Criticism of credit counseling (USA)

In the late 1980s and early 1990s, the number of credit and debt counseling agencies in America increased significantly. An antitrust lawsuit was filed against the NFCC, arguing that the presence of creditors on the NFCC’s Board of Directors constituted monopolistic practices. As a result of this litigation, creditors agreed to fund non-NFCC member agencies as well.

These sharp increases of credit counseling activity also created other, more serious issues in the industry. By the early 1990s, abuses by certain credit counseling organizations were so significant, it led to criticism of the entire industry.

A credit counseling agency typically receives most of its compensation from the creditors to whom the debt payments are distributed. This funding relationship has led many to believe that credit counseling agencies are merely a collections wing of the creditors. This fee income, known as “Fair Share,” are contributions from the creditors that originally earned the agency 15% of the amount recovered. However, in recent years, Fair Share contributions have dwindled steadily, with contributions of 4-10% being the most common.

Still the NFCC considers bankcard companies to be one of their primary "constituents," and the NFCC website promotes the fact that they collect $5 billion for creditors each year. It also promotes their efforts to steer consumers away from bankruptcy.

The Federal Trade Commission has filed lawsuits against several credit counseling agencies, and continues to urge caution in choosing a credit counseling agency. The FTC has received more than 8,000 complaints from consumers about credit counselors, many concerning high or hidden fees and the inability to opt out of so-called “voluntary” contributions. The Better Business Bureau also reports high complaint levels about credit counseling.

The IRS also has weighed in on the subject of credit counseling, and has denied nonprofit 501(c)(3) tax-exempt status to around 30 of the nation's 1000 credit counseling agencies. Those 30 credit counseling agencies account for more than half of the industry's revenue. Audits of non-profit credit counseling agencies by the IRS are ongoing.

The lobby against credit counselors arises from the belief by the collection industry that the not-for-profit status of the credit counselors gives them an unfair financial and market advantage over them. The IRS apparently agrees. The tax exempt revocations seem to be centered around whether a tax exempt credit counselor actually performed their mandated mission by assisting the community at large, other than their whole attention to their own DMP customers in a "collection practice" (no one knows for sure however).

Congress has also investigated the credit counseling industry, and issued a report that said while some agencies are ethical, others charge excessive fees and provide poor service to consumers. The report also stated that NFCC member guidelines, if applied to the entire credit counseling industry, would go a long way toward eliminating the abuses they uncovered in some parts of the industry.

Other organizations have voiced criticisms of the credit counseling industry, often citing the Fair Share funding model as evidence that credit counselors serve the interests of the creditors over the interests of consumers, and that credit counselors are not forthcoming in speaking out about the actions of creditors for fear of losing what little funding remains. Credit counselors respond that their job is not to take sides but to negotiate with all parties equally to help successfully resolve debts. They further argue that the steady decline in Fair Share funding belies the notion that creditors are in control of the credit counseling industry.

Another common criticism of credit counseling is the assertion that participating in a Debt Management Plan will ruin a consumer’s credit. Fair Isaac Corporation, the company that pioneered the use of credit scores, states that participation in a Debt Management Plan has no effect on a consumer's FICO credit score. However, the participation in such a plan does appear on consumer credit reports, and the client may have more difficulty obtaining a car or home loan and be denied any further unsecured credit, such as a credit card. This is because lenders often use multiple risk factors to determine creditworthiness. While credit card banks offering relatively low-credit-line cards may use a credit score alone to approve a new account, a mortgage or car lender typically will scrutinize the entire credit report more extensively and verify employment and income information. Some lenders view a prospective customer's participation in a Debt Management Plan as indicative of the customer being unfit to manage their finances.

Additionally, mortgage loans backed by federal programs such as HUD or FHA have additional government underwriting guidelines in addition to the lender's own policies. HUD/FHA states their position on credit counseling is neutral and that a factor they will consider is whether the client has been adhering to the payment plan initially established through the credit counseling agency.^[1] The FHA recommends credit counseling programs to those who fear being denied a mortgage loan due to credit approval.^[2]

Counseling agencies have also been criticized for understating their clients' future responsibilities during the initial enrollment process. Agencies have been accused of telling clients to stop paying creditors directly and cease all telephone contact with creditors. This can result in accounts falling past due during the period that the client transitions into the DMP. Many clients come to the DMP with current accounts; they are simply seeking lower interest rates rather than needing help bringing their accounts current. It takes the average DMP 1-2 months to start making disbursements to creditors, during which time the accounts will fall past due if the client does not continue making direct payments to the creditors. Often this is impossible, however, because the client cannot afford to pay the DMP an advance payment as well as pay the creditors the normal monthly payment amounts. In this way a client's credit can be damaged as the accounts unintentionally fall past due.

Given this criticism, the industry is likely to be changed forever in the immediate future as it is scrutinized by both the consumer and government regulators over how they will be paid for the services they perform. In meantime, there will be no shortage of debt-burdened consumers who will now be facing a burgeoning, and more traditional, collection industry.

It should also be noted that many credit counseling services employ people hired off the street who are then trained in credit counseling. Thus the person helping you may not have any formal training in financial management other than what they received when they got hired as a credit counselor. This training is usually minimal and focused only on the services provided rather than a full course on financial management.

source : http://en.wikipedia.org/wiki/Credit_counseling