Complaints about credit counseling agencies on rise

By Mary Dalrymple
Associated Press

•	Who to contact Consumers who have problems with debt management services can contact the FTC online (www.ftc.gov) or by calling toll-free at (877) FTC-HELP. You can also write the Exempt Organizations Examinations at the Internal Revenue Service, 1100 Commerce St., MC 4900 DAL, Dallas, TX 75242.

The Internal Revenue Service and the Federal Trade Commission, pursuing an increasing number of consumer complaints, said some nonprofit credit counselors do not meet the standards for educational, tax-exempt status.

The two agencies said consumers sometimes are pushed into debt repayment plans or consolidation loans — fixed payment plans to help pay off debts — without help in learning how to budget, save and manage debt.

Complaints also have centered on high fees, hidden charges, even late fees when counselors fail to pay a consumer's creditors on time. In a few cases, counselors have not paid a consumer's creditors at all, consumer groups said.

"Many of these groups provide a valuable service to consumers, but some use the tax code to skirt consumer protection laws," said IRS Commissioner Mark Everson.

The IRS and FTC warned consumers that the nonprofit label does not ensure the services are affordable or that the organization has a consumer's best interests in mind.

"It's a question of tax status," said Steve Baker, the FTC's Midwest region director. "It's not a Good Housekeeping seal of approval."

The IRS announced it has begun auditing some credit counseling services to see if they meet the nonprofit criteria for tax-exempt status. Applications from new organizations will undergo more rigorous screening, including analyses of marketing materials.

An IRS official said the agency lacks resources to audit all credit counselors and refused to name those under examination. The official said the IRS will concentrate on areas highlighted by the FTC and credit counseling associations. New applications will be forwarded to IRS headquarters so officials can look for trends among new entrants.

Longtime credit counselors see worrying trends. Lydia Sermons-Ward, a senior vice president at the National Foundation for Credit Counseling, said phone bank operations have proliferated since the early 1990s. They advertise widely, she said, pushing costly consolidation loans and funneling fees paid by creditors back into their operations and advertising.

"Some of the new entrants are levying such high fees on the consumers that it's putting the consumers in deeper debt," Sermons-Ward said.

Nonprofit credit agencies traditionally have a community center where a debtor can meet a counselor face-to-face. The counselor typically spends a lot of time reviewing a debtor's financial situation before recommending a strict budget, a debt repayment plan or bankruptcy.

Credit counselors have been financed historically by credit card companies. Those contributions have been declining, forcing credit agencies to charge some fees.

Deanne Loonin, a staff attorney with the National Consumer Law Center, said credit card companies also are less willing to lower interest rates and waive fees for consumers who prove they're serious about paying off their debts by entering counseling.

"It sort of calls into question the whole model," she said. "We need to take a closer look at the creditors' roles in all this."

The IRS and FTC urge consumers to read agreements with credit counseling organizations, ask about fees and make sure creditors will work with the agency before signing contracts.