AFSCME 3357-HOF'S BLOG

Credit Counseling Industry Shocked by New Law
Not-For-Profit Credit Counselors a Doomed Species?

For years there has been broad discontent among legislators and administrators over the fraud and kickbacks between "not-for-profit" credit counseling companies and their very profitable affiliates.

Last week the Senate adopted H.R. 4, now called the Pension Protection Act of 2006. It's now going to President Bush, who has already indicated that he will sign it. Most of the public press over this law concerned impact on pension plans, but deep within the bill, there are provisions that will make it radically more difficult for debt management and credit counseling companies to maintain non-profit status. I'm linking an industry press release on the subject here.

Here is a summary of the relevant provisions of the new act according to the AADMO, the American Association of Debt Management Organizations:

The legislation would prohibit 501(c)(3) and 501(c)(4) tax-exempt status for a credit counseling agency unless it:

Â? provides credit counseling tailored to the specific needs of individuals

Â? does not make loans or negotiate making loans

Â? does not provide or charge for credit repair

Â? does not refuse service for the inability to pay or enroll in a DMP

Further, the credit counseling agency:

Â? must charge only "reasonable" fees

Â? must waive fees if the consumer is unable to pay

Â? except as permitted by state law, not charge a fee based on a percentage of the debt or payment

Â? except as permitted by state law, not charge a fee based on a percentage of the amount of the payment savings (actual or projected)

Â? must not have a board without broad community representation and who are not employed nor may benefit from the agencyÂ?s activities (based on certain criteria)

Â? must not own more than 35 percent of Â?back-endÂ? services

Â? must not pay for referrals or be paid for referrals

The language does include specific requirements solely for 501(c)(3) agencies. This includes:

Â? The organization cannot not solicit contributions from consumers during the initial counseling process or while the consumer is receiving services from the organization.

Â? The aggregate revenues of the organization which are from payments of creditors of consumers of the organization and which are attributable to debt management plan services do not exceed the applicable percentage of the total revenues of the organization. The amount is 50 percent.

There is a Â?ramp-downÂ? mechanism for the aggregate revenue threshold of creditor contributions that goes into effect one year after the enactment of the law. That first year of the law when it is actually in effect provides that the threshold is 80 percent, 70 percent the next year, 60 percent the year after, then into the 50 percent level in perpetuity.

The legislation also declares Â?Debt Management Plan ServicesÂ? to be unrelated business income. The term Â?debt management plan servicesÂ? means services related to the repayment, consolidation, or restructuring of a consumerÂ?s debt, and includes the negotiation with creditors of lower interest rates, the waiver or reduction of fees, and the marketing and processing of debt management plans.

There are two consequences of this law that immediately come to my mind as a consumer attorney. If the credit counselors shift their structures to that of for-profit entities, they will be fair game under the Fair Debt Collection Practices Act, at least to the extent that they receive any funding from creditors. Secondly, and hopefully, many of these companies will just go out of business. I do hope that the few that provide statutorily required pre-bankruptcy counseling stay in business, but most of them won't be missed.