Consumer Credit Counseling and the Law
Let’s be clear about two things:. First, there are millions of consumers who could likely benefit from counseling to help them control spending and reduce credit card debt. Second, finding a credit counselor who is competent, disinterested, and reasonably priced is about as easy as getting a straight answer from a politician. But help may be on the way.
The Rise of the Credit Counseling Machine
Here is a list of the credentials that a person needs to become a counselor in the mostly unregulated world of credit counseling:
- A pulse
- A telephone
- A sales pitch designed to generate false hope.
- Conscience is optional
There is an organization – the National Foundation for Credit Counseling – that has some credibility. On the other hand, the NFCC is funded in large part by the credit industry itself. This causes me to question whether the NFCC has a conflict of interest with the very consumers it serves. “Debt management plans” are often designed to insure maximum payment to the credit card companies.
Incidentally, a business that self-identifies as “not for profit” is not necessarily any more altruistic than a for-profit enterprise. It is quite easy for a “not for profit” business to line the pockets of the business owners with plenty of cash.
The Uniform Debt Management Services Act
Fortunately, state legislatures are beginning to target the sad world of consumer credit counseling. At the leading edge of this regulatory effort is the Uniform Debt Management Services Act (UDMSA). This comprehensive law (the bill itself totals 88 pages) was released by the Uniform Law Commission in 2005. It has since been passed into law in Colorado, Delaware, Rhode Island, and Utah. It is been introduced and awaiting passage in Connecticut, Maine, Minnesota. Missouri, New Mexico, Tennessee, Texas, and Washington.
The UDMSA attacks the credit counseling abuse problem in three different ways: (1) requiring registration of service providers; (2) regulating the terms of debtor agreements; and (3) providing an enforcement mechanism.
Registration. No credit counseling service provider may operate in the state without first registering as a consumer debt-management service in that state. The registrant must submit detailed information concerning its business, including financial condition, the identity of the owners, and the service locations. To register, the provider must have an insurance policy against fraud, dishonesty, and theft. It must also provide a security bond of a minimum of $50k. Yearly renewal of the registration is required.
Service Agreements. To enter into agreements with debtors, the credit counselor must disclose the fees and services to be offered and the risks/benefits of entering into the agreement. (I would love to see one of these explanations.) The service provider must offer counseling services from a certified counselor and a plan must be created in consultation with the counselor. The terms of the agreements and fees that may be charged are set by law.
The best feature is that the consumer-debtor has three days to cancel the credit counseling agreement without penalty.
Any payments made by the consumer for creditors must be kept in a trust account that may not be used to hold any other funds. There are strict accounting and reporting requirements for all funds that are held.
Enforcement. The UDMSA prohibits: (a) misappropriation of funds held in trust; (b) settlement for more than 50% of a debt with a creditor without the debtor’s consent; (c) gifts or premiums to enter into an agreement; and (d) representation that settlement has occurred without certification from a creditor.
Enforcement can be carried out by a state administrator or at individual levels. The administrator has investigative powers and the power to assess a civil penalty up to $10k or to bring a civil action. An individual debtor also may bring a civil action for damages, including treble damages if a credit counselor obtains payments not authorized by law.
What Credit Counseling Regulation Means for Consumers
Not all states will enact the UDMSA in the proposed form and some will not enact it at all. Lobbying will be fierce in some cases. But for consumers in those states that implement most of the Act, the benefits should be significant.
First, it will eliminate a lot of the completely unethical and worthless credit counseling businesses, particularly those who operate from out-of-state phone banks.
A consumer who is contacted by someone offering credit counseling or debt management services should first determine if the UDMSA has been adopted by his or her state, then ask the service provider if the business is operating in compliance with the Act. I predict that many credit counseling businesses will argue that they are not subject to the UDMSA in that state because they operate from a different state. Hang up on those people.
Also check with your state UDMSA administrator (which will probably be your state’s consumer protection office) to confirm that the credit counseling business has registered.
Finally, after you enter into a credit counseling/debt management services agreement, take the three days to carefully consider whether that really is what you need to do, or whether you can just do it yourself, at a much lower cost.
Perhaps now the evil component of the credit counseling machine will fade away. Mr. ToughMoneyLove would certainly welcome an end to those annoying “secret that the credit card companies don’t want you to know” commercials.
Photo credit: Vince Chan