Some Credit Advisory Outfits Are Nonprofit in Name Only

Some credit counselors are like adult-film actors -- they don’t use their real names. Or so it would seem from testimony last week to a U.S. Senate subcommittee.

When John Pohlman was hired last summer as a credit counselor in Agawam, Mass., he said he was told to pick a phony name. It was the first in a series of clues, he said, to the true nature of the industry.

Credit counseling was once the realm of nonprofit agencies operating on a shoestring, staffed by low-paid employees hoping to help people on the margins get an even break. But increasingly, Senate investigators found, the agencies are nonprofit in name only.

At the office where Pohlman worked, an electronic message board flashed the names of counselors with the “top sales” for the month, he testified. Pohlman quickly learned that if he got one of the company’s heavily indebted customers to pay a stiff upfront fee on the “sale” of a debt-management plan, he’d take home 25% of the charge as a commission -- and he might win a trip to Florida.

Never mind that the company was supposed to be helping debt-laden consumers work their way out of trouble. Never mind that not everyone needed a debt-management plan. The fact that the fees sometimes shoved people over the edge and into bankruptcy wasn’t supposed to be his concern, he said he was told.

A densely worded five-page contract spelled out the company’s fees, but employees were encouraged to quickly push people through it. Pohlman said counselors like himself were told to stick to a script: Get the customers to sign the deal and fax it back, and then have them rush a cashier’s check to the company to cover the first debt-management payment.

“It made me physically ill,” he said in a phone interview later. “It’s something that you shouldn’t do to your fellow consumer.”

Questionable Policies

Pohlman was employed by Cambridge Credit Counseling, a national outfit that provides credit counseling and debt-management services primarily via phone and e-mail from the company’s Massachusetts headquarters. It employs more than 200 counselors.

In an interview, Chief Operating Officer Chris Viale defended his firm’s practices. Its fees are fair, reasonable and “disclosed so clearly to the consumer,” he said.

Viale said fake names were used mainly to ensure that no two counselors had the same moniker, so that customers could reach them easily by just remembering a first name.

But he also acknowledged that some counselors go by the same phony first name. He said that couldn’t be avoided because of the growing number of employees.

“There are a ton of bad actors in this industry, but we are not one of them,” Viale said.

Raymond Schuck of Lima, Ohio, begs to differ. Like Pohlman, he also testified to the Senate’s Permanent Subcommittee on Investigations on his experience with Cambridge.

Schuck said he called the company in the summer of 2001, when he was $90,000 in debt, and agreed to a debt-management program that he thought would cost him $194 a month in fees. But after he sent in his first payment of $1,946, he started getting calls from his creditors asking why he’d missed a payment. It was only then that he realized that, in addition to the $194 a month, Cambridge charged the $1,946 as a setup fee.

“I was absolutely shocked,” he testified. “Had I known this policy in advance, I would have searched for a different credit counseling agency. I would not have agreed to give Cambridge $2,000 when that money could have gone to my creditors.”

Viale said Schuck was aware of the setup fee but that the company eventually agreed to refund half of it when it became clear it couldn’t help Schuck, who wound up filing for bankruptcy protection.

Cambridge was one of several debt-management firms profiled in the subcommittee’s report, which found that the credit counseling industry has undergone a major shift in recent years.

Community-based organizations that used to charge minimal fees for spending hours working out budgets with indebted consumers in face-to-face meetings are increasingly being replaced with national telemarketing operations that provide little counseling and charge a small fortune, according to the subcommittee’s report.

The panel’s investigators found that many companies in the industry now operate through a series of interrelated firms. A nonprofit sets up a debt-management agreement with a consumer, which usually includes the payment of an upfront fee and monthly maintenance fees. The nonprofit then hires a for-profit firm to administer the debt-management plan. The for-profit often has the same owners and many of the same officers as the nonprofit. But by taking the first steps through a nonprofit, the for-profit companies circumvent tax and consumer protection laws aimed at the industry, the report concluded.

Viale contends that the report is riddled with errors. However, he acknowledges that Cambridge is a nonprofit that contracts with for-profit companies for administration of their plans. The for-profit companies are owned by Cambridge’s president. The fees charged to consumers, which amount to 100% of the first monthly payment and 10% of all payments after that, are necessary to pay debt counselors a fair wage, he said.

Abuses in credit counseling have become so commonplace that the Federal Trade Commission, which regulates advertising claims, and the Internal Revenue Service, which regulates nonprofit organizations, issued a joint warning in October. In testimony before the Senate subcommittee, top officials at both agencies said they didn’t have adequate resources to fully protect consumers from abuses.

Protect Yourself

Consumer advocates say anyone needing credit help should take these precautions:

* Deal with the credit agency in person, not over the phone. There remain hundreds of small, community-oriented organizations, many of which are members of the National Foundation for Credit Counseling. NFCC counselors are often willing to spend hours going over a consumer’s budget and figuring out whether he or she is a good candidate for a debt-management plan. The upfront cost to the consumer averages about $25, according to the Senate report.

* Know the charges. Debt-management firms normally have consumers sign a contract that spells out their fees, which are sometimes termed “donations.” Make sure the fees aren’t too high, because such costs can interfere with the consumer’s ability to pay off debt.

* Check out the counselor with the local Better Business Bureau, whose offices keep track of complaints. If a lot have been filed against a credit outfit, look elsewhere.

* Don’t be rushed. Shady outfits will push people to make a fast decision. But debt-management plans can have a long-term effect on your budget and credit history. Make sure to weigh all options and understand the long-term effect of a debt-management plan before signing up.

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Kathy M. Kristof welcomes your comments but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past columns, visit latimes.com/kristof.