Consumer Affairs Funded Report on the Study of the Credit Counselling Industry.

We reported in our blog of June 5, 2006 that Canada’s Office of Consumer Affairs was undertaking the funding of a study on Credit Counsellors in order to ensure that consumers are well served and to reduce the risk of fraud or conflict of interest. Consumer Affairs was prompted to take this step by the widespread abuses of the credit counselling industry in the United States.

The report on credit counsellors was issued on November 20, 2006 by L’Union des consommateurs. The report raises concerns about poorly trained credit counsellors and the conflict of interest “non profit” credit counsellors have because they are funded by credit grantors.

L’Union des consommateurs 257 page report was issued in French only on November 20, 2006. The report covers non profit and for profit credit counselling companies. The report notes that the Credit Counselling Industry is unregulated and raised concerns that there are no standards of expertise and experience required of the people counselling consumers. The report observes that anyone can claim to be an expert, duly qualified to advise consumers—whatever the training and experience he or she may (or may not) possess, thus leaving consumers vulnerable.

The report was also very concerned with the conflict of interest that “non-profit” credit counsellors have since a significant part of their funding comes from creditors. The report recited the following warning on page 54 of its Conclusions:

Is Credit Counselling a Good Idea? Investigate BEFORE You Act:

Consider that the alternative, bankruptcy, may well permit you to recover a good credit rating much faster than credit counselling. Negative credit items remain on your credit report for up to seven years. This would include the records of your credit counselling and a list of your “bad debts.” Bankruptcy will also remain on your record for up to seven years, but you may well be able to reestablish credit after a couple years. Think about that.

You might consider a credit counselling program now which will stop creditors from harassing you. You can then investigate bankruptcy.

While credit counselling services are generally presented as not-for-profit, unbiased, consumer debt counselling services, they are also often franchises and collect a fee from your creditors for collecting your payments. Not-for-profit credit counselling services may be receiving secret commissions or generous financial support from creditors, the Government, United Way and industry at large. Not for profit does not mean that the employees and/or operators of many of these services are not collecting salaries and growing a business.

The report observed in its Executive Summary that as experience in the U.S. has shown, potential exists for grave abuses at the expense of consumers. Hence the importance and urgency of examining regulating the practices and ethics of budget counselling in Canada to ensure that consumers enjoy an adequate level of protection in this sector.

The report’s conclusions include the following:

1. Lack of regulation of the industry make consumers vulnerable to receiving poor advice from untrained or poorly qualified counsellors; it seems obvious that, to work in this field, one requires appropriate training.
2. Legislative guidelines on the training of certain consultants (e.g. financial advisors) and making it illegal for those without the required training to suggest that they are qualified to offer such services would certainly be steps in the right direction, if we are to provide the public with assurances that what assistance is on offer shall be provided by qualified actors.
3. Some non-profits may advise only those solutions that bring in funding via commissions or donations from creditors;
4. Questions need to be clarified with respect to the nature and scope of the funding structures of organizations offering budget counselling.
5. Organizations offering budget counselling may face a difficult balancing act as they seek to maintain complete independence vis-à-vis creditors and the need for funding, which could quite logically come from creditors who benefit, directly and indirectly, from the results of effective budget counselling. The right balance remains to be found.

The 257 page report was completed on November 20, 2006. It is expected to be available on the L’Union des consommateurs website in January of 2007. We were issued a copy of the full report (in French) and an Executive Summary in English.

Credit Counsellors under Scrutiny.

Canada’s Office of Consumer Affairs is undertaking the funding of a study on Credit Counsellors in order to ensure that consumers are well served and to reduce the risk of fraud or conflict of interest. Consumer Affairs was prompted to take this step by the widespread abuses of the credit counselling industry in the United States. The study will be conducted by L’Union des consommateurs.

Their analysis will focus on the following points:
o cost of credit counselling;
o sources of funding;
o policy on the allocation of payments to creditors;
o existence of a consumer awareness program;
o nature and size of the business;
o annual volume of counselling sessions;
o training required or offered to credit counsellors;
o rules of ethics;
o existence of and participation in a national association.

L’Union des consommateurs have stated that they will call on members of Credit Counselling of Canada for assistance in identifying the agencies to be targeted and finding pertinent local legislation and major legal precedents.

It is unfortunate, that by seeking cooperation with members of Credit Counselling of Canada, that there appears to be a bias by
L’Union des consommateurs towards non-profit credit counsellors. This built in bias will mar the credibility of L’Union des consommateurs report, especially with the latest news coming out of the US on May 15, 2006 about the widespread abuses by non-profit credit counsellors.

The US Internal Revenue Service (IRS) reported on May 15, 2006 that, the audits of 41 organizations, representing more than 40 percent of the revenue in the industry, have been completed. All of the completed audits have resulted in revocation, proposed revocation or other termination of tax-exempt status.

RAMPANT ABUSE BY CREDIT COUNSELLORS IN THE UNITED STATES

Credit Counsellors Controlled by Credit Card Companies:
Steve Rhode, president and co-founder of Myvesta issued a statement on November 20, 2003 on the Credit Counseling Hearing Held by The Subcommittee on Oversight of the Committee on Ways and Means. Amongst other things, he said that credit counsellors were controlled by the credit card companies.

“Back-Office” Servicing Companies are Threatening to Change the Industry into a Debt Collection Mill:
In March 2004, the United States Senate tabled a report entitled Profiteering in a non-profit industry: Abusive practices in credit counseling. The report contains stories of abuses committed in the United States in the field of support services for consumers in debt. The Committee reported that the proliferation of for-profit, “back-office” servicing companies is threatening to change the industry into a debt collection mill instead of an industry whose focus should be on consumer counselling and education.

Consumers Deceived into Paying at Least $170 Million in Hidden Fees:
On March 21, 2005 the Federal Trade Commission issued a statement that one of the largest non-profit credit counselling firms in the US, AmeriDebt Inc., will shut down its debt management operation as part of a settlement of Federal Trade Commission charges that it deceived consumers into paying at least $170 million in hidden fees.

Attorney General Jay Nixon of Missouri, in announcing the lawsuit, filed in St. Louis Circuit Court against non-profit credit counsellor AmeriDebt, said that:

“…AmeriDebt has served more as an anchor than a life preserver for many consumers. “

IRS Takes New Steps on Non-Profit Credit Counseling Groups Following Widespread Abuse:
The IRS announced on May 15, 2006 that over the past two years, the IRS has been auditing 63 non-profit credit counseling agencies, representing more than half of the revenue in the industry. To date, the audits of 41 organizations, representing more than 40 percent of the revenue in the industry, have been completed. All of the completed audits have resulted in revocation, proposed revocation or other termination of tax-exempt status.

“Over a period of years, tax-exempt credit counseling became a big business dominated by bad actors,” said IRS Commissioner Mark W. Everson.

“We are taking the unprecedented step of contacting every known organization in the tax-exempt credit counseling world to determine if there are further problems. And we are issuing guidance to assist those smaller organizations who do play it straight and want to continue to stay on the right side of the law.” Everson said.

In addition, the IRS has tightened up its review of new applications by credit counseling firms for tax-exempt status. Since 2003, about 100 applications have been reviewed, but only three have been approved.

WHAT DOES THIS MEAN FOR CANADIAN DEBTORS CONSIDERING USING A CREDIT COUNSELLOR?

Canadian debtors who are considering using a credit counsellor should take the precaution of getting a second opinion from a trustee in bankruptcy or an insolvency lawyer.

Trustees will give a free consultation with no obligation to use their services. Insolvency lawyers will charge you for 1 – 1 ½ hours of their time but it will be money well spent for your peace of mind and potential savings of thousand of dollars.

Here are some things to be aware of when dealing with credit counsellors:

• Credit counsellors that advertise as “non-profit” are funded by banks, credit card companies and other credit grantors and therefore have a conflict of interest. Be careful! Their mandate is to steer people away from going bankrupt or filing a proposal. Be skeptical and you decide if they are giving the best advice for you and your family or the best advice for their sponsors the banks, credit card companies and other credit grantors.

• Setting your monthly payments too high is common. We find that the Industry Canada Standards on required payments in a bankruptcy or a proposal are very accurate in establishing the maximum payments that should be made. You can calculate your maximum monthly payments by filling in this predictor.

• Setting a payment plan for an extended period of time such as five or more years is common. This is almost always a very bad idea for you. Most trustees in bankruptcy feel that the term should be a maximum of three to four years. It is a stipulation in the Bankruptcy and Insolvency Act that the term for a “Consumer Proposal” be no more than five years. Terms longer than this have a very high failure rate, because people cannot see a “light at the end of the tunnel”.

• Some credit counsellors just want to charge you for filling out bankruptcy forms and referring you to a “very good” bankruptcy trustee. Don’t pay anyone for doing this! All bankruptcy trustees have the same code of ethics and the same costs and will all give you the same service.

• Some credit counsellors may try to mislead you by saying that their services will give you a better credit rating than a bankruptcy and that a bankruptcy or a proposal will ruin your credit rating. Don’t be fooled! Any kind of a payment plan or bankruptcy or a proposal will be flagged by the credit bureau and will be a negative on your credit bureau report.

• Some credit counsellors may try to frighten people into using their services by saying how terrible bankruptcy is. Don’t be misled by these bankruptcy myths.