, there 
is a service fee that is retained by the Cambridge 
    Senator Levin. From the first payment?
    Mr. Pohlman. Yes, sir.
    Senator Levin. Were you told to create an impression of any 
kind relative to the first fee going totally to the----
    Mr. Pohlman. Oh, gosh, no. Again, these were highly 
structured scripts in which----
    Senator Levin. Yes, but when you say highly structured, 
what was the impression that was created in the mind of the 
listener, that it was all going to the company?
    Mr. Pohlman. The impression--no----
    Senator Levin. That a part of it was going to the company?
    Mr. Pohlman. The clients were told that 1 month, the first 
month's fee, was a service type of fee and it was to be 
retained by the organization. I don't recall their exact 
verbiage, but the verbiage was very confusing, very 
authoritarative. It was glossed over.
    Senator Levin. Are you surprised that people like Mr. 
Schuck got the impression that the first month's payment would 
go to creditors?
    Mr. Pohlman. No, absolutely not.
    Senator Levin. That doesn't come as a surprise to you no 
matter what it was that you were saying on your script?
    Mr. Pohlman. No, sir.
    Senator Levin. Ms. Troy, what were you told in terms of 
that first payment?
    Ms. Troy. As far as I recall, the first conversation with 
the counselor, I was told that I would be paying about $5 per 
account. That would be the monthly fee which will be going from 
month to month. And based on my number of my credit cards, I 
figure it will be probably about $30, $35 a month. She 
mentioned a voluntary contribution and I told her, I am not in 
a position right now to give any voluntary contributions to 
anybody. And she said, well, you don't have to. We can do that 
later. Just don't worry about it. It was just something like 
    Senator Levin. And what about that first month's payment? 
What were you told about it? Was that any different from the 
other payments that would follow?
    Ms. Troy. No. I was not informed about any difference. To 
my full knowledge, the first payment I sent, it was going to 
cover my debts to my creditors.
    Senator Levin. And that is the impression you got from the 
phone call?
    Ms. Troy. Definitely, yes.
    Senator Levin. And you signed a contract, as well?
    Ms. Troy. I believe I signed the contract.
    Senator Levin. Did you read the contract, or could you have 
read it given the size of the print?
    Ms. Troy. I have difficulties with reading without 
    Senator Levin. You should try a magnifying glass on some of 
those contracts.
    Ms. Troy. From now on, I will.
    Senator Levin. Mr. Allen, were you surprised to hear that 
Ms. Troy believed that her fee that was sent in, or the check 
that was sent in with her first payment, she thought would go 
to her creditors? Does that surprise you?
    Mr. Allen. Yes and no. As a counselor, I gave my consumers 
a choice. Because we were a non-profit organization, I took it 
at face value. If we are not here to make a profit, why should 
I push the contributions? I gave people a choice. They could 
either do a monthly contribution, and by the time I came on in 
2003, the costs had risen slightly. It was now $7 for every 
creditor you put on the program, with a $20 minimum and a $70 
maximum that AmeriDebt would accept as a monthly payment.
    Senator Levin. As the alternative to what?
    Mr. Allen. As an alternative to not make a contribution----
    Senator Levin. At all?
    Mr. Allen. At all.
    Senator Levin. And could you be given that service if you 
made no contribution?
    Mr. Allen. Supposedly.
    Senator Levin. Did you have people who were serviced by 
your company who made no contribution whatsoever?
    Mr. Allen. I serviced many consumers that decided not to 
give a contribution one way or another.
    Senator Levin. And were they serviced, do you know?
    Mr. Allen. As far as I know and as far as I hope. I hope 
    Senator Levin. You hope they were?
    Mr. Allen [continuing]. What they signed for is what they 
    Senator Levin. And so they may or may not have been 
serviced if they made no contribution whatsoever, either up 
front or month-by-month, is that correct?
    Mr. Allen. Very true.
    Senator Levin. So you just don't know that part of it?
    Mr. Allen. I just don't know. I never saw them, the 
maintenance of these----
    Senator Levin. And were they told that the first payment 
that they would send, like the $700-and-some that Ms. Troy 
sent, would go entirely to the company? Is that the impression 
which was left with them? Her impression was only a small part 
of it, as I remember her testimony, would go to the company, 
the rest to her creditors. Are you surprised that she had that 
    Mr. Allen. I am surprised that it actually happened based 
on what her counselor had told her. If her counselor had said, 
we will not worry about it at this point in time, to me, that 
seems then my first payment is going to my creditors. Now, like 
I said, I can only speak for myself and the type of counselor 
that I was.
    Senator Levin. I understand. And then were you told that 
you could send a personal check?
    Ms. Troy. No. They didn't accept personal checks. I had to 
obtain cashier's checks from my bank because it was the only 
option, cashier's checks or money order.
    Senator Levin. Did they explain to you why they would not 
accept a personal check?
    Ms. Troy. No, they didn't, but I figured that maybe, if 
people realized what went wrong, they can always stop the 
check. You cannot stop the money order or cashier's checks.
    Senator Levin. Thank you. Thank you, Mr. Chairman.
    Senator Coleman. Senator Dayton.
    Senator Dayton. Thank you, Mr. Chairman. I want to thank 
all of you for coming forward today and sharing your 
experiences with the Subcommittee.
    Mr. Schuck, when did you contact Cambridge Credit?
    Mr. Schuck. I contacted them when I realized that I simply 
wanted to control the debt that I had.
    Senator Dayton. What date? At what point in time?
    Mr. Schuck. It was--point in time--it must have been about 
in June or something in 2001.
    Senator Dayton. Two-thousand-one, OK.
    Mr. Schuck. I believe it was----
    Senator Dayton. Were you sent then at some point in the 
process this service plan, service agreement?
    Mr. Schuck. I am sorry?
    Senator Dayton. Were you sent at some point in the process 
a service agreement?
    Mr. Schuck. Yes, sir, I was.
    Senator Dayton. And when was that in the process?
    Mr. Schuck. It would have been after I talked with them, 
they indicated they would be able to fax me a copy of the 
service agreement.
    Senator Dayton. And did you read the agreement, then?
    Mr. Schuck. Well, I read it as fast and as close as I could 
    Senator Dayton. And you were----
    Mr. Schuck [continuing]. The sooner I get it back, the 
better off I will be.
    Senator Dayton. But you were not aware, based on your 
review of that document, of this monthly payment--the first 
monthly payment was, in fact, going to be a set-up management 
fee to them?
    Mr. Schuck. No, I was not. No. And certainly in retrospect, 
now looking back, I should have read the document a lot closer. 
It was only several months later that I realized that.
    Senator Dayton. Mr. Pohlman, you joined the company in 
September of last year?
    Mr. Pohlman. Yes, sir.
    Senator Dayton. I don't know what changed in terms of the 
format of the document that was sent. This one is five-pages, 
single-spaced. We have a document that has been provided by the 
company. You haven't had a chance to see that, but at what 
point in the process was that document sent to your people you 
were recruiting?
    Mr. Pohlman. Just about right on the first contact, sir. I 
was going to explain myself, the organization, and how we can 
help them. I was to push and push and push until I could fax 
the service agreement and the creditor information to them. I 
was to tell them that it was very simple to fill out, takes 
about 10 minutes. They were instructed to fax it back to me 
immediately and I would be calling them back later that day 
with their new payment amount.
    Senator Dayton. So they are getting the service plan. Are 
they then at that point aware of what their actual monthly 
payment is going to be?
    Mr. Pohlman. No. When I am faxing the service agreement to 
them, they are to review it and review it closely, fill out 
their creditor information, send it back to us. We would 
process that and then I would contact them later today with 
their new payment amount.
    Senator Dayton. OK. So they are signing this document----
    Mr. Pohlman. The agreement----
    Senator Dayton [continuing]. They are agreeing to terms 
without knowing what those terms are, if they haven't received 
word about what their monthly payment is going to be, and the 
10 percent on top of that.
    Mr. Pohlman. But I am faxing them out the five-page service 
    Senator Dayton. Right.
    Mr. Pohlman [continuing]. A one-page cover sheet and the 
creditor sheet.
    Senator Dayton. Right, and they are filling that out and 
they are signing a document here that I believe is--I haven't 
read the whole document, but is an agreement they are making 
for payment of an amount that has not yet been specified to 
them, is that----
    Mr. Pohlman. The first month's payment.
    Senator Dayton. The first month's payment, all right. What 
is the value to the client of this arrangement? You are 
consolidating all or some portion of their existing credit card 
    Mr. Pohlman. Right.
    Senator Dayton [continuing]. And then that determines the 
monthly payment, and then on top of that is a 10 percent fee 
collected by or retained by Cambridge Credit. What does that 
monthly payment amount to?
    Mr. Pohlman. Typically a repayment of a debt management 
plan is 3 to 5 years, depending on the amount of the debt.
    Senator Dayton. So you are paying off the credit card 
companies based on a monthly payment of X amount----
    Mr. Pohlman. Yes.
    Senator Dayton [continuing]. And then in addition to that X 
amount, there is another 10 percent surcharge on that?
    Mr. Pohlman. No. It would have been included in the total--
    Senator Dayton. Included in that, OK.
    Mr. Pohlman [continuing]. Payment amount.
    Senator Dayton. So that 10 percent is in there. So the 90 
percent, then, is sufficient to pay off these existing debts 
plus interest within 3 to 5 years.
    Mr. Pohlman. That is the theory.
    Senator Dayton. Do you make that computation?
    Mr. Pohlman. No, sir. I believe it was an automated process 
in the computer system.
    Senator Dayton. So you plug in the information and then the 
computer spits out the terms?
    Mr. Pohlman. No. They were highly sophisticated. The client 
was instructed to fax the information back to us and it was 
faxed into their system and it was electronic from there on.
    Senator Dayton. Electronic being that some computation then 
is made of the amount necessary to pay off all the debts within 
three to 5 years plus the 10 percent surcharge for the company.
    Mr. Pohlman. Yes, sir. Creditors have minimums and there 
are some----
    Senator Dayton. Right, and that is all included in the 90 
    Mr. Pohlman. Yes. It is all included in the monthly payment 
    Senator Dayton. So what is the benefit to the client?
    Mr. Pohlman. I don't see any.
    Senator Dayton. But what are you representing as the 
benefit when you sign up the client?
    Mr. Pohlman. That they are going to be debt free within a 
specified period of time.
    Senator Dayton. Is there any value in that? You are 
basically in sales. If he calls back to try to get any 
clarification of the information about why money wasn't sent to 
creditors, you don't take those calls?
    Mr. Pohlman. No, sir. We were highly departmentalized and 
customer service was a separate department and we were not 
encouraged to speak with other departments.
    Senator Dayton. You are representing yourself as a credit 
    Mr. Pohlman. Yes, sir.
    Senator Dayton. You are a credit counselor, but you don't 
deal with customer service?
    Mr. Pohlman. Once they are on the plan, it was out of my 
    Senator Dayton. So, what kind of counseling is actually----
    Mr. Pohlman. Performed?
    Senator Dayton. Yes.
    Mr. Pohlman. Little to none, sir.
    Senator Dayton. At all. If somebody actually wants either 
some questions asked or some actual hands-on direct counseling 
after you have enrolled them, then that goes on to someone 
else. What do they call themselves, do you know? They are not 
credit counselors, are they?
    Mr. Pohlman. Customer service reps.
    Senator Dayton. OK. So you have a fake name and you have a 
fake title, in effect. You are a credit counselor, and you are 
working for somebody that is also representing itself to a non-
profit, so it is really basically faked all the way through 
until that person has been put on the line and started to pay 
    I guess my time has expired, Mr. Chairman. Thank you.
    Senator Coleman. Thank you, Senator Dayton. Senator Pryor.


    Senator Pryor. Mr. Chairman, thank you, and I am so glad 
that you are taking the lead on this issue. I think it is a 
very important issue for consumers all across America.
    Mr. Pohlman, if I can follow up with some of the questions 
that Senator Dayton was asking, he asked about the credit 
counselor moniker that you had. Did you receive any training or 
any accreditation as a credit counselor?
    Mr. Pohlman. No, sir. My training was about one day of 
reading their material. I was on the phone the next day. They 
are very structured scripts. You were not to deviate a single 
word or syllable from the scripts and I just jumped right in.
    Senator Pryor. Is it fair to say that the training you 
received from your company was more sales training than it was 
counseling training?
    Mr. Pohlman. Yes, sir. I mean, you must understand, I had 
11 years' experience in the industry.
    Senator Pryor. Yes, I want to ask you about that in just 
one second, but first, I want to ask about something you said 
in your opening statement about your fake name.
    Mr. Pohlman. Yes, sir.
    Senator Pryor. I have been sitting here trying to think of 
why anyone in the credit counseling business would want a fake 
name to be used, even managers having fake names, with the 
customers and I am having trouble coming up with a rationale 
for that. Do you know what the rationale is for having a fake 
    Mr. Pohlman. No. When my wife also had a lot of trouble 
with that rationale, I can tell you that we went by a first 
name. It was more of an acronym. I mean, if your name was David 
Wood, they may call you Woody or what have you. But anyway, I 
chose the name of Daniel. I was not allowed to be John. I was 
told that the reason why I could not use my name of John was 
because of computer and customer service reasons. Years ago, we 
had a John, and we don't want our customers confusing the 
previous John with the current John.
    Senator Pryor. Yes, but----
    Mr. Pohlman. So I was told that I had to----
    Senator Pryor. I guess the reason that doesn't hold water 
with me is that the company probably had employed people in the 
past named Daniel, too. That doesn't make sense. But is that 
all you were told about it at the company?
    Mr. Pohlman. That was what I was led to believe, sir.
    Senator Pryor. Now, you had mentioned that you had had, 
what, 11 years' experience----
    Mr. Pohlman. Yes, sir.
    Senator Pryor [continuing]. In this type of work before, 
and you had worked for non-profits, as I understand it.
    Mr. Pohlman. Yes, sir.
    Senator Pryor. Tell me, in your view, how this is supposed 
to work. How should non-profits service consumers who are 
having financial and debt problems? How should this work?
    Mr. Pohlman. Yes, Mr. Pryor. We were spending an hour and a 
half with our clients, and again, this was an NFCC affiliate 
and we were licensed within the State of where we were doing 
business. We had----
    Senator Pryor. I am sorry, licensed in what way?
    Mr. Pohlman. Licensed, I am sorry, by the State of--in my 
case, the State of Connecticut----
    Senator Pryor. Right.
    Mr. Pohlman [continuing]. Banking Department. We were 
licensed debt adjustors.
    Senator Pryor. OK. And were you licensed at this new 
company where you were working?
    Mr. Pohlman. I believe they were licensed in the State of 
Massachusetts, but we did business all across the country.
    Senator Pryor. OK. Now keep going. I am sorry.
    Mr. Pohlman. OK. In my 11 years with an NFCC affiliate, we 
provided up to an hour and a half counseling with the client. 
The client was mailed a budget worksheet in which they were to 
put their income, their expenses, who their creditors were. We 
told them--they were then booked for an appointment for an hour 
and a half. They were told to bring a source of income, such as 
pay stubs, such as child support, any legitimate form that 
income comes in. We were looking at budgeting, money 
management. Perhaps they were having too much money withdrawn 
from their paycheck.
    There was an intensive hour and a half of budgeting, money 
management. In some cases, the clients were so well educated in 
that hour and a half that they could handle things on their 
own. They found out that they were having too much money taken 
out of their paycheck, so the counselor told them to reduce 
that. Perhaps there are ways of eliminating debt that they 
weren't aware of. We made referrals to other non-profits, other 
social service agencies like legal aid or aid for the elderly. 
We considered those successful counseling sessions.
    We let them go home and let them talk to their spouse, 
their significant other, about a debt management plan. We did 
not push the plan during the session. If they chose the plan, 
fine. They had the options. They could go home and think about 
    Senator Pryor. When you were working for other non-profits, 
did you feel like you were helping consumers?
    Mr. Pohlman. Absolutely.
    Senator Pryor. And when you were working for Cambridge, did 
you feel like you were helping consumers?
    Mr. Pohlman. No, sir.
    Senator Pryor. That is all I have, Mr. Chairman. Thank you.
    Senator Coleman. Thank you very much, Senator Pryor.
    Just one last thing, if I can do a follow-up, Mr. Allen, 
just to follow up on a question that you responded to from 
Senator Levin. He was trying to understand what you would have 
told your customers, again, to understand whether Ms. Troy 
would have been told about that first payment going to the 
company, and you did testify that you told customers that was a 
voluntary payment, is that correct?
    Mr. Allen. Yes, sir.
    Senator Coleman. Did you also recall in your testimony 
saying that you were reprimanded for doing that by your 
    Mr. Allen. Many times.
    Senator Levin. Could I just ask one question about these 
checks? Were the monthly checks after your first payment also 
supposed to be cashier's checks and not personal checks?
    Mr. Schuck. Absolutely, they were.
    Senator Levin. Is that true with you, too, Ms. Troy?
    Ms. Troy. The first one, I said it was. And then when I 
picked up that the money didn't go to the creditors, I asked 
for a refund. I wanted to----
    Senator Levin. Did you send a second check?
    Ms. Troy. I don't think so.
    Senator Levin. Thank you.
    Senator Coleman. I want to thank the panel very much. I 
appreciate your testimony, appreciate you coming forward today.
    Senator Coleman. With that, I would then call our second 
panel for today's hearing.
    I would now like to welcome our second panel to today's 
hearing. This panel is comprised of representatives of four 
credit counseling agencies. I welcome Chris Viale, General 
Manager of Cambridge Credit Counseling Corporation; Matthew 
Case, the Chief Operating Officer of AmeriDebt; Ms. Cuba Craig, 
the Chief Executive Officer of American Financial Solutions; 
and finally, James Kroening, the Director of FamilyMeans Credit 
Counseling Service in Stillwater, Minnesota.
    I believe, Mr. Kroening, you are an NFCC member?
    Mr. Kroening. That is correct.
    Senator Coleman. I appreciate all of you being with us this 
morning and I look forward to hearing your testimony regarding 
the credit counseling industry.
    Before we begin, pursuant to Rule 6, all witnesses who 
testify before this Subcommittee are required to be sworn in. I 
would ask you now to please rise and raise your right hand.
    Do you swear that the testimony you are about to give 
before the Subcommittee will be the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Mr. Viale. I do.
    Mr. Case. I do.
    Ms. Craig. Yes.
    Mr. Kroening. I do.
    Senator Coleman. As I indicated to the first panel, we do 
have a timing system. When you see the yellow light come on, it 
means you should conclude your testimony. Your entire written 
statement will be entered into the record.
    With that, we will start with Mr. Viale, followed by Mr. 
Case, Ms. Craig, and finish up with Mr. Kroening. After your 
further testimony, we will then turn to questions.
    Mr. Viale, you may proceed.


    Mr. Viale. Thank you, Mr. Chairman and Members of the 
Subcommittee. My name is Chris Viale. I am the Chief Operating 
Officer of Cambridge Credit Counseling. I want to use my 5 
minutes to respond to the Subcommittee's staff report and the 
first panel because I think the public so far has heard a very 
slanted and biased view of Cambridge Credit Counseling.
    \1\ The prepared statement and supplemental written submission with 
attachments of Mr. Viale appear in the Appendix on pages 97 and 102 
    I am proud that we are not a debt mill, that our main focus 
is providing education and financal solutions for the 
approximately two million consumers who have contacted us 
during our 7 years of operation. These are productive, tax-
paying, middle-class people who are struggling under mountains 
of consumer debt and our education and debt management plans 
help them.
    You found one unhappy client, but I wish the Subcommittee 
had spoken to Sister Veronica or the other clients that are 
here with us today. They would love to share their experience 
and how we have helped them at Cambridge.
    So let me first respond to Mr. Schuck and let me show you 
how Cambridge provides full and adequate disclosure at two 
critical points in the decisionmaking process. The first 
example is our service agreement. As you can see, Section 1 
covers services, fees, and sign-up instructions. The first 
payment is our design fee, which is equal to 1 month's payment. 
Our payment program service fee is charged monthly and is equal 
to 10 percent of the client's payment or $25, whichever is 
greater. The example box on the board was added in July 2002 as 
a way to disclose this even clearer and it is very easily 
summarized at the bottom of the section, right above where each 
consumer has to sign.
    As for Mr. Schuck, although he made seven payments and 
interest fee concessions were arranged on his accounts, we 
still refunded half his initial fee after he complained. But 
for the record, I have a copy of a service agreement where Mr. 
Schuck signed. Right above the signature is a clear disclosure 
of the fees we charge. Our records also show that Mr. Schuck 
took 2 weeks, not 1 day or 15 minutes, after he signed the 
service agreement to think about joining our program and 
sending the initial fee in. But again, I am sorry his 
experience is not that of the vast majority of the clients that 
we help.
    The second example of disclosure is our debt management 
summary. Now, while we have started this about 8 months ago, 
the information provided is very clear. It illustrates for a 
consumer exactly how much is going to each creditor, how much 
the monthly service fee is, the fact that the first payments 
are a fee, what the program costs will be, and how much the 
consumer will save. And we have recently added even clearer 
disclosure that the first payment fee does not go to your 
    Now, I hope for the Q&A that I will get the opportunity to 
address many of the false statements that Mr. Pohlman has made 
    Now let me respond to the Subcommittee's staff report, 
which unfortunately is slanted against Cambridge because it 
conveniently leaves out several important facts. The first, the 
staff report does not mention that our fees are regulated and 
approved by State authorities in four different States and that 
we undergo annual reviews in Michigan, Connecticut, and Maine. 
In New York, the Banking Department has licensed Cambridge's 
sister company to conduct its programs and has approved its fee 
structure under the statute that says fees charged to consumers 
cannot be unreasonable. If the Subcommittee staff believes our 
fees are ``clearly excessive,'' then perhaps the staff should 
investigate the New York State Banking Department, which has 
also approved the similar up-front fee structures of other 
credit counseling companies.
    Second, the staff report does not mention at all the 
Cambridge ``Good Payer'' program. Cambridge is the only company 
in this industry that actually rebates half of the fair share 
money that we get from creditors to our qualified clients. We 
have given to over 75,000 clients a total of more than $14 
million back in rebates, and here is the data that we submitted 
to the staff, but for some reason it is not mentioned in the 
report. It is important, because if a client successfully 
completes our program, in almost all cases, they will receive 
more back in rebates than they were charged in the initial fee.
    And the third thing, the report makes an unfair and 
distorted accusations that Cambridge is essentially a money-
making machine for the Puccios. I can tell you this is not what 
Cambridge is about. We provide real benefits for real people 
with real value to them. Moreover, the vast majority of the 
40,000 consumers that contact us each month take advantage of 
access to financial education. Only about 12 percent of the 
consumers that contact us ever join our debt management 
program. We are not telemarketers in any way.
    Doesn't the fact that tens of thousands of consumers are 
succeeding under our program mean anything to this 
Subcommittee? I wish the Subcommittee staff had told a balanced 
story about the value that our clients get for the fees they 
pay. They might have done this if they had accepted our 
invitation to visit the Cambridge site and to see firsthand how 
much we care and how much we help consumers.
    Now, I am sorry that my CEO, Mr. Puccio, will not be here 
today to appear on the second panel. He is in the George 
Washington Hospital with symptoms of a stroke, and the 
Subcommittee has received a letter from the Chairman of the 
George Washington Neurology Department.
    In conclusion, the Cambridge revolution is all about 
education, empowerment, service, choice, and ultimately 
financial freedom. Congress can share in this mission or kill 
it, but if you kill it, you will be denying consumers the 
innovative solutions they need in today's environment.
    At Cambridge, we are committed to the consumer. You can ask 
Sister Veronica or the other Cambridge clients that are here 
with us today if you really want to know how consumers feel 
about Cambridge and their experience. Thank you.
    Senator Coleman. Thank you, Mr. Viale. Mr. Case.


    Mr. Case. Thank you, Mr. Chairman and Members of the 
Subcommittee. I am Matthew Case, Chief Operating Officer of 
AmeriDebt. On behalf of everyone at AmeriDebt, I would like to 
express our thanks for the opportunity to participate in this 
hearing today.
    \1\ The prepared statement of Mr. Case appears in the Appendix on 
page 127.
    AmeriDebt has helped hundreds of thousands of Americans 
work their way out of debt and gain control over their 
finances. We are proud of our record as a pioneer in the modern 
credit counseling industry. At the outset, let me stress the 
fact that AmeriDebt is actively engaged in attempting to 
resolve the concerns of consumers and government officials. 
Even though the vast majority of AmeriDebt clients have no 
complaints with the organization, we are working diligently to 
correct any remaining concern.
    What is more, AmeriDebt took an extraordinary step last 
November when we decided to stop advertising and stop accepting 
new clients onto our program. Today, we continue to fulfill our 
non-profit mission by serving approximately 72,000 clients 
whose accounts were active at the time. For these clients, 
AmeriDebt represents a lifeline of fiscal health. It would be 
tragic if their financial recovery plans were jeopardized by 
hasty or ill-conceived regulatory action.
    AmeriDebt has worked hard to resolve all alleged consumer 
protection issues. There is no question that we continue to 
pursue our non-profit counseling and consumer education 
missions. The time has come to put these issues behind us and 
work together with policy makers and the public to deal with 
the much larger crisis of consumer debt.
    Revolving consumer debt has now surpassed three-quarters of 
a trillion dollars. As this crisis depend over the past few 
years, AmeriDebt helped consumers save millions by providing 
credit counseling services and debt management plans to reduce 
monthly payments, lower interest rates, and reduce or eliminate 
late payment and over-the-limit penalties.
    Correcting financial problems years in the making is no 
easy task. It requires commitment and discipline by consumers 
and is time and labor intensive for credit counselors. As a 
result, many credit counseling agencies follow the advice of an 
influential report published by Visa in 1999. The Visa report 
suggested that the credit counseling agencies could be more 
efficient and serve clients better by contracting with private 
sector companies to perform back-office administrative tasks. 
AmeriDebt's decision to do so accomplished these objectives.
    Some say this approach clashes with the non-profit status 
of credit counseling agencies. Although AmeriDebt was formed 
before I joined the organization, it is critical to realize 
that our non-profit status, like that of nearly every credit 
counseling agency in the country, is in large measure an 
outgrowth of State laws and creditor mandates. Many States 
require credit counseling agencies to be non-profit and 
creditors reject debt management plans unless the plans come 
from non-profit organizations. The practical effect is to force 
any credit counseling agency to organize as a non-profit entity 
if it wishes to help consumers in more than one State.
    Historically, credit counseling was provided only by small, 
local counseling agencies. Unfortunately, their services were 
either unknown or unavailable as a practical matter to a 
majority of the people in need. Even if this credit counseling 
model made sense 30 or 40 years ago, there should be no 
question that the magnitude of America's consumer debt problem 
far exceeds the capacity of traditional credit counselors to 
    AmeriDebt helped pave the way for effective credit 
counseling on a national scale. We hope our knowledge and 
experience prove helpful to the Subcommittee as it considers 
the future of credit counseling.
    Once again, on behalf of AmeriDebt and our 72,000 clients, 
I would like to thank the Subcommittee for this opportunity to 
    Senator Coleman. Thank you, Mr. Case. Ms. Craig.


    Ms. Craig. Thank you, Mr. Chairman. Members of the 
Subcommittee, good morning. I am Cuba Craig, President and CEO 
of American Financial Solutions, AFS, a non-profit consumer 
credit counseling agency and a division of North Seattle 
Community College Foundation in Seattle. We have offices in 
Seattle and Bremerton, Washington, which is across from the 
Puget Sound Naval Shipyard.
    \1\ The prepared statement of Mr. Craig appears in the Appendix on 
page 142.
    AFS first opened its doors with two full-time employees, 
including me, in 1999. Since then, we have grown substantially. 
This morning, I would like to tell you what we do and how we 
support ourselves. Then I would like to explain recent changes 
we have made and other changes we have initiated as a result of 
your investigation.
    AFS provides financial counseling and education to 
consumers and, where appropriate, enrolls them in debt 
management plans. Under such plans, clients agree to make 
regular payments and creditors typically agree to reduce their 
interest rates. This helps creditors to the extent it is an 
alternative to bankruptcy.
    AFS does not charge up-front or other fees to our clients. 
Because of the steep decline in fair share payments from 
creditors, we have recently begun to request voluntary 
contributions from our clients. The client is informed that any 
contribution is voluntary, and the client can stop his or her 
contribution at any time. A client who cannot afford to 
contribute is not asked to do so. The maximum amount we allow a 
client to contribute is $50 per month.
    Although we always intended to handle all of our original 
calls in-house, in the past, both AFS and counselors at Amerix, 
a for-profit back-office service provider, handled some of 
those calls. Origination calls are the initial calls from 
clients seeking credit counseling. The Amerix employees who 
handled the origination calls were trained and certified to our 
AFS standards. The arrangement was to assist us while we built 
up our workforce. AFS counselors now take all of our 
origination calls in-house.
    AFS opened its Bremerton facility in 2001 with 12 
counselors. When we reached 60 counselors, I began exploring 
options for further expansion, including plans to refurbish a 
former school and double our counseling capacity. Last fall, 
the foundation board decided not to purchase the new facility 
and asked for financial plans to support the project and cost-
effective alternatives. Since then, I have been considering 
other ways to move all of our origination in-house.
    At midnight on March 14 of this year, we stopped having 
Amerix handle our origination calls. Although handling all 
origination calls in-house has always been our plan, your 
investigation helped to bring this about more quickly than 
otherwise might have happened.
    Last fall, the North Seattle College Foundation Board, 
which is composed of volunteers, installed a new president and 
oversight committee. Since then, they have been studying our 
operations to ensure that our activities are appropriate and 
that our management systems are effective and efficient.
    Since the Subcommittee began its investigation, we have 
stepped up our efforts to ensure that AFS meets all applicable 
requirements. To that end, a review was conducted for AFS and 
the board and recommendations were prepared and considered. 
Earlier this month, the oversight committee made several 
recommendations to me for action.
    First, AFS has stopped outsourcing origination. Any future 
expansion will be accomplished only by employing AFS counselors 
    Second, AFS counselors are trained to make all appropriate 
disclosures. We will review all of our written materials and 
scripts to ensure they reflect that practice.
    Third, AFS will review and attempt to negotiate its 
contracts with Amerix, with particular attention to changing 
certain provisions, including the method by which payments to 
Amerix are calculated in favor of a transaction-based or 
similar payment system, and the assist rate provision in the 
current contract, which is counter to AFS philosophy and 
practice. We also will seek to terminate the FreedomPoint and 
the FreedomPoint Financial contracts.
    Fourth, we will again seek competitive bids for back-office 
    Fifth, we will review and revise our debt management plan 
form agreements as appropriate.
    Sixth, we will review all applicable laws and regulations.
    AFS is proud of our well-trained counselors and the service 
we offer to the public. AFS, the foundation board, and the 
board's oversight committee are dedicated to ensuring that AFS 
carries out its mission appropriately and effectively and 
completely within the bounds of the law. I am happy to answer 
any questions you may have.
    Senator Coleman. Thank you very much, Ms. Craig.
    Ms. Craig. You are welcome.
    Senator Coleman. Mr. Kroening.


    Mr. Kroening. Good morning, Chairman Coleman and 
distinguished Members of Congress. I am James Kroening, 
Director of Consumer Credit Counseling Service at FamilyMeans, 
a multi-service agency located in Stillwater, Minnesota, 
serving not only the Twin City metropolitan area but Western 
Wisconsin and also Southeastern Minnesota. I am here today to 
describe how FamilyMeans CCCS, with a department budget of 
approximately $1 million and a program staff of 12, is able to 
provide affordable, effective, and client-centered budget 
counseling, education, and debt management plans to 10,000 
people a year while adhering to the highest stringent standards 
of quality.
    \1\ The prepared statement of Mr. Kroening appears in the Appendix 
on page 150.
    To understand our approach, one must first look at our 
organizational history. FamilyMeans is a mission-based non-
profit started over 40 years ago by community leaders. Because 
financial stability is a key to a family's well-being, 
FamilyMeans has always provided financial counseling, mental 
health counseling, and supportive services to give people the 
tools they need to lead healthy, productive lives. Our multiple 
services give our clients assistance with underlying issues 
that may be affecting their lives.
    Our 18-member board of directors provides fiscal oversight, 
establishes policy, and raises financial support for the 
agency. They serve a maximum of six consecutive years, sign 
disclosure statements about potential conflicts of interest, 
and are not related to staff members.
    FamilyMeans has a long history of being accredited and 
licensed, meeting the rigorous standards set by the National 
Council on Accreditation of Services for Families and Children 
and the National Foundation for Credit Counseling. Our 
organization is licensed by the States of Minnesota and 
Wisconsin. Each of these licensing and accrediting bodies 
conducts thorough reviews and audits of business practices and 
our professional services. The agency also has an ongoing 
quality assurance program to help monitor and improve our 
    Our community roots, the capable board of directors, and 
our adherence to the highest standards in the non-profit sector 
ensure that we provide well-run mission-based programs that 
effectively meet community needs.
    FamilyMeans CCCS provides budget counseling, financial 
education, and debt management programs, which I will refer to 
as DMPs. Budget counseling is the heart of our CCCS program. We 
conduct one-and-a-half-hour comprehensive financial counseling 
sessions because they are effective. A certified financial 
counselor and a client work together to examine their income, 
their monthly expenses, and their debts. Each client leaves 
with a workable budget and a tailored action plan.
    Many families learn how to manage their money from these 
sessions and, therefore, do not need a DMP. In fact, the DMP is 
only recommended to clients who need intervention with 
creditors. We put all unsecured debt on the DMP, not just major 
creditors or those who make creditor contributions.
    Equally important, FamilyMeans CCCS offers consumer 
education each year to approximately 5,000 people. We conduct 
free classes about money management, home buying, credit use at 
schools, colleges, shelters, treatment and recovery programs, 
community centers, correctional facilities, and other non-
profit organizations. This work helps to prevent future 
financial problems.
    Over the last decade, organizations have entered into the 
credit counseling field who focus on the DMP and its potential 
revenue generation rather than offering comprehensive 
counseling and education services. The practices of these 
companies have adversely affected the credit counseling field 
and tainted the non-profit sector.
    I am appalled to know that consumers receive only a 15-
minute survey instead of comprehensive counseling and education 
that can lead to lasting change. I am disappointed to hear that 
some organizations put selected debt on a DMP, charge high set-
up fees, guaranteeing income to the company and almost certain 
failure to the consumer. I am saddened that many individuals 
who could manage their own debt are lured into debt management 
plans with promises of lowered interest rates. I am frustrated 
that current laws tie our hands when people come to us after 
they have been badly served by another organization. I am angry 
that these same businesses enrich their executives and have 
for-profit affiliations that taint the word non-profit, 
betraying the spirit and the standards we honor.
    Not surprisingly, creditors have responded to these 
practices by reducing their contributions, limiting customer 
concessions, such as lowered interest rates, actions that both 
hurt consumers and legitimate non-profit agencies like 
FamilyMeans. For us, creditor contributions have decreased 30 
percent in the last 4 years. Our inability to replace this 
revenue has forced us to close four locations and significantly 
reduce staff over the last 4 years.
    Fortunately, others see the value in the work that we 
provide. We successfully have raised charitable dollars from 
the United Way, foundations, and many individuals to support 
our counseling and our education. With the help of these 
charitable funders and by voluntarily adhering to the standards 
of not only COA, the NFCC and its consumer protection 
standards, FamilyMeans will strive to maintain and restore the 
public's trust and continue to bring financial stability to 
    I am hopeful that Congress and the Executive Branch take 
action to uphold the integrity of the credit counseling field 
in the face of these questionable business practices by recent 
market entrants so that FamilyMeans and other non-profits like 
ours can continue to serve consumers experiencing financial 
difficulties in the communities throughout the country.
    Senator Coleman. Thank you very much, Mr. Kroening.
    Mr. Viale, is it correct that the employees at Cambridge 
are asked to pick out false names?
    Mr. Viale. If when they start there are other counselors 
with the same first name that are presently working within the 
group itself, we do ask them to pick out a different name for 
the purpose of making it simpler for a client to call in and 
get to that counselor from customer service.
    Senator Coleman. Can't they just call themselves, Mr. 
    Mr. Viale. They could, but people like to be more formal 
and call it by--more personal and go by their first name. This 
has recently changed--that policy. It has changed several 
months ago, but that was a policy we had in place and it was 
just to simplify the process for the client calling in.
    Senator Coleman. There was testimony that there is what one 
would describe as a leader board for top sales for employees 
who are supposedly providing credit counseling services. Is 
there, in fact, what one would describe as a leader board in 
the Cambridge operation?
    Mr. Viale. There are two separate boards. One board is 
daily productivity, which is monitored by the people around 
them just so we can help motivate the counselors within the 
floor, and then there is the board that illustrates what the 
counselors achieved as far as their goals and what they have 
done as far as helping consumers.
    Enrollment in debt management plan and also through 
    Senator Coleman. There is a board for education?
    Mr. Viale. Yes.
    Senator Coleman. Could you describe that board?
    Mr. Viale. The board--well, it is actually--it is not the 
big monitor board but it is a board that goes up that shows how 
many consumers the counselors are getting to our education 
website, goodpayer.com, and having them opt in for financial 
    Senator Coleman. So your education is not personal 
counseling. If someone doesn't enroll in a DMP, do you refer 
them to a website?
    Mr. Viale. Correct, and if they enroll, we refer them to 
our own website, correct.
    Senator Coleman. If they enroll, aren't they sent 
educational videotapes and workbooks?
    Mr. Viale. That is correct.
    Senator Coleman. If they don't enroll, are they sent 
educational videotapes and workbooks?
    Mr. Viale. No, they are not. The counselors work with each 
consumer to try and deliver whatever education, the wants and 
needs the best to our ability, and then we work with them to 
get them to our education wellness site, which is 
    Senator Coleman. Are there bonuses that are paid to 
employees for enrolling consumers in debt management plans?
    Mr. Viale. There are three separate incentives that we have 
for our counselors. Our counselors are hourly employees and 
they have incentives based on the number of qualified consumers 
they enroll in the program, the retention rates of the 
qualified consumers they enroll in the program, and the amount 
of people that they deliver some value of education to.
    Senator Coleman. Do you disagree with Mr. Kroening's 
assessment that there are many people for whom DMPs aren't the 
appropriate path?
    Mr. Viale. One hundred percent correct. That is why only 12 
percent of the people that enroll in our program, people that 
call in actually enroll in our program. We have----
    Senator Coleman. But the bonuses you give are for DMPs?
    Mr. Viale. For qualified clients that do, indeed, need a 
DMP. Our systems, the technology that we have in place and the 
compliance measures we have in place only allow our counselors 
to enroll consumers that need a DMP plan.
    Senator Coleman. Do we have Exhibit 6? \1\ It is actually 
Mr. Schuck's client financial disclosure. On Exhibit 6, it 
appears that his expenses exceed his gross income. Is that the 
kind of client that needs a DMP?
    \1\ See Exhibit No. 6 which appears in the Appendix on page 249.
    Mr. Viale. This person exceeds by $24?
    Senator Coleman. Right, gross income, not take-home. Gross 
income, expenses exceed gross income.
    Mr. Viale. This document is not familiar to me. I know it 
has Cambridge Credit Counseling Corporation on it----
    Senator Coleman. Assume just for the purposes of this 
discussion, assume that this is a document----
    Mr. Viale. No, this would be someone that does not belong 
in our DMP plan.
    Senator Coleman. Mr. Kroening, would you disagree with 
    Mr. Kroening. I would agree, with it. A deficit, we would 
not put a client onto a debt management plan.
    Senator Coleman. That is Mr. Schuck's counseling----
    Mr. Viale. From--correct.
    Senator Coleman. The individual who is paying a fee of 
close to $2,000 to enroll in a DMP.
    Mr. Viale. Right, and that is from our systems of 2001.
    Senator Coleman. Exhibit 10 \1\--Mr. Viale, does this 
exhibit look familiar to you?
    \1\ See Exhibit No. 10 which appears in the Appendix on page 254.
    Mr. Viale. Yes, it does.
    Senator Coleman. Is this a letter that you sent to 
    Mr. Viale. Yes, we do.
    Senator Coleman. And this is sent to consumers who have not 
enrolled in a DMP?
    Mr. Viale. That is correct.
    Senator Coleman. And I note it says, ``Second letter. We 
have no record of receiving a response from you. Please review 
this offer before it expires.''
    Mr. Viale. Correct.
    Senator Coleman. Does it appear you are selling something 
here? Is this an offer?
    Mr. Viale. Often to try and help people. We want them to 
call in to be able to try and provide them with whether or not 
they need a DMP or whatever type of education we can deliver to 
    Senator Coleman. And again when it comes to education, Mr. 
Kroening talked about an hour-and-a-half session with his 
clients. How long are your sessions?
    Mr. Viale. For in-house counseling, which his organization 
does, it lasts anywhere from an hour to an hour and a half. 
Phone counseling, which is a lot different than in-house, can 
last anywhere from 15 minutes to an hour, depending upon the 
perplex situation of the consumer.
    Senator Coleman. But the decision to make a DMP often 
relates to that initial phone counseling?
    Mr. Viale. Not even close, no. It is not until we have done 
a full budget disclosure with the consumer, information has 
been put into our systems, and the systems allow for that 
consumer to come on our program. This is relatively new 
programming that we have, but that is the system that is in 
place. It has been in place that way for 2 years now.
    Senator Coleman. Mr. Case, who founded AmeriDebt?
    Mr. Case. Who founded AmeriDebt?
    Senator Coleman. Yes.
    Mr. Case. To my understanding, it was founded by three 
directors, Pamela Shuster, Ilze Vipulis, and Jane Conigliaro, I 
    Senator Coleman. Is it Pukke, or how did you pronounce it?
    Mr. Case. Pamela Pukke.
    Senator Coleman. Pukke. Is she related to Pamela Shuster?
    Mr. Case. It is the same person.
    Senator Coleman. The same person?
    Mr. Case. Yes.
    Senator Coleman. And Pamela Shuster is related to Andris 
    Mr. Case. Correct.
    Senator Coleman. So Andris Pukke, DebtWorks, does the back-
room services for AmeriDebt?
    Mr. Case. They have in the past. It is now The Ballenger 
Group who does the----
    Senator Coleman. The Ballenger Group. But in the past, 
under AmeriDebt. AmeriDebt would sign the folks up, but 
everything would be processed by----
    Mr. Case. AmeriDebt had processed clients in-house for 
approximately 2 years before the outsourcing arrangement was 
done with DebtWorks, sir.
    Senator Coleman. Was Pamela Pukke ``Pamela Pukke'' when she 
started AmeriDebt, do you know?
    Mr. Case. I am sorry?
    Senator Coleman. Was Pamela Pukke--you said Pamela Shuster. 
That is why I was a little confused early on. When AmeriDebt 
was formed and DebtWorks was in the position of processing 
AmeriDebt's work, was there a relationship between Ms. Pukke 
and Mr. Pukke?
    Mr. Case. Pamela Shuster had stepped down from the board 
somewhere around August 1999 and the contract was signed with 
DebtWorks in October 1999.
    Senator Coleman. How long have you known Mr. Pukke? What is 
your relationship with him?
    Mr. Case. Long-time family friend.
    Senator Coleman. If I may turn to a copy of Exhibit 15, can 
you identify Exhibit 15? \1\ Does that look familiar to you?
    \1\ See Exhibit No. 15 which appears in the Appendix on page 261.
    Mr. Case. Yes.
    Senator Coleman. And can you tell me what it is?
    Mr. Case. From my understanding, this is a company meeting 
that the Executive Director Jeff Formulak had, and his notes.
    Senator Coleman. And the notes talk about ``We met our 
goal. We achieved $2,837,033 in contributions. Our goal last 
month was 7,500 clients and $2,600,000 in contributions.'' Does 
this look like a sales meeting?
    Mr. Case. It is kind of a--to get the morale up around the 
office, to my understanding.
    Senator Coleman. But what are you selling?
    Mr. Case. Well, it also states there, sir, that we did help 
9,100 clients, approximately.
    Senator Coleman. Helped enroll them in DMPs.
    Mr. Case. These are the individuals that were enrolled in 
DMPs, that is correct, sir.
    Senator Coleman. It talks about bonus structure. Is there a 
bonus for education?
    Mr. Case. A bonus is for several things. Again, I did not 
deal directly with the clients. The managers really handle all 
the bonuses.
    Senator Coleman. Mr. Viale, who do you report to at 
    Mr. Viale. I report to John Puccio.
    Senator Coleman. John Puccio, he is the CEO?
    Mr. Viale. Correct.
    Senator Coleman. Is there anyone else between you and Mr. 
    Mr. Viale. No, there is not.
    Senator Coleman. Do you know how much Mr. Puccio earns each 
year from Cambridge Credit?
    Mr. Viale. Yes, I do.
    Senator Coleman. Can you tell us what that is, what is his 
    Mr. Viale. Six-hundred-and-twenty-four thousand, I think, 
was his salary last year.
    Senator Coleman. And your salary in this non-profit is how 
    Mr. Viale. It is right around $400,000.
    Senator Coleman. Ms. Craig, by the way, I do want to thank 
you for the initiatives that American Financial has made.
    My time is going to be up, but I did want to follow up. Mr. 
Kroening and Ms. Craig, I want to thank you for the changes, 
and I am running out of time here. Mr. Kroening, I appreciate 
what the NFCC is doing and I think one of the great 
difficulties in this hearing is that we are grouping folks 
    Clearly, there is a difference in non-profits, and that may 
be one of the issues here. People buying something, it is a 
non-profit. It may be that you need for-profit agencies and 
folks should get out there and have that and they can make 
choices. But what you have got here is non-profits that do 
certain things with the idea of not making bonuses and not 
making money and not making $600,000 and $400,000 a year, and 
you have for-profits that are acting as non-profits. I think 
that is problematic.
    Senator Levin.
    Senator Levin. Thank you, Mr. Chairman.
    Mr. Viale, you are presumably telling people that you are 
selling these management plans to how much their initial fee 
is. That is the theory of it, is that correct, on the 
    Mr. Viale. I didn't understand the question. I am sorry.
    Senator Levin. What is the initial fee?
    Mr. Viale. The first payment they make to our company is 
    Senator Levin. Regardless of that amount?
    Mr. Viale. Regardless of that amount, correct. About 20 
percent of the consumers that join our program get a reduced 
initial fee due to hardship.
    Senator Levin. So regardless of the amount of their debt, 
whether it is a small amount or a large amount, their initial 
fee is 10 percent of that debt?
    Mr. Viale. No, it is not 10 percent. It is the monthly 
payment that we develop, or our computer systems develop based 
on creditor guidelines to handle the debt for them.
    Senator Levin. What is the amount of the initial fee, set-
up fee?
    Mr. Viale. Whatever their monthly payment is going to be to 
satisfy the creditors and the program.
    Senator Levin. I am sorry?
    Mr. Viale. Whatever their monthly payment needs to be to 
satisfy the program. So, for instance----
    Senator Levin. So the first monthly payment is the fee.
    Mr. Viale. That is correct.
    Senator Levin. It all goes to you.
    Mr. Viale. That is correct.
    Senator Levin. And no matter what the size of that fee is, 
you keep it?
    Mr. Viale. Correct.
    Senator Levin. Shouldn't there be a relationship between 
the fee you get to set up a management plan and the services 
that you render?
    Mr. Viale. There should be a relationship to the savings 
and the rebates available for the consumer. It is all relative 
to the size of the debt the consumer has, an example being if 
somebody owes----
    Senator Levin. Shouldn't it relate to the services that you 
    Mr. Viale. No, it should relate to the savings the consumer 
can receive, the rebates they are able to receive through the 
program, and also, it should also relate to the fact that we 
have our fees reviewed and licensed in separate States, so they 
are deemed reasonable.
    Senator Levin. All right. Does that fee directly relate to 
what they are going to get in the future?
    Mr. Viale. It directly relates to their savings in interest 
rate reductions. It directly relates to the amount of rebates 
they can get back.
    Senator Levin. Not can get back, but do get back.
    Mr. Viale. That they can get back, qualified----
    Senator Levin. What if they don't get back any rebate?
    Mr. Viale. They haven't made their payments on time. Some 
of that is not in our control. Our system is not immune to the 
consumer following through with it.
    Senator Levin. But you keep that first monthly fee 
regardless of what comes subsequently in terms of benefits to 
that consumer, is that correct?
    Mr. Viale. That is correct. The consumer understands that 
when they come into the plan. It is disclosed very clearly to 
    Senator Levin. Apparently, some consumers don't understand 
    Mr. Viale. We disclose it at two very critical points. I 
can't see any other way to disclose it. Plus, our counselors 
reinforce it.
    Senator Levin. You have that in fairly small print, do you 
    Mr. Viale. No. It is boxed out. It is right above where 
they have to sign.
    Senator Levin. Because apparently there were quite a few 
consumers that don't understand that their first fee was--just 
read that to us again.
    Mr. Viale. It says, ``Payment design fee, proposed monthly 
payment, one time only.'' Below that, it is ``Payment program 
service fee, 10 percent of each payment made to Cambridge or 
$25, whichever is greater,'' and then there is an example box. 
``This is not a finance charge or an interest rate. This is not 
your proposed monthly payment. This is only an example. 
Proposed monthly payment, $300, 10 percent, $30, dispersed to 
creditors, $270. This is only an example.''
    Senator Levin. I see. And where does it say that you are 
keeping the entire fee?
    Mr. Viale. It says it right there, ``Payment design fee, 
proposed monthly payment, one time only.'' Plus, it says it all 
    Senator Levin. You are talking very fast. Payment--this is 
a program design fee?
    Mr. Viale. That is correct.
    Senator Levin. Where does that say that you are keeping all 
the money?
    Mr. Viale. It says it throughout the text and it says it 
    Senator Levin. No, I know the text, which no one can read. 
I am talking about in the box you pointed to. Where does it say 
you are keeping all the fee? Program design fee are not words 
which jump out to the average reader as being, none of this 
goes to your creditors.
    Mr. Viale. Well, we have it here. It is--I mean, we feel 
that is clear enough. We feel this is way above what any other 
company does as far as disclosure, plus the consumer receives 
this before they join the program. I think we have to 
understand that once they sign the service agreement, they are 
not obligated to our program. They are not signing up. They 
receive this. It is very clear exactly what we are charging 
them. The counselors go through this line by line.
    Senator Levin. Your counselors on the telephone go through 
your customers line by line with that debt management plan 
summary after it is received?
    Mr. Viale. Correct.
    Senator Levin. So after that is received by your customers, 
they call back and then they go through with Mr. Daniel, or 
whoever it is, if they can find them, the----
    Mr. Viale. It is not----
    Senator Levin. It is not hard to find your folks?
    Mr. Viale. No, it is not hard to find us.
    Senator Levin. All right. They go through it line by line, 
OK. And your first payment fee there----
    Mr. Viale. Line by line. Each----
    Senator Levin. No, just point out the first payment fee, if 
you would.
    Mr. Viale. ``Payment design fee. This payment is not paid 
to your creditors,'' $374.
    Senator Levin. All right.
    Mr. Viale. Total estimated monthly fees----
    Senator Levin. So on that right there, not where they sign 
but something which is sent to them which looks like this is 
where the words, ``This payment is not paid to your creditors--
    Mr. Viale. That is relatively new, but yes, that is where 
it is.
    Senator Levin. Relatively new? How new?
    Mr. Viale. Several weeks as far as just that--in 
    Senator Levin. In parentheses? You didn't even have the 
parentheses year after year where people signed their name. It 
obviously wasn't very clear because now, 3 weeks ago, you add 
    Mr. Viale. The payment design fee has been there all along.
    Senator Levin. I know it has been----
    Mr. Viale. It is very clear.
    Senator Levin [continuing]. But that is not intelligible to 
people, and so you finally, a few weeks before this hearing, 
add these words, not where they sign, not where they sign yet. 
That is still not added, is it? Where is it?
    Mr. Viale. Is what?
    Senator Levin. Go back to where they sign their name, where 
you say everything is so clear, where there are no parentheses. 
See those words, ``Payment design fee''----
    Mr. Viale. Yes.
    Senator Levin [continuing]. Right where they sign?
    Mr. Viale. Yes.
    Senator Levin. That is not intelligible. That doesn't tell 
people none of that goes to their creditors. So a few weeks 
ago, you put on this other exhibit, ``None of this goes to your 
creditors.'' Why don't you put that in that box where they are 
signing their name, ``None of this goes to your creditors''?
    Mr. Viale. These service agreements have been approved by 
several different banking departments and the States we are 
licensed in.
    Senator Levin. That is fine.
    Mr. Viale. We are trying to do our best with full 
disclosure. The counselors go through this----
    Senator Levin. Why don't you put the parentheses in that 
box where people sign their names?
    Mr. Viale. We can do that.
    Senator Levin. Well, it is obviously clearer, isn't it, to 
say none of this goes to your creditors?
    Mr. Viale. Yes. That is why we have put it here.
    Senator Levin. A few weeks ago.
    Mr. Viale. Correct, but the payment design fee and the 
counselors through their presentations, if you want to pull 
this up--can I pull up the presentations?
    Senator Levin. No, I think----
    Mr. Viale [continuing]. Where we say----
    Senator Levin. I think I would rather focus on my 
    Mr. Viale. OK, sir.
    Senator Levin. Let me tell you, that is not disclosure. I 
am just going to make a statement here. You have got your 
statement that it is, but it is obviously not disclosure, 
payment design fee, unless you tell people where they sign 
their name and over the telephone that none of that is going to 
go to your creditors. You have now done this on a form which 
goes out afterwards, and that may or may not help. It is a 
little better than what you have been doing all these years.
    Let me just ask one more question before my time runs out. 
You have got a relationship--let me be clear. The non-profit 
has a relationship with the for-profit, is that correct? The 
for-profit does the processing services, the so-called back-
room services for the not-for-profit?
    Mr. Viale. Part of the family of companies is a for-profit 
company, correct, that does back-end support.
    Senator Levin. And the people who control the non-profit 
also control the for-profit, is that fair to say?
    Mr. Viale. That is fair to say.
    Senator Levin. And those folks, then, are negotiating with 
themselves in terms of what those processing fees are, is that 
    Mr. Viale. No. Those contracts--I am not 100 percent 
familiar with this, but those contracts are evaluated at fair 
market value.
    Senator Levin. But they seem to be very different from all 
of the contracts which are worked out by the associations, for 
instance, the National Foundation for Credit Counseling and the 
AICCCA. They have very different fees than you do. So when you 
say fair market value, there is no place you look in a manual 
to find fair market value, is there?
    Mr. Viale. The back-end support systems we have are not 
within the industry anywhere. We have looked closely with other 
companies to gauge what fair market value would be.
    Senator Levin. But in terms of setting that fee, it is set 
by the people who control the non-profit with the people who 
own the for-profit, is that correct?
    Mr. Viale. I didn't understand the question, sir.
    Senator Levin. Who negotiates that fee? Isn't it the non-
profit with the profit-making company?
    Mr. Viale. Oh, I don't know.
    Senator Levin. How is the fee set? Who sets it?
    Mr. Viale. I don't know. That is not my line of expertise. 
My responsibilities are day-to-day operations of our family of 
    Senator Levin. Does anyone outside of the two families of 
the companies set it up or is it set up within the family of 
companies as to what that fee is?
    Mr. Viale. Well, this is reviewed by two separate 
accounting firms----
    Senator Levin. No, I know about that, but who sets the fee? 
Is it set up within the family of companies?
    Mr. Viale. I am not sure. I think it is reviewed and it is 
proposed, but I am not sure how it gets approved.
    Senator Levin. Would it surprise you to know that it is $25 
or $30 that compares to $1 to $2 for each of these plans per 
month by other non-profit companies, that it is 20 times higher 
than other non-profits?
    Mr. Viale. It is surprising, because there are other bids I 
have seen for $13, $15, and $18.
    Senator Levin. Do you put this out for bids?
    Mr. Viale. That, I don't know.
    Senator Levin. If it were--I thought you said a minute 
    Mr. Viale. I said I have seen bids from other 
    Senator Levin. No, I know that, but before that, didn't you 
say that this fee was negotiated between the profit----
    Mr. Viale. No.
    Senator Levin [continuing]. And the non-profit?
    Mr. Viale. No, I did not say--I don't have the answer to 
    Senator Levin. You just don't know where these fees are 
set, or how these fees are set?
    Mr. Viale. No.
    Senator Levin. The larger the fee, the more money would go 
to the profit-making corporation, is that fair to say?
    Mr. Viale. It seems fair to say.
    Senator Levin. Yes. And so the larger the fee, the more 
money would get into a company which then is not regulated in 
terms of profit by the IRS, is that correct?
    Mr. Viale. I don't know. I am not an accountant. I don't 
know those answers.
    Senator Coleman. Thank you, Senator Levin. Senator Pryor.
    Senator Pryor. Thank you, Mr. Chairman.
    First, let me say to Mr. Case that I feel like your answer 
a few moments ago when you talked about Pamela Shuster was not 
forthcoming. I feel like you were deliberately misleading the 
Subcommittee by not giving her married name, and I want to 
thank the Chairman for drawing that out because I wouldn't have 
picked up on that.
    Mr. Case. I am sorry. I didn't mean to do that. I did not 
mean to do that. We refer to her, because back in the time when 
she was affiliated with the company, she was Pamela Shuster.
    Senator Pryor. Well, I just want to thank the Chairman for 
connecting the dots on that because I think that is a 
    Mr. Case. I apologize.
    Senator Pryor [continuing]. Fact that you left out.
    If I may, is your name pronounced ``Vile''? ``Vi-al''?
    Mr. Viale. ``Vi-al-ee.''
    Senator Pryor. ``Vi-al-ee.''
    Mr. Viale. Yes.
    Senator Pryor. Mr. Viale, let me focus with you just for a 
few moments. You mentioned in your opening statement that you 
felt like some of the early witnesses had unfairly painted your 
company as a money-making machine for the two founders. And 
again, I am sorry, I am not sure of the pronunciation, but 
    Mr. Viale. ``Pu-chee-oh.''
    Senator Pryor. ``Pu-chee-oh.'' As I understand your 
testimony, he made $624,000 in one year. His wife made $624,000 
in one year.
    Mr. Viale. His brother.
    Senator Pryor. His brother. And in addition, he made an 
additional $600,000 from related organizations. Is that----
    Mr. Viale. That, I don't know.
    Senator Pryor. In 2002, did he sell the company?
    Mr. Viale. No. There was no sale of the company in 2002. 
There was a sale of a company in 1996 or 1997 to the non-profit 
when we moved to Massachusetts.
    Senator Pryor. OK. And then, as I understand it, your 
salary is $400,000 or more?
    Mr. Viale. Right around there, correct.
    Senator Pryor. And do you have any incentives or any 
bonuses on top of that $400,000?
    Mr. Viale. No.
    Senator Pryor. Now, if I can, I would like to ask Mr. 
Kroening down here on this end of the table, what is your 
salary at your non-profit?
    Mr. Kroening. My annual salary is $60,000.
    Senator Pryor. Thank you. Mr. Viale, I believe you said 
that you have about 40,000 customers or clients that call in 
every month, is that the figure you said?
    Mr. Viale. New callers that call in each month, correct.
    Senator Pryor. But you only sign up, what, about 12 percent 
of those?
    Mr. Viale. That is correct.
    Senator Pryor. As I understood your testimony, that is what 
you said. So that is about 4,800 a month. Is my math right?
    Mr. Viale. Something right there, yes.
    Senator Pryor. What is your average fee that you charge 
your clients?
    Mr. Viale. Three-hundred-and-eighty dollars is right around 
the average initial fee of a consumer that joins a program.
    Senator Pryor. OK. Now, you said $385?
    Mr. Viale. It is right around $380. It fluctuates, but 
around $380
    Senator Pryor. And you said something there that I think is 
important, and that is your $385 for the initial fee.
    Mr. Viale. Yes.
    Senator Pryor. What is the total fees that they are charged 
during their relationship with you?
    Mr. Viale. It would be $38 per month from the second month 
thereafter, and the plan can range anywhere from 4 to 5 years, 
or 4 to 5\1/2\ years.
    Senator Pryor. OK. Now, how are these fees calculated?
    Mr. Viale. It is based on the service agreement. It is 10 
percent of their monthly payment, and whatever their payment 
needs to be on the program is the initial fee. That is the 
first payment that is our fee.
    Senator Pryor. OK. And these are averages. They are not the 
same for everybody. They all fluctuate depending on what the 
customer's needs are.
    Mr. Viale. The payment size--well, it fluctuates for each 
consumer, yes, correct.
    Senator Pryor. OK. What percentage of your clients stay 
with the program through the duration?
    Mr. Viale. We have a little over a 30 percent completion 
    Senator Pryor. OK. And is there any penalty for dropping 
    Mr. Viale. No penalty.
    Senator Pryor. Now, of the clients that you have, how 
many--what percentage, I think that is the best way to handle 
this, what percentage actually enroll in a debt management plan 
of the clients you have that have signed up with you? Do all of 
them enroll in debt management?
    Mr. Viale. No. Twelve percent of the people that call us 
enroll in the debt management plan.
    Senator Pryor. I understand that. We have already covered 
    Mr. Viale. Right.
    Senator Pryor. But I am asking, of those 12 percent, how 
many sign up in the debt management, all of them?
    Mr. Viale. That is correct. The other 88 percent is 
counseled to our best ability with whatever education they 
    Senator Pryor. OK. So you are going to try to tell the 
Subcommittee today that those 88 percent do receive some 
services from you?
    Mr. Viale. We try as hard as we can to deliver services to 
those consumers.
    Senator Pryor. But everybody that ``signs up,'' they are 
moved into a debt management plan?
    Mr. Viale. That is correct.
    Senator Pryor. Now, Mr. Kroening, let me ask you, based on 
your experience, you have heard a lot about debt management 
plans today. Do they work for everybody or how is this 
consistent--is this consistent with your experience and what 
you do?
    Mr. Kroening. With our experience, again, we will only put 
folks on plans when it is necessary and needed by the family. 
Again, in our case, we don't talk about how many people contact 
us. We talk about the folks that we actually counsel. In this 
case, approximately 30 percent of the folks that we counsel 
will go onto a debt management plan.
    Senator Pryor. And your counseling is an hour and a half, 
whereas I believe the testimony is their's may be about 15 
minutes on that initial phone call?
    Mr. Kroening. Yes. Our counseling will be an hour and a 
half, sometimes as much as 2 hours.
    Senator Pryor. Mr. Chairman, I have one last question. I 
know I am almost out of time, but again, it is for Mr. Viale, 
and that is you are operating under the label non-profit. Why 
did you choose to operate under a non-profit label?
    Mr. Viale. Well, I don't have a specific answer for that, 
but I know the industry forces us to be a non-profit.
    Senator Pryor. I don't think that is true. I think you 
    Mr. Viale. Well, the creditors only endorse, for the most 
part, a non-profit status to grant benefits to the consumer.
    Senator Pryor. So it is to your benefit to work with 
creditors to be a non-profit, but also, wouldn't you agree with 
me that it is to your benefit to work with your clients to call 
yourself a non-profit because it gives them an assurance that 
there is a credibility with your company, would you agree with 
    Mr. Viale. No, I wouldn't agree with that. If we were for-
profit or non-profit, we would put the same energy into working 
with each consumer we are talking to.
    Senator Pryor. I am not talking about the energy you put 
in. I am talking about how consumers feel toward a for-profit 
company versus a non-profit organization. Would you agree with 
me that they feel better about going to a debt counselor or a 
debt agency that is a non-profit, or would you not agree with 
    Mr. Viale. I don't know. I don't know that to be true 
either way.
    Senator Pryor. That is all I have, Mr. Chairman. Thank you.
    Senator Coleman. Thank you, Senator Pryor. Senator Dayton.
    Senator Dayton. Thank you, Mr. Chairman.
    So the purpose of your enterprise is ostensibly to provide 
the client with a reduction in his or her payments based on 
your negotiation with the creditors? How is that reduction 
documented? How does the client know that he or she is getting 
value from what you are charging?
    Mr. Viale. We fax them our service agreement. They sign the 
service agreement, so they understand the terms of the service 
agreement. We provide them with a budget analysis. We go over 
their bills in detail. Then we provide them with a debt 
management plan summary, which is here, and it goes over 
exactly each creditor we are handling, how much has to go to 
each creditor, how long it will take, what it would cost them 
on their own based on 18 percent interest, and what it would 
cost through us and their savings, as well as the fees and the 
rebates they can receive.
    Senator Dayton. Is that 18 percent what is actually being 
charged at that time?
    Mr. Viale. It is an underestimate. Most consumers we are 
talking to are being charged more than 18 percent interest.
    Senator Dayton. But you are representing this as their 
savings. Is this based on actual interest rates or are you 
making assumptions here?
    Mr. Viale. Well, they are not assumptions. They are not 
based on the actual information the consumer has. We don't have 
that available to us.
    Senator Dayton. Well, you are asking the consumer to 
provide you with information. Why wouldn't you obtain that 
    Mr. Viale. We are not able----
    Senator Dayton. How do you assess whether the client is 
going to receive a benefit if you don't know what the client is 
presently paying?
    Mr. Viale. We don't know exactly what their interest rates 
are with each account. That is impossible for us to know.
    Senator Dayton. You are setting up a management fee, which 
in the case of Mr. Schuck was $2,000. Wouldn't that be an 
appropriate part of the service, then, to make an actual 
determination rather than just plugging in some generic 
    Mr. Viale. There is no generic assumptions. We know what 
    Senator Dayton. What are the interest rates based on?
    Mr. Viale. The interest rates are based on creditor 
guidelines. We know what they will do upon acceptance of the 
proposals prior to our client joining our program. So there is 
no guesswork involved in the plan that we are setting up for 
    Senator Dayton. Why aren't you representing to them in the 
plan the actual cost of their present situation and then 
showing them what reductions you are able to gain for them?
    Mr. Viale. Because it is creditor-specific. There are 
sliding scales for each creditor. It is impossible for us to 
determine exact figures for the consumer.
    Senator Dayton. But don't you have the exact figures based 
on that client's present situation?
    Mr. Viale. It is impossible.
    Senator Dayton. What is impossible?
    Mr. Viale. Well, I will give you an example.
    Senator Dayton. If I come to you and I have six credit 
cards and I am overdue on whatever they are, I have six 
interest rates that are being charged on my six accounts--what 
is complicated about that?
    Mr. Viale. Well, we don't know what certain creditors like 
Discover, MBNA, or other creditors are going to do with the 
interest rate concessions.
    Senator Dayton. You are negotiating with each creditor a 
reduction part of this management fee that you are collecting 
up front?
    Mr. Viale. No. There is not a negotiation process. They are 
going to evaluate the proposal we send in based on criteria of 
the client, their client. Then they are going to, in turn, set 
an interest rate for that particular account.
    Senator Dayton. These savings, then, are just based on a 
set of fictitious assumptions? They are not based on actual 
    Mr. Viale. We don't negotiate with the creditors.
    Senator Dayton. They are not based on an actual fact of 
what is going to be accomplished on their behalf?
    Mr. Viale. We have general terms for each creditor. Some 
    Senator Dayton. I am not talking about general terms. You 
are charging $2,000 for a computer printout and representing 
that as actual savings. If I am taking the time, which I would 
hope I would, to be reading this and trying to make an 
assessment, I am relying on your assertions that this is what I 
am going to save so I can understand whether I am getting an 
appropriate benefit or not, and you are saying that they are 
not based on actual facts, they are based on your assumptions 
or some generic numbers that you plug into a computer program.
    Mr. Viale. It is not----
    Senator Dayton. Why is that worth $2,000 to me?
    Mr. Viale. Because that is what the amount of the--that 
particular client, that is what you owe them. That is what it 
is going to take to pay back the debt through us.
    Senator Dayton. No, that is what you are charging. You are 
charging me an up-front management fee, which in Mr. Schuck's 
case is $2,000. I am just using that as an approximation. I 
don't know if that is high or low for your average customer----
    Mr. Viale. It is very high.
    Senator Dayton. High, OK. So whatever it is, $1,500--what 
is the average management fee?
    Mr. Viale. Three-hundred-and-eighty dollars. Three percent 
of our clients have payments over $1,000.
    Senator Dayton. I am talking about the first month, the up-
    Mr. Viale. Three-hundred-and-eighty dollars is the average.
    Senator Dayton. Does that include the 10 percent?
    Mr. Viale. Correct.
    Senator Dayton. All right. So for that, what am I getting? 
I am getting this computer printout?
    Mr. Viale. You are getting our systems of generating to our 
best ability what the estimated savings will be for each client 
that comes in to us.
    Senator Dayton. What is that document being represented as? 
What is the title of that, not the one in front of you now but 
the one that you send out there?
    Mr. Viale. It is called the Debt Management Plan Summary, A 
Pro Forma Statement.
    Senator Dayton. OK. Would I have any reason not to believe 
that is reflective of my situation and that you made that 
determination? I mean, what other kind of service are you 
providing except for an effort to reduce my overall payments?
    Mr. Viale. This is only part of what we do. I mean, this is 
    Senator Dayton. What else do you do?
    Mr. Viale [continuing]. Ten to 20 percent of what we do. 
The rest is all education.
    Senator Dayton. On a website?
    Mr. Viale. No, not on the website. The counselors interact 
with the consumers and do our best to deliver whatever 
education they want and they need. What the Subcommittee 
doesn't understand----
    Senator Dayton. How can your counselors provide information 
if they don't have the facts? How can they counsel without the 
    Mr. Viale. We do have----
    Senator Dayton. Let me just ask one other question, Mr. 
Chairman. I am sorry. This fair, what do you call it, the fair 
share plan for the rebate----
    Mr. Viale. Good payer program.
    Senator Dayton [continuing]. The bonus you are paying----
    Mr. Viale. Yes.
    Senator Dayton. Based on the figures you have provided to 
your almost 76,000 clients, the $14 million, that averages out 
to $185 per client.
    Mr. Viale. A hundred-and-eighty-two dollars, correct.
    Senator Dayton. So that is less than--and you say the 
average up-front payment is $385?
    Mr. Viale. That is correct.
    Senator Dayton. You are giving them back a fraction of what 
they are paying you, but more importantly, I guess my question 
is, if twice that is the total value of the savings that you 
are getting from the creditors, again, what value are you 
providing to this client for all that you are charging?
    Mr. Viale. Some of those 10,000, and you have a payment of 
$300, we will use $300 as our example, they are going to save 
roughly between maybe $100 to $150 in interest charges every 
month by being on our program.
    Senator Dayton. How do you know that? You don't have that 
    Mr. Viale. We have----
    Senator Dayton. You just said it is impossible to get that 
    Mr. Viale. It is impossible to get accurate information. 
The information we are providing is very close to accurate.
    Senator Dayton. How is it impossible to get accurate 
information on what is actually occurring out there among your 
    Mr. Viale. You should talk to the banks about that.
    Senator Dayton. Well, no, I don't talk to the banks. It is 
what you----
    Mr. Viale. It is not----
    Senator Dayton. What do you----
    Mr. Viale. The creditor----
    Senator Dayton. I get a monthly statement. I get 
information on what the current interest rate is. But at the 
end of all my good behavior, I am getting $185 back as a bonus. 
The other $185 you are saving, that is the total value of the 
savings, $370, that on average you have achieved through 
interest reductions from the creditors.
    Mr. Viale. That is not true.
    Senator Dayton. I am just using the numbers you provided.
    Mr. Viale. That is not true. I mean----
    Senator Dayton. What is true, then? What are you getting 
for these costs?
    Mr. Viale. Extreme value we are delivering to people who 
need a debt management program.
    Senator Dayton. No. Quantify it. What are you getting for 
    Mr. Viale. We are getting reduced interest rates so they 
can get out of debt in a reasonable time frame.
    Senator Dayton. So they are getting $370 worth of reduced 
interest rates?
    Mr. Viale. On a monthly basis, they are getting----
    Senator Dayton. No, not monthly, that is the total. The 
total rebate is $185.
    Mr. Viale. No, no----
    Senator Dayton. It is half of the interest that you have 
saved. So the total value of the interest you have saved--well, 
don't shake your head. Then tell me what the facts are.
    Mr. Viale. This is rebates. This is fair share money the 
creditor sends to an organization.
    Senator Dayton. And they get half of it and you get half.
    Mr. Viale. Right. That is not interest rate reductions. 
That is not savings on the plan. This is just fair share, that 
we give half back to our consumers. No one does that. Interest 
rate concessions, we all get. We all save the client the same 
type of money from a monthly basis from each creditor. It is 
all standard. There is no difference in what we do.
    Senator Dayton. But again, what are you saving them?
    Mr. Viale. Tens of thousands of dollars. Someone who owes 
    Senator Dayton. How do I know that if I am a customer? How 
do I know what you are saving me?
    Mr. Viale. It is our expertise, and everything we have in 
our system is all computerized based on creditor guidelines. 
There is no guesswork in what we do to a degree. We can't 
provide an exact detailed report, and nobody can.
    Senator Dayton. Thank you, Mr. Chairman----
    Senator Coleman. Thank you, Senator Dayton.
    Senator Dayton [continuing]. For your indulgence.
    Senator Coleman. I want to just follow up on a couple 
things. Fair share, you talked about fair share. The number one 
creditor for Cambridge is Citibank, is that correct?
    Mr. Viale. I am not exactly sure. It is one of the top 
    Senator Coleman. The top ones. Do you know if Citibank does 
anything with fair share, provides any fair share rebate?
    Mr. Viale. Provides any fair share--I don't understand.
    Senator Coleman. Isn't it true that many of your top 
creditors no longer participate in fair share or else only 
rebate a very small percentage?
    Mr. Viale. We are down----
    Senator Coleman. Are you aware of that?
    Mr. Viale. I am aware of it. We are down to a little bit 
less than 5 percent fair share.
    Senator Coleman. Your top creditor, Citibank, do you know 
if they provide any fair share?
    Mr. Viale. Yes, they do, to us.
    Senator Coleman. And what percentage.
    Mr. Viale. Yes. Well, 9 percent is the fair share. I think 
it is nine. It is eight----
    Senator Coleman. Citibank is giving you back 9 percent?
    Mr. Viale. It is 8 or 9 percent based on--they are still 
coming out with their new policy of their grants and that 
hasn't been released to the community yet.
    Senator Coleman. Bank One, one of your top three, what is 
their fair share?
    Mr. Viale. That might be zero right now.
    Senator Coleman. It might be zero. And MBNA, your number 
two credit group, what is their fair share?
    Mr. Viale. They are at zero right now.
    Senator Coleman. OK. So your top creditors, and I want to 
turn to you, Mr. Kroening, because you are impacted by this, 
aren't you?
    Mr. Kroening. Yes.
    Senator Coleman. Is it fair to say that the top creditors 
today are not participating in fair share or have substantially 
cut their fair share because of the fact that so much of this 
revenue is being generated now through either for-profits that 
are making a lot of profits or for-profits that are benefitting 
from what the non-profits are doing?
    Mr. Kroening. Yes, Mr. Chairman. My belief is that we have 
seen a major decrease in the creditor support for our type of 
counseling and debt management work that we do, related 
specifically to the number of new entrants and the number of 
folks that they are putting on plans. And specifically, I 
believe it is related to the fact that many people are being 
put into debt management plans that simply do not need it and 
creditors have seen their line item expense go out the roof 
with this. What they do is cut across the board. So this has 
drastically affected us. Our organization has a budget of just 
around $1 million. Over the last 4 years, these cuts have meant 
about $250,000 in less revenue for us.
    Senator Coleman. The last area of inquiry, I want to clear 
up this thing about education so we are very clear. There is an 
initial call to a customer. Mr. Schuck is a customer. That call 
lasts approximately how long, Mr. Viale?
    Mr. Viale. It can last anywhere from 5 to 15, 20 minutes, 
the first call.
    Senator Coleman. Let me back up. Is there any face-to-face 
education you have with any of your consumers?
    Mr. Viale. One hundred percent. If they live in the area, 
they come in for face-to-face counseling.
    Senator Coleman. What percentage of your customers come in 
for face-to-face counseling?
    Mr. Viale. People that live in the area, almost 100 percent 
of them.
    Senator Coleman. What percent of the total----
    Mr. Viale. We are national. We don't have a facility in 
every State and every county.
    Senator Coleman. So what percent of your total customers 
get face-to-face counseling?
    Mr. Viale. Approximately 10 to 20 a day get face-to-face 
counseling, so I don't know what that would relate to. I have 
never done the numbers up.
    Senator Coleman. The education--so I am making it very 
clear, if you don't enroll in a debt management plan, you get 
referred to a website, is that correct?
    Mr. Viale. That is correct.
    Senator Coleman. And if you do enroll in a debt management 
plan, you get a workbook and a videotape, is that correct?
    Mr. Viale. You get a two-and-a-half-hour video series and a 
workbook plus the website plus newsletters and the education 
center along with the counselor.
    Senator Coleman. If there is just a little follow-up, 
because we do have two more panels. Senator Levin?
    Senator Levin. Mr. Viale, going back to the rebate issue, 
you said that your customers get the average of $185 rebate, so 
about half that average initial fee is rebated to all of those 
customers you have got that get the plan and sign up, is that 
what you are saying?
    Mr. Viale. A hundred-and-eighty-two dollars, correct.
    Senator Levin. That is the average?
    Mr. Viale. That is the average amongst the whole group.
    Senator Levin. All of the group?
    Mr. Viale. Correct.
    Senator Levin. So that half of your total money that you 
got in initial fees last year, for instance, was rebated?
    Mr. Viale. That would be untrue because they have to be on 
the program for 6 months, so--but if you were to look at it 
over the time, yes, that would be true.
    Senator Levin. Only people who were on the program for 6 
months get rebates?
    Mr. Viale. Correct.
    Senator Levin. What percentage of the 12 percent of the 
people that you sign up are on your program for 6 months?
    Mr. Viale. The average length of time for a consumer on our 
program is 23 months. That stat I have.
    Senator Levin. So you don't have that figure, what 
percentage of people drop out before 6 months and therefore 
don't get a rebate at all?
    Mr. Viale. No. I do have that around 20 percent actually 
get more than their initial fee back in rebates.
    Senator Levin. But you don't have the percentage that get 
nothing because they dropped out after----
    Mr. Viale. I don't have that percentage here, no.
    Senator Levin. Mr. Case, very quickly, what percentage of 
your customers make no contribution up front at all?
    Mr. Case. I don't have a percentage, sir, but 5,000-plus 
are on our program right now with no contributions whatsoever.
    Senator Levin. Up front?
    Mr. Case. Anything, in all----
    Senator Levin. And how many are in your program?
    Mr. Case. We have approximately 72,000 people in the 
program right now.
    Senator Levin. Are the people who sign up these customers 
discouraging folks from making voluntary contributions?
    Mr. Case. I am sorry?
    Senator Levin. Are they--excuse me. I misspoke. Are the 
people who engage in these first phone calls trying to sign up 
people, do they discourage folks from saying that they can't 
make a contribution?
    Mr. Case. Mr. Levin, as far as if people can't make the 
contribution, we don't jam it down their throat. I mean, we 
understand certain people are in certain hardship situations 
    Senator Levin. Exhibit 14 \1\ has the following item. The 
script tells your employees what to say in response to the 
customer who says, ``I can't afford a contribution right now, 
but maybe I can afford to contribute later,'' and here is what 
your script advises the employee to say. ``If you can afford to 
make a monthly payment, you can afford to make a contribution. 
That contribution is not going into our pocket. It is going to 
cover the costs of setting you up on the program. Would you 
rather have that payment go to us to help people like you get 
out of debt or would you like it to go into the creditors' 
pocket as an extra interest? Would you rather support a non-
profit company or help a bank get richer?'' Is that your 
    \1\ See Exhibit No. 14 which appears in the Appendix on page 260.
    Mr. Case. I didn't personally write the script, sir.
    Senator Levin. Is that your company's script?
    Mr. Case. That is in the company handbook, yes.
    Senator Levin. Is that as disgusting as it sounds? Does 
that not disgust you? If you don't call that pressure on 
somebody to make a contribution, how would you label that?
    Mr. Case. I would call it pressure.
    Senator Levin. You would call it pressure. That is how 
voluntary your contributions are.
    One last question. Mr. Kroening, we have heard that the 
average initial fee that is charged by Cambridge is $380. What 
is your average initial fee?
    Mr. Kroening. Twenty dollars.
    Senator Levin. Thank you. Senator Dayton.
    Senator Dayton. Thank you, Mr. Chairman.
    I will be brief because we have a roll call vote starting, 
but Mr. Kroening, I want to thank you for being here and 
presenting a comparative perspective. You have given new 
meaning to the phrase, ``swimming with the sharks.'' These are 
your compatriots. Ms. Craig, I am glad that this investigation 
has prompted a review of some of your practices. I hope they 
are conforming to Mr. Kroening's.
    Ms. Craig, since I didn't have a chance to ask--I am sorry, 
Mr. Case--before, Ms. Troy stated that she was not able to talk 
with a counselor when she wanted some counseling information 
and was referred instead to ``customer service,'' Who is 
customer service in your business?
    Mr. Case. Sir, the customer service would either be The 
Ballenger Group or DebtWorks, depending on when she was on the 
program. I believe she was in 1999, so it would be DebtWorks.
    Senator Dayton. And DebtWorks is another subsidiary of The 
Ballenger Group?
    Mr. Case. DebtWorks was bought by The Ballenger Group, sir.
    Senator Dayton. OK. But she says she got a different person 
each time, that she didn't have anybody who was familiar with 
her case. So there is not a counselor? Mr. Allen is 
representing himself as a counselor, but he doesn't do any 
    Mr. Case. He does do counseling, sir. My understanding of 
the customer service area is each client who comes onto the 
program, their customer number is their Social Security number. 
That enables them to be allowed to talk to any customer service 
representative simply by giving them their Social Security 
number to pull it up----
    Senator Dayton. Are those people trained as counselors, 
whatever that term means in your industry?
    Mr. Case. The customer service?
    Senator Dayton. Yes.
    Mr. Case. They are trained in customer service, sir.
    Senator Dayton. Who provides this ``counseling''?
    Mr. Case. The counselors provide the up-front education.
    Senator Dayton. In the 15 minutes that you are allotting 
for that purpose?
    Mr. Case. My understanding is there are several calls. 
There is not one call and you are signing up. I mean, there is 
a lot of----
    Senator Dayton. What is the counseling? What is the content 
of the counseling?
    Mr. Case. Right up front, there is a budget analysis done 
right away, because different people are in different 
    Senator Dayton. Your budget analysis with people who are 
calling you, referring to your advertising, under the kind of 
circumstances they are in, does that budget analysis show that 
they are able to make voluntary ``contributions''? I mean, if 
they could make voluntary contributions, why would they be 
needing your service?
    Mr. Case. Sir, there is a negotiation period which takes 
normally between 30 and 45 days with the creditors to make sure 
all these proposals are----
    Senator Dayton. You are charging $5 per account per month.
    Mr. Case. Per month, right, for maintenance fees.
    Senator Dayton. Five dollars per account per month?
    Mr. Case. It is actually $7, sir.
    Senator Dayton. Seven dollars per account per month.
    Mr. Case. Correct.
    Senator Dayton. That presumably is the cost, probably more 
than the cost, of actual time you are spending negotiating with 
these creditors. Why is there a voluntary contribution 
necessary at all?
    Mr. Case. Because we are charged monthly fees by the back-
office company which helps us defer those costs.
    Senator Dayton. Who is a for-profit that owns these other 
operations, right?
    Mr. Case. It is two different companies, sir.
    Senator Dayton. Well, it is different companies but the 
same principals?
    Mr. Case. No.
    Senator Dayton. Some of the same?
    Mr. Case. No.
    Senator Dayton. No relationship at all between The 
Ballenger Group and AmeriDebt?
    Mr. Case. No.
    Senator Dayton. None at all between The Ballenger Group 
    Mr. Case. Not at all.
    Senator Dayton. OK. Just one last question. You talk about 
the value that you have achieved for your customers. How do you 
quantify all these tangible benefits, I think you called them?
    Mr. Viale. Is this question to me?
    Senator Dayton. No, Mr. Case.
    Mr. Case. Oh, I am sorry, sir. What was the question?
    Senator Dayton. For years, AmeriDebt helped consumers save 
millions by providing these various services. How do you 
determine what those savings are? What are the benefits the 
clients receive?
    Mr. Case. We had an analysis done which we refer to, the 
Painter Analysis. It was a report done for our litigation in 
the State of Illinois and these are the numbers that the 
Painter Analysis came up with.
    Senator Dayton. So when you say they have received 
approximately $13,300 in tangible benefits----
    Mr. Case. That is correct.
    Senator Dayton [continuing]. What are tangible benefits?
    Mr. Case. If, in fact, they stayed, making minimum payments 
on their unsecured debt throughout--until the payment was paid 
off or go onto this debt management program and reap the 
benefits of re-aging the accounts, getting the interest dropped 
down, and getting the debt paid off in a 3- to 5-year time 
period, sir.
    Senator Dayton. But what constitutes the tangible benefit?
    Mr. Case. If, in fact, the interest rates were not lowered 
and they paid the minimum payments, it would take them, I 
forget the number, it is approximately, I believe, 20 years or 
so pay off this debt.
    Senator Coleman. Senator Dayton.
    Senator Dayton. Is $13,300 in tangible benefits the sum of 
the money that they paid off? What are you calling a tangible 
    Mr. Case. It is a tangible benefit because they are not 
paying the interest rates they were once paying, sir.
    Senator Dayton. So the interest rate differential, the 
value of that is $13,300 for an average client?
    Mr. Case. That is my understanding.
    Senator Dayton. You run the business, don't you? Wouldn't 
you know?
    Mr. Case. That is my understanding.
    Senator Dayton. Thank you, Mr. Chairman.
    Senator Coleman. Thank you. Just to clarify one thing and 
we will dismiss this panel. The Ballenger Group bought 
DebtWorks. That chart, though, DebtWorks was originally--
Ballenger is now DebtWorks, is that correct?
    Mr. Case. That is correct, sir.
    Senator Coleman. So when you answered Senator Dayton, you 
said that there is no relationship between The Ballenger Group 
and AmeriDebt, you are technically correct, but DebtWorks, 
which was the predecessor to The Ballenger Group, was started 
by Mr. Pukke, who was the husband of Pamela Pukke, is that 
    Mr. Case. That is correct, sir. They did not serve on the 
boards at the same time, though.
    Senator Coleman. But you said there was no relationship. I 
just want to be very clear that there was very clearly a 
relationship when DebtWorks started this relationship with 
Debticated Scape, a relationship with DebtServe, a relationship 
with Dedicated Consumer Counseling, a relationship with 
CrediCure, a relationship with the Credit Network, a 
relationship with Fair Stream. All the folks who started those 
and were involved in those at one time were associated with 
AmeriDebt, is that correct?
    Mr. Case. I don't think that is correct, sir.
    Senator Coleman. Senator Dayton.
    Senator Dayton. Thank you, Mr. Chairman. If his answer to 
me was as clarifying as his answer to the average customer, I 
can see why there is so much trouble. Thank you, Mr. Chairman.
    Senator Coleman. This panel will be excused. I want to 
thank you for your participation.
    We do have a vote. I have 6 minutes, and what I am going to 
do is I am going to call the third panel. If Senator Levin gets 
back, I will turn the gavel to him. Again, I want to thank 
everybody for appearing, Ms. Craig, Mr. Kroening, Mr. Viale, 
and Mr. Case.
    I will warn the panel that we are in the midst of a vote 
and if my colleague, Senator Levin, gets back within the next 2 
minutes, we will continue. Otherwise, I will simply adjourn, 
take a 10-minute break, and then reconvene.
    But in the interest of time, I would like to welcome our 
third panel to today's hearing. This panel is comprised of the 
representatives of the for-profit companies that have contracts 
with some of the credit counseling agencies from panel two. I 
would welcome Andris Pukke, the President of DebtWorks; Michael 
Malesardi, the Chief Financial Officer of The Ballenger Group; 
and finally, Bernaldo Dancel, the Chief Executive Officer for 
Amerix Corporation. I do appreciate all of you being here and 
look forward to your testimony.
    John Puccio, the Chief Executive Officer of Brighton Debt 
Management Services, was invited to testify at today's hearing. 
Yesterday afternoon, we learned that Mr. Puccio declined to 
testify because of health concerns. I understand that he is in 
the hospital. We certainly wish him a speedy recovery.
    In order to provide the Cambridge-Brighton entities with an 
opportunity to testify before this Subcommittee today, we 
extended an invitation to Mr. Puccio's brother, Richard Puccio. 
Richard Puccio, like his brother, is a part-owner of entities 
in the Cambridge-Brighton enterprise and is involved in their 
activities. Richard Puccio declined to testify, as well.
    Senator Coleman. Mr. Pukke, Mr. Malesardi, and Mr. Dancel, 
we are anxious to hear your testimony today. You each have a 
certain level of corporate responsibility to deal with non-
profit agencies in a manner consistent with their non-profit 
status and a manner consistent with the Internal Revenue Code. 
Some of you have changed your operations since the outset of 
the Subcommittee's investigation, some of you have not.
    What I am going to do is I am going to swear in the panel 
and then we are going to take a 10-minute break because I think 
we are running close on the vote.
    Before we begin, pursuant to Rule 6, all witnesses who 
testify before the Subcommittee are required to be sworn. At 
this time, I would ask you all to please stand and raise your 
right hand.
    Do you swear the testimony you are about to give before the 
Subcommittee is the truth, the whole truth, and nothing but the 
truth, so help you, God?
    Mr. Pukke. I do.
    Mr. Malesardi. I do.
    Mr. Dancel. I do.
    Senator Coleman. You may sit down, gentlemen, please. Mr. 
Pukke, you have somebody sitting next to you. Please identify 
that individual for the record.
    Mr. Williams. Senator Coleman, my name is John Williams. I 
am an attorney for Mr. Pukke. As we have informed the 
Subcommittee staff in correspondence, in view of the pending 
litigation and investigations into DebtWorks and Mr. Pukke, we 
have advised Mr. Pukke to decline to answer any questions and 
to assert his constitutional privilege. We understand the staff 
has, despite this, insisted that Mr. Pukke be here personally 
to assert his privileges and so he is here today. I am going to 
say he will have no prepared statement, of course. If you 
choose to put questions to him, he will assert his privilege.
    Senator Coleman. Thank you very much, Mr. Williams.
    What I will do now is I will adjourn the hearing for at the 
most 10 minutes, but I ask all the members of the panel to 
please then be back after that 10-minute recess. So we will 
take a 10-minute recess.
    Senator Coleman. This hearing of the Permanent Subcommittee 
on Investigations is back in order.
    Mr. Pukke, I understand that you have made a request by 
correspondence regarding Rule 11 of the Subcommittee's Rules of 
Procedure requesting that no television, motion picture, other 
cameras, or lights be directed at you. Rule 11 of the 
Subcommittee's rules and procedures states a witness may 
request on grounds of distraction, harassment, personal safety, 
or physical discomfort that during the testimony, television, 
motion picture, other cameras and lights should not be directed 
at him or her. Such requests shall be ruled on by the 
Subcommittee Members present at the hearing.
    In considering Mr. Pukke's request, I note the Subcommittee 
has rejected similar requests in the past. Therefore, after 
consulting with Ranking Member Senator Levin, without 
objection, the witness's request to invoke Rule 11 is hereby 
    Mr. Pukke, I understand from counsel that you have invoked 
the Fifth Amendment privilege. I want the record, however, to 
reflect that this Subcommittee has always taken care to treat 
respectfully a witness who asserts a Fifth Amendment privilege. 
The invocation of that right by American citizens should not 
and does not imply guilt. This right does not, however, allow 
one to refuse to appear before the Subcommittee. A witness 
before the Subcommittee may assert a privilege against self-
incrimination, refusing to answer specific questions, but 
cannot use the invocation of the Fifth Amendment to avoid 
appearing before the Subcommittee altogether.
    In furtherance of this Subcommittee's hearing today, its 
ongoing fact finding responsibilities, and the Senatorial 
exercise of legislative duties, I will begin the questioning.


    Senator Coleman. Mr. Pukke, when you first formed DebtWorks 
to offer back-end processing services to non-profit credit 
counseling agencies, your first customer was AmeriDebt. At this 
time, one of AmeriDebt's directors was your wife, Pamela 
Shuster Pukke, and your brother, Erik, was an employee. How did 
you ensure that the contract you signed with AmeriDebt did not 
cause it to overpay for the services you were performing for 
    Mr. Pukke. Senator, based on advice from counsel, I invoke 
my right to not answer that question.
    Senator Coleman. After you formed DebtWorks, friends and 
family members of yours created additional non-profit 
counseling agencies which promptly contracted with your company 
for services. Is it fair to say that the primary motive of 
setting up these additional agencies was to generate more 
revenue for DebtWorks?
    Mr. Pukke. On advice from counsel, I invoke my right to not 
answer that question.
    Senator Coleman. In 1996, you pleaded guilty to a Federal 
charge of defrauding consumers by using your company, Infinity 
Resources, to falsely promise to broker debt consolidation 
loans. It is my understanding that customers of AmeriDebt and 
the other 10 non-profit agencies currently contracted with The 
Ballenger Group are still referred to your company. Is this 
    Mr. Pukke. Senator, on advice of counsel, I am asserting my 
right to not answer that question.
    Senator Coleman. Last question, Mr. Pukke. I also 
understand that you own Fidelity and Trust Mortgage Company and 
F&M Mortgage Company. Are customers of AmeriDebt and the other 
10 non-profit agencies still referred to those companies?
    Mr. Pukke. Again, I am asserting my right to not answer 
that question.
    Senator Coleman. Mr. Pukke, you have been asked several 
specific questions about DebtWorks and about your practices 
within the credit counseling industry. In response to each of 
the questions, you have asserted your Fifth Amendment 
privilege. Is it your intention to assert the Fifth Amendment 
privilege to any question that might be directed to you by the 
Subcommittee, any other questions that might be directed to you 
by the Subcommittee regarding the organization of DebtWorks and 
its practices?
    Mr. Williams. Senator Coleman, in view of what we 
understand to be the pointed questions, I can't imagine a 
question that you are going to put to him that we will not 
assert the Fifth, although we will respond to any question that 
you may put to us.
    Senator Coleman. Given the fact that you are asserting your 
Fifth Amendment right against self-incrimination to any more 
questions asked by the Subcommittee, you are hereby excused.
    Mr. Williams. Thank you.
    Senator Coleman. Mr. Malesardi.


    Mr. Malesardi. Good morning, Mr. Chairman and Senators. My 
name is Michael Malesardi and I am the Chief Financial Officer 
of The Ballenger Group. Thank you for inviting me to speak 
before you today and thank you to the Subcommittee staff for 
their help and courtesy in helping us respond to your data 
requests and prepare for our face-to-face meetings.
    \1\ The prepared statement of Mr. Malesardi with attachments 
appears in the Appendix on page 153.
    Ballenger began doing business on January 1, 2003, as an 
independent solutions provider of custom software development, 
payment processing services, back-office functions, and 
marketing programs, with a specialization in consumer debt 
management. Our clients are credit counseling agencies and we 
receive no direct funding from consumers or credit card 
    Clearly, the status quo in the credit counseling industry 
is not acceptable. We are committed to the establishment of 
fair and efficient Federal regulations that protect consumers 
and preempt the confusing and costly patchwork of State 
    By way of background, from 1982 to 1992, I spent 10 years 
as a certified public accountant with Price Waterhouse. From 
1992 until 2002, I was controller or CFO of three SEC 
registrants. In July 2002, I joined a company by the name of 
DebtWorks as CFO. Along with several other newly-hired 
executives, I was hired to help the owner of DebtWorks, Andris 
Pukke, prepare for and execute a sale of his company to a third 
    In the summer of 2002, the new management team solicited 
bids from third parties who were interested in acquiring a 
majority stake in DebtWorks, primarily private equity firms. 
Ultimately, the negotiations were unsuccessful and we mutually 
terminated them in November 2002.
    Following termination of negotiations with the third 
parties, the management team then approached Mr. Pukke in 
December 2002 about forming a new independent company and 
executing a management buyout of a majority interest in the 
operating assets of DebtWorks. The management team retained its 
own counsel, separate from DebtWorks, and after extensive 
negotiations, we reached an agreement to form The Ballenger 
Group and began doing business on January 1, 2003.
    The Ballenger Group did not acquire the stock of DebtWorks 
and DebtWorks continued as a separate, unrelated legal entity 
with its own separate management and business operations. The 
Ballenger Group is not a successor to DebtWorks.
    From January 1 through October 31, 2003, The Ballenger 
Group was 51 percent owned by the management team, with the 
remaining 49 percent owned by DebtWorks. To ensure the 
managerial independence of The Ballenger Group, our purchase 
agreement virtually eliminated any possibility of control or 
influence by DebtWorks, including the removal of any of their 
management, voting, or board rights.
    On October 31, 2003, the management team then increased its 
ownership of The Ballenger Group to 100 percent, completely 
removing all of DebtWorks' ownership.
    Mr. Chairman, in plain English, I want to reemphasize that 
since our inception as an operating business, neither Mr. Pukke 
nor DebtWorks have had anything to do with the management, 
operations, or control of The Ballenger Group. There is no 
ongoing relationship between The Ballenger Group and DebtWorks 
other than payments associated with our purchase of the assets.
    Concerning the three companies the Subcommittee asked us 
about as to their relationship with DebtWorks, I am not 
familiar with either F&M Mortgage or Fidelity and Trust 
Mortgage. My knowledge of Infinity Resources Group is limited 
to an understanding that it is a debt consolidation loan 
business in which Mr. Pukke has been involved, but The 
Ballenger Group does not and has never performed any service 
for or on behalf of Infinity.
    Since the formation of The Ballenger Group, we have added 
two new CCA clients and have had one existing client reinitiate 
counseling operations. The Ballenger Group has never initiated 
the formation of a credit counseling agency and has no plans 
ever to do so.
    At the request of their banks, The Ballenger Group agreed 
to act as a back-up guarantor to the start-up loans that these 
three agencies obtained. Our guarantee falls in line behind the 
obligation of the agency and the personal guarantees of their 
    Since the launch of The Ballenger Group in 2003 as an 
independent company, we have been steadfast in setting The 
Ballenger Group apart from DebtWorks and Mr. Pukke. In fact, 
during 2003, we terminated a client relationship with 
Dedicated, an agency that was headed by his brother.
    Mr. Chairman, we can't change the historic fact that The 
Ballenger Group acquired the assets of DebtWorks, but in 
creating The Ballenger Group, we created a new entity operating 
under new management and have held ourselves to a new standard 
for the company, our client agencies, and the consumers that 
they serve. We appreciate the chance to set the record straight 
with respect to our complete independence from Mr. Pukke and 
    We are actively engaged in proposing reforms we believe 
will make the industry more consumer-friendly, including 
national regulation and competition. Our written testimony, 
which we would ask be placed in the record, addresses our 
thoughts on reforms.
    Thank you for the opportunity to be here today and I would 
be pleased to take any questions.
    Senator Coleman. Your written testimony will be placed in 
the record, without objection.
    I will stand corrected, Mr. Malesardi. I think in 
questioning the previous panel, on a number of occasions, I 
called The Ballenger Group a successor to DebtWorks and your 
testimony has made it very clear that you are not a successor 
to DebtWorks, and so the record will be corrected on that 
    Mr. Malesardi. Thank you, Senator.
    Senator Coleman. Thank you. Mr. Dancel.


    Mr. Dancel. Thank you, Mr. Chairman and Members of the 
Subcommittee. My name is Bernie Dancel. I serve as the CEO of 
Ascend One Corporation. I appreciate the opportunity to discuss 
with you important issues concerning credit counseling. The 
Subcommittee's inquiry is important, and at least for our 
company has stimulated constructive self-examination.
    \1\ The prepared statement of Mr. Dancel appears in the Appendix on 
page 175.
    I want to make two points today. First, I do not believe 
the term ``profiteering'' in the title of this hearing applies 
to our company, as I will explain in discussing several aspects 
of credit counseling and our company. Second, since there is 
always room for improvement, I will briefly discuss important 
initiatives we have undertaken, in no small part as a result of 
our interaction with the Subcommittee.
    I would like to begin with a word about how my own 
experience led me to the credit counseling field. Growing up, I 
watched my mother struggle financially and ultimately file for 
bankruptcy. And at age 25, after struggling to support two 
households as a divorced dad, I ended up filing for bankruptcy 
myself. This was one of the worst experiences of my life.
    Later, I worked as a counselor with a credit counseling 
agency. I saw firsthand that there was a better way to reach 
financially distressed consumers like myself. I realized that 
CCAs needed to be more accessible, offer more privacy, and 
become more efficient by using modern technology to meet this 
growing demand.
    Now let me turn to my main points. First, the term 
``profiteering'' does not apply to our company. Of course, we 
are a for-profit business and we serve non-profit entities, but 
I am sure you agree that there is nothing wrong with that. The 
real question is whether we offer good service at a fair price, 
and the answer to that is clearly yes.
    First, we offer unique and valuable services that agencies 
can purchase more efficiently from us than performing these 
services themselves.
    Second, our prices are clearly fair. The bottom line is 
that consumers working with the CCAs we serve typically 
contribute the same or less than what consumers pay with other 
    In addition, as the documents we produced to this 
Subcommittee show, we operate on a very low profit margin, 
generally less than 3 percent before taxes annually.
    With respect to debt management plans, we recognize that 
DMPs are not right for everyone, and in fact, consumers, CCAs, 
and Amerix are all best off when DMPs are limited to consumers 
who are qualified for them. More than 70 percent of callers to 
CCAs we serve do not enroll on a debt management plan, as is 
true for CCAs that are members of the two leading trade 
    Also, and Mr. Chairman, this is critical, the CCAs we serve 
do not charge large up-front fees. They charge nothing. So we 
can only recoup our costs if the consumer sticks with their 
plan. Some other entities, including AmeriDebt and Cambridge, 
charge hefty up-front fees that let them recoup their cost on 
day one. So where these other CCAs make money if the consumers 
immediately drop off their debt management plans, we actually 
lose money on consumers who don't stick with their plans for an 
extended period of time.
    We agree with the Subcommittee that education and 
counseling for all consumers is crucial. The CCAs we serve 
provide a variety of educational resources through community 
programs, web-based materials, and monthly publications. And we 
publish and update a comprehensive online educational library 
available to any visitors to the Care One website. In addition, 
DMPs themselves are a very valuable educational tool--indeed 
the best--when they are right for a consumer. By making regular 
payments and exercising financial discipline, consumers learn 
to stick to a plan, modify their behavior, and get back on 
their feet.
    At the same time, we recognize we can do better. In that 
spirit, we recently announced a number of new initiatives 
summarized in our March 16 letter to this Subcommittee. These 
initiatives are designed to ensure that all consumers get a 
useful education and counseling experience, whether or not they 
use a DMP.
    First, we are adopting enhanced licensing standards for 
Care One that require agencies to provide patient counseling to 
every consumer, devote significant time to community outreach, 
and comply with standards established by the two leading trade 
associations. We will also offer each consumer a personalized 
budget worksheet whether or not they enroll in a DMP.
    Second, we will assist our CCA clients in revising scripts 
consistent with this objective.
    Third, we no longer offer overflow origination services.
    Fourth, we are eliminating from our service contracts 
certain provisions relating to debt management plans, such as 
assist rates and revenue standards.
    Finally, we have made a $5 million commitment to the Ascend 
One Fund for Financial Literacy to educate children and young 
adults about how to manage their finances responsibly.
    Mr. Chairman, Ascend One is committed to playing a positive 
role in the credit counseling field so that all consumers can 
get the help they need, like myself, delivered in a fair and 
straightforward manner. Thank you, and I look forward to your 
    Senator Coleman. Thank you very much, Mr. Dancel.
    If we can get Exhibit 3 up,\1\ to both you gentlemen, what 
we are struggling with here is the reality of individuals being 
processed through non-profits. I mean, that is the voice that 
they hear, and you heard from the consumers here and even some 
of the employees. There is something about being a non-profit 
that makes people feel safe.
    \1\ See Exhibit No. 3 which appears in the Appendix on page 242.
    And the concern we have is the relationship between the 
non-profits and the for-profits. In many cases, as with one of 
the instances we had here, what you have got are non-profits 
that have relationships, either marital relationships or 
friendship relationships. So I am trying to sort out, what is 
the right way to go here? I mean, is it at all possible for 
consumers to benefit when you have situations such as what The 
Ballenger Group is trying to do and Amerix is trying to do?
    One of the issues, one of the criteria that I think I would 
like to see in place is the for-profit shouldn't be in a 
position to substantially influence the non-profit so that the 
non-profits can't do things independently.
    Mr. Dancel, I would ask you, looking at Amerix, and we had 
folks here from American Financial, can you talk to me about 
the independence of the non-profits in dealing with you? Was 
there a point in time where you actually had what I might call 
quotas in terms of the number of folks that had to be signed 
onto DMPs?
    Mr. Dancel. The CCA clients that we have are completely 
independent organizations. There is no overlap in governance or 
board membership or executive or any kind of management 
positions. They make decisions independent of one another as 
well as independent of Ascend One or Amerix. In fact, we have 
had CCA clients in the past who have terminated particular 
services that we provide and in other cases have terminated 
their relationship with us altogether. So I believe that is a 
demonstration that there is complete independence of these 
organizations from us.
    We have had in the past certain standards within our 
agreements with them. At one point, we had a transaction-based 
pricing model where we had a fairness opinion as to the 
fairness of the price that we provided.
    Senator Coleman. I just want to make sure I understand what 
transaction-based models mean. Can you, in lay terms, explain 
    Mr. Dancel. Sure. That is where, based on the activity, we 
charge them a flat amount for that service. It is not connected 
with any kind of sharing of revenue or other types of pricing 
    Senator Coleman. I just want to clarify my notes here, 
looking back at some of the responses given earlier--did you at 
one time require credit counseling agencies to enroll 30 
percent of their calls into a debt management plan?
    Mr. Dancel. Yes, we did. There was a contractual standard 
that was set which we used--an industry standard, as you heard 
earlier today from the gentleman from Minnesota, that has been 
published through the NFCC as well as AICCCA--in terms of the 
number of customers who sign up for debt management enrollment 
after they have been counseled. It is approximately 30 percent.
    Senator Coleman. Doesn't that really fly in the face of 
allowing credit counselors to make some independent judgment as 
to the needs of their particular client when you are actually 
setting a target, you have got to do 30 percent?
    Mr. Dancel. This 30 percent simply allowed us in the event 
that over an extended period of time we could not recoup our 
costs for the services we provided, that we would be able to 
terminate the contract.
    Senator Coleman. I would suggest, though, that it flies in 
the face of what you would want from your credit counselors, to 
make independent judgments. Have you changed that policy, by 
the way?
    Mr. Dancel. We have heard the Subcommittee's concern about 
that and we have changed that.
    Senator Coleman. I appreciate that.
    Mr. Dancel, one other question. Our investigation showed 
that you started up a non-profit called, was it Genus Credit 
Management, is that correct?
    Mr. Dancel. Yes, Mr. Chairman.
    Senator Coleman. And that Genus later sold its portfolio of 
debt management plan accounts to American Financial Solutions, 
and I think the figure was around $17 million.
    Mr. Dancel. Yes, Genus Credit Management sold their 
portfolio to American Financial Solutions, I believe for $17 
million in 2001.
    Senator Coleman. And can you tell us what happened to the 
proceeds from that sale?
    Mr. Dancel. The proceeds for that sale, sir, went to Genus 
Credit Management, or the In-Charge Institute, the parent of 
Genus Credit Management.
    Senator Coleman. For what purposes?
    Mr. Dancel. The In-Charge Institute sold the Genus Credit 
Management Portfolio to American Financial Solutions. They had 
independent--both parties, Genus Credit Management and AFS, had 
independent reasons for why that made sense to them. AFS wanted 
to grow their credit counseling business and the number of 
consumers that they were serving through counseling and 
education, and I believe Genus Credit Management and In-Charge 
Institute wanted to capitalize on that portfolio for other 
business ventures that they were looking at.
    Senator Coleman. I am just trying to get where the proceeds 
went. Again, where did those proceeds go?
    Mr. Dancel. They went to In-Charge Institute.
    Senator Coleman. And who are the principals in that?
    Mr. Dancel. I only know that Dave Jones, at the time, was 
the chairman of In-Charge Institute. I don't know who the other 
principals were.
    Senator Coleman. Mr. Dancel, one further question, and I do 
appreciate some of the changes that you have made. Do you 
support the standards that NFCC or AICCCA provide?
    Mr. Dancel. We do support those standards. In fact, in the 
standards that we have for Care One agencies that license that 
service mark, they are required to comply with those standards.
    Senator Coleman. Mr. Malesardi, does The Ballenger Group 
support those same standards?
    Mr. Malesardi. We support industry standards. We don't have 
any NFCC clients, but I can tell you that the standards that we 
do offer exceed any industry standards out there and we do--we 
are ISO certified and have five metrics that do exceed those.
    Senator Coleman. How does The Ballenger Group exercise some 
sense of corporate responsibility to ensure that its counseling 
agency truly educates its consumers? I mean, you have heard a 
lot of testimony today that is not occurring the way it should. 
So what do you do? Talk to me a little bit about corporate 
responsibility, what you do to make sure that happens.
    Mr. Malesardi. OK. Well, we are definitely pro-consumer and 
you can see that in the fulfillment agreement that we have 
provided to the Subcommittee. We did add last year three best 
practices that really cover three different areas, and that is 
that the credit counseling agencies that we serve should be 
providing full disclosure of material facts, that they should 
be doing things to maximize consumer satisfaction, and also 
minimize consumer confusion, and the agreement provides that if 
they don't adopt the best practices that we have provided, 
which include sample contracts, sample disclosure statements, 
that we can terminate that relationship.
    Senator Coleman. Are these best practices mandatory or 
    Mr. Malesardi. We consider them to be mandatory in the 
sense that if they don't follow them, we can terminate the 
    Senator Coleman. Do we have a chart \1\ that is the 
organization chart for AmeriDebt? And again, I want the record 
to correct that The Ballenger Group is not the successor to 
    \1\ See Exhibit No. 2 which appears in the Appendix on page 241.
    Mr. Malesardi. Thank you.
    Senator Coleman. But is The Ballenger Group still serving, 
for instance, Fair Stream?
    Mr. Malesardi. Fair Stream is one of the two new clients 
that we actually started providing services for in 2003 after 
the company was formed.
    Senator Coleman. And I believe Mr. Case would not affirm 
for the record that the entities Fair Stream and Credit 
Network, DebtServe, DebtScape, Debticated, all those have the 
names of individuals who we believe, the Subcommittee 
investigation believes were involved in AmeriDebt. It appears 
that, for instance, Andrew Smith, originally involved in 
AmeriDebt, is now involved in Fair Stream.
    I am sitting in your shoes and AmeriDebt is the poster 
child for ills in this industry. How do you generate a level of 
confidence that the folks who are working through agencies with 
folks who are former AmeriDebt officers, that they are serving 
their clients in a proper fashion?
    Mr. Malesardi. I think you have to look to the fact that 
these are distinct entities, that The Ballenger Group is 
providing only certain services for these agencies. So they 
take the consumer through the counseling and education process, 
and that is the point at which time The Ballenger Group takes 
over responsibility. I can tell the Subcommittee that the data 
entry and the payment processing and the customer support we 
provide are superior to anything we think they can get 
elsewhere in the industry.
    Senator Coleman. Thank you, Mr. Malesardi.
    I would note that Mr. Puccio cannot be here today. We will 
be keeping the record open. There are questions that we still 
need to have answered, and so we will keep the record open in 
regard to questions that Mr. Puccio can answer.
    With that, I will turn to Senator Levin.
    Senator Levin. Thank you, Mr. Chairman.
    Mr. Dancel, American Financial Solutions testified that as 
a result of the PSI, our investigation, it wants to renegotiate 
the contract that it has with you for processing. Are you aware 
of that?
    Mr. Dancel. Yes, we are.
    Senator Levin. That they have made that announcement? Are 
you willing to renegotiate?
    Mr. Dancel. Yes, Senator, we are.
    Senator Levin. When does your contract with them run out?
    Mr. Dancel. August 2005.
    Senator Levin. And your contract charges them $30 per plan 
per month, is that correct?
    Mr. Dancel. No, that would not be correct. The cost depends 
on the level of service that we are providing to them on a per 
account basis. So that would range anywhere from 50 percent of 
their revenue to 85 percent of their revenue.
    Senator Levin. Depending on the services you provide?
    Mr. Dancel. Depending on the number of services we are 
providing, yes.
    Senator Levin. What does that average, do you know, per 
plan, per debt management plan per month?
    Mr. Dancel. Our average across the AFS customer base, the 
average would be in the $15 to $16 level.
    Senator Levin. Per month?
    Mr. Dancel. Yes, sir.
    Senator Levin. Now, Southern New England pays an outside 
vendor $1.20 per plan per month and Consumer Credit Counseling 
Services of Los Angeles pays an outside vendor $2 per plan per 
month. Why is there such a huge difference between what you 
charge and what they charge?
    Mr. Dancel. I don't know what list of services they are 
providing. I don't believe we are comparing apples to apples.
    Senator Levin. How many competitors do you have?
    Mr. Dancel. Processing entities?
    Senator Levin. Yes, that do the same type of work you do.
    Mr. Dancel. I am not sure how many there are out there.
    Senator Levin. Would there be a handful?
    Mr. Dancel. Again, that depends on the level of--what 
services are being provided----
    Senator Levin. The type of services, the range of services 
you provide. How many would there be?
    Mr. Dancel. I believe there probably are just a handful of 
companies that provide all the services that we provide.
    Senator Levin. Is The Ballenger Group one of them?
    Mr. Dancel. I don't know the business of The Ballenger 
    Senator Levin. Have you competed with any other company for 
a service contract?
    Mr. Dancel. Yes, we have. American Financial Solutions, in 
fact, has put out a request for proposal----
    Senator Levin. Now?
    Mr. Dancel. They put out a request for proposal in 2001 
when they were looking at purchasing the Genus portfolio and 
they put it out to many suppliers within the industry as well 
as processors outside the industry and they were not able to 
get any comparable price to what we were----
    Senator Levin. So the contract that you won was a contract 
that was bid on by others?
    Mr. Dancel. They put out a request for proposal. I don't 
know what types of bids came in, but they came back to us and 
said they couldn't get it at a price that we were offering.
    Senator Levin. They solicited proposals on the contract 
that you are now under with them?
    Mr. Dancel. Yes.
    Senator Levin. Is the 50 to 80 percent of all the income 
that they generate a large percentage compared to what other 
processors like you get?
    Mr. Dancel. We don't believe that AFS or any of our other 
credit counseling agency clients can get the services that we 
provide at the price that we provide it anywhere, and evidence 
of that is that our CCAs are able to pass that savings on to 
consumers, where they have no up-front contribution or fee and 
they meet, if not lower, the monthly amount of voluntary 
contribution that they ask for from the consumer is either at 
the NFCC or AICCCA standards or lower than most, as well as 
they are able to do quite a lot of education and counseling 
activity. For example, I believe AFS in just the last 12 months 
has provided to their foundation over $4 million towards 
education and scholarships.
    Senator Levin. You are saying that your clients do not 
charge up-front fees, is that what you said?
    Mr. Dancel. Yes. They charge no up-front fee whatsoever.
    Senator Levin. None of them?
    Mr. Dancel. None of them.
    Senator Levin. Mr. Malesardi, you charge AmeriDebt a 
monthly processing fee of about $25 per month, is that about 
    Mr. Malesardi. That is correct.
    Senator Levin. Per plan?
    Mr. Malesardi. Per DMP, that is correct.
    Senator Levin. These figures, again, are a multiple of the 
$1 to $2 per month processing fee that the vendors that I 
referred to in New England and Los Angeles charge. What is your 
justification of that large fee, the larger fee?
    Mr. Malesardi. I agree with Mr. Dancel's comment that I 
don't think these are apples to apples comparisons.
    Senator Levin. Your services are different from theirs?
    Mr. Malesardi. We are providing a comprehensive service, 
software solution, and other things that go beyond that.
    Senator Levin. Have you had competitors for your contract 
with AmeriDebt?
    Mr. Malesardi. AmeriDebt has--we haven't done anything new 
with AmeriDebt since we assumed responsibility in 2003. We 
have, as I said in my statement, added two new clients in 2003. 
I don't know what process they went through, but we were 
successful in getting that business.
    Senator Levin. And you don't know if there were bids for 
those contracts or not?
    Mr. Malesardi. I do not.
    Senator Levin. Were they negotiated directly with those 
other customers of yours?
    Mr. Malesardi. We did negotiate them directly. We are 
independent entities. We went through a negotiation process, as 
would be typical for any service provider.
    Senator Levin. They didn't tell you whether or not there 
were other people they were considering?
    Mr. Malesardi. They did not disclose that to us.
    Senator Levin. All right. Did you hear the testimony about 
the voluntary contributions?
    Mr. Malesardi. Is that directed to me?
    Senator Levin. From Mr. Case, did you hear that testimony 
that they----
    Mr. Malesardi. Yes, I did.
    Senator Levin. Were you troubled by it?
    Mr. Malesardi. I can't comment, really, on their business 
practices. We have a fixed fee that we charge to the credit 
counseling agencies. They are our client and not the ultimate 
    Senator Levin. Were you troubled when they heard that they 
acknowledged that they pressured consumers into buying their 
service? Did you hear that?
    Mr. Malesardi. I did hear his comment.
    Senator Levin. That amounted to pressure?
    Mr. Malesardi. We are pro-consumer, and as I said, our best 
practices push on full disclosure of these facts and treating 
consumers in a fair manner so that they are satisfied, so we 
would promote any practice that leads to that.
    Senator Levin. You are benefitting from pressure being 
placed on somebody who is vulnerable. That is what it amounts 
    Mr. Malesardi. I would disagree with that assertion, 
because we get a flat fee from the credit counseling agency 
regardless of whether a consumer makes a contribution to them 
or not. So we don't really benefit or get hurt by the amount of 
their contribution.
    Senator Levin. So the stronger that non-profit is has no 
effect on how much money you are paid?
    Mr. Malesardi. No. I mean, our----
    Senator Levin. It doesn't make any difference how many 
customers they have?
    Mr. Malesardi. Oh, we would benefit by if they have more 
customers in the sense that we get more of the revenue stream. 
But that is the extent of it.
    Senator Levin. Let me ask you again, because it seems to me 
it is so obvious. If they are not paid by any of their 
customers, you are not going to get paid, either, are you?
    Mr. Malesardi. I think, ultimately, that is the risk in 
this business. That is the risk of being an outsourcer.
    Senator Levin. And if they pressure people into signing up 
with them, which they acknowledge that pitch does, since you 
are the indirect beneficiary of that, shouldn't that trouble 
you just a little bit?
    Mr. Malesardi. As I have said, we want them to follow best 
practices and if they didn't follow best practices and didn't 
change that, then we could terminate that relationship, as we 
have done.
    Senator Levin. As you have done?
    Mr. Malesardi. Not with one client.
    Senator Levin. Thank you, Mr. Chairman.
    Senator Coleman. Senator Dayton.
    Senator Dayton. Thank you, Mr. Chairman.
    Mr. Malesardi, I am trying to understand how this works. 
These non-profits are called credit counseling agencies and the 
people who come to them believe then that they are getting 
credit counseling services. I am going to use AmeriDebt as a 
prototype. I don't know how the other 10 of your non-profits 
operate, but this is the only one I have any information on. 
They stated in the testimony we just received that AmeriDebt, 
and I am quoting on Mr. Case's statement, page two, ``AmeriDebt 
helped consumers save millions by providing credit counseling 
services and debt management plans to reduce monthly payments, 
lower interest rates, and reduce or eliminate late payment and 
overtime penalties.''
    It goes on to say, then, that ``Correcting financial 
problems years in the making is no easy task. It is time and 
labor intensive for credit counselors, so as a result,'' and 
this is a Visa board suggesting that credit counseling agencies 
contract with private sector companies to perform back-office 
administrative tasks. Is that you?
    Mr. Malesardi. That is The Ballenger Group, yes.
    Senator Dayton. And then you are stating in your testimony 
that you are an independent, for-profit provider of customer 
service solutions, custom software development, payment 
processing services, back-office functions, and marketing 
programs to credit counseling agencies. So your clients, as you 
view them, are these 11 agencies.
    Mr. Malesardi. Absolutely.
    Senator Dayton. So when Ms. Troy testifies that she was 
pitched this plan by a ``counselor,'' and when she was calling 
back then to talk with the counselor, she was sent to a 
``customer service''--somebody in customer service. Is that 
under your entity or is that under AmeriDebt's?
    Mr. Malesardi. It would depend on what time it happened. If 
it was during the initial----
    Senator Dayton. Now.
    Mr. Malesardi. No, I am saying, if it was during the 
initial counseling process, the back and forth that happens 
happens with a counselor at the credit counseling agency. Only 
once a consumer makes a decision to enroll in a debt management 
plan does that file get transferred to The Ballenger Group and 
does our work really begin on it.
    Senator Dayton. So at that point of----
    Mr. Malesardi. So if a consumer then called up after that 
to ask questions about the status of payments, the status of 
the creditor proposal process, any of those types of 
administrative things, that would come to a customer service 
center that is under The Ballenger Group. But if a consumer 
then asked for additional follow-up counseling or education, 
that again goes back to the credit counseling agency and that 
is their responsibility.
    Senator Dayton. Well, as I understand it from the testimony 
of Ms. Troy and also from what Mr. Allen said, they think that 
is your responsibility. As I understand it, Mr. Allen and his 
contemporaries at AmeriDebt are in sales. What you call 
counseling, it sounds to me like it is a sales pitch and then 
negotiation, and at that point, once this agreement or whatever 
is signed, then it goes to you.
    According to Ms. Troy--again, I don't know the experience 
of other clients, but if she called for ``counseling'' at that 
point, they are getting somebody in your operation, not 
somebody in AmeriDebt.
    Mr. Malesardi. That is not correct.
    Senator Dayton. Who is providing the service? Who is 
providing what service, then, to the client for which they are 
paying $7 an account per month?
    Mr. Malesardi. On a monthly basis for the process of 
providing the payment processing--they send their payments in 
and they get distributed to their creditors--and any follow-up 
customer support that they need related to that, that service 
is provided by The Ballenger Group.
    Senator Dayton. And they are paying----
    Mr. Malesardi. If they have follow-up questions on their 
counseling or budgeting, that service is provided by the credit 
counseling agency.
    Senator Dayton. But according to the testimony of at least 
one person today, they go to you when they call for 
``counseling.'' Who establishes this plan? Who takes the 
information from the client and establishes this DMP?
    Mr. Malesardi. The credit counseling agency does that.
    Senator Dayton. Based on what?
    Mr. Malesardi. They do it based on guidelines from the 
creditors as to what they are willing to do in terms of 
applying debt management plan benefits.
    Senator Dayton. And you have no role in that whatsoever?
    Mr. Malesardi. That is correct.
    Senator Dayton. So they establish this and then they hand 
that over to you and then you just take the payments and 
process them and----
    Mr. Malesardi. Well, they would transmit the proposed plan 
to The Ballenger Group. We would then, in turn, issue proposals 
that would get sent electronically to their creditors, or by 
paper if they don't accept it that way, and the creditors then 
respond back either accepting or denying and making changes to 
that. That is where the kind of back and forth negotiation 
process begins that is very time and labor intensive.
    Senator Dayton. So the credit counseling agency is 
establishing the framework of the plan or the concept of the 
plan and then you negotiate that actual arrangement with those 
various creditors?
    Mr. Malesardi. If it is a major creditor, they have 
established guidelines as to what they are willing to do.
    Senator Dayton. So it is a no-brainer. That is 
    Mr. Malesardi. If the----
    Senator Dayton. You are just plugging in numbers.
    Mr. Malesardi. Yes. If the proper information is provided 
by the consumer, then it is a no-brainer. If they understate, 
for example, how much they owe to a particular creditor, then 
the creditor will deny that proposal and insist on a few more 
dollars. If their creditors are not one of the major creditors, 
I mean, it can be doctors, dentists, or people like that who 
don't have established policies, then there is more interaction 
with that creditor.
    Senator Dayton. There is millions of dollars to savings to 
consumers by credit counseling services and debt management 
plans. Where does that come from? Where do they save money in 
this whole process? They are paying more in the voluntary 
contribution. They are paying more--in addition to everything 
else they owe, they are paying more to you and to AmeriDebt. 
Where do they realize savings in this?
    Mr. Malesardi. I can't speak to the specific example you 
gave, but I do know that relative to the high interest rate and 
the over-limit fees and the late payment charges that they are 
incurring, that when those are reduced by the creditors to the 
benefits they offer under a DMP, there are dramatic savings to 
be made, and over time, that is significant.
    Senator Dayton. Who determines what those dramatic savings 
are? Are you quantifying those dramatic savings?
    Mr. Malesardi. We do not. That would be----
    Senator Dayton. But you are negotiating the final 
arrangement. Is AmeriDebt computing that? They don't even know 
what the final arrangement is. You are handling that. Who is 
keeping score for the consumer?
    Mr. Malesardi. The credit counseling agency would quantify 
for the consumer what kinds of savings they can get from 
enrolling in a DMP.
    Senator Dayton. Based on a plan that they submit to you, 
but then you negotiate those actual arrangements with the 
    Mr. Malesardi. I am sorry if I am not being clear, but when 
the proposed debt management plan comes in to us, it has 
already been set up by the credit counseling agency and the 
savings or the costs of that program----
    Senator Dayton. I thought you said you were negotiating 
with the creditors.
    Mr. Malesardi. I did say we transmit that proposal that the 
CCA has made. We transmit that to the creditors, and if there 
is a need for an adjustment based on what the creditors want, 
then there is a back and forth process. I am not sure 
negotiation is the proper term, and I know I used that, but----
    Senator Coleman. Senator Dayton----
    Mr. Malesardi. It is an administrative back and forth.
    Senator Dayton. I just don't understand where this millions 
of dollars of savings----
    Mr. Malesardi. To the consumers?
    Senator Dayton [continuing]. Where it comes from. The 
consumer, it seems to me, is paying--I mean, you are just 
setting up arrangements for them to pay what they owe and then 
you are getting something back from the creditors for doing so, 
and then they don't in your case even see their fair share or 
whatever it is called of that. And then they are paying an 
additional surcharge of $7 an account per month of which you 
are getting $25 per month per account. I mean, I see where you 
are making your money. I see where AmeriDebt is making its 
money. I don't see where the consumer is getting anything. It 
is apparent to me that it has got to be more costly.
    Mr. Malesardi. I don't think that is the case. I think if 
you look at a lot of the industry information, the consumers 
are being charged penalty rates of interest that may be 25 
percent or higher, and by enrolling in a DMP, they get that 
    Senator Coleman. Senator Dayton, we are going to have to 
    Senator Dayton. I just want to thank you for this----
    Senator Coleman. I will give you an opportunity for follow-
up questions, if you want.
    Senator Dayton. Thank you. I am going to have to leave, but 
I want to thank you for this hearing. It has been extremely 
valuable and you have gotten into an area that is very 
disturbing and I thank you very much for your leadership on 
    Senator Coleman. Thank you, Senator.
    I just have one follow-up, perhaps two questions. Mr. 
Malesardi, just to follow up on Senator Levin's question, he 
asked if you were concerned. May we have Exhibit 14? \1\ I want 
to make it first very clear that you make your money off of 
folks who enrolled in DMPs, right? In other words, your income 
is dependent--the relationships you have with the credit 
counseling agencies are based on the number of folks involved 
in debt management plans, is that correct?
    \1\ See Exhibit No. 14 which appears in the Appendix on page 260.
    Mr. Malesardi. That is correct. That is our business.
    Senator Coleman. So Senator Levin asked whether you were at 
all concerned about pressure tactics and you really didn't 
answer that very directly. The reality is that you benefit if 
folks use pressure tactics, is that a fair statement?
    Mr. Malesardi. I will say that we are concerned about 
pressure tactics because we are pro-consumer. We would not want 
to see somebody pushed into a DMP that they shouldn't be in.
    Senator Coleman. So my question, then, is if we look at 
Exhibit 14 where we have folks saying, ``would you rather have 
that payment go to us to help people like you get out of debt 
or would you like it to go to the creditor's pocket? Would you 
rather support a non-profit company or help a bank get 
richer?'' Do you know if these practices are being used by the 
other credit counseling agencies that you provide services for?
    Mr. Malesardi. They are not to my knowledge, and I am not 
comfortable with the way that is worded.
    Senator Coleman. Do you have a process by which you are 
aware of the scripts or the sales pitch that is being made by 
the credit counseling agencies that you service?
    Mr. Malesardi. No. We don't review the scripts of our 
credit counseling agency clients.
    Senator Coleman. I would suggest that you do, Mr. 
Malesardi, and Mr. Dancel, I would suggest that you do.
    The last thing, Mr. Dancel, Amerix is getting 50 to 85 
percent of the non-profit's clients' revenue. How do you 
respond to the charge that you are siphoning off the bulk of 
the revenues from non-profits?
    Mr. Dancel. We provide a level of services that are very 
valuable, and for them to do the services or provide the 
services themselves that we provide to them, we bring 
tremendous economies of scale, technological advance, which 
allows them to not only operate and put more funds toward their 
educational and counseling mission, but it also allows them to 
operate and provide debt management plans to consumers at a low 
cost up front as well as on a monthly voluntary contribution 
level that is commensurate with what is in the industry, if not 
lower. In fact, many consumers of our client agencies, over 
32,000 consumers, get their service on a monthly basis for free 
and another 105,000 consumers of our credit counseling agency 
clients pay just a partial amount of the voluntary contribution 
that is requested.
    Senator Coleman. Your revenues have increased from $43 
million to $95 million in 3 years between 1999 and 2002?
    Mr. Dancel. Yes, that is correct.
    Senator Coleman. That is about a 120 percent increase?
    Mr. Dancel. Yes, that is correct.
    Senator Coleman. Mr. Malesardi, one last----
    Mr. Malesardi. May I make a follow-up comment?
    Senator Coleman. Please.
    Mr. Malesardi. I misspoke on one thing, and that is in the 
written testimony that we provided, on page 12, our best 
practices actually do include a form disclosure script to 
assist the CCAs in making adequate disclosures. So that is 
something we are involved with.
    Senator Coleman. I appreciate that, Mr. Malesardi.
    Mr. Malesardi, Mr. Dancel, I want to thank you for 
appearing. We will excuse this panel.
    I will note for the record that we will take Mr. Puccio's 
deposition. That deposition, once he recovers, will become part 
of this official record.\1\
    \1\ See Exhibit No. 18 which appears in the Appendix on page 264.
    Senator Coleman. We will now call the fourth and final 
    I would like to welcome our final panel of witnesses for 
today's important hearing. I appreciate their patience in this 
    We have with us the Hon. Mark Everson, the Commissioner of 
the Internal Revenue Service. Mr. Everson, I welcome you back 
to the Subcommittee. You have testified before this 
Subcommittee numerous times in the past several months, 
including on tax shelter hearings and our focus on DOD 
contractors who cheat on their taxes. I appreciate your 
appearance once again.
    I want to acknowledge the IRS's proposed 2005 budget 
request, which includes $300 million for enforcement efforts. 
On February 26 of this year, I, along with Senator Levin, 
Senator Collins, and Senator Lieberman, wrote a letter to the 
Subcommittee on Transportation, Treasury, and General 
Government Appropriations in support of this 10.7 percent 
increase in IRS funding for enforcement efforts that will 
target tax cheaters. I support your efforts to vigorously 
enforce our laws.
    Today, however, I want to address the IRS's response to 
date regarding non-profit entities within the credit counseling 
industry whose practices appear to violate the tax code and 
conflict with the specific purpose of granting tax-exempt 
status to credit counseling agencies. Moreover, while progress 
has been made on this front, I believe that more is needed.
    I would also like to welcome the Hon. Thomas Leary, 
Commissioner of the Federal Trade Commission. I appreciate both 
of you being with us today and look forward to your testimony 
and getting your perspective on addressing the problems facing 
the credit industry.
    As you are aware, witnesses before this Subcommittee are 
required to be sworn. I would ask you to please rise and raise 
your right hand.
    Do you swear that the testimony you are about to give 
before this Subcommittee is the truth, the whole truth, and 
nothing but the truth, so help you, God?
    Mr. Everson. I do.
    Mr. Leary. I do.
    Senator Coleman. Thank you, gentlemen. You know about the 
timing system. When you see the yellow light goes on, please 
conclude your testimony. Your full statements will be entered 
as part of the official record.
    With that, we will begin with Mr. Everson and then follow 
with Mr. Leary and then I shall have some questions. You may 
proceed, Commissioner.


    Mr. Everson. Thank you, Mr. Chairman. I am pleased to be 
before you today to discuss IRS oversight of not-for-profit 
credit counseling agencies.
    \1\ The prepared statement of Mr. Everson with attachments appears 
in the Appendix on page 181.
    Before turning to the subject at hand, I do wish to express 
my appreciation for your strong bipartisan support to the IRS 
and the President's 2005 budget request. In your letter to 
Senators Shelby and Murray of February 26, you wrote, ``Lack of 
resources has encouraged abuse of the Federal tax system and 
hampered IRS collection efforts. As a result, honest taxpayers 
pay more than their fair share.''
    Mr. Chairman, you, Senator Levin, Senators Collins and 
Lieberman went on to say, ``Increased funding for IRS tax 
enforcement is critical, not only to stop the tax cheating but 
to strengthen public confidence in the fairness and integrity 
of our tax laws.''
    I agree with these views wholeheartedly. It is my strong 
belief that tax administration is a subject about which there 
can and should be bipartisan agreement.
    As you know, I have articulated four enforcement priorities 
for the IRS. They are up here on this chart.\2\ These 
priorities align closely with areas of inquiry of this 
Subcommittee. They include discourage and deter non-compliance 
with emphasis on corrosive activity by corporations, high-
income individual taxpayers, and other contributors to the tax 
gap; assure that attorneys, accountants, and other tax 
practitioners adhere to professional standards and follow the 
law; and detect and deter domestic and offshore-based tax and 
financial criminal activity.
    \2\ The chart referred to appears as an attachment to the prepared 
remarks in the Appendix on page 189.
    These first three objectives directly address concerns 
which you surfaced last fall in your hearings concerning the 
development and marketing of abusive tax shelters. I look 
forward to a continuing dialogue with the Subcommittee on this 
    Our fourth enforcement objective is to discourage and deter 
non-compliance within tax-exempt and government entities and 
misuse of such entities by third parties for tax avoidance or 
other unintended purposes. This, of course, directly relates to 
your hearing today.
    I am pleased that you are addressing the area of tax-exempt 
credit counseling and I want to commend the staff for what I, 
in contrast to one of your witnesses, consider a balanced and 
very penetrating report.
    Although many credit counseling organizations provide 
important educational and charitable services, clearly, a 
growing number do not. We are concerned some organizations are 
preying on those in financial distress and using tax exemptions 
for reasons of profit rather than charity. We have selected 
over 50 organizations for examination. Over the course of this 
year, we will be examining about one-half of the total revenue 
of all known credit counseling organizations.
    Our work to date is raising serious issues about a number 
of these tax-exempt organizations. Some appear to have as their 
principal activities selling debt management plans rather than 
providing credit counseling. Rather than counseling, many 
companies are promising to restore favorable credit ratings or 
to provide commercial debt consolidation services. Some appear 
to operate as ``boiler room call shops'' instead of charities.
    Some tax-exempts have boards of directors that are not 
representative of the local community. A board may also be 
related by family or business ties to for-profit entities that 
service the debt management plans. That raises the question, 
just who benefits from the charity, needy people in debt or 
company insiders and their business connections?
    We are also seeing tax-exempt companies that are supported 
by so-called ``voluntary'' fees from customers. I want to just 
note, my wife got a call last week, perhaps it was a poorly 
chosen target, but the first words out of the mouth of this 
lady were, ``We are a charity and anything you put into the 
program is tax deductible.'' It went on from there. [Laughter.]
    Mr. Everson. Often, these fees are in the hundreds of 
dollars and appear high in comparison to the nominal fees 
historically considered by the courts to be appropriate for 
such organizations.
    Non-compliance involving tax-exempt entities is especially 
disturbing because it involves organizations that are supposed 
to be carrying out some special or beneficial public purpose. 
If we don't act to guarantee the integrity of our charities, 
there is a risk that Americans will lose faith in charitable 
organizations in general, damaging a vital part of our Nation's 
social fabric.
    We are making an unprecedented effort to address abuses in 
the credit counseling industry. IRS examinations and 
investigations of credit counseling agencies may very well 
result in the lifting of some tax exemptions and, in fact, 
criminal referrals to the Department of Justice. Thank you.
    Senator Coleman. Thank you, Commissioner Everson. 
Commissioner Leary.


    Mr. Leary. Yes, thank you, Mr. Chairman and Members of the 
Subcommittee. You have a written statement from me that 
represents the views of the Commission. Anything I say here 
orally, is on my own.
    \1\ The prepared statement of Mr. Leary appears in the Appendix on 
page 193.
    Senator Coleman. That written statement will be entered as 
part of the official record, without objection.
    Mr. Leary. Thank you. I personally want to thank the 
Subcommittee for putting a human face on the problems that we 
normally just see on cold pieces of paper and I am pleased to 
be here.
    The Commission recognizes that credit counseling services 
can help financially distressed consumers. But some firms are 
deceiving consumers about who they are, what they do, and how 
much they charge. For example, we have brought a lawsuit 
against AmeriDebt and against Mr. Pukke, who was briefly here 
this morning. Our complaint specifically pleads deceptive 
conduct of the kind you have heard so much about: 
Misrepresentation of non-profit status, misrepresentation that 
consumers would get counseling services, and misrepresentation 
that there were no up-front fees but rather only voluntary 
    Your questions demonstrate that you know what this is all 
about, so I don't need to elaborate in this oral statement, but 
just let me comment on some things you have heard this morning.
    You have heard a lot about practices that have changed very 
recently. I won't comment on the adequacy of these changes, but 
this fact illustrates the spillover benefits of this inquiry 
and of our individual enforcement efforts. I want to emphasize, 
however, that last-minute conversions do not expunge a law 
violation if there was one.
    You have heard a lot about the disclosure of voluntary 
fees. Our concern is a practical one. Companies have every 
incentive to continue to obscure this issue. Ask yourself if 
people already in desperate shape, by definition, would 
otherwise volunteer to pay hundreds or thousands of dollar to a 
company that represents itself as a charity.
    You have heard some mention that there are some satisfied 
customers. Yes, indeed, there are some satisfied customers. But 
you can still violate the law even though there are some 
customers who are ultimately satisfied. The question is whether 
you gave people what you said you would give them and whether 
you told the truth about the fees you charge, and that is what 
our investigations and our cases are all about.
    Before I close, I want to mention some practices that were 
not discussed today that do continue to concern us. Number one 
is failure to pay creditors at all. 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.
    Number two, promising results that cannot be delivered. 
Some agencies promise that they will lower consumers' interest 
rates, monthly payments, or overall debt by an unrealistic 
amount. Some are also making false promises that they can 
eliminate accurate negative information from consumers' credit 
    And number three is a failure to abide by telemarketing 
laws. To the extent that these agencies are not bona fide non-
profit organizations, they must comply with the FTC's 
telemarketing sales rule, including the new national Do Not 
Call Registry.
    I don't know whether you are on that registry, 
    Mr. Everson. No, I am not, but I should be. [Laughter.]
    Mr. Leary. We are continuing to address all these issues 
together with others using both law enforcement and consumer 
education. Our current efforts include joint education with the 
IRS and State regulators, and we have recently issued a joint 
press release that highlights troubling practices within the 
industry and provides tips for choosing a credit counselor. We 
have independently issued a variety of consumer educational 
materials so that consumers can spot fraud and deception and 
take action to avoid it.
    We remain concerned about deceptive practices in the credit 
counseling industry and will continue to work to protect 
consumers in this critical area. Thank you very much, Mr. 
    Senator Coleman. Thank you very much, Mr. Leary.
    I am going to go in reverse order here. And, I appreciate 
the human face that you put on this and the focus on the 
consumer, on the individual.
    Does the FTC have jurisdiction over non-profits?
    Mr. Leary. We don't have jurisdiction over genuine non-
profits, Mr. Chairman, but the courts thus far have been very 
clear that we have jurisdiction over entities that are 
nominally non-profits but that are in practical import run on a 
for-profit basis. If for some reason or other that situation 
ever should change in the courts, we may be asking for 
    Senator Coleman. And we appreciate your efforts to work in 
these areas and to have the willingness to address those 
situations where companies who are in the guise of non-profits 
may actually be operating as for-profit entities.
    Mr. Leary. That is correct.
    Senator Coleman. I want to thank you for your involvement 
in this area. Are you troubled by the sales pitch that was 
being made or has been made, in this case it is AmeriDebt but 
certainly may be others, where individuals are being pushed to 
get involved in a debt management plan, are told, ``Would you 
rather support a non-profit company or help a bank get richer? 
Would you rather have that payment go to us to help people like 
you get out of debt or would you like it going into the 
creditor's pocket?'' Does that kind of language trouble you?
    Mr. Leary. Well, I think that is an illustration of just 
what I was talking about, Senator. You know there is no magic 
formula for making a disclosure adequate to consumers. There 
are no magic words that will do it. As long as the incentives 
are there for people financially to benefit in a big way from 
deception on the issue of payments, they are going to try to do 
it one way or the other. It is an ongoing struggle.
    Senator Coleman. What kind of remedies are available? You 
have indicated that the FTC has brought actions against 
AmeriDebt, its back-office processing facility, for deceptive 
practices, and Andris Pukke for deceptive practices. What kind 
of remedies is the FTC seeking?
    Mr. Leary. We can go to court, Mr. Chairman, and we can get 
injunctions. We can get consumer redress. We can get 
disgorgement of unearned profits. The monetary remedies, we can 
get only through going to court. The longer administrative 
process on our own can provide the injunctive remedy, but well 
down the road. So we tend to bring these cases in court because 
the most important thing is to shut off the deception as fast 
as possible.
    Senator Coleman. I understand that AmeriDebt is winding up 
its operation. I don't think they accept new customers. How 
does that affect your actions and will the FTC monitor entities 
affiliated with AmeriDebt after it has closed its doors?
    Mr. Leary. I don't want to comment on what we may or may 
not be doing with reference to other AmeriDebt affiliates that 
are not respondents in a particular action, Mr. Chairman, but I 
can assure you that we will seek and hopefully obtain relief 
that will give us the opportunity to remedy the situation 
across the board.
    Senator Coleman. Thank you, Mr. Leary.
    Commissioner Everson, you talked a little bit about tax-
exempt entities, non-profits. You have made a very good point 
about the impact this has on all non-profits. If there are 
those out there who claim to be operating as non-profits that 
are not, it really has an impact on consumer confidence in non-
    If an entity is involved in selling debt management plans 
as a primary focus or principal focus, maybe not sole but 
exclusive, selling a product, would that cause some concerns 
for the IRS if that entity is claiming to be an educational 
    Mr. Everson. It is important that the organization first 
comply with the representations it makes when it originally 
comes in for a determination as to its tax-exempt status. It 
has got to be consistent with what they have told us. What they 
have told us in order to be approved, would have to show that 
they are doing something for the public good. In this arena, 
that has traditionally meant education and counseling. Debt 
management has been in there, but largely for the lower-income 
folks and in a very targeted area.
    What you have seen here is a real expansion, and I would 
note one point that I haven't heard raised so far is we saw a 
very significant increase in these applications for the 
establishment of these organizations after a short lag from 
when the new law, the Credit Repair Organization Act, came into 
effect. And that law made these up-front fees that folks are 
talking about illegal. But at the same time, it didn't apply to 
the tax-exempts.
    So it is pretty clear that the players learned how to 
navigate the system and escape the regulation from the FTC and 
also these prohibitions that came in. So very clearly, this has 
all changed and gotten way out of line from traditional public 
good organizations.
    Senator Coleman. Does it trouble you when you hear 
testimony about what appear to be boiler room call shops, 
scripts to sell debt management plans? Does it trouble you when 
we are talking about entities that are operating in the guise 
of a 501(c)(3)?
    Mr. Everson. It troubled my wife when she received this 
call. I think that the testimony you have received today is 
shocking and that the report very clearly documents problems. 
In fact, you made reference to our hearing last fall. This 
reminds me of that hearing, where you have these 
interrelationships amongst parties established for mutual 
benefit. The difference there was that at least those were all 
profit-making businesses. Here, you have polluted charitable 
organizations. That is a terribly serious problem.
    Senator Coleman. Is this something in which one can 
actually have kind of a bright line test, FTC, are there bright 
lines? I am trying to figure out whether there are standards, 
whether we can kind of set some bright line standards, or does 
all of this have to be determined on a case-by-case basis?
    Mr. Everson. I think that this is more a case of looking at 
the individual facts and circumstances, and because of the 
complexity that has been established, that takes some time. 
There are some red flags, of course, and you have gone over 
some of them, these salaries, the extent of dealings with other 
related party profit-making entities. What we have to do as we 
conduct these audits is to look at the whole web and sift 
through it and see whether there is a private benefit that is 
being channeled to some related party which might be bad even 
if the entity itself that is making the call to the taxpayer is 
actually a not-for-profit.
    Senator Coleman. From the IRS perspective, and actually, I 
will ask both witnesses here, principally, there are 
enforcement concerns and enforcement efforts going on. Are you 
aware of any legislative changes that you would suggest that 
would increase or enhance your ability to provide enforcement 
in this area? Commissioner Everson, and then Commissioner 
    Mr. Everson. Well, there is----
    Senator Coleman. Aside from money for enforcement that we 
are working on.
    Mr. Everson. If I could indulge you for just one minute on 
that point. This chart shows you the decline in our enforcement 
personnel more broadly that took place and that you are 
familiar with. I want to show you just the impact on this tax-
exempt piece of our business.
    Since starting here--the baseline is 1995--this is the 
increase in assets in 501(c)(3) organizations. There are almost 
a million of these organizations. This is the increase in 
returns filed. This is the decrease in staffing trying to do 
this work, and this----
    Senator Coleman. This is IRS staffing, Commissioner?
    Mr. Everson. IRS staffing within the piece of the IRS that 
does this work. And this is this line adjusted for the returns 
filed. It takes into account the volume increase.
    I would suggest to you that that is a real challenge. Now, 
we are addressing that. We have the bill that we requested. But 
I would also say this gap doesn't even take into account the 
changes in behavior which, of course, means that it is a much 
more complicated problem. You don't have the same profile of 
abuse that you had back at the beginning.
    Senator Coleman. On the other hand, Commissioner Everson, 
would it be fair to say that if the IRS took aggressive action 
against a few individuals, that might impact the behavior of 
other individuals in this area?
    Mr. Everson. This is very much our hope, because we have at 
present an expectation that by the end of this calendar year, 
something like a third of the revenues, the actual examinations 
will have been closed already. I would hope these closures and 
the actions that would be taken if there are revocations, or as 
I mentioned, criminal referrals, the word will get out and 
people will come back to us to clean up their act.
    That is exactly what the Commissioner is saying. It doesn't 
mean you can excuse the past behaviors. There could be 
sanctions. But I am hopeful that we don't have to go as far 
down the road with as many audits as we are currently 
contemplating if there are adjustments like some of the 
adjustments you have already seen.
    Senator Coleman. And Commissioner Leary, the question about 
legislative changes or anything that you believe is required to 
enable you to do the work you need to do in this area?
    Mr. Leary. Mr. Chairman, I think the Congress has been 
relatively generous with us in times of great budget pressure. 
At the moment, we are not asking for any legislative fix. 
However, as I indicated, in the event that we run into 
difficulties in the courts, and I don't anticipate it, but in 
the event that we run into difficulties on this jurisdictional 
issue, we may be asking for some relief.
    Senator Coleman. I appreciate the work that you are doing, 
    Commissioner Everson.
    Mr. Everson. Could I just second that point? Every time 
that you exempt a certain sector of organizations from, be it 
consumer protection laws or other areas, you will see a 
channeling into the tax-exempt area, I think, and you have to 
very carefully weigh when you make those exclusions. There are 
valid reasons for the good organizations, such as one that you 
had present here today, to enjoy exemptions, but you end up in 
a situation where the IRS acts as a proxy for the Federal Trade 
Commission. I am not sure that is wise public policy.
    Senator Coleman. I appreciate your perspectives, gentlemen. 
I want to thank you for appearing before this Subcommittee. I 
want to thank you for the good work that you do.
    The record of this hearing will be held open for 30 days.
    This hearing is now adjourned.
    [Whereupon, at 1:17 p.m., the Subcommittee was adjourned.]

                            A P P E N D I X



    The ``Roaring 1990s'' was an era of unprecedented prosperity. Yet 
for many Americans families, it was also a ``Decade of Debt'' that left 
them entering the new millennium with uncertainties about their 
financial health.
    Stagnant incomes. Job losses. Longer hours for lesser pay. 
Increasing healthcare expenses. Rising prescription drugs. Housing 
costs beyond reach. Soaring college tuitions. These are just some of 
the unrealistic demands made today on the fixed budgets of the American 
    At a time when our Nation is continuing to suffer from economic 
troubles, many of us continue to be under siege financially. So where 
does the American family turn to for help? The unfortunate answer, for 
many, is ``plastic.''
    Every day across this Nation, millions of families receive multiple 
solicitations in the mail from a variety of eager creditors. No matter 
what your particular financial situation may be, all you have to do is 
sign the short, customized, user-friendly application form on the 
dotted line, and you can activate your own personal line of credit 
today for tens of thousands of dollars in instant cash.
    It is literally that simple, and the aggressive marketing works.
    The credit card companies sent out over five billion solicitations 
in 2001 alone. Between 1993 and 2000, the amount of credit the industry 
extended grew from $777 billion to almost $3 trillion.
    An important study called, ``Borrowing to Make Ends Meet: The 
Growth of Credit Card Debt in the '90s,'' released in September 2003 by 
Demos, a nonpartisan nonprofit public policy research organization 
based in New York City, found that low and moderate-income families who 
are struggling financially, were forced to take on credit card debt at 
rates unprecedented in American history.
    Ironically, this took place during the 1990's, the same decade that 
brought unprecedented prosperity to so many in our country.
    The Demos study also found that over the last decade, credit card 
debt among Americans over the age of 55 has increased more than it has 
among the general population. The increase is even more substantial 
among those over age 65. One reason for this demographic trend is the 
similar rise in prescription drug costs that has moved beyond reach for 
many seniors who live on fixed income.
    The study concludes that a combination of structural and economic 
trends, coupled with abusive credit card practices have left working 
families and older Americans with few options other than to borrow 
heavily just to make ends meet.
    Those lucky enough to own homes were able to rely on cash-out 
refinancing, home equity lines or credit lines secured by the roofs 
over their heads. But for the vast majority and for the low-income 
families without homes of their own, plastic was their only choice.
    Between 1989 and 2001, the total amount of credit card debt that 
Americans took on collectively almost tripled, from $238 billion to 
$692 billion, while the average American family experienced a 53 
percent increase in credit card debt.
    This dangerous increase in personal debt took place during the same 
time that the personal savings rate for Americans continued to decline.
    This same period of time also saw the number of people filing for 
bankruptcy jump 125 percent. Each year, over 1.5 million Americans 
resort to bankruptcy as the only realistic option to escape from their 
financial dead end street.
    It is not just the low and moderate-income families facing 
bankruptcy. According to a ground breaking book by Harvard Law 
Professor Elizabeth Warren and Amelia Warren Tyagi, ``The Two Income 
Trap: Why Middle-Class Mothers and Fathers are Going Broke,'' the 
coming years will turn out to be most difficult for the average middle-
class American family.
    It may sound counterintuitive, but Professor Warren makes a 
compelling argument that in today's economy, it is the suburban home-
owning family with two wage earners and school-age children who are 
most at risk financially, especially when one of the working parents 
loses a job or faces a medical emergency.
    More importantly, this book demonstrates that the major 
responsibility for the problem lies with the credit card industry and 
the unscrupulous practices that the industry engages in as it continues 
its greedy drive for more and more credit-hungry customers.
    The deregulation of Federal and State laws governing interest rates 
during the 1970's and 1980's created incentives for credit issuers to 
take advantage of the laws in States with the most lender-friendly 
policies. The credit card industry flourished, as did its creative 
adoption of abusive penalty fees, late fees, and other hidden tricks 
designed to keep consumers in debt as long as possible. These practices 
correlated with skyrocketing profits for the industry.
    When consumers can no longer tolerate spiraling personal debts, 
they are left with little choice but to seek bankruptcy protection in 
court. Yet this Congress for years has been ready to pass harsh 
legislation to block even that relief from being granted to the 
    The bankruptcy bill pending in the Senate today would do this while 
providing even more opportunities for the credit card industry to 
    Today we will learn from this Subcommittee about another factor 
that has contributed to the gathering of the economic ``Perfect Storm'' 
facing indebted and financially desperate Americans.
    While the credit counseling industry was originally created to 
serve debtor-consumers navigate their way out of financial trouble, the 
industry as we know it today seems to lead the unwitting consumer 
directly into the eye of the Perfect Storm.
    Instead of serving as a good faith mediator between the debtor and 
creditor, many of these agencies have become nothing more than 
automated debt collectors for the credit card companies.
    Worse, today's ``nonprofit'' counseling service provider is sorely 
mislabeled--it seeks profit and provides no counseling.
    The abusive credit counseling agency practices, together with the 
abusive credit card industry practices provide a potent one-two punch 
that knocks out most consumers' hope of staying away from the 
bankruptcy court.
    I am glad that the abuses of the credit counseling industry are 
finally coming to light through this hearing.
    Last year, my home State of Illinois took an important first step 
by becoming the first State in the Nation to seek legal recourse 
against AmeriDebt, a national credit counseling agency, which, I should 
note, is represented at this hearing today. I am also glad to note that 
several other States have followed suit.
    On February 5, 2003, Illinois' Attorney General Lisa Madigan filed 
a lawsuit alleging violations of my State's consumer protection laws.
    For example, under the Illinois Debt Management Services Act, a 
debt counseling agency cannot charge more than a $50 initial fee and 
cannot charge more than $30 average monthly fee per debtor.
    As our State's Attorney General and this Subcommittee learned, 
however, AmeriDebt charges an average of approximately $305 for an 
initial fee, and averages intakes of approximately $35 per month per 
Illinois consumer.
    Similar to the findings of this Subcommittee, the suit in my 
homestate alleges that AmeriDebt violated Illinois' Consumer Fraud Act 

      Failing to disclose hidden fees and payments;
      Failing to tell consumers that their first payment under 
a debt management plan is kept by the company instead of being sent to 
the creditors as the consumers were led to believe;
      Representing that AmeriDebt will bring debtors' accounts 
up to current status then failing to make timely payments to creditors;
      Representing that consumers' payments are ``voluntary 
contributions'' when they are in practice mandatory fees; and
      Representing itself as a not-for-profit when the debt 
management work is done by a for-profit company.

    Additionally, we discovered that AmeriDebt was never licensed in 
Illinois to operate as a debt management company, yet it took on over 
11,000 clients in Illinois during years of marketing in the State.
    I would like to commend Chairman Coleman and Ranking Member Levin 
for undertaking a bipartisan investigation into this troubling industry 
and for holding this important hearing today.
    I hope this effort results in some serious and much-needed Federal 
legislation being adopted in this Congress, and I pledge to work with 
you and other interested members to make that happen.
    Ever since I drafted the first comprehensive bankruptcy reform bill 
in the 105th Congress, I have been concerned about some of the 
aggressive practices of the credit card industry and their growing 
influence in our economy.
    I believe we need to address these concerns and offer possible 
solutions in an open and honest way if we are going to change the 
course of the economic trend that is so intricately tied to the 
practices of that vast industry.
    I would also like to see us continue to look for reasonable reform 
in the bankruptcy area, and, in particular, focus on the conditions 
that lead American consumers to bankruptcy. Still, any serious reform 
effort has to take into consideration the significant role of the 
credit counseling industry, and I hope this industry, as a whole, will 
work with us in crafting some solutions that are unquestionably 
    It is good to see representatives from the credit counseling 
industry here ready to explain their side of the story. I think we 
should be fair in listening to the legitimate voices on that side.
    We should be careful not to paint a picture with a broad brush that 
raises unfair suspicion about every single credit counseling agency in 
the Nation. I have no doubt that there are many credible agencies doing 
the counseling and educational work in the true spirit of their 
nonprofit missions.
    So I ask you--especially the agencies that are already living up to 
the high standards established by the associations--to join us in 
promoting stronger standards for everyone.
    I know that the bankruptcy bill currently pending in the Senate 
contains a provision that proposes standards for the credit counseling 
industry, which is a positive step. But I agree with the Subcommittee's 
report and its recommendation that changes may be necessary to 
strengthen this provision in the bill, and I look forward to working on 
those changes.
    Finally, I urge the government representatives here today--the 
Internal Revenue Service and the Federal Trade Commission--to continue 
your diligent pursuit of the wrongdoers.
    As I know from my homestate's experience, a few States have already 
shown leadership in protecting the citizens within their borders. But 
this is a problem with national implications and it is time for the 
Federal agencies to do all they can to curb these abusive practices.
    Please let us know what, if any, tools you need to carry out your 
pursuit of this matter.
    Thank you.

    Mr. Chairman: Thank you for holding this hearing on a very 
important subject: fraud and abuse in the credit counseling industry.
    This hearing is important because consumer debt has exploded in 
this country--it now exceeds 2 trillion dollars. Revolving credit--
mostly in the form of credit cards and overdraft protection--exceeds 
750 billion dollars. That's about seven thousand dollars per household. 
And because so many people have lost their jobs over the last 3 years, 
more and more Americans are having trouble paying their bills. Our 
economy went into a recession in March 2001.
    In part because of overly aggressive marketing by the credit card 
industry, more and more Americans have tried to make ends meet in a bad 
economy by borrowing. And now many of them are in trouble.
    When they get in trouble, many of them turn to non-profit credit 
counseling companies for help. The problem, as it turns out, is that 
some of the largest credit counselors have the same management as for-
profit debt consolidation firms. The non-profit counselor steers people 
with credit problems to the for-profit consolidator.
    Given such a scenario, it's difficult to imagine that the 
counseling being given is truly objective and always in the customers' 
best interests. I look forward to learning to what extent the business 
ties between the counselors and the consolidators are made known to the 
customers desperate to work out their debt problems.
    The Subcommittee has learned that some of these ``non-profits'' pay 
their officers excessive wages--in one case as much as $624,000 a year.
    And the Subcommittee has learned that representatives of some non-
profits deceive their customers with hidden fees and deliberately make 
promises they know they cannot keep with regard to lowering monthly 
payments and improving credit scores.
    We're talking about an industry with one billion dollars in annual 
    Mr. Chairman, I certainly don't want to indict the entire industry. 
There are counselors and consolidators who are truly helping customers 
dig out from a mountain of debt. But there is enormous cause for 
concern here in Congress when 9 of the top 15 non-profit credit 
counselors--whose firms account for 40 percent of that one billion 
dollars--are being investigated by the Internal Revenue Service.
    We need to sort out the ``bad apples'' in this industry and I think 
this hearing is a useful first step in that process.
    Thank you Mr. Chairman.

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