[Senate Report 109-55]
[From the U.S. Government Publishing Office]



109th Congress                                                 S. Rept.
                                 SENATE                                
 1st Session                                                     109-55
_______________________________________________________________________

                                     




                 PROFITEERING IN A NON-PROFIT INDUSTRY:

                 ABUSIVE PRACTICES IN CREDIT COUNSELING

                               __________

                              R E P O R T


                            prepared by the

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                                 of the

                              COMMITTEE ON

               HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                          UNITED STATES SENATE






                             APRIL 13, 2005
                   COMMITTEE ON GOVERNMENTAL AFFAIRS

                   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          THOMAS R. CARPER, Delaware
TOM COBURN, Oklahoma                 MARK DAYTON, Minnesota
LINCOLN D. CHAFEE, Rhode Island      FRANK LAUTENBERG, New Jersey
ROBERT F. BENNETT, Utah              MARK PRYOR, Arkansas
PETE V. DOMENICI, New Mexico
JOHN W. WARNER, Virginia

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

                                 ------                                

                PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

                   NORM COLEMAN, Minnesota, Chairman
TED STEVENS, Alaska                  CARL LEVIN, Michigan
TOM COBURN, Oklahoma                 DANIEL K. AKAKA, Hawaii
LINCOLN D. CHAFEE, Rhode Island      THOMAS R. CARPER, Delaware
ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
JOHN W. WARNER, Virginia             MARK PRYOR, Arkansas

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


                            C O N T E N T S

                                 ------                                
                                                                   Page

I. INTRODUCTION..................................................     1

II. EXECUTIVE SUMMARY............................................     2

III. OVERVIEW OF THE CREDIT COUNSELING INDUSTRY..................     4

    A. History of the Credit Counseling Industry.................     4

    B. Current Law Governing the Credit Counseling Industry......     5

IV. GDEBTWORKS, AMERIX, AND CAMBRIDGE: THREE CASE STUDIES........     9

    A. DebtWorks and The Ballenger Group Conglomerate............    10

       (1) GFormation of DebtWorks and The Ballenger Group 
  Conglomerate...................................................    10
       (2) Control of the Affiliated Credit Counseling Agencies..    13
       (3) Private Benefits to the For-Profit Corporations.......    14
       (4) Harm to Consumers.....................................    15

    B. The Ascend One-Amerix Conglomerate........................    18

       (1) Formation of the Ascend One-Amerix Conglomerate.......    18
       (2) Control of the Affiliated Credit Counseling Agencies..    20
       (3) Private Benefits to the For-Profit Corporations.......    20
       (4) Harm to Consumers.....................................    22

    C. The Cambridge-Brighton Conglomerate.......................    23

       (1) Formation of the Cambridge-Brighton Conglomerate......    24
       (2) Control of the Affiliated Credit Counseling Agencies..    25
       (3) Private Benefits to the For-Profit Corporations.......    26
       (4) Harm to Consumers.....................................    28

V. REGULATION AND ENFORCEMENT....................................    32

    A. Industry Self-Regulation..................................    32

    B. Creditor Standards........................................    34

       (1) History of the Creditor-Credit Counseling Agency 
  Relationship...................................................    34
       (2) Three Creditor Models.................................    36
       (3) Using Fair Share Payment Standards to End Abuses......    38

    C. State Regulation and Enforcement..........................    40

    D. Federal Regulation and Enforcement........................    41

       (1) Internal Revenue Service..............................    41
       (2) The Federal Trade Commission..........................    43
       (3) Pending Bankruptcy Legislation........................    44

VI. POST HEARING CHANGES IN THE INDUSTRY.........................    45

    A. DebtWorks and The Ballenger Group.........................    46

       (1) AmeriDebt Files for Chapter 11 Reorganization.........    46
       (2) The Ballenger Group...................................    47

    B. The Ascend One-Amerix Conglomerate........................    49

    C. The Cambridge-Brighton Conglomerate.......................    51

    D. Recommendations...........................................    53

 
  PROFITEERING IN A NON-PROFIT INDUSTRY: ABUSIVE PRACTICES IN CREDIT 
                               COUNSELING

                              ----------                              


I. INTRODUCTION

    In September 2003, the U.S. Permanent Subcommittee on 
Investigations of the Committee on Governmental Affairs, began 
an investigation into the credit counseling industry. The 
investigation focused on new entrants into the industry, the 
marketing of debt management plans, the relationship between 
non-profit credit counseling agencies and for-profit service 
providers, and the quality of the counseling that clients 
received. The Subcommittee's Majority Staff initiated the 
investigation at the direction of the Subcommittee's Chairman, 
Senator Norm Coleman, with the concurrence and support of the 
Subcommittee Ranking Minority Member, Senator Carl Levin. The 
information in this report is based on the ensuing bipartisan 
investigation by the Subcommittee's Majority and Minority 
staffs.
    Credit counseling agencies (``CCAs'') have traditionally 
been non-profit companies that rely upon contributions from 
creditors and charities and small fees from consumers to cover 
the operating costs of providing advice, debt counseling, and 
debt management plans to consumers who have trouble paying 
their credit card bills. Some new entrants to the industry, 
however, have developed a completely different business model--
a ``for-profit model'' designed so that their non-profit credit 
counseling agencies generate massive revenues for for-profit 
affiliates through advertising, marketing, executive salaries, 
and any number of other activities other than actual credit 
counseling. The new model looks to the consumer to provide 
those revenues.
    Many of the new non-profit and for-profit companies are 
organized and operated to generate profits from an otherwise 
non-profit industry. Evidence of the new entrants' intention to 
create profits is indicated in several ways, including: (1) the 
manner in which the new entrant is organized, (2) the extent of 
control exercised by a for-profit entity over its non-profit 
CCA affiliate, and (3) the massive revenues funneled to the 
for-profit entity from the non-profit agency.
    When profit motive is injected into a non-profit industry, 
it should come as no surprise that harm to consumers will 
follow. Indeed, the primary effect of the for-profit model has 
been to corrupt the original purpose of the credit counseling 
industry--to provide advice, counseling, and education to 
indebted consumers free of charge or at minimal charge, and 
place consumers on debt management programs only if they are 
otherwise unable to pay their debts. Some of the new entrants 
now practice the reverse--they provide no bona fide education 
or counseling and place every consumer onto a debt management 
program at an unreasonable or exorbitant charge.

II. EXECUTIVE SUMMARY

    Consumer debt has more than doubled in the past 10 
years.\1\ The nation's credit card debt is currently $735 
billion.\2\ The rapid increase in credit card balances is one 
factor in the corresponding increase in personal bankruptcies. 
Since 1996, more than one million consumers have filed for 
bankruptcy each year, with a record 1.66 million new filings in 
2003.\3\ As Chairman Coleman stated in his opening statement at 
the hearing entitled Profiteering in a Non-Profit Industry: 
Abusive Practices in Credit Counseling, March 24, 2004, ``The 
growth in both debt and bankruptcy demonstrates the need for 
much better financial education. Although the immediate cause 
of most bankruptcies is a sudden setback such as divorce, 
serious illness, or unemployment, the amount of debt these 
individuals carried when faced with this tragic event indicates 
their poor understanding of credit and finances.''
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    \1\ Eileen Powell, ``Consumer Debt More Than Doubles in Decade,'' 
The Washington Times, January 6, 2004.
    \2\ Id.
    \3\ The American Bankruptcy Institute, available at 
www.abiworld.org.
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    The social need for better financial education is one of 
the primary reasons why credit counseling has long been 
recognized as a charitable and educational activity worthy of 
tax exempt status under Section 501(c)(3) of the U.S. tax code. 
For the past several decades, consumers in debt regularly 
turned to the non-profit credit counseling industry for advice 
and financial education. Consumers who could not afford to make 
all of their payments often enrolled in a debt management 
program, which allowed them to consolidate their debts from 
several credit cards, reduce their monthly payments, and lower 
their interest rates.
    Over the past several years, however, the credit counseling 
industry has undergone significant changes. The activities of 
some ``new entrants'' have resulted in increasing consumer 
complaints about excessive fees, non-existent education, poor 
service, and generally being left in worse debt than when they 
initiated their debt management program. With this in mind, the 
Subcommittee initiated an investigation to determine the state 
of the credit counseling industry and whether solutions are 
available to remedy its problems.
    The Subcommittee's investigation included a thorough 
examination of credit counseling agencies, their for-profit 
affiliates, major credit card issuers, Federal and state 
agencies and officials, consumer advocates, and their 
interrelated relationships. Additionally, current and former 
credit counselors and CCA clients were interviewed and 
Subcommittee staff responded to advertisements from various 
agencies to see what advice was being given. The Subcommittee 
held a hearing on March 24, 2004 in which the Subcommittee's 
preliminary findings were disclosed and members of the industry 
testified.
    The hearing illustrated the new entrants' model of credit 
counseling. High consumer fees and lucrative contracts that 
benefit the related for-profit company characterize this model. 
The Subcommittee focused on three debt management conglomerates 
to illustrate the unfriendly consumer practices eviscerating 
the industry. These conglomerates were DebtWorks and The 
Ballenger Group, Ascend One-Amerix, and Cambridge-Brighton. The 
hearing consisted of four panels representing consumers, and 
former CCA employees, CCAs, their for-profit affiliates, and 
Federal regulators.
    The first panel included two victims of the new entrants' 
predatory practices. Jolanta Troy testified about her 
experience with AmeriDebt, Inc. (``AmeriDebt''). AmeriDebt is a 
very large CCA with multiple class action suits pending against 
it with the Federal Trade Commission and the attorneys general 
of multiple states. The second witness was Raymond Schuck, a 
former client of Cambridge Credit Counseling (``Cambridge''), 
another large CCA with suits pending from the Attorneys General 
of Massachusetts and North Carolina. Two former employees of 
AmeriDebt and Cambridge also testified. These former 
``counselors'' discussed the sales tactics they were instructed 
to practice in order to convince debt-ridden consumers to sign 
onto debt management plans (``DMPs'') rather than offering 
financial education or counseling.
    The second panel consisted of CCAs known for high-pressure 
sales of DMPs in conjunction with their operations as part of a 
for-profit conglomerate. The witnesses included representatives 
of AmeriDebt, American Financial Solutions (``AFS''), and 
Cambridge. These non-profit CCAs provided little to no 
counseling and education to consumers, poor service, and had a 
controversial relationship with their for-profit affiliates. 
For contrast, a member of the National Foundation for Credit 
Counseling (``NFCC''), an association of CCAs still following 
the ``old school'' model, testified about its very different 
approach to credit counseling.
    The for-profit affiliates to the above-mentioned CCAs 
comprised the third panel. The Ballenger Group, Amerix, and 
Brighton Debt Management Services provide processing services, 
marketing and advertising, lead generation, and other services 
to their non-profit CCAs. The Subcommittee found that these 
for-profit affiliates use their non-profit CCAs to generate 
significant revenues that are siphoned out of the non-profit 
CCAs through contracts at above market prices. Through these 
contracts, the for-profit affiliates exert a great deal of 
control over the non-profit CCAs by setting minimum rates for 
DMP sign ups and fee collections.
    Completing the hearing, on the fourth panel, was 
Commissioner Mark Everson of the Internal Revenue Service and 
Commissioner Thomas Leary of the Federal Trade Commission. Each 
discussed their agency's actions to address abuses in the 
credit counseling industry. The Internal Revenue Service 
announced the implementation of a new program for reviewing the 
applications of credit counseling agencies for non-profit 
status. The IRS has also initiated audits of over 50 CCAs. 
Commissioner Leary discussed the Federal Trade Commission's 
concerns about the industry and the actions it has taken 
against AmeriDebt and The Ballenger Group, as well as 
generally, to protect the American consumer from deceptive and 
unfair practices. Commissioner Everson stated in his testimony, 
``Based on the FTC data and our examinations, it appears that 
some organizations are operating solely on the Internet and are 
providing debt management and not credit counseling. In many 
cases, credit counseling services have been replaced by 
promises to restore favorable credit ratings or to provide 
commercial debt consolidation loans.'' Clearly, something is 
wrong with the credit counseling industry.

III. OVERVIEW OF THE CREDIT COUNSELING INDUSTRY

  A. History of the Credit Counseling Industry

    The practice known as ``credit counseling'' was initiated 
by creditor banks and credit card companies during the mid-
1960s in an effort to stem the growing volume of personal 
bankruptcies. Most, if not all, of the original CCAs were 
members of the National Foundation for Credit Counseling 
(``NFCC'').\4\ NFCC member agencies were generally community-
based, non-profit organizations that provided a full range of 
counseling, often in face-to-face meetings with consumers. 
Trained counselors would advise consumers about how to remedy 
their current financial problems, counsel them on budget 
planning, and educate them as to how to avoid falling into debt 
in the future. These counseling sessions were traditionally 
one-on-one meetings in which an educated counselor performed a 
detailed analysis of an individual's income, expenses, debts, 
and other budget requirements. A consumer would meet with a 
counselor more than once and for significant periods of time, 
often over an hour. After a budget analysis, the counselor 
might recommend that the consumer readjust his or her budget, 
utilize a debt management plan, or seek legal assistance, 
possibly to declare bankruptcy.
---------------------------------------------------------------------------
    \4\ For more information on the NFCC, visit the organization's 
website at www.NFCC.org.
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    From the outset, a popular credit counseling option was the 
``debt management plan'' (``DMP''). In order to initiate a DMP, 
a consumer would authorize the credit counselor to contact each 
of the consumer's unsecured creditors--primarily credit card 
companies. The counselor would then negotiate with each 
creditor to lower the consumer's monthly payment amount, to 
lower the interest rate, and to waive any outstanding late 
fees. All of the consumer's lowered monthly payments were then 
``consolidated'' into a single payment. The consumer would send 
a single payment to the CCA, which would then distribute 
payments to each of the consumer's creditors.
    DMPs were prevalent because each party involved--the 
consumer, the creditor, and the CCA--received a tangible 
benefit. Consumers got their finances under control and 
received concessions from their creditors, such as reduced 
interest rates, waiver of late fees, and forgiveness of overdue 
payment status. Creditors, rather than taking a loss from a 
bankruptcy, received all of the principal debt owed by the 
consumer. The CCA, in return for organizing the DMP, would 
receive ``fair share'' payments from the creditor to cover 
their expenses, salaries, and operational costs. The fair share 
remittance generally amounted to 12-15% of the payments 
received by the creditor as a result of the DMP.
    This mutually beneficial system operated smoothly for 
several decades. Some NFCC CCAs charged nominal fees or 
requested contributions from consumers. Such fees or 
contributions were used to defray their costs for counseling 
and initiating and maintaining the DMP. Such fees and 
contributions were small in comparison to the creditor 
concessions received by the consumer. Today, the fees charged 
by NFCC CCAs remain minimal. The average initial fee to set up 
a DMP with a NFCC agency in 2002 was $23.09 and the average 
monthly maintenance fee was $14.\5\
---------------------------------------------------------------------------
    \5\ NFCC 2002 Member Activity Report, p. 30.
---------------------------------------------------------------------------
    Growth in consumer credit card debt in the 1990s however, 
brought many new and aggressive entrants into the credit 
counseling industry. Since 1994, 1,215 CCAs have applied to the 
IRS for tax exempt status under Section 501(c)(3).\6\ Over 810 
of these applicants applied between 2000 and 2003.\7\ There are 
currently 872 active tax-exempt CCAs operating in the United 
States.\8\ Many of these new entrants are not centered around 
community-based, face-to-face counseling, but rather upon a 
nationwide, Internet and telephone-based model focused 
primarily, if not solely, upon DMP enrollment. Many of the new 
entrants are set up on a for-profit model. The for-profit model 
is designed to provide the maximum benefit to related for-
profit corporations, which enter into contracts with non-profit 
CCAs to siphon off revenue from the CCA. A common method used 
by the for-profit entity to collect revenue from the CCA is to 
set itself up as a ``back-office processing company,'' which 
contracts to provide data entry and DMP payment processing for 
the CCA. The Subcommittee found that these contracts are often 
executed by officers or directors of a CCA who have familial 
ties or close business relationships with the owners of the 
for-profit entity. The Subcommittee also found that, in many 
instances, multiple non-profit CCAs would send processing fees 
to a single for-profit company, which reaped substantial 
profits.
---------------------------------------------------------------------------
    \6\ Letter, dated 12/18/03, to the Subcommittee from IRS 
Commissioner Mark Everson, p. 2 (``Everson letter'').
    \7\ Everson letter, p. 2.
    \8\ Id.
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  B. Current Law Governing the Credit Counseling Industry

    CCAs are almost exclusively organized as non-profits under 
26 U.S.C. Sec. 501(c)(3). The Credit Repair Organizations Act 
of 1997 (``CROA'') sought to regulate organizations claiming to 
offer ``credit repair services.'' \9\ However, this 
legislation, which is administered by the Federal Trade 
Commission (``FTC''), does not apply to Section 501(c)(3) 
organizations. In fact, the significant increase in tax-exempt 
CCAs roughly coincides with the passage of CROA, presumably 
because CCAs organized as non-profits to avoid CROA 
regulation.\10\ Moreover, the provisions of the Federal Trade 
Commission Act generally do not apply to organizations with 
tax-exempt status.\11\ Section 501(c)(3) status provides 
protection from scrutiny from many state regulators as well.
---------------------------------------------------------------------------
    \9\ 15 U.S.C. Sec. Sec. 1679 et. seq.
    \10\ Credit Counseling in Crisis, Consumer Federation of America 
and the National Consumer Law Center (April 2003).
    \11\ 15 U.S.C. Sec. Sec. 41 et. seq.
---------------------------------------------------------------------------
    Two more recent developments provide additional incentives 
for companies to enter the credit counseling industry with 
Section 501(c)(3) status. First, prospective Federal bankruptcy 
legislation proposes requiring individuals to obtain credit 
counseling before being eligible to file for bankruptcy. If 
enacted, most likely the industry would see large increases in 
persons seeking their services. Second, in the same vein, the 
recent ``Do Not Call'' list, established by the FTC to prevent 
unwanted telephone solicitations, exempts ``charitable 
solicitations.'' This exemption means CCAs with Section 
501(c)(3) status can continue to make telephone solicitations 
seeking business.
    A corporation may qualify for tax-exempt status under 
Section 501(c)(3) if it is organized and operated exclusively 
for certain aims, such as charitable, religious, scientific, or 
educational purposes.\12\ No part of the corporation's net 
earnings may inure to the benefit of any individual or any 
private shareholder in the corporation.\13\ The corporation may 
not be organized or operated for the benefit of any private 
interests, such as the interests of the creator, the creator's 
family, any shareholders of the corporation, or any persons 
controlled directly or indirectly by such private 
interests.\14\ Organizations claiming tax-exempt status are 
required to apply for such status by filing an Application for 
Recognition for Exemption Under Section 501(c)(3) with the 
IRS.\15\ IRS agents review each application and recognize or 
deny tax-exempt status.\16\ Once an organization is recognized 
as having tax-exempt status, it must operate under the 
requirements of Section 501(c)(3) or risk losing its tax-exempt 
status. Each year, the tax-exempt organization must file an 
information return with the IRS detailing its activities, 
revenues, and expenses.\17\
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    \12\ 26 U.S.C. Sec. 501(c)(3).
    \13\ Id.
    \14\ IRS Publication 557, Tax-Exempt Status for Your Organization 
(Rev. May 2003), p. 17.
    \15\ 26 U.S.C. Sec. 508(a).
    \16\ Everson letter, p. 6.
    \17\ IRS Publication 557, supra, at p. 8.
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    Credit counseling organizations have been recognized as 
proper tax-exempt entities for several decades.\18\ In 1969, 
the IRS affirmed that Section 501(c)(3) tax-exempt status was 
properly granted to an ``organization [that] provides 
information to the public on budgeting, buying practices, and 
the sound use of consumer credit through the use of films, 
speakers, and publications.'' \19\ The ruling noted that such 
organizations may enroll debtors in ``budget plans'' where the 
debtor makes fixed payments to the organization and the 
organization disburses payments to each of the debtor's 
creditors.\20\ The budget plan services were to be ``provided 
without charge to the debtor.'' \21\ The organization offered 
education to the public on personal money management through 
informative tools and provided individual counseling to ``low 
income individuals and families.'' An aspect of the counseling 
included the use of debt management plans constructed free of 
charge. This ``free'' service was possible because the primary 
source of funding for the organization was contributions from 
creditors through ``fair share'' contributions. Because the 
organization provided assistance to low income individuals 
without charge and provided education to the public, it 
qualified for tax-exempt status under Section 501(c)(3).
---------------------------------------------------------------------------
    \18\ Providing credit counseling is not an inherently charitable 
activity. Whether an organization providing credit counseling qualifies 
for exemption under Section 501(c)(3) depends upon whether the manner 
in which it provides such counseling serves recognized charitable or 
educational purposes. Treas. Reg. Sec. 1.501(c)(3)-1(d)(2) provides 
that the term ``charitable'' is used in Section 501(c)(3) in its 
generally accepted legal sense, and includes relief for the poor and 
distressed or underprivileged. ``Educational'' as used in Section 
501(c)(3) includes instruction of the public on subjects useful to the 
individual and beneficial to the community. Treas. Reg. 
Sec. 1.501(c)(3)-1(d)(3)(i)(b).
    \19\ Rev. Rul. 69-441, 1969-2 C.B. 115.
    \20\ Id. at *2-3.
    \21\ Id. at *3.
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    In 1978, the U.S. District Court for the District of 
Columbia expanded the activities a CCA could perform under 
Section 501(c)(3) in Consumer Credit Counseling Service of 
Alabama v. United States.\22\ The ``principal activities'' of 
the CCAs were to, without charge, ``provide (a) information to 
the general public, through the use of speakers, films, and 
publications, on the subjects of budgeting, buying practices, 
and the sound use of consumer credit, and (b) counseling on 
budgeting and the appropriate use of consumer credit to debt-
distressed individuals and families.'' \23\ As an ``adjunct'' 
to those principal activities, agencies could enroll debtors in 
a ``debt management program'' for a ``nominal'' fee which ``may 
not exceed the sum of $10.00 per month'' and which is ``waived 
. . . in instances where its payment would work a financial 
hardship.'' \24\ Only an ``incidental'' amount of revenue was 
to be realized by the agency through the debt management 
programs.\25\
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    \22\ No. 78-0081, 1978 U.S. Dist. LEXIS 15942 (D.D.C. Aug. 18, 
1978); see also, Credit Counseling Centers of Oklahoma v. United 
States, No. 78-1958, 1979 U.S. Dist. LEXIS 11741 (D.D.C. June 13, 
1979).
    \23\ Id. at *3.
    \24\ Id. at *3-4.
    \25\ Id. at *5.
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    In this case, the IRS had revoked the exempt status of 
Credit Counseling Services of Alabama because it did not 
restrict its services to the poor and it charged a nominal fee 
for its services. The IRS made this decision even though the 
agency provided free information on credit to the public and 
would waive its fee if it created a hardship. When CCCS of 
Alabama challenged the revocation, the court found that the 
agency fulfilled charitable purposes by educating the public on 
subjects useful to the individual and beneficial to the 
community without any fees.\26\ The court found the counseling 
program was both educational and charitable. The court found 
that the debt management plans were an integral part of the 
agency's counseling function and thus were charitable and 
educational as well. The court also found the DMPs were 
incidental to the agencies' primary function of education 
because the counselors spent only 12% of their time on the DMPs 
and the fees were nominal.
---------------------------------------------------------------------------
    \26\ Treas. Reg. Sec. 1.501(c)(3)-1(d)(3)(i)(b).
---------------------------------------------------------------------------
    Existing case law indicates that an organization may 
qualify for Section 501(c)(3) status if it is organized and 
operated for charitable purposes. The term charitable includes 
the relief of the distressed or poor.\27\ The term also 
includes educational organizations. The term ``educational'' 
includes (1) instruction or training of an individual for the 
purposes of improving or developing his/her capabilities and 
(2) instruction of the public on subjects useful and beneficial 
to the community.\28\ Thus the two components of education are 
individual training and public education. Whether a CCA 
operates exclusively for charitable purposes depends on the 
application of the operational test set forth in the IRS code:
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    \27\ Treas. Reg. Sec. 1.501(c)(3)-1(d)(2).
    \28\ Id. at (3).

      LAn organization will be regarded as ``operated 
exclusively'' for [charitable] purposes only if it engages 
primarily in activities which accomplish one or more 
[charitable] purposes specified in Section 501(c)(3). An 
organization will not be so regarded if more than an 
insubstantial part of its activities is not in furtherance of a 
[charitable] purpose.\29\
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    \29\ Treas. Reg. Sec. 1.501(c)(3)-1(c)(1).

    An organization is not organized or operated exclusively 
for an exempt purpose unless it serves a public rather than a 
private interest. To meet this requirement, an organization 
must establish ``that it is not organized or operated for the 
benefit of private interests such as designated individuals, 
the creator or his family, shareholders of the organization, or 
persons controlled, directly or indirectly, by such private 
interests.'' \30\ This prohibition covers ``inurement'' of 
earnings to insiders in the form of excessive compensation or 
other benefits, but it can even apply where the benefit to the 
private interest is reasonable compensation that is no more 
than fair market value for the services.\31\ An organization 
may also be considered to serve private interests if it 
provides a substantial private benefit to outsiders who do not 
constitute a charitable class.\32\
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    \30\ Id. at (ii).
    \31\ See, e.g., est of Hawaii v. Commissioner, 71 T.C. 1067 (1979) 
(``Nor can we agree with petitioner that the critical inquiry is 
whether the payments made to International were reasonable or 
excessive. Regardless of whether the payments made by petitioner to 
International were excessive, International and Est, Inc., benefited 
substantially from the operation of petitioner.''); Church by Mail v. 
Commissioner, 765 F. 2d 1387 (9th Cir. 1985).
    \32\ See, e.g., American Campaign Academy v. Commissioner, 92 T.C. 
1053, 1064 (1989), in which the Tax Court upheld denial of recognition 
of exemption under Section 501(c)(3) of an organization that provided 
training to political campaign workers because the organization's 
services were provided to persons affiliated with a particular 
political party.
---------------------------------------------------------------------------
    A charitable organization may operate a trade or business 
if it furthers an exempt purpose. The regulations under Section 
501(c)(3) provide:

      An organization may meet the requirements of Section 
501(c)(3) although it operates a trade or business as a 
substantial part of its activities, if the operation of such 
trade or business is in furtherance of the organization's 
exempt purpose or purposes and if the organization is not 
organized or operated for the primary purpose of carrying on an 
unrelated trade or business. . . . In determining the existence 
or nonexistence of such primary purpose, all circumstances must 
be considered, including the size and extent of the trade or 
business and the size and extent of the activities which are in 
furtherance of one or more exempt purposes.\33\
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    \33\ Treas. Reg. Sec. 1.501(c)(3)-1(e).

This test requires determining ``whether the [organization's] 
exempt purpose transcends the profit motive rather than the 
other way around.'' \34\ In the context of credit counseling, 
the regulations require determining whether the goal of the 
claimed educational activity is benefiting the public or simply 
generating profits for individuals and related businesses.
---------------------------------------------------------------------------
    \34\ Elisian Guild, Inc. v. United States, 412 F.2d 121, 124 (1st 
Cir. 1969), rev'g 292 F. Supp. 219 (D. Mass 1968).
---------------------------------------------------------------------------
    Tax-exempt CCAs face harsh penalties from the IRS if they 
fail to confine their activities exclusively to educational and 
charitable purposes. If a CCA is held to have conferred private 
benefits or to have violated the prohibition on inurement, its 
tax-exempt status is subject to revocation. In lieu of having 
its exemption revoked, the IRS may instead choose to impose 
``intermediate sanctions'' against the CCA or a related entity. 
Intermediate sanctions may also be imposed upon certain 
individuals who are not employed by the CCA but have engaged in 
an ``excess benefit transaction'' with the CCA, meaning that 
the person personally benefited from the CCA through, for 
example, drawing an excessive salary. An excess benefit 
transaction is any transaction where a CCA provides an economic 
benefit to a ``disqualified person'' that has a greater value 
than the value of goods or services that the CCA receives from 
the disqualified person.\35\ The tax code provides that, where 
an individual outside the CCA has substantial influence over 
the affairs of the CCA and engages in an excess benefit 
transaction with that CCA, the individual is subject to 
sanction. The sanction imposed upon such an individual is an 
excise tax equal to 25% of the excess benefit.\36\ Further, if 
the individual fails to correct the harm caused by the excess 
benefit transaction within the taxable period, a tax equal to 
200% of the excess benefit may be assessed against the 
individual.\37\
---------------------------------------------------------------------------
    \35\ 26 U.S.C. Sec. 4958(c)(1)(A). A ``disqualified person'' is 
someone who, at any time during the 5 years preceding an excess benefit 
transaction, was ``in a position to exercise substantial influence over 
the affairs of the organization.''
    \36\ 26 U.S.C. Sec. 4958(a)(1).
    \37\ Id. at (b).
---------------------------------------------------------------------------
    In addition to the serious tax consequences that could be 
assessed against CCAs and their affiliated for-profit entities, 
consumer protection laws provide additional protection against 
improper conduct in the credit counseling industry. The Federal 
Trade Commission (``FTC'') is charged with enforcing Section 
5(a) of the FTC Act, which prohibits unfair and deceptive acts 
or practices in or affecting commerce.\38\ Although the FTC 
generally lacks jurisdiction to enforce consumer protection 
laws against bona fide non-profits, it may assert jurisdiction 
over a CCA if the FTC can demonstrate that the CCA is 
``organized to carry on business for its own profit or that of 
its members,'' that it is a ``mere instrumentality'' of a for-
profit entity, or that it is operating within a ``common 
enterprise'' with one or more for-profit entities.\39\
---------------------------------------------------------------------------
    \38\ 15 U.S.C. Sec. 45(a).
    \39\ 15 U.S.C. Sec. 44; Sunshine Art Studios, Inc. v. FTC, 481 F.2d 
1171 (1st Cir. 1973); Delaware Watch Co. v. FTC, 332 F.2d 745 (2d Cir. 
1964).
---------------------------------------------------------------------------
    The Subcommittee has uncovered alarming abuses of the 
preceding regulations by three credit counseling conglomerates, 
as described in the following section.

IV. DEBTWORKS, AMERIX, AND CAMBRIDGE: THREE CASE STUDIES

    As noted above, the ``traditional'' CCA model has been in 
operation for several decades. This model was generally a 
community-based, modest operation with minimal overhead and 
expenses. There were no large fees, no large executive 
salaries, no high-priced advertising blitzes, and no expensive 
marketing campaigns. Day-to-day operations were characterized 
by face-to-face meetings between consumers and credit 
counselors that lasted in some cases for several hours. If a 
consumer enrolled in a DMP, the employees of the CCA would 
negotiate with the consumer's various creditors, set up the 
plan, and distribute payments to the creditors until the 
consumer's debts were paid in full. The traditional CCA did not 
``outsource'' any of its essential functions to for-profit 
companies, and millions of dollars did not flow through the CCA 
to for-profit companies.
    The ``new'' CCA model has modified or even reversed the 
practices of the traditional CCA. The new model is 
characterized by high consumer fees and lucrative contracts 
that benefit related for-profit companies. The revenue 
generated through DMPs is seldom spent on improving or 
expanding education or counseling, but rather on advertising, 
marketing, and other activities unrelated to assisting 
consumers with their financial problems. Although there are 
likely scores of such new CCAs currently operating, this Report 
focuses on the following three major debt management groups: 
(1) DebtWorks and The Ballenger Group conglomerate, (2) the 
Ascend One-Amerix conglomerate, and (3) the Cambridge-Brighton 
conglomerate.

  A. DebtWorks and The Ballenger Group Conglomerate

    The first case study examines DebtWorks, Inc. 
(``DebtWorks''), later purchased by The Ballenger Group, LLC 
(``Ballenger''), which provides DMP processing services to 11 
non-profit CCAs, including (1) AmeriDebt, Inc. (``AmeriDebt''), 
(2) A Better Way Credit Counseling, Inc. (``A Better Way''), 
(3) CrediCure, (4) Debticated Consumer Counseling, Inc. 
(``Debticated''), (5) Debtscape, Inc. (``Debtscape''), (6) 
DebtServe, Inc. (``DebtServe''), (7) Fairstream, Inc. 
(``Fairstream''), (8) Mason Credit Counseling (``Mason''), (9) 
Nexum Credit Counseling, Inc. (``Nexum''), (10) The Credit 
Network, Inc. (``The Credit Network''), and (11) Visual Credit 
Counseling (``Visual''). The aggregate consumer debt managed by 
those 11 CCAs has exceeded $2.5 billion.\40\
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    \40\ Letter from Ballenger to Subcommittee, dated 11/26/03, at 
Exhibit A.
---------------------------------------------------------------------------

    (1) Formation of DebtWorks and The Ballenger Group Conglomerate

    DebtWorks was organized by Andris Pukke and his wife Pamela 
Pukke (also known as Pamela Schuster). Andris Pukke entered the 
credit counseling industry by organizing and operating a for-
profit CCA in Gaithersburg, Maryland, called Consumer Debt 
Resources.\41\ In 1996, after the State of Maryland ordered 
Consumer Debt Resources to cease operations because it was a 
for-profit company, it began to wind down its affairs. At that 
same time, however, Pamela Pukke was organizing a non-profit 
CCA--AmeriDebt--Pamela Pukke acted as vice president, 
secretary, and director of the new CCA.\42\ Although not listed 
as an officer or director, Mr. Pukke regularly held himself out 
to be the president of AmeriDebt.\43\
---------------------------------------------------------------------------
    \41\ Subcommittee interview of Ballenger representatives (3/12/04).
    \42\ Articles of Incorporation, dated 12/23/96 (originally named 
Consumer Counseling Services, Inc.); AmeriDebt Form 1023, dated 3/19/
97.
    \43\ Subcommittee interview of Ballenger representatives (3/12/04).
---------------------------------------------------------------------------
    After operating as a non-profit CCA for approximately 3 
years, AmeriDebt decided to ``spin off'' its DMP processing 
function and turn it into a for-profit entity called DebtWorks, 
which was wholly owned and controlled by Mr. Pukke.\44\ 
DebtWorks was incorporated on July 21, 1999, purchased certain 
assets of AmeriDebt on September 1, 1999, and signed its first 
contract with AmeriDebt to provide DMP processing on the same 
day.\45\ AmeriDebt simply moved its DMP enrollment employees to 
a building next door while the DMP processing function 
(DebtWorks) remained in AmeriDebt's original office space.\46\ 
AmeriDebt also opened ``branch'' DMP enrollment locations in 
New York and Florida. AmeriDebt was initially DebtWorks' sole 
client, but that was soon to change as AmeriDebt officers, 
directors, and employees fanned out to form multiple CCAs, each 
of which subsequently contracted with DebtWorks for DMP 
processing services.
---------------------------------------------------------------------------
    \44\ Articles of Incorporation of DebtWorks, Inc., Bates DWS 
001538-1541.
    \45\ Id.; Asset Purchase Agreement between AmeriDebt and DebtWorks, 
dated 9/1/99, Bates DWS 001526-1535; Fulfillment Agreement between 
AmeriDebt and DebtWorks, dated 9/1/99. AmeriDebt asserts that a 
``disinterested board'' at AmeriDebt chose DebtWorks to be AmeriDebt's 
DMP processor after reviewing several bids from other entities. 
Subcommittee interview of AmeriDebt representative (2/27/04).
    \46\ Subcommittee interview of AmeriDebt representative (2/27/04).

    
    
    Most or all of the 11 non-profit DebtWorks CCAs were 
organized by insiders of AmeriDebt or by friends of Mr. Pukke, 
including: (1) Edward Catsos, the managing director of 
AmeriDebt's Florida office and who also organized DebtServe; 
\47\ (2) Edward's brother, James Catsos, who had served as 
AmeriDebt's secretary and formed Debticated with Mr. Pukke's 
brother, Eriks; \48\ (3) Andrew Smith, who served as interim 
president for AmeriDebt and formed Fairstream; (4) William 
Sargent, an AmeriDebt counseling manager who formed Debtscape; 
\49\ (5) Jeffrey Formulak and Richard Brennan, respectively 
vice president and general counsel of AmeriDebt who currently 
operate CrediCure; \50\ and, (6) Harold Patrie, an AmeriDebt 
counseling manager, who formed The Credit Network.\51\ Matthew 
Case, the current chief operating officer of AmeriDebt and long 
time family friend of Mr. Pukke, acted as president of The 
Credit Network prior to his employment with AmeriDebt.\52\ This 
proliferation of CCAs served both the interests of DebtWorks 
and the various former AmeriDebt employees: DebtWorks was 
affiliated with a larger number of CCAs and could therefore 
capture a larger market share of the DMP enrollment business, 
while the former AmeriDebt employees apparently paid themselves 
higher salaries from their CCAs than they had received at 
AmeriDebt.\53\
---------------------------------------------------------------------------
    \47\ Id.
    \48\ Id.
    \49\ Id., AmeriDebt 1998 Form 990, p. 7.
    \50\ Subcommittee interview of CrediCure representatives (4/7/04).
    \51\ Id.; see also AmeriDebt 1998 Form 990, p. 7.
    \52\ Deed of Lease Agreement for The Credit Network, dated 5/13/99.
    \53\ For example, Eriks Pukke made approximately $51,000 as an 
AmeriDebt counseling manager, but makes $85,000 as president of 
Debticated. AmeriDebt 1997 Form 990, p. 7; Debticated 2002 Form 990, p. 
4.
---------------------------------------------------------------------------
    The Subcommittee investigation uncovered significant 
evidence that these CCAs formed a common enterprise. Spirer & 
Goldberg, P.C., a law firm with a long-time relationship with 
Mr. Pukke, filed the Section 501(c)(3) applications for almost 
every CCA in the current conglomerate, including AmeriDebt, A 
Better Way, Mason, Nexum, Visual, The Credit Network, and 
Debticated. Moreover, in its application to the IRS, Mason 
listed its billing address as 12850 Middlebrook Road in 
Germantown, Maryland--the address of DebtWorks. In addition, 
some of these CCAs, such as Debticated, signed a contract with 
DebtWorks before they were even granted non-profit status.\54\ 
At least two CCAs--A Better Way and Visual--received ``start-
up'' loans from Infinity Resources Group, Inc. (``Infinity 
Resources''), a private lending institution wholly owned and 
operated by Mr. Pukke.\55\ None of the Section 501(c)(3) 
applications filed with the IRS by the new CCAs mentioned the 
fact that the applicant CCA intended to contract with DebtWorks 
for processing services, although each such CCA did.
---------------------------------------------------------------------------
    \54\ Fulfillment Agreement between Debticated and DebtWorks (8/1/
00); Letter from IRS granting Section 501(c)(3) status to Debticated 
(8/16/00).
    \55\ See, e.g., A Better Way 2000 Form 990, indicating loan of 
$150,000 from Infinity Resources.
---------------------------------------------------------------------------
    At the end of 2002, Mr. Pukke formed Ballenger for the 
purpose of purchasing the operating assets--the right to 
service DMP accounts--from DebtWorks.\56\ The DebtWorks 
managers then teamed with industry outsiders to execute a 
management buyout from Mr. Pukke for $43 million, financed with 
cash and a promissory note. Ballenger still owes Mr. Pukke and 
DebtWorks more than $37 million on this promissory note.\57\
---------------------------------------------------------------------------
    \56\ Subcommittee interviews of Ballenger representatives (1/15/04 
and 3/12/04).
    \57\ Id.
---------------------------------------------------------------------------
    Since DebtWorks and The Ballenger transaction, Ballenger 
has continued the practice of assisting with the organization 
of CCAs. For example, both Debtserve and Fairstream obtained 
start-up capital of $250,000 by way of a loan, which Ballenger 
signed as a secondary guarantor.\58\ In addition, both 
Debtserve and Fairstream were extended a functional line of 
credit by Ballenger for remittance of initial payments that 
were due to Ballenger.\59\
---------------------------------------------------------------------------
    \58\ Subcommittee interview of Ballenger representatives (3/12/04).
    \59\ Id.
---------------------------------------------------------------------------

    (2) Control of the Affiliated Credit Counseling Agencies

    DebtWorks exercised control of its affiliated CCAs through 
certain contracts, termed ``Fulfillment Agreements,'' with each 
CCA. Basically, the Fulfillment Agreements contracted all 
functions of the CCAs to DebtWorks except for the actual 
enrollment of consumers into DMPs: ``DebtWorks shall perform 
all fulfillment, back-office, and customer relations services 
for budget plan clients of [the CCA], with the exception of 
intake and counseling services.'' \60\ In effect, the CCA 
served as a mere ``call center'' from which consumers could be 
enrolled into DMPs. All operations from that point forward were 
contractually turned over to DebtWorks.
---------------------------------------------------------------------------
    \60\ See, e.g., Fulfillment Agreement between DebtWorks and Mason, 
dated September 6, 2001.
---------------------------------------------------------------------------
    After Mr. Pukke sold the DMP portfolio of DebtWorks to 
Ballenger, Ballenger added a new term to the Fulfillment 
Agreements that conferred additional control over the CCAs. 
Specifically, Ballenger added a term that charged each CCA a 
standard fee of $50 for each new DMP enrollment, and an 
additional $25 per month for each active DMP.\61\ However, if 
the CCA could not for some reason obtain the standard fee from 
the consumer, Ballenger required a minimum $20 start-up fee and 
a minimum $10 monthly fee for each DMP. As a result, each CCA 
was contractually required to pay Ballenger for each DMP that 
it initiated and maintained. Each CCA was therefore required to 
generate income from its consumers or be considered in breach, 
regardless of the fact that the income it generated from 
consumers supposedly consisted solely of ``voluntary'' 
contributions. The result was that Ballenger required each non-
profit CCA to pay it for DMP enrollment and maintenance, even 
if a new DMP generated no revenue for the CCA. Such control 
over the CCA's revenue limited the CCA's ability to direct 
funding toward counseling, education, or other matters.
---------------------------------------------------------------------------
    \61\ Id. at para. 4.1.
---------------------------------------------------------------------------
    Other provisions in the Fulfillment Agreement further 
demonstrated Ballenger's control over its CCAs. For example, 
Ballenger required exclusive rights to each CCA's consumer 
trust accounts and reserved the right to withdraw funds 
electronically as well as draw checks on those accounts. In 
fact, if the CCA itself accessed its account, it was deemed a 
breach of the agreement subject to termination and entitled 
Ballenger to ``liquidated damages.'' \62\ Another provision in 
the Fulfillment Agreement allowed Ballenger to determine, by 
its sole discretion, that (1) a CCA was in breach of the 
agreement, and (2) if not cured within 30 days, Ballenger may 
transfer the CCA's DMPs to another CCA serviced by 
Ballenger.\63\ Thus a consumer that signed up for a DMP with a 
particular CCA could be transferred to another CCA of 
Ballenger's choice without consulting the consumer. In effect, 
Ballenger had total control over the DMP once established.
---------------------------------------------------------------------------
    \62\ Id. at para. 2.3.
    \63\ Id. at para. 6.4.2.
---------------------------------------------------------------------------

    (3) LPrivate Benefits to the For-Profit Corporations

    DebtWorks reported gross revenues of $2,160,100 in 1999, 
$15,411,072 in 2000, $38,066,044 in 2001, and $53,117,661 in 
2002.\64\ These figures document a 2359% increase in gross 
revenues over 3 years. In all, between 1999 and 2002, DebtWorks 
obtained nearly $109 million in gross revenues from its ``non-
profit'' CCA affiliates. Even if those revenues were realized 
by DebtWorks through arms-length transactions at fair market 
value, the evidence suggests that the DebtWorks CCAs are not 
operating exclusively for exempt purposes, and therefore, may 
be in violation of tax regulations because they are providing 
excess benefits.\65\ If the revenues received by DebtWorks from 
their affiliated CCAs were the result of excess benefit 
transactions, then intermediate sanctions may be warranted.\66\
---------------------------------------------------------------------------
    \64\ DebtWorks 1999-2002 Form 1120S, Bates DWS 005411-5510. 
DebtWorks was allegedly unable to provide the Subcommittee with 
executed tax returns. This data was therefore taken from its draft 
returns.
    \65\ Treas. Reg. Sec. 1.501(c)(3)-1(a), see also, Private Benefit 
Under IRC 501(c)(3), p. 135.
    \66\ 26 U.S.C. Sec. 4958.
---------------------------------------------------------------------------
    Servicing the DebtWorks portfolio has continued to be 
lucrative for Ballenger since its transaction with DebtWorks. 
In 2003, Ballenger realized gross receipts of $37,390,906.\67\ 
Ballenger is owed an additional $10.7 million from affiliated 
CCAs, most of which are in arrears. Like DebtWorks' revenue, 
all of the revenue received by Ballenger comes from consumers 
who enroll in DMPs through the ``non-profit'' CCAs.
---------------------------------------------------------------------------
    \67\ Ballenger Accounts Receivable, Bates 01241.
---------------------------------------------------------------------------
    Mr. Pukke also continues to profit from Ballenger's CCAs by 
offering consumers debt consolidation loans through his company 
Infinity Resources. Several of the current Ballenger CCAs 
operate a program where they refer consumers to Infinity 
Resources, which charges a fee to process a consumer's loan 
application and then profits from the interest earned on the 
loan itself. For example, Eriks Pukke's CCA--Debticated--
promotes the Infinity Resources debt consolidation loan as a 
key component of Debticated's program:

      Debticated, Inc. is the ONLY company in the country that 
offers such a unique and beneficial debt consolidation program.

      Our ``six month'' program has revolutionized the debt 
consolidation industry by providing clients with the benefits 
associated with working with a non-profit credit counseling 
company, combined with the opportunity for a complete debt 
consolidation loan.

      If you successfully complete the [six month] program we 
will attempt to secure a debt consolidation loan for you. . . . 
This is the ultimate goal of the program.\68\
---------------------------------------------------------------------------
    \68\ Debticated promotional materials faxed to a consumer (name 
withheld) on February 28, 2001 (emphasis in original).

This advertisement indicates that the stated goal of Debticated 
is not to provide credit counseling, education, or debt 
management, but rather to refer consumers to a for-profit 
entity for a loan consolidation. Additionally, Debticated is 
hardly the ``only'' CCA that offers debt consolidation loans 
with Infinity Resources: A Better Way, The Credit Network, and 
AmeriDebt all offer the same service.\69\ Mr. Pukke and 
Infinity Resources have become the subject of a number of legal 
actions for their treatment of consumers referred to Infinity 
Resources by AmeriDebt. In addition to several civil lawsuits 
brought against Infinity Resources, Mr. Pukke pleaded guilty in 
1996 to a Federal charge of defrauding consumers by falsely 
promising to broker debt-consolidation loans while pocketing 
excessive application fees.\70\ Nevertheless, between 1999 and 
2002, Infinity Resources reported gross revenues in excess of 
$8.3 million.\71\
---------------------------------------------------------------------------
    \69\ A Better Way Form 1023, Tab D, dated January 20, 2000; The 
Credit Network Form 1023, Tab D, dated September 23 1999; Caroline E. 
Mayer, ``Easing the Credit Crunch?,'' The Washington Post, November 4, 
2001.
    \70\ Caroline E. Mayer, ``Easing the Credit Crunch?,'' The 
Washington Post, November 4, 2001.
    \71\ Infinity Resources 1999-2002 Form 1120S, Bates DWS 005289-
5410. Infinity Resources was allegedly unable to provide the 
Subcommittee with executed tax returns. This data was therefore taken 
from its draft returns.
---------------------------------------------------------------------------
    A referral by a non-profit CCA to a for-profit entity for 
debt consolidation loans does not serve any educational or 
charitable purpose. Such referral activities, if more than 
insubstantial, may constitute a private benefit to Infinity 
Resources that is prohibited under the tax code and could 
support revocation of the Section 501(c)(3) status of any 
Ballenger CCA that makes such referrals. If the revenues 
received by Infinity Resources between 1999 and 2002 were the 
result of excess benefit transactions, then intermediate 
sanctions may be warranted.\72\
---------------------------------------------------------------------------
    \72\ 26 U.S.C. Sec. 4958.
---------------------------------------------------------------------------

    (4) Harm to Consumers

    Consumer Jolanta Troy, who was harmed by AmeriDebt, 
testified about her experiences at the hearing on March 24, 
2004. Ms. Troy was a 46-year-old mother of two children, ages 
11 and 16, when she heard an AmeriDebt radio commercial. Ms. 
Troy had recently been divorced and began accumulating debt 
soon thereafter. Her job as a behavior specialist consultant 
working with mentally ill and behaviorally challenged children 
did not provide her with enough income to repay $30,000 in 
credit card debt and support her children. Ms. Troy contacted 
AmeriDebt in 2001, and was informed by Vicky, an AmeriDebt 
``counselor,'' about the benefits of enrolling in a DMP. Ms. 
Troy told Vicky that she wanted to think about whether to sign 
up for a DMP, but soon thereafter received 3 to 4 additional 
calls from AmeriDebt, pressuring her to enroll.
    Ms. Troy agreed to enroll and was told that her first 
payment would be $783. She was told to rush the payment by 
Western Union ``so that her bills would be paid on time.'' 
Vicky told her that she could make a voluntary contribution at 
a later date when she was more financially stable. Ms. Troy 
mailed in her $783 payment, but continued to receive calls from 
creditors. She then called AmeriDebt to inquire about her 
account and was informed that AmeriDebt had kept her first 
payment and had sent nothing to her creditors. Ms. Troy 
requested a refund and was denied, even after complaining to 
the Better Business Bureau. Ms. Troy then believed her only 
option was to declare bankruptcy, which she did later that 
year. Needless to say, she received no counseling or education 
from AmeriDebt during any of their telephone conversations.\73\
---------------------------------------------------------------------------
    \73\ Subcommittee interview with Jolanta Troy (3/15/04).
---------------------------------------------------------------------------
    Ms. Troy's experience with AmeriDebt appears to be all too 
common. Like most consumers with severe financial problems, Ms. 
Troy was vulnerable to the sales pitch of a company claiming to 
be a ``non-profit'' that would solve all her debt problems. She 
testified, ``The counselor said that AmeriDebt was a non-
profit--like a charity--and I needed their help. Because 
AmeriDebt said it was a non-profit, I thought I could trust 
them.'' AmeriDebt counselors preyed on her fears and 
vulnerabilities with high-pressure sales tactics that were 
intrusive and often belittling.
    At the Subcommittee's hearing, Senator Carl Levin 
questioned Matthew Case, the President of AmeriDebt, about such 
tactics. Senator Levin asked Mr. Case about an AmeriDebt script 
that tells employees how to respond to a consumer that says, 
``I can't afford a contribution right now but maybe I can 
afford to contribute later.'' The AmeriDebt script instructs 
the counselor to respond with:

      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 creditor's pocket as extra interest? Would you 
rather support a non-profit company or help a bank get richer? 
\74\
---------------------------------------------------------------------------
    \74\ Profiteering in a Non-Profit Industry: Abusive Practices in 
Credit Counseling, March 24, 2004, Official Hearing Record, Exhibit No. 
14, p. 260.

    Senator Levin asked Mr. Case ``If you don't call that 
pressure on somebody to make a contribution how would you label 
that?'' ``I would call it pressure,'' Mr. Case said.
    Other examples of instructing AmeriDebt counselors how to 
quickly make a ``sale'' are found in the AmeriDebt employee 
training manual:

     If you can assume a position of authority, you 
will find that people give it over to you without resistance. 
\75\
---------------------------------------------------------------------------
    \75\ Profiteering in a Non-Profit Industry: Abusive Practices in 
Credit Counseling, March 24, 2004, Official Hearing Record, Exhibit No. 
12, p. 258.

     Create a sense of urgency, ``Your creditors want 
you to get started as soon as possible. The quicker you get 
started, the faster you will be out of debt.'' \76\
---------------------------------------------------------------------------
    \76\ Id.

     Be prepared! If you can't answer questions or 
make the right point, it could be the difference in a sale or 
no sale. \77\
---------------------------------------------------------------------------
    \77\ Id.

    By focusing on the sale of DMPs, the consumer misses 
valuable counseling and education addressing the source of the 
consumer's financial problems. Senator Mark Dayton asked Mr. 
Case at the hearing, ``Where is the counseling? What is the 
content of the counseling?'' Mr. Case replied, ``Right up 
front, there is a budget analysis done right away because 
different people are in different situations.'' The 
Subcommittee finds that a simple budget analysis solely to 
determine if a consumer is a candidate for a DMP fails to meet 
the charitable purpose required of tax-exempt organizations. In 
addition, the consumer's desperate state generally makes it 
easier for AmeriDebt, and other companies like it, to persuade 
consumers to ``buy'' a DMP at inflated prices with few 
services. As in Ms. Troy's case, the non-profit status often 
provides a sense of trustworthiness that lowers the consumer's 
scrutiny of both the DMP and AmeriDebt.
    The Subcommittee's investigation also determined that the 
fee Ms. Troy was charged bore no relation to the cost of the 
services that would have been provided to her by AmeriDebt. The 
initial DMP start-up fee charged by AmeriDebt and the other 10 
CCAs serviced by DebtWorks and Ballenger is based upon the 
consumer's aggregate debt, rather than the actual expense of 
initiating a DMP. Specifically, the consumer is generally asked 
to make a contribution equaling 3% of their aggregate debt. For 
example, if a consumer owes a total of $25,000 the initial 
``contribution'' would be $750 (3% of $25,000). In contrast, 
the start-up fee at the average NFCC member agency for a 
consumer who owes $25,000 would be $23.09.\78\
---------------------------------------------------------------------------
    \78\ NFCC 2002 Member Activity Report, p. 30.
---------------------------------------------------------------------------
    Furthermore, as in the case of Ms. Troy, consumers are 
often left with the impression that this initial fee amount 
will be sent to their creditors, when in fact it is retained by 
the CCA. Ms. Troy testified at the Subcommittee's hearing, ``I 
could not afford to give AmeriDebt almost $800. I thought the 
money would go to my credit cards to pay down the balances.''
    Aside from the initial start-up ``contribution,'' Ballenger 
also charged consumers a monthly DMP maintenance 
``contribution.'' Again, the contribution amount was not based 
upon actual costs or the value of the service to the consumer, 
but upon the number of credit cards included in the DMP--
generally $7 per credit card with a minimum of $20 per month 
and a maximum of $70 per month. Average monthly fees at NFCC 
members, in contrast, are $10 per month.
    The profit motive of AmeriDebt is also illustrated through 
its employee management practices. John Paul Allen, a former 
AmeriDebt ``counselor,'' testified at the hearing, ``I should 
have seen a red flag during my interview with AmeriDebt when I 
was asked by my interviewers to sell them a stapler. That is 
really what AmeriDebt is about--sales.'' AmeriDebt's objectives 
are evident through management incentives such as bonuses for 
DMPs both in quantity and quality--the more DMPs signed up and 
the larger the first up-front payment, the larger the bonus for 
the counselor.\79\ NFCC and AICCCA member CCAs do not allow 
incentives tied to DMPs, because it gives counselors a motive 
to place consumers on DMPs instead of just providing counseling 
or financial education. In fact, Mr. Allen was reprimanded 
repeatedly for informing his customers that they did not have 
to pay the ``voluntary contribution.'' Allen testified, ``My 
managers would say `Think of all the money you could make if 
you would collect those voluntary contributions.' '' When 
consumers were hesitant to give a contribution, Allen 
testified, ``We were instructed to say things like `Don't you 
want us to be around for the next person?' or we would tell 
them that we were a non-profit and thus subject to audit by the 
IRS.'' \80\
---------------------------------------------------------------------------
    \79\ Subcommittee interview with John Paul Allen (2/21/04).
    \80\ Id.
---------------------------------------------------------------------------
    Customer service was another AmeriDebt issue Allen had 
concerns with.\81\ He testified, ``I would get calls from 
people two and three months after I set them up on a plan, 
complaining that their creditors still had not received a 
payment.'' These situations, like Ms. Troy's, are examples of 
consumers who were unaware AmeriDebt would keep the first 
payment. Since their creditors did not receive payment, the 
consumers accrued monthly late fees, and could end up in a 
worse financial predicament than when they started with 
AmeriDebt.
---------------------------------------------------------------------------
    \81\ Id.
---------------------------------------------------------------------------

  B. The Ascend One-Amerix Conglomerate

    The second case study examines the Ascend One-Amerix 
conglomerate. Amerix Corporation (``Amerix'') provides DMP 
processing services for five non-profit CCAs: (1) American 
Financial Solutions (``AFS''); (2) Genesis Financial 
Management, Inc. (``Genesis''); (3) Consumer Education 
Services, Inc. (``CESI''); (4) Clarion Credit Management 
(``Clarion''); and (5) Debt Management Group. The combined 
consumer debt under the management of these five CCAs exceed 
$4.1 billion.\82\
---------------------------------------------------------------------------
    \82\ Amerix Active Clients and Total Debt as of October 2003, Bates 
AMX 000001.
---------------------------------------------------------------------------

    (1) Formation of the Ascend One-Amerix Conglomerate

    Amerix is one of four for-profit companies wholly owned by 
a holding company called Ascend One Corporation (``Ascend 
One''), 87% of which is owned by Bernaldo Dancel, the President 
and CEO of Ascend One.\83\ An organizational chart of Ascend 
One and its affiliates is shown below:
---------------------------------------------------------------------------
    \83\ Stockholders of Ascend One Corporation, Bates AMX 000008.

    
    
    In November 1992, Mr. Dancel founded a non-profit CCA 
called Genus Credit Management (``Genus''). In October 1996, 
Mr. Dancel split Genus into two parts, dividing the counseling 
function and DMP portfolio from the processing function. On 
October 3, 1996, Mr. Dancel incorporated Amerix as a for-profit 
business to provide DMP processing services for the Genus DMP 
portfolio. Mr. Dancel severed his management ties to Genus 
around that same time in order to run Amerix.
    Over the next several years, Amerix facilitated the 
establishment of several CCAs to serve as sources of revenue 
for Amerix. Amerix approached community colleges and 
universities with the express purpose of proposing a ``start-
up'' CCA.\84\ In all, between 1998 and 2003, Amerix made 
presentations to almost 30 colleges and universities.\85\ Under 
normal circumstances, a new CCA is required to apply to the IRS 
for Section 501(c)(3) status. The IRS then has the opportunity 
to review the application of each new CCA and determine whether 
the applicant qualifies for non-profit status. However, by 
finding existing Section 501(c)(3) organizations (such as 
community colleges and universities) that could be used to 
establish CCAs, Amerix facilitated the establishment of new 
CCAs while bypassing the scrutiny of the IRS associated with 
applying for new Section 501(c)(3) status. In this manner, AFS 
was organized under the Section 501(c)(3) status of the North 
Seattle Community College Foundation.\86\ Other Amerix CCAs 
such as Clarion and Debt Management Group were similarly 
organized through pre-existing Section 501(c)(3) entities that 
did not perform credit counseling services prior to their 
relationship with Amerix.\87\ This practice effectively side-
stepped IRS review of these new entrants into the credit 
counseling industry.
---------------------------------------------------------------------------
    \84\ Subcommittee interview of Amerix representative (1/30/04).
    \85\ See list of colleges, universities, and non-profits presented 
with start-up opportunity, Bates AMX 001732.
    \86\ Letter from AFS to Subcommittee, dated 11/19/03.
    \87\ Telephone interview of Clarion representative (3/9/04).
---------------------------------------------------------------------------
    In addition to Amerix (which provided DMP processing 
services), Ascend One created additional for-profit 
corporations to serve its CCAs, including FreedomPoint, 3C 
Inc., and FreedomPoint Financial. FreedomPoint marketed various 
specialized products such as ``prepaid'' credit cards and tax 
settlement products to consumers carrying significant debt.\88\ 
3C Inc. owned the ``CareOne'' service mark under which Amerix's 
CCAs are marketed to the public. FreedomPoint Financial served 
as a mortgage broker and marketed mortgage-related products to 
highly indebted consumers. Ascend One also operated a website 
called ``CareOne,'' which functioned as a referral service, 
matching inquiring consumers with the closest CCA in the Ascend 
One conglomerate.
---------------------------------------------------------------------------
    \88\ Subcommittee interview of Amerix representative (1/30/04).
---------------------------------------------------------------------------
    Some of the five CCAs in the Ascend One conglomerate 
referred consumers to FreedomPoint and FreedomPoint Financial. 
As noted above, a CCA will not be regarded as tax-exempt ``if 
more than an insubstantial part of its activities is not in 
furtherance of an exempt purpose.'' \89\ Referrals by a non-
profit CCA to for-profit entities selling credit cards, 
mortgage brokerage services, and other products are 
questionable because a non-profit must serve an educational or 
charitable purpose. Such referral activities, if more than 
insubstantial, may constitute a private benefit to Ascend One 
that is prohibited under the tax code and could lead to 
revocation of the Section 501(c)(3) status of each CCA that 
makes such referrals.
---------------------------------------------------------------------------
    \89\ Treas. Reg. Sec. 1.501(c)(3)-1(c), see also, Private Benefit 
Under IRC 501(c)(3), pp. 135-39.
---------------------------------------------------------------------------

    (2) Control of the Affiliated Credit Counseling Agencies

    Although Amerix did not own any of the five CCAs it helped 
to establish, Amerix exerted control over them through its 
Service Agreements. The Service Agreements were generally 
entered into by Amerix and a new CCA as part of the CCA's 
``start-up'' arrangement. A key term in Amerix's Service 
Agreement required CCAs to enroll 30% of their callers onto a 
DMP: ``During the Term, [the CCA] agrees to maintain an Assist 
Rate of not less than 30%'' where ``Assist Rate'' is defined as 
``the ratio of Client Commitments to First Time Calls per 
Counselor per month.'' \90\ That meant for every 10 calls 
received by a CCA, at least three must be placed into a DMP or 
the CCA was considered in breach of contract. Indeed, Amerix 
has taken legal action against one of its CCAs--Genesis--for 
its failure to maintain a 30% ``assist rate.'' \91\ Such 
contractual requirements essentially remove the discretion and 
judgment of a credit counselor as to which consumers they 
should enroll in DMPs.
---------------------------------------------------------------------------
    \90\ Service Agreement between Amerix and Genesis Financial 
Management, Inc., dated 9/9/02, para. 14. Amerix's other CCAs are also 
required to carry an Assist Rate of 30%.
    \91\ Amerix Corporation v. Genesis Financial Management, Inc., No. 
16 Y 181 00463 03, Before the American Arbitration Association, filed 
on 9/2/03.
---------------------------------------------------------------------------
    In addition to the ``assist rate'' requirement, additional 
provisions in the Service Agreements required each DMP to 
generate a minimum of $30 each month per DMP, termed the 
``revenue standard.'' \92\ This requirement meant that each CCA 
was contractually required to find money from some source for 
each DMP to meet the ``revenue standard'' in their Service 
Agreement. Each CCA was therefore required to generate income 
from its consumers or be considered in breach, regardless of 
the fact that all income generated from consumers was 
supposedly ``voluntary.''
---------------------------------------------------------------------------
    \92\ See, e.g., Service Agreement between Amerix and AFS, dated 10/
18/02, para. 15.
---------------------------------------------------------------------------
    The control granted to Amerix through the ``assist rate'' 
and ``revenue standard'' provisions indicates that Amerix's 
CCAs may be operating for a private, rather than public, 
purpose. Control of a non-profit by a for-profit is not 
permitted under the Internal Revenue Code due to the potential 
for abuse of the non-profit agency by the for-profit 
corporation. If a CCA ``is closely controlled . . . by . . . a 
for-profit management company that operates with a great amount 
of autonomy'' then the CCA must establish that the CCA is not 
organized or operated for the benefit of private interests, 
according to the IRS.\93\ This analysis is called the 
``operational test'' and is usually conducted during the 
Section 501(c)(3) application process. Amerix's practice of 
organizing CCAs through existing Section 501(c)(3) entities, 
however, deprived the IRS of the opportunity to determine the 
extent of control that Amerix would possess over associated 
CCAs when first established.
---------------------------------------------------------------------------
    \93\ Private Benefit Under IRC 501(c)(3), p. 136.
---------------------------------------------------------------------------

    (3) Private Benefits to the For-Profit Corporations

    On November 1, 2001, Mr. Dancel sold Genus' DMP portfolio 
to AFS for $17 million. AFS told the Subcommittee that the sale 
price of the Genus portfolio was based upon the future revenues 
that would be generated by the portfolio from fees and fair 
share payments over a period of several years.\94\ AFS, 
however, was already under contract to pay Amerix for 
processing services on all of AFS's DMP accounts. Therefore, 
AFS paid $17 million to Amerix for the DMP portfolio itself, 
and since that time has paid Amerix out of the revenues 
generated by the same portfolio. For example, in fiscal year 
2001, AFS paid Amerix more than $70 million in processing fees 
for servicing their DMP portfolio and paid back over $7.4 
million of the outstanding loan.\95\ Such ``double payment'' by 
AFS to Amerix for the same goods and services may constitute an 
excess benefit transaction under the Internal Revenue Code, and 
could subject Amerix to excise taxes on any excess benefit.\96\
---------------------------------------------------------------------------
    \94\ Subcommittee interview of AFS representative (1/22/04).
    \95\ AFS 2001 Form 990.
    \96\ 26 U.S.C. Sec. 4958.
---------------------------------------------------------------------------
    Amerix and Ascend One have enjoyed great financial benefits 
from their contracts with the CCAs. Under the terms of Amerix's 
``Fee Schedule,'' Amerix was to receive between 50-85% of every 
dollar received by the CCA. If a consumer contacted an Amerix 
CCA directly and enrolled in a DMP, then Amerix was to receive 
50% of all the non-profit's revenue--enrollment fees, monthly 
fees, voluntary contributions, and creditor fair share 
payments--generated by that DMP in exchange for Amerix's 
processing services.\97\ If the consumer contacted and enrolled 
with the CCA as a result of a referral from Amerix, Amerix was 
then entitled to 68% of all revenue generated by the DMP.\98\ 
Finally, if a consumer enrolled in a DMP entirely through the 
``CareOne'' website, then Amerix was entitled to 85% of all 
revenue generated by the DMP.\99\ Such pricing levels were 
based not upon the cost of the processing services provided by 
Amerix, but rather upon the results of lead generation and 
marketing activities.
---------------------------------------------------------------------------
    \97\ See, e.g., Service Agreement between Amerix and AFS, dated 10/
18/02, Schedule B, p. 20.
    \98\ Id.
    \99\ Subcommittee interview of Genesis representative (2/24/04). 
The questionable practice of enrolling on a DMP entirely through the 
Internet is discussed below.
---------------------------------------------------------------------------
    The Service Agreements have, in fact, been lucrative for 
Amerix. Amerix reported gross revenues of $43,292,677 in 1998, 
$79,805,084 in 1999, $91,686,853 in 2000, $76,382,167 in 2001, 
and $95,286,442 in 2002.\100\ These figures represent an 
increase of 120% in gross revenues during this time period. In 
all, between 1998 and 2002, Amerix received $386 million in 
gross revenues--all of which was generated by the ``non-
profit'' credit counseling industry. Even if the amounts above 
had been realized by Amerix through arms-length transactions at 
fair market value, the absence of any charitable or educational 
purpose suggests that the Amerix CCAs were not operating 
exclusively for exempt purposes and therefore may be in 
violation of tax regulations.\101\ If the revenues received by 
Amerix between 1998 and 2002 were the result of excess benefit 
transactions, then intermediate sanctions may be warranted 
against Amerix.\102\
---------------------------------------------------------------------------
    \100\ Amerix/Ascend One 1998-2002 Form 1120S, Bates AMX 001452-
1730.
    \101\ Treas. Reg. Sec. 1.501(c)(3)-1(a); see also, Private Benefit 
Under IRC 501(c)(3), p. 135.
    \102\ 26 U.S.C. Sec. 4958.
---------------------------------------------------------------------------

    (4) Harm to Consumers

    Like DebtWorks CCAs, some Amerix CCAs charged excessive DMP 
fees. On the other hand, at least two Amerix CCAs--AFS and Debt 
Management Group--had capped their fees as a result of their 
membership in the Association of Independent Consumer Credit 
Counseling Agencies. As such, the harm caused to consumers from 
unreasonable DMP fees was greatly mitigated at these two CCAs. 
Even these Amerix CCAs, however, failed consumers by neglecting 
to provide adequate counseling and education.
    Amerix CCAs provided few services to their clients. Through 
Ascend One's ``CareOne'' website and links at each of the 
Amerix CCA websites, a consumer was permitted to enroll in a 
DMP without a single contact with a credit counselor at any of 
the five CCAs in the Amerix conglomerate. Since a CCA's 
charitable status is largely dependent upon its providing 
educational services, there is no reasonable reading of IRS 
regulations or case law that permits a CCA to enroll a consumer 
into a DMP without the consumers interacting with a credit 
counselor.\103\
---------------------------------------------------------------------------
    \103\ See, e.g., Consumer Credit Counseling Service of Alabama v. 
United States, No. 78-0081, 1978 U.S. Dist. LEXIS 15942 (D.D.C. Aug. 
18, 1978).
---------------------------------------------------------------------------
    Until March 24, 2004, Amerix employed between 30 and 40 
``credit counselors'' at its location in Columbia, Maryland. 
These ``counselors'' provided DMP enrollment services for 
Amerix's affiliated CCAs when a particular CCA could not at 
that moment provide services to a consumer. For instance, if a 
consumer on the East Coast telephoned AFS (located in Seattle) 
during the morning hours (before AFS was open for business) the 
caller was routed to Amerix in Maryland. From there, an Amerix 
``credit counselor'' enrolled the consumer in a DMP. Any CCA 
that knowingly allowed its services to be transferred to a for-
profit company, however, may be placing itself in jeopardy of 
losing its license in states that allow only non-profit 
agencies to provide credit counseling services.
    Amerix stated that the reason why it approached colleges 
and universities to pitch CCA ``start-up'' opportunities was 
because those organizations could educate consumers about their 
finances.\104\ It does not appear, however, that any Amerix 
CCAs provide classes to consumers on credit practices or 
budgeting. Genesis told the Subcommittee that it would like to 
provide counseling and education, but it was unable to do so 
due to a lack of funds after making the payments required under 
its Service Agreement with Amerix.\105\
---------------------------------------------------------------------------
    \104\ Subcommittee interview of Amerix representative (1/30/04).
    \105\ Subcommittee interview of Genesis representative (2/24/04).
---------------------------------------------------------------------------
    Consumers who actually enrolled in a DMP with AFS were 
allowed access to a website that had some form of interactive 
program regarding spending and budgeting.\106\ However, AFS did 
not permit consumers who did not enroll in a DMP to have access 
to that website even though AFS's non-profit mission is to 
provide counseling and education to all consumers in need of 
such help.
---------------------------------------------------------------------------
    \106\ Subcommittee interview of AFS representative (1/22/04).
---------------------------------------------------------------------------
    AFS told the Subcommittee that, originally, it had high 
hopes of raising funds for grants and scholarships for students 
enrolled at North Seattle Community College. On March 18, 2002, 
shortly after AFS acquired the DMP portfolio of Genus, the CEO 
of AFS stated that ``we're generating more revenue than the 
foundation ever did. We anticipate giving (North Seattle 
Community College) in the multimillions of dollars over the 
next few years'' and expected that their next donation would 
perhaps be in the million-dollar range.\107\ Although AFS 
obtained gross revenues of $75,165,312 during the following 
fiscal year, it managed to donate only 0.8% of that amount 
($581,766) for the college's grants and scholarships.\108\ 
Ironically, 2 years prior to the AFS-Genus transaction, when 
AFS had total revenues of just $4,180,059, it donated 16% of 
that amount ($673,306) in grants and scholarships.\109\
---------------------------------------------------------------------------
    \107\ Jeanne Lang Jones, ``A Strong Foundation: $17M Purchase Makes 
College's Nonprofit Arm the Largest U.S. Credit Counseling Firm,'' 
Puget Sound Business Journal, March 18, 2002.
    \108\ AFS 2002 Form 990, pp. 1-2, Bates AFS 01849-01882.
    \109\ AFS 2000 Form 990, pp. 1-2.
---------------------------------------------------------------------------

  C. The Cambridge-Brighton Conglomerate

    The third case study examines the Cambridge-Brighton 
conglomerate, a complex web of interrelated non-profit and for-
profit entities with overlapping directorates and ownership. 
The Subcommittee's investigation has determined that the 
operations of the Cambridge-Brighton conglomerate were 
completely integrated and controlled by brothers John and 
Richard Puccio. Brighton Debt Management Services, Ltd. 
(``Brighton DMS'') provided DMP processing services to three 
CCAs: (1) Cambridge Credit Counseling Corp., a non-profit CCA 
based in Massachusetts; (2) Brighton Credit Management Corp., a 
for-profit CCA based in Florida; and (3) Cambridge/Brighton 
Budget Planning Corp., a CCA based in New York with a pending 
application for Section 501(c)(3) status. Debt Relief 
Clearinghouse Ltd. was the for-profit marketing arm for the 
conglomerate, and Cypress Advertising & Promotions, Inc. 
(``Cypress'') provided advertising services.\110\ Brighton DMS 
processed DMP accounts amounting to approximately $900 million 
of consumer debt.
---------------------------------------------------------------------------
    \110\ Subcommittee interview of Cambridge and Brighton DMS 
representatives (1/20/04).



    (1) Formation of the Cambridge-Brighton Conglomerate

    The Cambridge-Brighton conglomerate was originally 
organized by John and Richard Puccio as a for-profit 
enterprise. Two entities--Cambridge Credit Corporation 
(``Cambridge Credit'') and Brighton Credit Corporation 
(``Brighton Credit'')--were incorporated on April 20, 1993 and 
October 28, 1993, respectively, as for-profit corporations in 
New York.\111\ The two entities operated out of the same 
location.\112\ Cambridge Credit performed the DMP enrollment 
function while Brighton Credit performed the DMP processing 
services.\113\ In 1996, after operating for approximately 3 
years, the New York Banking Department served a cease and 
desist order prohibiting the two entities from performing 
credit counseling services in New York because they were for-
profit organizations.\114\
---------------------------------------------------------------------------
    \111\ Cambridge Credit Corporation 1998 Form 1120S, Bates 00297-
312; Brighton Credit Corporation 1998 Form 1120S, Bates 00230-243.
    \112\ Id.
    \113\ Subcommittee interview of Cambridge and Brighton DMS 
representatives (1/20/04).
    \114\ Id.
---------------------------------------------------------------------------
    The Puccio brothers moved their principal operations to 
Massachusetts where they formed several new corporations, 
including Cambridge Credit Counseling Corp. (``Cambridge'') and 
Brighton Credit Corporation of Massachusetts (``Brighton 
Mass.''), later known as Brighton Debt Management Services 
(``Brighton DMS).\115\ As was the case in New York, one 
entity--Cambridge--was organized to perform the DMP enrollment 
function while a for-profit entity--Brighton Mass.--was 
organized to perform the DMP processing and to lease equipment, 
personnel, software, and provide ``other services'' to 
Cambridge.\116\ Cambridge applied for Section 501(c)(3) status, 
which was granted by the IRS on February 12, 1998.\117\ In 
terms of aggregate debt, Cambridge is currently the largest CCA 
in the Cambridge-Brighton conglomerate.
---------------------------------------------------------------------------
    \115\ Brighton Mass. 1998 Form 1120S, Bates 00423-435 (Brighton 
DMS, incorporated on March 21, 2003, was originally incorporated and 
did business as ``Brighton Credit Corporation of Massachusetts'').
    \116\ Cambridge 1997 Form 990, p. 16, Bates 00175; Subcommittee 
interview of Cambridge and Brighton DMS representatives (1/20/04). 
Brighton DMS was incorporated on March 21, 2003 to perform DMP 
processing for all Cambridge-Brighton CCAs.
    \117\ Letter from IRS to Cambridge, dated 2/12/98, Bates 00002-4.
---------------------------------------------------------------------------
    Despite the cease and desist order from the New York 
Banking Department, John and Richard Puccio incorporated 
another New York entity--the non-profit Cambridge/Brighton 
Budget Planning Corporation (``Cambridge/Brighton'')--on 
December 6, 1996.\118\ Cambridge/Brighton operated in the same 
space previously occupied by Cambridge Credit and Brighton 
Credit.\119\ Like Cambridge, Cambridge/Brighton was under 
contract with Brighton DMS for all processing services 
associated with its DMP portfolio. A third CCA was organized as 
a for-profit corporation in Florida--Brighton Credit Management 
Corp. (``Brighton Credit Management''). Like Cambridge and 
Cambridge/Brighton, Brighton Credit Management outsourced all 
of its DMP processing services to Brighton DMS.
---------------------------------------------------------------------------
    \118\ Cambridge/Brighton Attachment to Form 1023, Bates 20698.
    \119\ Cambridge/Brighton 2002 Form 990, Bates 20643-65.
---------------------------------------------------------------------------
    In addition, the Puccio brothers created two other wholly-
owned and controlled, for-profit entities that conducted 
business with the three Cambridge-Brighton CCAs. On July 17, 
1996, Cypress Advertising & Promotions, Inc. was created by the 
Puccios to ``procure advertising space/time'' for the 
Cambridge-Brighton CCAs. On January 27, 2000, another for-
profit company named Debt Relief Clearinghouse, Ltd. (``Debt 
Relief'') was created by the Puccios to ``produce television 
infomercials'' and operate a call center to screen calls for 
the Cambridge-Brighton CCAs.\120\ Both Cypress and Debt Relief 
operated from the same location as Cambridge/Brighton in New 
York. Each of the Cambridge-Brighton CCAs paid Debt Relief and 
Cypress for their services. In sum, although credit counseling 
is supposedly a ``non-profit'' industry, only two entities 
within the Cambridge-Brighton conglomerate were organized as 
non-profits. All of the revenue realized by the conglomerate 
was generated by consumers who enrolled in DMPs.
---------------------------------------------------------------------------
    \120\ Debt Relief 2000 Form 1120S, Bates 00333-340; Cambridge/
Brighton Attachment to Form 1023, Bates 20701.
---------------------------------------------------------------------------

    (2) Control of the Affiliated Credit Counseling Agencies

    Unlike the Amerix and Ballenger conglomerates that 
exercised control over their CCAs through the terms of complex 
service contracts, the principals of Brighton DMS actually 
owned or controlled each of their three CCAs, Cambridge, 
Cambridge/Brighton, and Brighton Credit Management, as well as 
all of the affiliated for-profit entities, Brighton DMS, Debt 
Relief, Cypress, Cambridge Credit, and Brighton Credit. The 
Cambridge-Brighton non-profit CCAs (Cambridge and Cambridge/
Brighton) were controlled by John and Richard Puccio through 
their positions as directors, officers, and ``key employees.'' 
John and Richard Puccio have served as directors of Cambridge 
since its inception.\121\ John Puccio served as president and 
director of Cambridge/Brighton, and Richard Puccio served as 
``strategic planner.'' \122\ Additionally, the for-profit 
entities in the Cambridge-Brighton conglomerate were wholly or 
collectively owned by John and Richard Puccio:
---------------------------------------------------------------------------
    \121\ Cambridge Schedule of Officers and Directors, Bates 01120-
01125.
    \122\ Cambridge/Brighton 2002 Form 990, p. 4, Bates 20646.
    \123\ Brighton Credit Management 2002 Form 1120S, Schedule K-1.
    \124\ Subcommittee interview of Cambridge and Brighton DMS 
representatives (1/20/04); Brighton Mass. 1998 Form 1120S, Bates 00432.
    \125\ Debt Relief 2000 Form 1120S, Bates 00339.
    \126\ Cypress 2000 Form 1120S, Bates 00364.
    \127\ Cambridge Credit 1998 Form 1120S, Bates 00309.
    \128\ Brighton Credit 1998 Form 1120S, Bates 00240.

------------------------------------------------------------------------
    CAMBRIDGE-BRIGHTON FOR-PROFIT       JOHN PUCCIO (%   RICHARD PUCCIO
               ENTITIES                   Ownership)      (% Ownership)
------------------------------------------------------------------------
Brighton Credit Management \123\              100%              0%
------------------------------------------------------------------------
Brighton Mass.\124\                            50%             50%
------------------------------------------------------------------------
Brighton DMS                                   50%             50%
------------------------------------------------------------------------
Debt Relief \125\                             100%              0%
------------------------------------------------------------------------
Cypress \126\                                 100%              0%
------------------------------------------------------------------------
Cambridge Credit \127\                         50%             50%
------------------------------------------------------------------------
Brighton Credit \128\                          50%             50%
------------------------------------------------------------------------

    Through their joint ownership and control of each entity in 
the Cambridge-Brighton conglomerate, John and Richard Puccio 
directed all operations and executed all contracts. Almost 
every possible operation of Cambridge, for example, was 
contracted out to a related for-profit entity. Cambridge paid 
Brighton DMS to provide processing for Cambridge's DMP 
portfolio.\129\ Cambridge paid Brighton Mass. to lease its 
equipment, personnel, and software.\130\ Cambridge paid Debt 
Relief for referrals of consumers \131\ and paid Cypress to 
place advertising.\132\ The level of control over the 
Cambridge-Brighton entities by John and Richard Puccio is 
illustrated by the fact that some of the entities within the 
conglomerate conducted millions of dollars of business with one 
another without any written contract. For example, Brighton 
Credit Management (the CCA based in Florida) had no contract 
with Brighton DMS or Debt Relief, but they have conducted 
business with one another for almost 3 years. Such control of 
CCAs by for-profit organizations, whether under contract or 
not, may violate the ``private benefit'' prohibitions of the 
tax code.\133\ To illustrate this point, Senator Levin asked 
Chris Viale, the general manager of Cambridge, at the 
Subcommittee's hearing, ``And the people who control the non-
profit also control the for-profit, is that fair to say?'' Mr. 
Viale replied, ``Yes, that is fair to say.'' \134\
---------------------------------------------------------------------------
    \129\ Administrative Services Agreement between Cambridge and 
Brighton DMS, dated 6/1/03.
    \130\ Cambridge 2001 Form 990, p. 19, Bates 00085.
    \131\ Client Subscription Services Agreement between Cambridge and 
Debt Relief, dated 1/1/03.
    \132\ Advertising Services Agreement between Cambridge and Cypress, 
dated 4/1/99.
    \133\ Private Benefit Under IRC 501(c)(3), pp. 135-39.
    \134\ John Puccio was invited to testify at the Subcommittee's 
hearing, however the night before the hearing, Mr. Puccio informed the 
Subcommittee of health problems that would prevent him from appearing. 
Mr. Viale, general manager for Cambridge, testified in his place.
---------------------------------------------------------------------------

    (3) Private Benefits to the For-Profit Corporations

    The for-profit entities in the Cambridge-Brighton 
conglomerate have realized great private benefits from the 
Cambridge-Brighton CCAs they control. These benefits have been 
realized in two principal ways: (1) the two original New York 
for-profit entities (Cambridge Credit and Brighton Credit) 
created and executed a windfall transaction by selling their 
``intangible assets'' to the non-profit Cambridge, and (2) the 
for-profit entities in the current structure (Brighton DMS, 
Brighton Mass., Debt Relief, Cambridge Credit, Brighton Credit, 
and Cypress) have obtained large amounts of money from the non-
profits, Cambridge and Cambridge/Brighton, through various 
service contracts.
    When Cambridge was organized in Massachusetts, John and 
Richard Puccio executed a transaction between Cambridge and 
their two original New York corporations (Cambridge Credit and 
Brighton Credit) in which the New York corporations ``sold'' 
their ``intangible assets'' to Cambridge for $14.1 million. 
These ``intangible assets'' included ``trademarks and goodwill 
in the marks utilizing `Cambridge' and `Brighton' . . . 
copyrights, general business goodwill, business plans, creditor 
contacts and relationships, referral source contacts and 
relationships, business `know-how,' trade secrets and 
proprietary information.'' \135\ Since Cambridge had no money 
(being a newly-formed, non-profit organization), the two New 
York entities ``loaned'' Cambridge the necessary $14.1 million. 
John and Richard Puccio therefore created an artificial, 
``paper'' debt that Cambridge would be obligated to pay back to 
them for purchasing the ``intangible assets'' of Cambridge 
Credit and Brighton Credit. In effect, John and Richard Puccio 
sold their ``business goodwill'' and ``know-how'' to John and 
Richard Puccio.
---------------------------------------------------------------------------
    \135\ Intangible Assets Sale Agreement between Cambridge, Cambridge 
Credit, and Brighton Credit, dated 11/27/96, Bates 00038-46.
---------------------------------------------------------------------------
    As a result of this artificial sale, the Puccios required a 
non-profit agency (Cambridge) to pay two for-profit 
corporations (Cambridge Credit and Brighton Credit) $14.1 
million plus interest instead of spending that money on 
improving education, expanding community outreach programs, or 
any other activity for which Cambridge had been granted tax-
exempt status. Cambridge Credit and Brighton Credit have 
received repayments on the $14.1 million ``loan'' over the past 
several years from revenue realized by Cambridge from DMP fees 
paid by consumers. Although Cambridge has 50 years under the 
terms of the ``loan'' to repay the two New York entities, over 
$11.5 million has been paid back over the past 5 years alone. 
This $14.1 million transfer may constitute an ``excess benefit 
transaction'' prohibited by the tax code.\136\ Indeed, the IRS 
may determine that Cambridge was arguably created in part for 
the purpose of generating $14.1 million for two related for-
profit corporations, and may not have been organized 
exclusively for non-profit purposes.\137\
---------------------------------------------------------------------------
    \136\ 26 U.S.C. Sec. 4958(c)(1)(A), (f)(1)(A).
    \137\ Treas. Reg. Sec. 1.501(c)(3)-1(a).
---------------------------------------------------------------------------
    Beyond the revenue generated by the 1996 ``intangible 
assets'' sale, the Subcommittee's investigation determined that 
Cambridge has generated substantial additional revenues for the 
other for-profit entities in the Cambridge-Brighton 
conglomerate. In the Ascend One-Amerix and DebtWorks and 
Ballenger conglomerates discussed previously, all revenues 
generated by the CCAs streamed to a single entity. 
Specifically, in the Ascend One-Amerix conglomerate, all of the 
revenue from the CCAs streamed to for-profit Amerix, while in 
DebtWorks and Ballenger conglomerate all revenues streamed to 
for-profit DebtWorks or Ballenger. In contrast, the revenue 
streams were more diversified in the Cambridge-Brighton model. 
The three CCAs (Cambridge, Cambridge/Brighton, and Brighton 
Credit Management) have distributed their revenues to three or 
four for-profit entities, all owned and controlled by the 
Puccio brothers. The bulk of the funds generated by the three 
CCAs were allocated to Brighton DMS (formerly Brighton Mass.), 
Debt Relief, and Cypress.
    The primary function of for-profit Brighton DMS/Brighton 
Mass. was to provide DMP processing services, as well as to 
lease equipment, personnel, software and other goods and 
services to the Cambridge-Brighton CCAs. While it is not 
unusual in the credit counseling industry for a CCA to lease 
equipment, pay for potential leads, or pay for advertising, 
such payments are usually made as a result of arms-length 
transactions between unrelated parties at market rates. In the 
Cambridge-Brighton model, however, the revenues were 
transferred among related entities.
    Since 1998, Brighton DMS/Brighton Mass. has realized gross 
receipts in excess of $40.5 million.\138\ Since 2000, for-
profit Debt Relief has produced television ``infomercials'' and 
operated a call center to screen calls for the Cambridge-
Brighton CCAs. Debt Relief was paid $750 for each consumer it 
transferred to a CCA and who enrolled in a DMP.\139\ Through 
2002, Debt Relief referrals have resulted in gross receipts of 
over $25 million.\140\ Cypress has served as an advertising 
agency for the Cambridge-Brighton conglomerate since 1999, and 
has realized gross receipts in excess of $6.5 million.\141\
---------------------------------------------------------------------------
    \138\ Brighton Mass. 1998-2002 Form 1120S, Bates 00423, 00412, 
00400, 00388, and 00375.
    \139\ See, e.g., Client Subscription Services Agreement between 
Cambridge and Debt Relief, dated 1/1/02, at para. 4(b).
    \140\ Debt Relief 2000-2002 Form 1120S, Bates 00333, 00324, and 
00313.
    \141\ Cypress 1999-2002 Form 1120S, Bates 00369, 00359, 00350, and 
00341.
---------------------------------------------------------------------------
    While purportedly operating non-profit, educational 
entities, the individuals that own and operate the Cambridge-
Brighton conglomerate have grown extremely wealthy from their 
activities. The IRS Form 990s submitted by Cambridge state that 
Richard and John Puccio each received a salary in 2001 of 
$624,000 for managing its operations. In addition they received 
compensation from related organizations of more than $600,000 
in that same year. The Subcommittee elicited some of this 
information related to Puccio's salary through testimony at the 
March hearing from Chris Viale, the general manager. By way of 
contrast, Senator Mark Pryor asked the representative of a NFCC 
agency, ``What is your salary at your non-profit?'' The witness 
replied, ``My annual salary is sixty thousand dollars.'' As 
noted above, organizations do not qualify for non-profit status 
under Federal regulations if they are organized or operated for 
the benefit of individuals associated with the corporation.
    The Subcommittee has been told that the IRS has initiated 
an audit of Cambridge.\142\ As part of that audit, the IRS 
should determine whether the revenues received by Cambridge 
Credit and Brighton Credit from the sale of their ``intangible 
assets'' amounted to an excess benefit transaction and to what 
extent, if any, excise taxes should be assessed.\143\ 
Additionally, the IRS should determine whether Cambridge was 
organized or now operates for private benefit and, if so, 
whether its Section 501(c)(3) status should be revoked.\144\ 
Finally, the IRS should examine the organization and operation 
of Cambridge/Brighton, whose Section 501(c)(3) application is 
currently pending. Since Cambridge/Brighton was designed to 
operate in a similar manner to Cambridge, the IRS should fully 
scrutinize its application in order to determine whether it is 
organized and operated for the public benefit and to ensure 
that its assets do not inure to the benefit of any private 
individual.\145\
---------------------------------------------------------------------------
    \142\ Subcommittee interview of Cambridge and Brighton DMS 
representatives (1/20/04).
    \143\ 26 U.S.C. Sec. 4958.
    \144\ Treas. Reg. Sec. 1.501(c)(3)-1(a) (``[A]n organization must 
be both organized and operated exclusively for [tax exempt] purposes'' 
or ``it is not exempt.''
    \145\ Treas. Reg. Sec. 1.501(c)(3)-1(c)(2).
---------------------------------------------------------------------------

    (4) Harm to Consumers

    The Subcommittee interviewed a former client of Cambridge, 
Raymond Schuck, to evaluate the CCA's services. Mr. Schuck told 
the Subcommittee that, in the summer of 2001, he had $90,000 in 
debt distributed among nine credit cards.\146\ After hearing 
about Cambridge on the radio, he called them and spoke with a 
counselor. Mr. Schuck said that the counselor suggested a debt 
management plan, and promised him a reduction in interest 
rates. After answering a list of questions about his various 
credit cards. Mr. Schuck said that the counselor told him that 
his monthly payment would be $1,946 and that Cambridge would 
charge him 10% of his monthly payment for their services, or 
$194 a month. Mr. Schuck testified at the hearing, ``I thought 
that $194 was high, but I knew very little about the industry 
and what were appropriate fees. I made the apparently naive 
assumption that because it was a non-profit agency, I could 
trust them.''
---------------------------------------------------------------------------
    \146\ Subcommittee interview with Raymond Schuck (2/24/04).
---------------------------------------------------------------------------
    Mr. Schuck said the counselor told him to hurry and send 
the first monthly payment to Cambridge to get the program 
started. He immediately sent in a cashier's check. Although he 
had already sent in the check to Cambridge, Mr. Schuck said 
that he started getting calls from some of his creditors asking 
why he had not made any payments. As in Ms. Troy's situation 
with AmeriDebt, the creditors told him that they were unaware 
that he was on a DMP with Cambridge and told him that no 
payments had been received.
    Mr. Schuck said that he called Cambridge to find out what 
was going on. He said he found it very difficult to contact 
someone in customer service who could tell him about his 
account. Mr. Schuck said at the hearing, ``Getting in touch 
with someone who knew about my debt management plan and the 
status of my payments was an exercise in frustration.'' When 
Mr. Schuck did speak with Cambridge, he was informed that the 
first payment he had sent was a fee for initiating his DMP. He 
testified, ``I was absolutely shocked by this information. Had 
I known this policy in advance, I would have searched for a 
different credit counseling agency.'' Mr. Schuck continued, ``I 
would not have agreed to give Cambridge $2,000 when that money 
could have gone to my creditors.''
    Ultimately, Mr. Schuck declared bankruptcy. Mr. Schuck said 
that he felt that if Cambridge had done a reasonable analysis 
of his financial circumstances, the proper recommendation would 
have been to seek legal assistance and declare bankruptcy. In 
addition, because Cambridge kept his first payment without his 
knowledge, Mr. Schuck missed payments to nine creditors. As a 
result, Mr. Schuck's credit rating now bears the consequences 
of missed and late payments as well as the bankruptcy. 
Unfortunately, Mr. Schuck's experience was very consistent with 
current and former clients interviewed by the Subcommittee.
    The fee structure of the Cambridge-Brighton CCAs was the 
highest of any CCA that the Subcommittee investigated.\147\ The 
fees were clearly excessive and bore no relation to the actual 
expense of initiating and maintaining a DMP. At the hearing, 
Senator Levin questioned Chris Viale, the general manager of 
Cambridge, ``Shouldn't it [the fee] relate to the services 
rendered?'' Mr. Viale, said ``No.'' Senator Levin went on to 
ask, ``But you keep that first monthly fee regardless of what 
subsequently comes in terms of benefits to that consumer, is 
that correct?'' Mr. Viale said, ``That is correct.''
---------------------------------------------------------------------------
    \147\ Unfortunately, Cambridge's fee schedule is not unique in the 
industry. The Subcommittee's investigation identified several other 
CCAs who charged an initial fee equal to one month's payment, including 
Express Consolidation, Inc. of Delray Beach, Florida, and CreditCare 
Credit Counseling, Inc. of Boca Raton, Florida.
---------------------------------------------------------------------------
    The Subcommittee determined that the initial start-up fee 
charged to a consumer by the Cambridge-Brighton conglomerate--
the ``Payment Design Fee''--was typically an amount equal to 
the consumer's monthly payment. The vast majority of these 
monthly payments were several hundred dollars, and many were in 
excess of $1000 or even close to $2000. The result was that the 
Cambridge-Brighton CCAs routinely charged a consumer $500 or 
$1000 for merely setting up a DMP. Like AmeriDebt and Ballenger 
CCAs, the Cambridge-Brighton CCAs retained this fee instead of 
sending it to creditors. Also like AmeriDebt, the Cambridge-
Brighton CCAs too often failed to adequately disclose that fact 
to clients. Like many other consumers who dealt with Cambridge, 
Mr. Schuck was not informed that his ``Payment Design Fee'' of 
$1,946 would not go to his creditors, but would in fact be kept 
by Cambridge. The monthly DMP ``Program Service Fee'' charged 
by Cambridge-Brighton CCAs was also high. The amount had no 
relation to Cambridge's actual expenses but was instead set at 
10% of the monthly DMP payment. Therefore, a consumer who was 
already paying an $800 monthly payment would also be required 
to pay an $80 maintenance fee each and every month. By 
contrast, the average NFCC agency's monthly DMP maintenance fee 
in 2002 was $14.\148\
---------------------------------------------------------------------------
    \148\ NFCC 2002 Member Activity Report, p. 30.
---------------------------------------------------------------------------
    A related problem uncovered by the Subcommittee is that the 
initial 10% fee does not reflect payment for actual services 
rendered. Cambridge gets the ``Payment Design Fee'' (10% of 
total debt) up-front (as well as their monthly service fee). 
However, Chris Viale testified at the Subcommittee's hearing 
that, although its plans are designed to last 60 months, ``The 
average length of time for a consumer on the plan is 23 months. 
We have a little over a thirty percent completion rate [for 
their program].'' This data is clear evidence of Cambridge's 
understanding that although they were charging a financially-
strapped consumer in advance for 60 months of service, the 
likelihood that the consumer would actually require Cambridge's 
services for the full term of their plan was less than one-
third. The fact that two-thirds of their client base failed to 
finish the plan, cutting short any services obligated by 
Cambridge, was not evident in their fee structure.
    Still another problem identified by the Subcommittee 
involves the bonuses paid to CCA employees. The ``credit 
counselors'' in the Cambridge-Brighton CCAs were given bonuses 
for enrolling consumers on DMPs and could accumulate bonus 
money equal to as much as 25% of their clients' aggregate 
start-up fees for the month.\149\ Additionally, counselors 
could earn 2-week trips to Florida and other prizes by placing 
consumers on DMPs.\150\ At the same time, like the counselors 
at other new CCAs, Cambridge-Brighton ``credit counselors'' 
appeared to provide minimal credit counseling. Mr. Schuck told 
the Subcommittee that he was on the phone with his 
``counselor'' for a mere 20 minutes before he was convinced to 
mail a cashier's check for $1,946 to set up his DMP. When asked 
by Chairman Coleman at the Subcommittee's hearing about how 
many people received face-to-face counseling, Mr. Viale 
responded, ``Approximately 10 to 20 a day.'' Unfortunately, 
most Cambridge clients do not receive face-to-face counseling. 
They receive, as Mr. Schuck did, a sales pitch over the 
telephone.
---------------------------------------------------------------------------
    \149\ Subcommittee interview of former Cambridge employee (2/2/04).
    \150\ Id.
---------------------------------------------------------------------------
    John Pohlman, a former Cambridge credit counselor, 
testified at the Subcommittee's hearing about his experiences 
at Cambridge. Mr. Pohlman offered a unique perspective having 
worked for a NFCC agency for 11 years before going to work for 
Cambridge.\151\ Mr. Pohlman described a ``boiler-room'' 
mentality at Cambridge. He testified that on his first day he 
was forced to pick a fake name to use when dealing with 
consumers. He also testified, ``There was an electronic board 
at the front of the room that reminded me of the leader's board 
in a golf tournament. It had the names of the counselors who 
had the top sales for the month flashing in red and yellow 
lights.'' Incentives like this, the bonuses, and the free trips 
and other gifts exhibit an obvious emphasis on the DMP. 
Consumers unfit for a DMP could fall prey to counselors with 
self-serving motives who fail the consumer in need of education 
or counseling, or perhaps, as in Mr. Schuck's case, an attorney 
to file bankruptcy.
---------------------------------------------------------------------------
    \151\ Id. John Pohlman worked at the Consumer Credit Counseling 
Services of Southern New England prior to working at Cambridge.
---------------------------------------------------------------------------
    Mr. Pohlman also testified about his dissatisfaction with 
the level of scrutiny Cambridge gave consumers' financial 
circumstances. Through his experience working at NFCC agencies, 
Mr. Pohlman believed a worthwhile counseling session should 
last an hour to an hour and a half in order to get all 
necessary information. Mr. Pohlman said that at Cambridge, this 
process was expected to last 10 to 15 minutes. He testified, 
``This was all the time we needed, however, because the only 
information we got from the consumer was account information. 
There was no true budget analysis done for the consumer, just 
an analysis to determine whether their creditors would allow 
the consumer to enroll in a debt management plan.'' He went on 
to say, ``I was uneasy with the fact that I did not know 
anything about a person's mortgage payment, health care costs, 
car insurance, etc. . . . I knew nothing about them except they 
were in debt.''
    Mr. Pohlman admitted that with the limited amount of time 
he spent with the consumer, he had little confidence that they 
understood that the first payment went to Cambridge and not to 
their creditors. Mr. Pohlman testified, ``The goal was to 
authoritatively take them (the consumer) through the process of 
getting signed up on a plan as quickly as possible so they did 
not have time to consult a spouse or family member.'' Mr. 
Pohlman said, ``I was even instructed by one member of 
management to quote `Treat them like alcoholics.' In other 
words, they know they need help--make them get it. I truly 
believe that Cambridge preyed on consumers' desperation.''
    Mr. Schuck's and Mr. Pohlman's testimony offers a great 
deal of insight into Cambridge's profit-driven approach to 
credit counseling. Their experiences suggest that when profit 
motives are injected into a traditionally non-profit industry, 
harm to consumers may follow. When Senator Pryor asked Mr. 
Viale, ``Why did you choose to operate under a non-profit 
label?'' Mr. Viale responded, ``Well, I don't have a specific 
answer for that, but I know the industry forces us to be a non-
profit.''

V. REGULATION AND ENFORCEMENT

    The credit counseling industry is currently governed by a 
patchwork of professional, state and Federal standards, some of 
which are mandatory and others of which are voluntary. They 
include standards issued by credit counseling professional 
associations, guidelines issued by creditors, state statutes, 
and Federal tax and fair trade laws.

  A. Industry Self-Regulation

    The credit counseling industry has two major membership 
associations, the NFCC and the Association of Independent 
Consumer Credit Counseling Agencies (``AICCCA''), each of which 
has issued mandatory membership standards for their 
members.\152\ The NFCC standards, adopted through the Council 
on Accreditation for Children and Family Services (``COA''), 
are the more restrictive of the two. COA is an independent 
third-party not-for-profit accrediting body that has reviewed 
or accredited more than 1,400 international social service 
programs.\153\
---------------------------------------------------------------------------
    \152\ Another organization, the American Association of Debt 
Management Organizations (``AADMO''), is a trade association that does 
not maintain membership standards.
    \153\ NFCC information production to the Subcommittee, 9/10/04.
---------------------------------------------------------------------------
    If applied throughout the industry, these professional 
standards could significantly address the abusive practices 
identified in this Report. For example, agencies seeking COA 
accreditation are reviewed in eight specific areas:

     Mission and Purpose--determines whether consumer 
needs and preferences guide the organization in its design and 
delivery of services.

     Quality Assurance--evaluates the effectiveness 
and efficiency of services provided and corrects any observed 
deficiencies.

     Governance and Administration--determines whether 
the organization is governed and administered according to 
legal requirements and sound principles of effective management 
and ethical practice, evaluated by neutral oversight through a 
diversified board.

     Human Resources--evaluates the organization's 
ability to deploy personnel and foster efficient, effective 
service delivery for clients.

     Service Environment--ensures safe, accessible, 
and appropriate delivery for the needs of clients, employers, 
and other stakeholders.

     Financial Management--ensures that an 
organization manages its fiscal affairs according to sound 
financial practices and applicable statutory and professional 
requirements.

     Professional Practices--determines whether 
services are conducted with due regard to ethical and 
professional requirements and protects confidential information 
regarding clients.

     Service Delivery--ensures that an organization 
focuses its services on identifying the needs and problems of 
clients.\154\
---------------------------------------------------------------------------
    \154\ Id.

    In addition, to obtain and maintain accreditation, all NFCC 
member agencies must adhere to a rigid set of COA standards 
specific to the credit counseling industry. The standards 
---------------------------------------------------------------------------
include the following:

     Agencies must have annual audits of operating and 
trust accounts.

     Agencies must be licensed, bonded, and insured.

     Agencies must support and provide a variety of 
consumer education programs.

     Agencies must comply with consumer disclosure 
requirements.

     DMPs must include a detailed review of current 
and prospective income, as well as present and anticipated 
financial obligations.

     Funds are disbursed to creditors on behalf of the 
clients at least twice per month.

     Clients have a variety of deposit options 
including electronic methods, and are offered immediate 
correction of improper postings.

     Each client receives counseling, including an 
assessment of how he/she got into trouble, and a written 
comprehensive financial action plan.

     Clients receive a statement, at a minimum, every 
quarter.\155\
---------------------------------------------------------------------------
    \155\ Id.

All agencies must be re-accredited by COA every 4 years. 
Additionally, all NFCC agencies are required to abide by strict 
Member Quality Standards.\156\
---------------------------------------------------------------------------
    \156\ Id.
---------------------------------------------------------------------------
    On August 18, 2004, the NFCC announced that it had 
tightened its member standards to prohibit questionable 
practices.\157\ The NFCC enhanced seven existing member quality 
standards and added four new member quality standards.\158\ 
With the additions and modifications, the NFCC specifically 
prohibited the payment of bonuses to credit counselors, 
announced that public relations and marketing activities do not 
qualify as educational activities, and prohibited charging fees 
in advance of services.\159\ Additionally, the NFCC required 
all members to complete their submission for COA certification 
within 9 months of their application to COA (which is half the 
time previously required) and to establish a formal system of 
addressing consumer complaints. It also specifically prohibited 
the practice of ``pre-screening'' consumers for DMPs.\160\
---------------------------------------------------------------------------
    \157\ NFCC information production to the Subcommittee.
    \158\ NFCC 2004 Member Quality Standards.
    \159\ Id.
    \160\ Id.
---------------------------------------------------------------------------
    AICCCA maintains similar standards as part of the code of 
practice to which its members must adhere. For instance, AICCCA 
sets a maximum initial fee of $75 for setting up a DMP and a 
maximum $50 fee for monthly maintenance.
    Several CCAs have pointed to their compliance with an 
industry standard named ISO 9000 as ensuring that they adhere 
to high standards. ISO 9000 is a generic set of quality 
assurance standards that are followed by many large businesses, 
but it is not specific to the credit counseling industry.\161\ 
Pursuit of ISO 9000 standards may be helpful as a first step 
toward improving performance, because it requires careful 
documentation of business procedures. But ISO 9000 does not 
address business products or services. For instance, nothing in 
the ISO 9000 standard provides guidance to an entity on how 
much it can charge, what services it should offer, or what 
should be done with excess funds.
---------------------------------------------------------------------------
    \161\ The ISO 9000 Quality Systems Handbook, Fourth Edition, David 
Hoyle, Butter-Heinemann, 2001.
---------------------------------------------------------------------------
    Self-regulation also has limitations. First, although NFCC 
and AICCCA standards are mandatory for members, joining the 
association itself is voluntary. CCAs that wish to operate 
pursuant to lower business standards or no standards can simply 
refuse to join. Unrestrained by strict standards of practice, 
these CCAs may even obtain a competitive advantage over those 
who adhere to more ethical conduct. Second, it is unclear 
whether the associations have the resources and mechanisms 
needed to monitor and consistently enforce compliance with 
their standards. Weak enforcement reduces the efficacy of even 
strong standards.

  B. Creditor Standards

    A second source of credit counseling standards lies not 
with the CCAs themselves, but with the large creditors, such as 
banks and credit card operating companies, which interact with 
CCAs on a regular basis. Large creditors often support CCAs by 
providing them with a percentage of the payments made by the 
debtors that the CCAs counsel. Often referred to as ``fair 
share,'' these payments are intended to reimburse some 
operating costs in exchange for the CCAs' positive work in 
helping debtors repay their debts. Many of the largest 
creditors have developed standards to determine which CCAs are 
eligible to receive fair share payments. If well developed and 
carefully enforced, the Subcommittee believes these standards 
could play a major role in reducing abuses and encouraging best 
practices within the credit counseling industry.

    (1) History of the Creditor-Credit Counseling Agency Relationship

    In the late 1950s, credit card issuers played a key role in 
developing what we refer to today as the credit counseling 
industry. Originally, they helped establish local offices, 
known as Consumer Credit Counseling Services (``CCCSs''), which 
offered face-to-face counseling related to an individual's 
finances. These counseling sessions were viewed as comparable 
to other social services available at the time such as 
substance abuse or family counseling. These CCCSs took a 
comprehensive approach to treating a consumer's financial 
instability. Through tools such as debt management plans, 
referrals to other social agencies (to address other problems 
associated with the symptoms of the financial stress), and 
adequate financial education and counseling, these CCCSs nursed 
debt-ridden consumers back to financial health.
    The NFCC is the parent organization of the CCCSs and 
historically has worked with creditors to operate and fund 
these non-profit credit counseling agencies through fair share 
payments.\162\ The purpose of these fair share payments was to 
provide funding for the non-profit agencies to establish 
educational programs, implement debt management programs, and 
assist with operating expenses.\163\ This funding afforded CCAs 
the financial freedom to offer their services to customers 
without charge or to make payment of a modest fee voluntary. 
The consumers' voluntary contributions were relatively small 
amounts and were waived when necessary for hardship cases.
---------------------------------------------------------------------------
    \162\ The creditors interviewed by the Subcommittee typically 
viewed fair share payments as a form of voluntary contribution to a 
non-profit agency, rather than as payment for a contracted service. 
However, many creditors apparently treat these payments as ordinary 
business expenses rather than take charitable deductions for them on 
their tax returns.
    \163\ Historically, 60% of NFCC funding came from creditors and 40% 
came from charities. Subcommittee interview of NFCC representatives (1/
12/04).
---------------------------------------------------------------------------
    Fair share payments are typically paid by creditors on a 
monthly basis on the aggregate debtor payments managed by a 
CCA. Until the mid-to-late 1990s, this payment was typically 
12-15% of the aggregated debtor payments. In recent years, the 
expense associated with fair share payments has increased, at 
times taking up 25-30% of the budgets of the collections 
departments at major creditors.\164\ This increase has caused 
some creditors to reduce their fair share payments to a lower 
percentage. In addition, to improve the debt management plans 
they receive, some creditors have moved to performance-based 
fair share models. These models link the percentage of fair 
share payments each credit counseling agency receives to the 
success rates of the DMPs that the creditor receives from each 
CCA. \165\
---------------------------------------------------------------------------
    \164\ Subcommittee interview with Citigroup representatives (3/9/
04); Bank One operating expenses spreadsheet, Bates BO 253-254.
    \165\ Common ways to measure success rates are: (1) retention rate 
(the length of time a consumer stays on the DMP), (2) declination rate 
(the number of proposed DMPs declined by the creditor), and (3) a 
combination of those two measures as well as other factors.
---------------------------------------------------------------------------
    In addition to their historic funding relationship with 
non-profit CCAs, major creditors have traditionally acted in an 
advisory role for the NFCC through membership on the NFCC's 
board of directors. The close ties between creditors and NFCC 
members, however, led to the filing of two legal actions. In 
1994, a number of independent CCAs filed an antitrust suit 
against the NFCC, its member agencies, and the Discover Card. 
The plaintiffs alleged that the NFCC members and the creditors 
were operating to prevent new agencies from offering certain 
credit counseling services. The parties eventually entered into 
a settlement agreement which, in part, removed the creditors 
from the NFCC's national board of directors.\166\ In 1996, the 
NFCC entered into an agreement with the FTC to require its 
members to disclose the fact that they receive fair share 
payments from creditors. It is noteworthy that non-NFCC members 
are not required to disclose this information, even though they 
receive the same payments.
---------------------------------------------------------------------------
    \166\ Individual NFCC members may still have representatives from 
the local banking community on their board of trustees.
---------------------------------------------------------------------------
    In the mid-1990s, the rapid increase in consumer debt 
dramatically increased the number of potential clients. Some 
new CCAs began using more technologically advanced practices to 
implement their DMPs through innovative software. Some also 
launched heavily funded advertising and marketing campaigns 
using late night television infomercials and the Internet. 
Through these practices, these new entrants to the credit 
counseling market were able to reach hundreds of thousands of 
potential clients. The ability to reach and serve a national 
market has gradually shifted the industry from a local, 
community-based, client-specific operation to include 
nationwide, mass-marketed sales operations.
    As consumer debt reached new heights during the late 1990s 
and early 2000s, the DMP became the method of choice 
recommended to consumers by many of the new CCAs to resolve 
unsecured debt problems. These CCAs used DMPs to generate two 
streams of revenue, one from creditors providing them with fair 
share payments, and the second from consumers charged DMP 
start-up and monthly maintenance fees.
    Even without some CCAs' aggressive advocacy of DMPs, the 
rapid increase in consumer debt over the last decade would 
likely have produced a sharp increase in the use of DMPs.\167\ 
At the same time, as fair share payments also increased, it 
should not surprise anyone that creditors began to examine the 
nature of this growing expense. Some creditors apparently 
concluded that the wrong consumers were being placed on DMPs. 
For example, consumers who could afford to pay their debts but 
were looking for a break in interest rates were unnecessarily 
and incorrectly placed on DMPs. As a result, the creditors 
heightened the level of scrutiny of proposed DMPs. Some 
creditors also began issuing more detailed CCA and DMP 
standards, in effect becoming a regulator of credit counseling 
practices.
---------------------------------------------------------------------------
    \167\ The Subcommittee's concern is not with DMPs per se, but 
whether distressed consumers are inappropriately placed onto DMPs 
instead of receiving counseling or education to address the financial 
problem.
---------------------------------------------------------------------------

    (2) Three Creditor Models

    The Subcommittee interviewed three major creditors to gain 
an understanding of the industry as well as of actions taken by 
the creditors towards CCAs. These creditors were Bank One 
Delaware, N.A. (``Bank One''), MBNA America, N.A. (``MBNA''), 
and Citigroup, Inc. (``Citigroup''). The Subcommittee found 
that all three have promulgated standards for CCAs seeking fair 
share payments, and that all three have recently revised and 
tightened their standards to eliminate abusive practices.

      (a) Bank One

    Bank One utilizes a combination of a minimum standards 
model \168\ and a performance-based model when deciding whether 
to make fair share payments to a particular CCA. Bank One told 
the Subcommittee that before it will even consider making fair 
share payments, a CCA must be equipped to make debtor payments 
and submit debtor proposals electronically, and it must not be 
involved in any pending litigation. The agency's business 
eligibility is then assessed, and Bank One said the CCA must 
meet the following minimum standards:
---------------------------------------------------------------------------
    \168\ A minimum standards model requires that certain minimum 
criteria be met before any fair share payments will be made to a credit 
counseling agency.

     The CCA must be accredited; \169\
---------------------------------------------------------------------------
    \169\ Industry-accepted accreditation organizations include COA, 
BSI, BVQI, and ISO 9000 with an accepted ``Code of Practice.'' NFCC and 
AICCCA have each developed a code of best practices for their members 
that set accreditation standards.

     The counselors employed by the CCA must be 
---------------------------------------------------------------------------
certified;

     Any fees charged to consumers must meet Bank One 
guidelines; and

     The CCA's marketing budget and content must be 
approved by the CCA's board.

    Once these criteria were met, Bank One told the 
Subcommittee that it would make a maximum of 9% fair share 
payments to the CCA. It said that a CCA which meets the 
business eligibility requirements received a minimum of 2%, and 
the CCA may receive up to an additional 7% depending upon the 
performance of its portfolio of DMPs.\170\ Bank One explained 
that its performance criteria measure the average fixed payment 
and the default rate of the agency, both equally weighted to 
provide a maximum of 3.5% in additional fair share payments for 
each criteria. In addition, Bank One said that it measures a 
CCA's performance in meeting a ``New Inventory Criteria'' which 
measures whether the agency is continuing to sign up new Bank 
One card members or just administering existing Bank One 
accounts.
---------------------------------------------------------------------------
    \170\ Subcommittee interview of Bank One representatives (2/10/04). 
The new model was implemented in July 2003.
---------------------------------------------------------------------------

      (b) MBNA

    MBNA told the Subcommittee it also utilizes a minimum 
standards model coupled with a performance-based model.\171\ 
MBNA said that it had set minimum requirements that must be met 
before a CCA qualifies for any fair share payments:
---------------------------------------------------------------------------
    \171\ Subcommittee interview of MBNA representatives (2/17/04). 
MBNA's new model was implemented in February 2004.

---------------------------------------------------------------------------
     The CCA must be accredited;

     The CCA must have non-profit status under Section 
501(c)(3);

     The CCA may not be affiliated with any entity 
that is not a Section 501(c)(3) agency; \172\
---------------------------------------------------------------------------
    \172\ MBNA allows outsourcing only for payment processing.

     All DMP proposals and debtor payments must be 
---------------------------------------------------------------------------
transmitted electronically;

     A complete budget disclosure must be attached to 
all DMP proposals;

     No DMP start-up fee may exceed $75, no monthly 
fee may exceed $50, and there can be no fee assessed for early 
termination of the DMP;

     At least 90% of the CCA's consumers must have 
completed a full budget disclosure; and

     At least 85% of the DMP proposals submitted by 
the CCA must meet MBNA's criteria for establishing a DMP.

    Upon meeting these criteria, MBNA said that it assesses a 
CCAs' DMP portfolio to measure its payment volume and portfolio 
vintage. MBNA explained that the older the DMP account, the 
larger the percentage of fair share available, starting with 2% 
for brand new accounts and rising to a maximum of 15% for 
accounts that last 36 months or more.

      (c) Citigroup

    Citigroup told the Subcommittee that it had recently 
introduced a fair share model new to the credit counseling 
industry.\173\ In fact, Citigroup indicated that it had 
abandoned the fair share model altogether in favor of a new 
``Grant Program.'' Under this program, Citigroup said that it 
will pay CCAs according to Citigroup's ``perception of the 
agency's needs and the benefits they provide to the customer 
and the community.'' \174\ Citigroup explained that these 
payments will be made in quarterly advances of a lump sum 
contribution, \175\ and the amount of payment will reflect 
Citigroup's judgment of the value that the CCA is delivering to 
consumers, based on a 29 question ``application.'' The 
questions in the Citigroup application address many of the same 
issues utilized by other industry leaders to assess CCAs, 
including whether the CCA has non-profit status, appropriate 
business practices and structure, and low start-up and monthly 
fees. CCAs must also submit to and pass an audit by Citigroup.
---------------------------------------------------------------------------
    \173\ Subcommittee interview with representatives of Citigroup (2/
20/04). Citigroup's new model was implemented on January 1, 2004.
    \174\ Citigroup model letter to CCA, dated November 4, 2003, Bates 
CC 00073-74.
    \175\ Id.
---------------------------------------------------------------------------
    Citigroup said that its new grant program took effect in 
2004. Citigroup said that, since it began, approximately one-
third of the agencies who previously received fair share from 
Citigroup did not qualify for grant funding under the 
eligibility criteria.\176\ However, those agencies that did 
qualify for grant funding received a higher payment than they 
historically received under the former fair share model, 
according to Citigroup.\177\
---------------------------------------------------------------------------
    \176\ Information provided by Citigroup 8/24/04.
    \177\ Id.
---------------------------------------------------------------------------

    (3) Using Fair Share Payment Standards to End Abuses

    The collective impact on the credit counseling industry of 
the minimum and performance-based standards issued by major 
creditors such as Bank One, MBNA, and Citigroup could be 
substantial. Since many CCAs depend upon fair share revenue as 
a major source of income, they are obligated to comply with 
creditor standards. Creditors may therefore play a major role 
in eliminating some of the abusive practices examined in this 
Report. Standards setting limits on fees, for example, directly 
attack the problem of CCAs' charging excessive fees unrelated 
to costs. Standards restricting or prohibiting CCAs from 
affiliating themselves with for-profit entities addresses the 
core of the profiteering problem. Some of the performance-based 
requirements also encourage CCAs to initiate only DMPs that set 
realistic goals for consumers.
    As with the professional standards set by credit counseling 
associations, the effectiveness of the creditor standards will 
depend in large part upon the extent to which the creditors 
monitor compliance and discontinue fair share payments to CCAs 
that do not comply with their standards. Creditors informed the 
Subcommittee that they felt limited in their ability to police 
the industry, and some expressed reluctance to condition the 
concessions they provide to a debtor upon the debtor's choice 
of a particular CCA. Some creditors also worry about appearing 
to favor some agencies over others, although choosing to do 
business with some entities and not others is a routine 
business decision encountered every day in the marketplace.
    CCAs are less sanguine about the creditor standards. A 
common CCA complaint is the absence of uniformity among 
creditor standards that can translate into higher costs and 
administrative burdens for agencies.\178\ Creditors respond 
that, while uniformity in criteria for fair share payments may 
be desirable, current antitrust laws prohibit creditors from 
collectively agreeing on common standards. Another common CCA 
complaint is that creditors retain the right to change their 
criteria without notice and may apply changes retroactively. 
CCAs also contend that sudden changes to creditor criteria 
leave them with little time to respond. This complaint applies 
not only to the amount of fair share payments the creditor will 
pay, but also to the terms a creditor will offer debtors under 
a DMP.
---------------------------------------------------------------------------
    \178\ Subcommittee interviews with NFCC and AICCCA representatives 
(10/16/03, 10/9/03).
---------------------------------------------------------------------------
    CCAs also assert that the ambiguous tone of some fair share 
policies and an inability to obtain creditor clarification 
complicates the job of administering DMPs. For example, 
Citigroup announced its new ``grant'' program on November 4, 
2003.\179\ Some CCAs complained that the criteria for 
determining fair share payments under this program are 
subjective, leaving agencies unsure of how to operate in order 
to maximize their Citigroup fair share payments. Citigroup also 
required CCAs to respond by November 24, 2003, only 20 days 
after receiving notice of the change in policy, \180\ which 
some CCAs complained left them with little understanding of 
what to expect from Citigroup and an inability to plan their 
operating budgets.\181\
---------------------------------------------------------------------------
    \179\ Citigroup model letter to CCA, dated 11/4/03, Bates CC 00073-
74.
    \180\ Id.
    \181\ A CCA may request a quarterly payment in advance; however, 
the weight Citigroup affords any such request is unknown, since 
Citigroup pays CCAs according to a perception of their needs and the 
benefits provided to customers and the community. Subcommittee 
interview of Citigroup representatives (2/20/04).
---------------------------------------------------------------------------
    These developments suggest that bad actors have had a 
disproportionate impact on the credit counseling industry. As 
the Report has detailed, some new entrants have heavily 
marketed DMPs and failed to properly scrutinize the consumers 
placed on DMPs. In turn, creditors were forced to react to the 
increased volume of DMPs for which they were paying fair share. 
After finding inappropriate consumers placed on DMPs, many 
creditors reduced their fair share. Although an appropriate 
reaction to the activities of some new entrants, it is an 
unfortunate result for the CCAs that have traditionally 
provided quality services with careful selection of candidates 
for DMPs. Subcommittee Chairman Coleman questioned James 
Kroening, the director of an NFCC agency, Family Means, about 
this phenomenon at the Subcommittee's hearing. Mr. Kroening 
testified, ``It is my belief that we have seen a major decrease 
in 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. 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 [through] the roof.'' This is another negative side 
effect of the new entrants profit-driven practices.
    Ultimately, CCAs concede that creditors have no obligation 
to make any fair share payments to them. Many smaller 
creditors, in fact, do not typically provide fair share 
payments to CCAs. Thus, they recognize that creditors have the 
right to condition these payments as they see fit. Since having 
debtors pay their debts is in the best interests of the 
creditors, and many CCAs provide worthwhile counseling and debt 
management services that assist debtors in meeting their 
financial responsibilities, major creditors indicate they are 
likely to continue making fair share payments. Thus, creditor 
standards related to fair share payments continue to provide a 
valuable mechanism for curbing abusive practices in the credit 
counseling industry.

  C. State Regulation and Enforcement

    Although many states have statutes concerning the credit 
counseling industry, effective regulation at the state level is 
hampered due to the wide variety of differing state 
requirements and inadequate resources for monitoring 
compliance. In addition, many states still lack legislation 
directly applicable to the credit counseling industry. In these 
states, general laws against false advertising and fraud 
provide the only protection for consumers. In other states with 
laws that at least partially relate to credit counseling, the 
statutes were written when the industry generated few 
complaints, and therefore, either limit credit counseling to 
non-profit agencies or provide non-profits with an exemption 
from mandatory requirements. This type of exemption is the 
primary reason why many of the CCAs discussed in this Report 
applied for Section 501(c)(3) status. In recent years, a few 
states, such as Maryland, have passed more comprehensive laws 
dealing specifically with the debt management industry.
    The widespread use of the telephone and Internet by CCAs to 
contact and service consumers also inhibits effective state 
enforcement. Many CCAs assert that they do not need to be 
licensed in a state unless they maintain a physical presence in 
that state. Under this interpretation, a company located in 
Maryland could contact and serve consumers in every other state 
without obtaining separate state licenses or being bound by 
laws of the states in which its consumers reside. Those CCAs 
that attempt to comply with the laws of each state in which 
they serve consumers are burdened by a mix of different 
regulations and bonding requirements.
    Currently two alternatives offering model legislation for 
states to adopt are available. In February 2004, the National 
Consumer Law Center and the Consumer Federation of America 
jointly issued a Model Consumer Debt Management Services 
Act.\182\ In March 2004, the National Conference of 
Commissioners on Uniform State Laws discussed a draft of the 
Consumer Debt Counseling Act.\183\ Both laws would impose much 
tighter licensing and business practices on all credit 
counseling agencies.
---------------------------------------------------------------------------
    \182\ Available at www.law.upenn.edu/bll/ulc/UCDC/
Feb2004modelbill.pdf.
    \183\ Available at www.law.upenn.edu/bll/ulc/UCDC/
Mar2004mtgdraft.htm.
---------------------------------------------------------------------------
    In many states, the most significant regulatory action has 
come from suits filed by state attorneys general. In addition 
to an earlier action brought by the District of Columbia, \184\ 
the attorneys general in Illinois, \185\ Minnesota, \186\ 
Missouri, \187\ and Texas \188\ have each filed lawsuits 
against AmeriDebt over the past few years. These suits have 
typically charged AmeriDebt with consumer fraud and deceptive 
business practices such as false advertising, 
misrepresentation, non-disclosure of fees, and failure to 
obtain the proper licenses. The Subcommittee believes that 
these suits have convinced AmeriDebt to stop enrolling new 
consumers into DMPs. Nevertheless, they do not necessarily 
prevent the same business model from being used by other CCAs 
or conglomerates.
---------------------------------------------------------------------------
    \184\ District of Columbia v. AmeriDebt, Inc. and Andris Pukke, 
Superior Court of the District of Columbia.
    \185\ State of Illinois v. AmeriDebt, Inc., Circuit Court of the 
Seventh Judicial Circuit, Sangamon County.
    \186\ State of Minnesota v. AmeriDebt, Inc., District Court, Fourth 
Judicial District.
    \187\ State of Missouri v. AmeriDebt, Inc., Circuit Court of St. 
Louis City.
    \188\ State of Texas v. AmeriDebt, Inc., et al., District Court of 
Travis County, Texas.
---------------------------------------------------------------------------

  D. Federal Regulation and Enforcement

    On the Federal level, two key agencies, the U.S. Internal 
Revenue Service and the Federal Trade Commission, are aware of 
the major problems in the credit counseling industry, and have 
taken steps to enforce the tax code and the Federal Trade 
Commission Act, respectively.

    (1) The Internal Revenue Service

    As the Report notes, CCAs typically apply for non-profit 
status under Section 501(c)(3) of the Internal Revenue Code. 
The IRS has recognized more than 850 credit counseling 
organizations as tax exempt under Section 501(c)(3).\189\ The 
non-profit status of CCAs arose mainly by historical pattern, 
rather than pursuant to any specific decision by Congress. When 
creditors established the first CCAs, they set them up as non-
profits, presumably because of the tax savings and because this 
status harmonized with their original purpose of providing 
debtors with general financial education in exchange for little 
or no fee. State laws often made non-profit status a legal 
requirement to conduct debt proration activities within their 
borders.
---------------------------------------------------------------------------
    \189\ Testimony of Commissioner Mark Everson before the House Ways 
and Means Committee, Subcommittee on Oversight (11/20/03).
---------------------------------------------------------------------------
    As the recent problems in the credit counseling industry 
began to surface, the IRS has taken several steps to address 
the problems both retroactively and prospectively. 
Retroactively, the IRS has initiated audits of 50 CCAs, 
including nine of the fifteen largest CCAs in terms of gross 
receipts.\190\ The IRS Commissioner informed the Subcommittee 
that the Service will not hesitate to revoke the Section 
501(c)(3) designation of any CCA that has abused its non-profit 
status.\191\ The process for revoking non-profit status is 
fairly lengthy. The IRS must conduct a full audit of the 
agency's finances and make a formal finding that it does not 
qualify as a Section 501(c)(3) organization under the statute. 
The non-profit can appeal this decision both within the IRS and 
in the courts. In addition, the IRS is considering giving more 
explicit guidance on what the law requires of non-profits, 
which would put CCAs on formal notice of the standards they 
should follow.
---------------------------------------------------------------------------
    \190\ Everson letter, p. 1. Section 6103 of the Internal Revenue 
Code prevents the IRS from publicly revealing the identities of the 
CCAs currently under audit.
    \191\ Id. at p. 7.
---------------------------------------------------------------------------
    Prospectively, the IRS has taken measures to subject new 
CCA applications for Section 501(c)(3) status to greater 
scrutiny. It has formed a specialized group within the IRS 
called the Consumer Credit Service Compliance Team to develop 
and pursue strategies to address: (1) inurement and private 
benefit issues, and (2) issues related to CCAs that operate as 
commercial businesses.\192\ The Compliance Team currently has 
12 staff members, including technical specialists, examination 
agents, and attorneys from the Office of Chief Counsel.\193\ 
These individuals review the applications, including budgets 
and outsourcing contracts, of new CCAs to ensure that they plan 
to operate as bona fide non-profits.
---------------------------------------------------------------------------
    \192\ Id. at p. 4.
    \193\ Id.
---------------------------------------------------------------------------
    Since the Subcommittee's hearing on March 24, 2004, the IRS 
has identified 59 CCAs for examination.\194\ It has contacted 
39 of the selected CCAs and has begun examinations.\195\ It has 
already proposed revoking the tax-exempt status of one Section 
501(c)(3) credit counseling agency.\196\ In June 2004, it filed 
a $15 million suit against AmeriDebt in anticipation of 
revoking its Section 501(c)(3) status.\197\ The IRS has also 
sent denial letters to four applicants for exempt status 
because the organizations were operating for the substantially 
non-exempt purpose of marketing and selling debt management 
plans for the private benefit of insiders and related 
commercial entities.\198\
---------------------------------------------------------------------------
    \194\ Internal Revenue Service information production to the 
Subcommittee 9/1/04.
    \195\ Id.
    \196\ Everson letter to the Honorable Amo Houghton, dated 7/15/04, 
p. 1.
    \197\ Proof of Claim for Internal Revenue Taxes, In the Matter of 
AmeriDebt, Case No. 04-23649, filed 6/5/04.
    \198\ Everson letter to the Honorable Amo Houghton, dated 7/15/04, 
p. 1.
---------------------------------------------------------------------------
    As a result of these efforts, the IRS will have about 50% 
of the total revenues of the credit counseling industry under 
examination.\199\ For those CCAs under examination, the IRS has 
identified individuals and businesses that are involved in a 
scheme to create CCAs as a front for related for-profit 
businesses.\200\ Referrals have been made to investigate these 
abusive tax shelter promotions. The referrals include the 
promoter, all related entities and individuals, as well as the 
attorney and the CPA.\201\
---------------------------------------------------------------------------
    \199\ Id.at p. 3.
    \200\ Internal Revenue Service information production to the 
Subcommittee 9/1/04.
    \201\ Everson letter to the Honorable Amo Houghton, dated 7/15/04, 
p. 3.
---------------------------------------------------------------------------
    To combat such violations, the IRS has announced revisions 
of its Form 990, Return of Organization Exempt from Income Tax, 
and the Form 1023, Application for Tax Exempt Status Under 
Section 501(c)(3).\202\
---------------------------------------------------------------------------
    \202\ Id.
---------------------------------------------------------------------------
    On July 30, 2004, the IRS also released a memorandum of 
legal analysis related to the revocation of Section 501(c)(3) 
status for credit counseling organizations.\203\ This can be 
viewed as a sign of the IRS bracing for litigation ahead as it 
implements its more stringent practices, most likely leading to 
the revocation and denial of exempt status for existing 
organizations.
---------------------------------------------------------------------------
    \203\ Office of the Chief Counsel, Memorandum No. 200431023.
---------------------------------------------------------------------------

    (2) The Federal Trade Commission

    The FTC is charged with enforcing Section 5(a) of the FTC 
Act, which prohibits unfair and deceptive acts or practices 
affecting interstate commerce.\204\ The FTC lacks jurisdiction, 
however, to enforce consumer protection laws against bona fide 
non-profits. Nevertheless, the FTC may assert jurisdiction over 
a CCA if it demonstrates that the CCA is ``organized to carry 
on business for its own profit or that of its members.'' \205\ 
Alternatively, the FTC may assert jurisdiction over a non-
profit CCA if it is a ``mere instrumentality'' of a for-profit 
entity, or if it operates through a ``common enterprise'' with 
one or more for-profit entities.\206\ Even with these 
jurisdictional issues to contend with, the FTC has made inroads 
in enforcing the FTC Act against CCAs who may be abusing their 
non-profit status and engaging in unfair or deceptive 
practices.
---------------------------------------------------------------------------
    \204\ 15 U.S.C. Sec. 45(a).
    \205\ 15 U.S.C. Sec. 44.
    \206\ See Sunshine Art Studios, Inc. v. FTC, 481 F.2d 1171 (1st 
Cir. 1973); Delaware Watch Co. v. FTC, 332 F.2d 745 (2d Cir. 1964).
---------------------------------------------------------------------------
    At the Subcommittee's hearing, FTC Commissioner Thomas 
Leary testified to a number of practices that have come to the 
agency's attention that may violate the FTC Act. For example, 
Commissioner Leary listed the following as concerns with some 
existing CCAs:

     Misrepresentations about fees or ``voluntary 
contributions.''

     Promising great savings they often cannot 
deliver.

     Abuse of non-profit status.

     Failure to pay creditors in a timely manner or at 
all.

     Failure to abide by telemarketing laws.

     Noncompliance with the privacy and security 
requirements of the Gramm-Leach-Bliley Act, which restrains 
unauthorized use of personal financial information.\207\
---------------------------------------------------------------------------
    \207\ Testimony of Commissioner Thomas Leary at Subcommittee 
hearing, Profiteering in a Non-Profit Industry: Abusive Practices in 
Credit Counseling, March 24, 2004.

    On November 19, 2003, the FTC filed a complaint in Federal 
court against AmeriDebt, DebtWorks, Andris Pukke, and Pamela 
Pukke, and a second complaint against The Ballenger Group 
alleging these types of unfair and deceptive practices.\208\ 
The first complaint seeks to enjoin AmeriDebt, DebtWorks, and 
Mr. Pukke from making false and deceptive claims about the 
nature and costs of the services provided by AmeriDebt. That 
suit is ongoing. The FTC has settled the second case against 
Ballenger, which agreed to pay a $750,000 fine and change its 
practices, as described later in this Report.
---------------------------------------------------------------------------
    \208\ FTC v. AmeriDebt, Inc., et al., Case No. PJM 03cv3317, United 
States District Court for the District of Maryland; FTC v. The 
Ballenger Group, LLC, et al., United States District Court for the 
District of Maryland.
---------------------------------------------------------------------------
    In addition to its joint efforts with the IRS to inform 
consumers of the deceptive practices of some CCAs, at the 
hearing, the Honorable Commissioner Thomas Leary told the 
Subcommittee: ``the Commission is also currently conducting 
several non-public investigations of additional CCAs, debt 
negotiators, and related entities.'' Most likely, such 
investigations will result in the FTC taking additional action 
against existing CCAs and their for-profit affiliates.

    (3) Pending Bankruptcy Legislation

    Another factor affecting Federal oversight of the credit 
counseling industry is the possibility that Congress may enact 
bankruptcy reform legislation requiring greater use of credit 
counseling. In the 108th Congress, for example, Section 106 of 
H.R. 975 would have amended Federal bankruptcy law to require 
that all consumers receive ``an individual or group briefing . 
. . that outlined the opportunities for available credit 
counseling and assisted that individual in performing a related 
budget analysis.'' The briefing would have to come from an 
approved non-profit budget and credit counseling agency within 
180 days prior to filing a petition for bankruptcy. The bill 
would have also required debtors to complete ``an instructional 
course concerning personal financial management'' after filing 
for bankruptcy under either Chapter 7 or Chapter 13.
    Moreover, the bill would have required the clerk of each 
bankruptcy district to maintain a public list of CCAs and 
instructional courses approved by the United States Bankruptcy 
Trustee or the bankruptcy administrator in the district. CCAs 
and instructional courses would have had to meet the following 
criteria:

     Provide qualified counselors;

     Maintain adequate provision for the safekeeping 
and payment of client funds;

     Provide adequate counseling with respect to 
client credit problems; and

     Deal responsibly and effectively with other 
matters as they relate to the quality, effectiveness, and 
financial security of counseling programs.

Although the bill leaves these requirements to the Bankruptcy 
Trustee or the bankruptcy administrator for the individual 
districts to define, it does spell out certain minimum 
criteria. To be approved, a credit counseling agency must, 
among other requirements:

     Be a non-profit agency;

     Have a board of directors, the majority of which 
are not employed by the agency, and will not directly or 
indirectly benefit financially from the outcome of a credit 
counseling session;

     Charge a ``reasonable'' fee and provide services 
without regard to the debtor's ability to pay the fee;

     Provide full disclosure to clients regarding 
funding sources, counselor qualifications, possible impact on 
credit reports, any costs that will be paid for by the debtor, 
and how such costs will be paid;

     Provide adequate counseling that includes an 
analysis of the debtor's current situation, what brought them 
to that financial status, and how they can develop a plan to 
handle the problem without incurring negative amortization of 
their debts; and

     Provide trained counselors who receive no 
commissions or bonuses based on the counseling session outcome 
and who have adequate experience and training.

    The bill also spelled out minimum requirements for 
instructional courses on personal financial management. These 
courses, among other requirements, would have had to:

     Provide experienced and trained personnel;

     Provide relevant learning materials and teaching 
methodologies;

     Provide adequate facilities: instruction may 
occur over the telephone or the Internet if it is effective; 
and

     Demonstrate after the probationary period that it 
has been or is likely to be effective in assisting ``a 
substantial number of debtors'' to understand personal 
financial management.

The bill would have allowed CCAs and courses to be approved for 
a 6-month probationary period and for 1-year terms thereafter. 
The bill also would have allowed ``interested parties'' to seek 
judicial review of these approvals. The bill also would have 
allowed a district court to investigate any credit counseling 
agency and remove it from the list.

VI. POST HEARING CHANGES IN THE INDUSTRY

    Since the Subcommittee's hearing in March of 2004, a number 
of reforms have taken place throughout the credit counseling 
industry that may benefit consumers. Most notably, the three 
credit counseling agencies chronicled in this Report have 
undergone drastic changes ranging from bankruptcy to complete 
reorganization. The Internal Revenue Service has tightened its 
application process for Section 501(c)(3) status and heightened 
their scrutiny of current CCAs with tax-exempt status. Trade 
associations have tightened their member standards and educated 
their members on the current scrutiny and the need to comply 
with the requirements of Section 501(c)(3). Creditors have 
similarly tightened their standards for making fair share 
payments. The industry has a long way to go; however, with each 
improvement, consumers are one step closer to a service they 
can rely on.

  A. DebtWorks and The Ballenger Group

    Ballenger performed DMP processing for 11 non-profit CCAs, 
including AmeriDebt. Representatives of DebtWorks, Ballenger, 
and AmeriDebt were invited to testify at the Subcommittee's 
hearing. Matthew Case, chief operating officer of AmeriDebt, 
testified on behalf of AmeriDebt. Andris Pukke who was 
subpoenaed to appear on behalf of DebtWorks, invoked his Fifth 
Amendment privilege to remain silent. Michael Malesardi, the 
chief financial officer for Ballenger, testified in his place 
on behalf of Ballenger.
    At the time of the hearing, the FTC had filed complaints 
against AmeriDebt, DebtWorks, Andris Pukke, Pamela Pukke, and 
Ballenger.\209\ Currently, AmeriDebt's action is still pending, 
while Ballenger settled with the FTC on November 19, 2003, 
agreeing to pay a $750,000 fine and change its business 
practices.
---------------------------------------------------------------------------
    \209\ FTC v. AmeriDebt, Inc., et al., Case No. PJM 03cv3317, United 
States District Court for the District of Maryland; FTC v. The 
Ballenger Group, LLC, et al., United States District Court for the 
District of Maryland.
---------------------------------------------------------------------------

    (1) AmeriDebt Files for Chapter 11 Reorganization

    On June 5, 2004, AmeriDebt filed a petition for relief 
under the Chapter 11 reorganization provision of the Bankruptcy 
Code.\210\ Eight months earlier, AmeriDebt had stopped 
enrolling clients on DMPs.\211\ However, Federal and state 
enforcement actions have not been stayed by AmeriDebt's 
bankruptcy petition.\212\ On June 24, 2004, the U.S. Bankruptcy 
Court in Maryland directed the United States Trustee to appoint 
an Examiner for AmeriDebt in order to determine if a trustee 
should be appointed to manage AmeriDebt operations.\213\ The 
court ordered the Examiner to assess AmeriDebt's financial 
status, assess AmeriDebt's connection or relationship with 
Ballenger (including the officers, directors, and employees), 
and perform a preliminary preferences analysis.\214\ On August 
11, 2004 Raymond Peroutka, Jr. was appointed as the Bankruptcy 
Examiner in the matter.
---------------------------------------------------------------------------
    \210\ AmeriDebt letter to the Subcommittee, dated 8/23/04. In Re: 
AmeriDebt Inc., Case No. 04-23649-PM, In the District Court of 
Maryland, Greenbelt Division.
    \211\ AmeriDebt letter to the Subcommittee, dated 8/23/04.
    \212\ Id. at p. 2.
    \213\ Report for Examination, Case No. 24-23649-PM, United States 
Bankruptcy Court, District of Maryland, Greenbelt Division, p. 1.
    \214\ Id.
---------------------------------------------------------------------------
    AmeriDebt currently manages 57,000 DMPs all serviced by 
Ballenger.\215\ The remaining nine employees at AmeriDebt 
provide ``credit counseling'' to AmeriDebt's existing clientele 
via the telephone. The service processing provided by Ballenger 
makes up AmeriDebt's largest monthly expense. In the first 7 
months of 2004, AmeriDebt earned a net profit of approximately 
$1.5 million.\216\ Despite earning a net profit each month 
excluding May, the AmeriDebt management informed the Examiner's 
staff they do not anticipate reorganizing and emerging from 
Chapter 11.\217\
---------------------------------------------------------------------------
    \215\ Id. at p. 3.
    \216\ Id.
    \217\ Id.
---------------------------------------------------------------------------
    In assessing AmeriDebt's finances, the Examiner took issue 
with the transfer of AmeriDebt's servicing rights to DebtWorks 
in 1999. The Examiner pointed out that AmeriDebt transferred to 
DebtWorks, for virtually no consideration, servicing rights 
that would generate $107 million in fees over the next 4\1/2\ 
years.\218\ Using the January 2003 sale of 51% interest in the 
company owning the servicing rights and the profitability of 
the current owner of the servicing rights, Ballenger, the 
Examiner deduced that had this transfer been properly priced, 
AmeriDebt would have earned net profits for 2003 of $9.1 
million.\219\ Even with such profitability, the Examiner noted 
the pending state and Federal suits against AmeriDebt seeking 
restitution as a concern. Most important of these suits is an 
IRS claim for $15 million in anticipation of a finding that 
AmeriDebt violated its Section 501(c)(3) status. Ultimately, 
the Examiner recommended appointing a trustee and on September 
20, 2004 the court approved Mark D. Taylor as trustee.\220\
---------------------------------------------------------------------------
    \218\ Id. at p. 7.
    \219\ Id.
    \220\ Order Approving Appointment of Trustee, Case No. 24-23649 PM, 
United States Bankruptcy Court, District of Maryland, Greenbelt 
Division, 9/20/04.
---------------------------------------------------------------------------
    On January 23, 2005 the Federal bankruptcy judge approved 
the sale of roughly 60,000 remaining accounts to Money 
Management International, a large Houston CCA. This sale paves 
the way for the eventual dissolution of AmeriDebt as a company. 
The judge had earlier determined that, given the number of 
suits pending against AmeriDebt, dissolution was the best 
option.

    (2) The Ballenger Group

    Since the Subcommittee's hearing and the settlement of the 
FTC lawsuit, Ballenger has made a number of reforms to conform 
to the laws governing tax-exempt organizations and is also 
working as an advocate of for-profit CCAs. Among its reforms, 
Ballenger has modified its Fulfillment Agreement, changed its 
fee structure, and renegotiated its debt to Andris Pukke.
    Of the 11 CCAs that the Report described Ballenger as 
previously serving, only five currently have agreements with 
Ballenger for future DMP processing. Ballenger has executed 
Fulfillment Agreements with Debtscape, Debtserve, Fairstream, 
The Credit Network, and Visual Credit Counseling. According to 
Ballenger, it has made the following modifications to its 
Fulfillment Agreement with these CCAs: \221\
---------------------------------------------------------------------------
    \221\ Subcommittee interview with Ballenger representatives (9/29/
04).

      (1) The agreement between Ballenger and each CCA is now 
an ``at will'' contract. Either party may terminate the 
agreement at any time for any reason.\222\
---------------------------------------------------------------------------
    \222\ The ``at will'' contract comes with two requirements: (1) 
from date of notice, Ballenger will process the CCA's DMPs for 90 days 
and (2) the CCA must have a zero balance for their receivables with 
Ballenger or a ``mutually agreeable plan'' for resolving them.

      (2) Ballenger has eliminated the right to transfer 
consumers' DMPs from one CCA to another Ballenger CCA for any 
---------------------------------------------------------------------------
reason.

      (3) The rights to exclusive access to the CCAs' consumer 
trust accounts (consumers' monies designated for payment to 
creditors) have been eliminated. However, Ballenger maintains 
the right to access CCA escrow accounts in the event of non-
payment.

      (4) An automatic fee increase of 3% annually was 
eliminated.

      (5) Ballenger's right to market CCAs' consumers for 
goods and services in exchange for a revenue sharing agreement 
with the CCA has been eliminated.

      (6) All non-competition and exclusivity clauses 
requiring the CCA to do business only with Ballenger have been 
removed.

      (7) A clause requiring each agency to comply with all 
rules and regulations issued by the IRS has been added. In 
particular, Ballenger requires each CCA to certify that all 
necessary steps have been taken to comply with section 4958 
which guards against excess benefit to a third party.\223\
---------------------------------------------------------------------------
    \223\ Ballenger Fulfillment Agreement with The Credit Network 
executed September 1, 2004 para. 2.10.

    Ballenger has also reduced its fees to each CCA from $25/
$30 per DMP per month (depending on electronic submission) to 
$16/$19 per DMP. Ballenger has reduced the monthly fee by 10% 
on pre-2003 DMPs. Such reductions make Ballenger's fees 
competitive with the lowest in the industry.\224\
---------------------------------------------------------------------------
    \224\ Fair Market Value Evaluation prepared for The Ballenger 
Group, April-June 2004.
---------------------------------------------------------------------------
    As the Report detailed, on October 2003 Andris Pukke sold 
the rights to service various CCAs to Ballenger for $43 million 
with an outstanding note to Pukke for $37 million. Ballenger 
has renegotiated this debt, settling with Andris Pukke for 
$500,000 plus another payment to Pukke of $250,000 for an 
agreement not to compete with Ballenger.
    At the same time it has reformed its practices, The 
Ballenger Group has recently started and funded a new group 
called the Coalition for Responsible Credit Solutions 
(``CRCS''). CRCS aggressively advocates the for-profit CCA 
model and has launched a well-funded campaign to influence the 
pending language of a state model law regulating the credit 
counseling industry to allow for-profit CCAs. The CRCS 
criticizes the creditors and the NFCC and its CCAs, asserting 
that a CCA that accepts money from a creditor is working only 
for the creditor's interests.
    The CRCS's website includes a checklist for consumers on 
how to pick a CCA.\225\ This list suggests that face-to-face 
counseling is unnecessary and that a consumer should be able to 
get all needed education and counseling from the Internet. 
Additionally, CRCS suggests the IRS may revoke CCAs' tax-exempt 
status for accepting fair share payments from creditors, 
leaving few financial options for debtors and causing ``a 
bankruptcy explosion.'' \226\
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    \225\ Available at www.responsiblecredit.com/index.php. See also, 
``New Debt Counseling Group Draws Fire; Doubts: A Consumer Advocacy 
Group is Accused of Being a Creature of the Growing Debt Counseling 
Industry,'' The Baltimore Sun, July 21, 2004.
    \226\ ``Consumers for Responsible Credit Solutions Warns of a 
Future Bankruptcy Explosion if Most States or Congress Don't Act to 
Change Current Credit Counseling Laws,'' PR Newswire, August 26, 2004.
---------------------------------------------------------------------------
    For-profit CCA advocates have apparently convinced the 
National Conference of Commissioners on Uniform State Laws 
(``NCCUSL'') to incorporate a place for for-profit CCAs in 
their model law. As mentioned, the Consumer Federation of 
America and the National Consumer Law Center have also prepared 
a model law, which allows for-profit CCAs. However, in a letter 
to NCCUSL, the groups expressed reservations about the for-
profit model's ability to survive with the imposed fee limits 
they are suggesting.\227\ The CFA and NCLC maintain that they 
are neutral on the issue and have neither ``endorsed'' nor 
rejected the for-profit model.\228\ They also state: ``We note 
with concern that some of the credit counseling entities that 
have been most aggressive in insisting that creditors and 
legislators endorse the for-profit model, like The Ballenger 
Group, are the very same companies who have been investigated, 
sued or sanctioned for deceptive acts by state and Federal 
regulators or lawmakers.'' They go on to say, ``In our opinion, 
this means that their claims that the for-profit model would be 
the salvation of the credit counseling industry completely lack 
credibility.'' \229\ The CFA and NCLC support a non-profit 
presence as vital to the credit counseling industry and its 
future.\230\
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    \227\ NCLC/CFA letter to Commissioner William C. Hiloman, dated 8/
3/04.
    \228\ Id. at p. 5.
    \229\ Id.
    \230\ Id.
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  B. The Ascend One-Amerix Conglomerate

    As the Subcommittee's investigation proceeded, both AFS and 
Amerix notified the Subcommittee that each intended to modify 
its business practices. At the hearing, Cuba Craig, president 
and CEO of AFS, described the reforms that AFS had undertaken 
to conform to the letter and spirit of the law. It should be 
noted that AFS did not charge up front fees and had capped its 
monthly fees at $50 per month even prior to the Subcommittee's 
investigation. Criticisms of AFS operations were confined to 
its outsourcing and service agreement with Amerix. Cuba Craig 
testified, ``Since the Subcommittee began its investigation, we 
have stepped up our efforts to ensure that AFS meets all 
applicable requirements.''
    To that end, AFS told the Subcommittee that it had 
implemented the following changes to its operations:

      (1) Origination, counseling, and all DMP enrollment are 
now done in- house.\231\
---------------------------------------------------------------------------
    \231\ Second Addendum to Service Agreement between Amerix and 
American Financial Solutions, dated 4/12/04.

      (2) The service agreement requirements to enroll 30% of 
all first time callers on DMPs (the ``assist rate'') and to 
generate $30 revenue per month in consumer fees for each DMP 
(the ``revenue standard'') were eliminated in April 2004. \232\
---------------------------------------------------------------------------
    \232\ Id.

      (3) AFS terminated both the FreedomPoint Strategic 
Marketing Agreement and the the FreedomPoint Mortgage Brokerage 
Prospect Lead Agreement on May 1, 2004, which meant that AFS 
was no longer required to make client referrals to these for-
profit companies.\233\
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    \233\ AFS letter to the Subcommittee, dated 8/31/04.

      (4) On May 5, 2004 AFS gave notice to Amerix that it 
would not renew the Amerix Benefits Package Marketing Agreement 
at the end of its initial term, and that AFS wished to cease 
marketing the Member Benefits Package. AFS was released from 
its marketing obligations in mid-August.\234\
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    \234\ Letter from AFS to Amerix, dated 5/5/04.

      (5) AFS solicited information about competitive bids for 
marketing services and conducted an analysis of the back office 
servicing in order to assess the fair market prices of such 
services. AFS issued a request for proposal for back office 
services in mid-September.\235\
---------------------------------------------------------------------------
    \235\ Id.

      (6) AFS scripts regarding voluntary contributions have 
been revised to ensure that consumers are clear that any 
contribution is voluntary. \236\
---------------------------------------------------------------------------
    \236\ AFS letter to the Subcommittee, dated 8/31/04.

      (7) The AFS website has been changed to provide 
educational resources to all visitors, not just AFS clients. 
\237\
---------------------------------------------------------------------------
    \237\ Id.

      (8) In August 2004, AFS opened a community learning 
center in the poorest neighborhood school in the Bremerton 
School District, near an AFS call center in Washington state. 
The Learning Center offers classes, tutoring, counseling and 
other financial and credit education to anyone who wishes to 
participate, free of charge.\238\ In addition, AFS has created 
an internship where the students work with the AFS Education 
Manager conducting surveys of the community to identify 
financial education needs.\239\
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    \238\ AFS received partial funding for the learning center from the 
Association of Independent Consumer Credit Counseling Agencies. 2004 
AICCCA Consumer Education Grant 7/13/04.
    \239\ AFS letter to the Subcommittee, dated 8/31/04.

      (9) In an effort to ensure that appropriate consumers 
are on DMPs, AFS has assigned three counselors to follow up 
with consumers who miss payments to determine whether the 
consumers should remain on the DMP and provide additional 
counseling if needed.\240\
---------------------------------------------------------------------------
    \240\ Id.

    Amerix, which provides debt servicing to CCAs in the 
conglomerate, has also made a number of significant changes in 
its operations. Bernaldo Dancel, president and CEO of Ascend 
One, the holding company of Amerix, said at the hearing, ``We 
recognize that we can always do better, and this investigation 
has played quite a constructive role for our company in helping 
us.'' Mr. Dancel noted, ``I think, frankly, the area where I 
believe there is particular room for improvement is in seeing 
the CCAs we serve offer good education and counseling to all 
consumers seeking assistance, whether they are suitable for a 
DMP or not.'' Amerix told the Subcommittee that its reforms 
---------------------------------------------------------------------------
include the following:

      (1) Amerix has enlisted ``Enhanced Standards'' that will 
be required of every non-profit CCA wishing to do business with 
Amerix. Amerix told the Subcommittee that these enhanced 
standards include all of the requirements of AICCCA or NFCC 
membership, and require CCAs to conduct community outreach of 
1,000 hours per year, perform individual client assessments 
regardless of whether clients choose to enroll in a DMP, 
prepare budgeting worksheets with tips for the client, and 
partner with an educational institution to increase educational 
offerings and consumer financial awareness.\241\
---------------------------------------------------------------------------
    \241\ Ascend One letter to the Subcommittee, dated 8/23/04.

      (2) Amerix ceased providing overflow origination 
services to American Financial Solutions on March 15, 2004 and 
determined not to provide such services to any other CCA.\242\
---------------------------------------------------------------------------
    \242\ Second Addendum to Service Agreement between Amerix and 
American Financial Solutions, dated 4/12/04.

      (3) Amerix eliminated any assist rate or revenue 
standard from its service agreement with its CCAs so there are 
no minimum DMP enrollment or monthly fee generation, as 
explained earlier with respect to AFS.\243\
---------------------------------------------------------------------------
    \243\ Id.

      (4) Amerix worked with its CCAs to review and modify all 
scripts used by counselors when assisting clients with credit 
counseling.\244\
---------------------------------------------------------------------------
    \244\ Ascend One letter to the Subcommittee, dated 8/23/04; CESI 
Financial Counseling Session Guidelines and Disclosure Requirements; 
AFS Scripts.

      (5) Ascend One has provided funding of $500,000 and 
pledged over $5 million over 10 years to the Ascend One fund 
for financial literacy. In addition, on July 21, 2004, Ascend 
One made a $24,000 grant to Junior Achievement to provide 
financial literacy education in the Baltimore City Schools, and 
another grant on July 28, 2004, of $50,000 over a 5-year period 
to the Maryland Council on Economic Education.\245\
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    \245\ Ascend One letter to the Subcommittee, dated 8/23/04; Ascend 
One, Concentration Account, bank statement March, 2004.

      (6) Amerix also agreed to negotiate in good faith the 
fee structure for the services Amerix provides for AFS to 
reflect actual costs and the value of services provided.\246\
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    \246\ American Financial Solutions letter to the Subcommittee, 
dated 8/31/04.
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  C. The Cambridge-Brighton Conglomerate

    Cambridge representatives were invited to testify at the 
Subcommittee's hearing on March 24, 2004. Mr. Viale was invited 
to represent Cambridge, the non-profit CCA. Mr. Puccio was 
invited to represent the back office service provider for 
Cambridge and Brighton Debt Management. On the eve of the 
hearing Mr. Puccio informed the Subcommittee of health concerns 
that would prevent him from testifying. Mr. Viale attended the 
hearing and provided testimony on the CCA part of Cambridge's 
operations. A deposition of Mr. Puccio took place on July 1, 
2004 and is included in the hearing record.\247\
---------------------------------------------------------------------------
    \247\ Profiteering in a Non-Profit Industry: Abusive Practices in 
the Credit Counseling Industry, March 24, 2004, Exhibit No. 18, p. 264.
---------------------------------------------------------------------------
    Since the Subcommittee hearing on March 24, 2004, Cambridge 
has taken steps to overhaul its entire corporate structure. 
Discussed below are changes that the Cambridge-Brighton 
conglomerate told the Subcommittee it was making to transition 
from a profit-driven group of companies to a system of 
operations driven by non-profit motives.
    Cambridge-Brighton told the Subcommittee that a new non-
profit holding company will be created called ``Cambridge 
Credit Non-Profit Holding Company'' that will function as the 
parent company.\248\ This company will be the sole owner of 
each non-profit CCA and the sole shareholder of two of the for-
profit companies, Cambridge Index and Brighton Credit 
Management Corp.\249\ In addition, the for-profit service 
companies still wholly owned by John and Richard Puccio, 
Brighton DMS, Debt Relief Clearing House Ltd., and Cypress 
Advertising & Promotions, Inc. (``the servicing companies''), 
will become wholly owned subsidiaries of a new for-profit 
holding company called ``Cambridge Credit For-Profit Holding 
Company,'' whose stock will be wholly owned by the non-profit 
CCAs, Cambridge and Cambridge Budget Planning.\250\ As a 
result, Cambridge-Brighton told the Subcommittee that any and 
all profits of the servicing companies and the for-profit 
Cambridge Index and Brighton Credit, the for-profit CCA, will 
inure to the benefit of the non-profit CCAs and the non-profit 
holding company.
---------------------------------------------------------------------------
    \248\ Cambridge letter to the Subcommittee, dated 8/31/04.
    \249\ Id.
    \250\ Id.
---------------------------------------------------------------------------
    The Subcommittee was also told that officers and employees 
of Cambridge will transfer the capitol stock of Brighton DMS, 
Debt Relief Clearing House, and Brighton Credit (the for-profit 
CCA) to the non-profit holding company.\251\ Pursuant to these 
changes, the non-profit CCAs will control through the non-
profit holding company, Cambridge Credit Non-Profit Holding 
Company, 100% of the stock of each of the servicing companies. 
The non-profit holding company will also own all of the stock 
of the servicing companies and the for-profit CCA, Brighton 
Credit. Consequently, all profit generated by the for-profit 
companies will be in the control of and available for use by 
the non-profit companies.
---------------------------------------------------------------------------
    \251\ Id.
---------------------------------------------------------------------------
    Cambridge-Brighton said that with the reorganization, the 
board of directors of the non-profit CCAs and the non-profit 
holding company will be expanded to include nine members, eight 
of whom will be independent directors who may not be officers, 
employees, or independent contractors of the non-profit CCAs or 
the non-profit holding company.\252\ For the for-profit 
companies, the governing board will consist of three directors, 
two of whom will be independent.\253\
---------------------------------------------------------------------------
    \252\ Id.
    \253\ Id.
---------------------------------------------------------------------------
    Cambridge-Brighton told the Subcommittee that as of June 1, 
2004 all of its CCAs--Cambridge, Cambridge/Brighton Budget 
Planning, and Brighton Credit--had modified the fees charged to 
consumers for the construction and maintenance of the DMP.\254\ 
The maximum fee charged for initiating a DMP will be $75 and 
the maximum monthly fee for maintenance is $50 per month.\255\ 
Additionally, Cambridge has instituted a new refund policy 
allowing consumers to cancel the DMP at any time in the first 
90 days of enrollment with a full refund available.\256\
---------------------------------------------------------------------------
    \254\ Id.
    \255\ Id.
    \256\ Id.
---------------------------------------------------------------------------
    Cambridge-Brighton told the Subcommittee that its CCAs have 
introduced a system called ``post counseling'' in which their 
counselors follow up with consumers placed on DMPs to ensure 
that they are utilizing the budgeting tools provided to track 
their finances. Three scheduled calls are supposed to be 
completed within the first 90 days of entering the DMP and the 
goal is to emphasize the need to develop savings. \257\
---------------------------------------------------------------------------
    \257\ Id.
---------------------------------------------------------------------------
    For the community, Cambridge told the Subcommittee that it 
has committed $4 million over the next 3 years for the program 
``Learn Now or Pay Later,'' \258\ working with high school 
students across the nation to educate them on the 
responsibilities that accompany credit. Students achieving 
excellence in the program will be awarded scholarships. 
Additionally, Cambridge works with a local Job Corp program to 
educate at-risk youths about the importance of responsible 
financial habits.\259\ Speaking engagements at local colleges 
and information booths at local shopping malls are also part of 
their community outreach.\260\
---------------------------------------------------------------------------
    \258\ Id.
    \259\ Id.
    \260\ Id.
---------------------------------------------------------------------------
    If implemented, these and other reforms should help resolve 
the abusive practices documented in this report.

  D. Recommendations

    Based upon its investigation of the credit counseling 
industry, the Subcommittee makes the following recommendations:

      (1) Complete Industry Cleanup. The IRS and FTC should 
complete their ongoing reviews of the credit counseling 
industry to eliminate abusive conduct by credit counseling 
agencies that have been operating in violation of restrictions 
on non-profit charities or using unfair or deceptive trade 
practices.

      (2) Establish Five-Year Review. In light of past 
industry abuses, the IRS should require each credit counseling 
agency exempt from Federal taxation under Section 503(c)(3) to 
submit every 5 years, for IRS review, return information 
establishing its charitable activities and a certification that 
the agency is not providing a private benefit to any individual 
or entity. The IRS should review these materials to ensure each 
credit counseling agency is operating as a charitable 
organization and in compliance with the law for non-profit 
entities. Congress should consider enacting legislation 
conditioning a credit counseling agency's tax exemption on the 
submission of this documentation and the IRS's renewal of its 
tax-exempt status for 5-year periods.\261\
---------------------------------------------------------------------------
    \261\ The United States Senate Finance Committee has circulated a 
Discussion Draft of proposals for reforms and best practices in the 
area of tax-exempt organizations. The Committee suggests a five-year 
review of tax exempt status by the IRS, including the filing of current 
articles of incorporation and by-laws, conflict of interest policies, 
evidence of accreditation, management policies regarding best 
practices, a detailed narrative about the organization's practices, and 
financial statements.

      (3) Provide Consumer Education. To address rising 
consumer debt and bankruptcy rates, each credit counseling 
agency should provide affirmative financial counseling and 
educational programs designed to reduce excessive indebtedness 
within the populations they serve, and should evaluate, 
---------------------------------------------------------------------------
improve, and document the effectiveness of these programs.

      (4) Continue Creditor Support and Standards. Major 
creditors should continue to provide financial support to 
appropriate, non-profit credit counseling agencies, conditioned 
upon the agencies' achieving specified standards that 
contribute to the public good, including standards requiring 
agencies to maintain good standing and accreditation status 
within the industry, assess reasonable fees based upon actual 
costs, provide individualized debt counseling to clients, and 
avoid conduct or transactions that generate or create the 
appearance of generating a private benefit for any individual 
or entity. Creditors should carefully screen credit counseling 
agencies to ensure they provide funds only to reputable 
agencies that comply with their standards.

      (5) Clarify Federal Standards. The IRS and FTC should 
work together to clarify the standards that credit counseling 
agencies must meet to maintain tax exempt status under Section 
501(c)(3) and avoid deceptive or unfair trade practices, 
including by making it clear that a non-profit credit 
counseling agency must:

          (a) Accreditation--maintain good standing and 
accreditation status within the credit counseling industry, 
such as by meeting the accreditation standards of the Council 
on Accreditation for Children and Family Services;

          (b) Independent Board--maintain an independent Board 
of Directors that includes representatives of the community 
served by the agency and that includes no more than a minority 
of directors who are employed by the agency, a related entity, 
or any other person who stands to gain direct or indirect 
financial benefit from the agency's activities;

          (c) Public, Not Private Benefit--avoid conduct or 
transactions that generate or create the appearance of 
generating a private benefit for any individual or entity;

          (d) Full Disclosure--disclose to each client the 
existence and nature of any financial relationship that the 
agency has with a creditor of the consumer or with a for-profit 
entity that provides data processing, marketing, or financial 
services to the agency or the client;

          (e) Reasonable Fees--assess clients reasonable fees 
that are based upon the agency's actual costs and charged as 
services are provided, rather than substantially in advance of 
such services; and

          (f) No Improper Incentives--refrain from accepting 
compensation for referring clients to any service or 
organization, and refrain from paying compensation to any 
employee based upon the number of clients enrolled in debt 
management plans or the amount of client debt managed by the 
agency.

                                 
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