Credit counselling services

The New York Times fronts a story

today on not-for-profit credit-counselling services. Here’s the nut graf, which

comes very high up for a NYT piece:

The investigation could jeopardize the agencies’ nonprofit status and upend

the industry just as a proposed change in federal bankruptcy law stands to

steer many thousands more people to debt counseling. As nonprofit concerns,

the agencies are now exempt from dozens of state and federal regulations.

The investigation is long overdue. The industry is huge, and almost certainly

achieves more harm than good. While it’s necessary in theory, in practice it’s

a disaster, and needs a radical shake-up.

A lot of the blame for the present state of affairs can be laid at the feet

of the people who first decided that these companies could be eligible for non-profit

status. Of course, a lot of very rich and successful institutions have such

a status, like Harvard University or the Brooklyn Botanical Gardens. But in

the case of the credit counselling services, the people who benefit are basically

only the owners and senior employees. Meanwhile, as nonprofits, the services

are essentially unregulated.

It shouldn’t be like that, of course. The level of consumer debt in the US

is skyrocketing, helped along by record-low interest rates and a negative or

extremely low savings ratio. At the same time, the economy is decelerating sharply

from the 1990s boom. The entirely predictable result is that the number of credit

cards which are 30 days past due is at an all-time high, while – more

seriously – the number of home equity loans in default has doubled in

just nine months.

The interesting thing is that credit-card defaults, while high, don’t seem

to be accelerating. I put that down to two factors: for one, credit-card companies,

which went after people lower and lower down the credit spectrum during the

boom years, are now becoming increasingly picky about their customers and how

much money they’ll lend them. Second, when credit-card debts start spiralling

out of control, consumers are likely to take out some kind of home equity loan

in order to pay them off and bring down interest payments. In effect, they’re

jumping out of the frying pan of credit-card debt and into the fire of potentially

losing their house.

Such consumers are easy targets for the more unscrupulous end of the financial-services

industry. The IRS’s official

warning gives a good idea of what many such firms get up to:

Beware of high fees or required “voluntary contributions” that,

with high monthly service charges, may add to your debt and defeat your efforts

to pay your bills. It is illegal to represent that negative information, such

as bankruptcy, can be removed from your credit report. Promises to “help

you get out of debt easily” are a red flag.

In the New York Times article, one of the biggest such services, AmeriDebt,

justifies its practice of asking for a 3% "voluntary contribution"

from its clients. Yes, that’s 3% of their entire debt, upfront, on top of any

recurring fees they might charge, which start at $20 a month. AmeriDebt says

that it’ll happily do the same job without the voluntary contribution, but if

there’s one thing that nearly all of these services have in common, it’s a lack

of transparency.

The IRS encourages prospective clients of such firms to ensure that any deals

they sign include the company’s name and address: it’s often very difficult

to find out exactly who you’re dealing with. Companies change their name frequently,

and payments must be put in the mail to a post-office box somewhere: no easily-traceable

automatic-payment plans or direct debits allowed. If you’re trying to sign up,

the toll-free number will put you straight through to a sales agent, but if

you have any questions about where your money is going once you’re already on

the plan, expect interminable hold times and less-than-forthcoming customer

service representatives.

In an ideal world, these companies would have good relations with major creditors,

such as credit-card issuers, cellphone companies, and the like. They could then

negotiate deals with them much more easily than an individual could: "Hi,

we’ve put this person on a strict payment plan and they’ve torn up all their

credit cards. In return for a much higher probability of payment in full, can

you reduce your interest rates to something slightly less eye-watering?"

In practice, while that happens in a handful of cases, it’s very unlikely to

happen with all of an individual’s creditors, and in fact many are downright

hostile to the prospect of dealing with a credit service rather than the individual.

It’s not uncommon for one or two creditors to fall through the cracks, with

the debtor falsely believing that the credit counselling company is taking care

of the debt – and that can devastate someone’s credit report.

What’s more, most of these services are very bad at providing any kind of statement.

The idea is that you send them one monthly payment, which they then divvy up

and send out to all your different creditors. And since the individual credit

card companies still have you as a client, you can usually see what’s going

on with those debts. But a universal statement, with all the debts and payments

clearly listed along with any extra fees charged on top, is extremely rare.

Worst of all, many of these non-profit organisations are run by or closely

associated with the owners of predatory lending companies. Rather than pay off

umpteen different bills and credit cards, they say, why not simply consolidate

all your debt into one simple loan? Inevitably, there will be an upfront fee,

and the rate of interest probably won’t be very clear, and any property assets

will be at risk. But since the lender was referred by a non-profit credit service,

a lot of people’s defenses are down, and they just take what they’re offered

without shopping around.

The fact is, that most of these services provide very little in the way of

value beyond allowing their clients to make only one payment a month rather

than many. Needless to say, the total amount of money spent per month doesn’t

usually go down, and sometimes goes up, thanks to the fees charged. What the

clients really need is to talk to a financial adviser who can lay out their

options, from simple household budgeting to declaring bankruptcy, in an impartial

manner. Local community-service centers are good at that sort of thing; faceless

billion-dollar nonprofits are not. Unless these companies clean up their act

and agree to be regulated by someone like the SEC, they shouldn’t just lose

their nonprofit status: they should lose their right to exist altogether.