The History of Consumer Credit Counseling Services
Credit Counseling is a debt management solution devised by leading credit card issuing banks in the 1960s as a means of reducing default rates among consumers struggling to meet their monthly credit card payments. Consumers who enroll into a CCCS Debt Management Plan (DMP) are usually granted a reduction on their interest rates, called a “concession rate,” which is set by the individual banks. These rates are not negotiated on an individual basis, but are typically part of pre-arranged agreements between CCCS firms and lenders. Most credit counseling plans assume that the entire debt will be paid, and do not negotiate with creditors to reduce customers’ principal balances — but do lower interest and fee charges.
While it may seem strange that the credit card lenders would implement a program that allows consumers to pay less interest and, in some cases, reduce their monthly payments, CCCS firms also help the banks’ bottom lines by allowing some financially stressed customers to continue making payments on a regular basis. In return, the consumer finance industry has traditionally provided financial support to credit counseling agencies through a system of payments called “fair share,” in which lenders pay back to credit counseling agencies a percentage of the money the creditors receive from the agencies each month. Historically, the typical “fair share” percentage was around 15%, meaning that credit counselors received 15% of all money they paid to creditors on behalf of their customers.
In recent years, however, many banks reduced their fair share payments to around 6% to 8%, and some have stopped them altogether.1 Many experts see the counselors’ reliance on “fair share” as a serious conflict of interest between the credit counselors’ obligations to their consumer clients and their need to please credit card lenders, which provide many agencies’ revenue. Although the use of “fair share” is common among credit counseling agencies, its continued use has led to sharp criticisms of the credit counseling industry.
In addition to the money they receive through “fair share,” credit counseling organizations collect monthly fees directly from their customers, typically charging $10 to $15 per month for each debt enrolled in a DMP. While these charges may seem insignificant, one must consider that the fees are charged every month for the duration of a consumer’s credit counseling plan. For example, a consumer with 10 enrolled debts and a monthly DMP fee of $10 per account, would pay a total of $6,000 in fees over the life of the typical five-year DMP.
Although the fees and “fair share” payments provide a significant revenue stream for many credit counselors, many agencies operate as tax-exempt, non-profit “community service” organizations. While some credit counseling agencies are charitable non-profit organizations, a 2006 investigation conducted by the Internal Revenue Service found that many credit counselors claimed IRS tax-exempt status while bringing in large profits, using various means to disguise those profits, and providing executives with excessive compensation when compared with the pay at other, comparably sized, non-profit organizations. As a result of its investigation, the IRS revoked many credit counselors’ tax-exempt non-profit status, including many of the country’s largest credit counseling providers.2 These actions by the IRS have benefited consumers and the credit counseling industry, allowing more traditional CCCS programs to prosper, while forcing less scrupulous providers, such as AmeriDebt and other “DMP mills,” out of business entirely. The industry is now split between for-profit CCCS firms which derive the bulk of their revenue from monthly client fees and the traditional CCCS non-profit firms.
Once enrolled in a CCCS program, the agency will establish a Debt Management Plan, or DMP, under which the consumer makes a single monthly payment to the counseling agency; the agency keeps a portion of each payment for its fees, then distributes the customer’s payment amongst the individual creditors. A typical DMP aims to repay the entire debt, along with accrued interest, over the course of five years.
Credit Counseling in Crisis: The Impact on Consumers of Funding Cuts, Higher Fees and Aggressive New Market Entrants, Consumer Federation of America and National Consumer Law Center (April 2003). http://www.consumerfed.org/pdfs/credit_counseling_report.pdf;
Losing Credibility: Troubling Trends in the Consumer Credit Counseling Industry in Massachusetts. Senate Committee on Post Audit and Oversight. Massachusetts State Senate (April 2002).http://www.mass.gov/legis/senate/creditcounsel.htm.
|2.||Credit Counseling Compliance Project. Internal Revenue Service (May 2006).