IRS, FTC Probe Credit Counseling Industry
Debtors beware. Consumers who turn to nonprofit credit counseling services could find themselves paying high fees and getting little advice, government agencies said Tuesday in announcing an investigation of the industry.
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. It’s not a Good Housekeeping seal of approval,” said Steve Baker, the FTC’s Midwest region director.
The IRS said it has already begun auditing some credit counseling services to see if they meet the nonprofit criteria for tax-exempt status.
But an IRS official said the agency lacks resources to audit all credit counselors and refused to name those currently under examination.
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,” said Sermons-Ward.
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.
