Lawmakers vote licensing for nonprofit debt counselors

Fees would be capped if Ehrlich signs bill

April 09, 2003|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

Nonprofit groups that offer debt-management services to Marylanders would have to be licensed by the state and subject to caps on fees charged consumers under legislation unanimously passed Monday night by the General Assembly.

A spokeswoman for Gov. Robert L. Ehrlich Jr. said yesterday that the governor hasn't yet taken a position on the legislation. If he signs it, Maryland will join the trend to protect consumers from the increasing numbers of debt managers and credit counselors.

Generally, the nonprofits offering the services negotiate with unsecured creditors, such as credit-card companies, to cut or eliminate interest rates and late fees. The debtor makes one monthly payment to the debt group, which then pays the creditors.

Creditors support the groups by paying them a percentage of recovered debt.

Currently in Maryland, nonprofits can offer debt-management services provided that they don't charge a fee. Some, though, ask for "voluntary contributions."

Critics say the contributions aren't always voluntary and can be hundreds or even thousands of dollars.

Under the legislation, debt groups doing business with Marylanders would be required to be licensed by the state commissioner of financial regulation.

Groups would also have to post a surety bond of $10,000 to $350,000, depending on the size of their business.

Debt groups would be able to charge fees, subject to limits. Clients could be charged up to $50 for a one-time setup fee, plus a monthly maintenance fee of $8 per account, up to a maximum of $40.

Debt payments from consumers would be required to be held in trust, too, so the money isn't commingled with the debt group's operating funds, said Mary Louise Preis, Maryland commissioner of financial regulation.

Violators could be fined up to $1,000 for the first infraction, and $5,000 for each subsequent violation or sentenced to five years in prison.

This was the second year that Sen. Patrick J. Hogan introduced legislation to regulate debt managers.

"As the number of people who are in debt has skyrocketed, the number of bankruptcies has skyrocketed, and the number of these companies providing supposed credit counseling services has skyrocketed, we started to see that there were real problems out there and this was a whole area totally unregulated," the Montgomery County Democrat said.

Problems include debt-counseling groups failing to forward consumers' payments to creditors, thereby putting them deeper in debt, Hogan said.

"There are some good ones out there, but what we are trying to do is protect consumers from the fly-by-night ones," he said.

Among the consumers testifying at a legislative hearing this year was Brenda Coran of Rockville.

Coran said she signed up with a debt-management program offered by Linthicum-based Debtscape, but didn't realize that her initial $2,645 payment went to the nonprofit as a "voluntary contribution" and not to her creditors.

"They had in small print a `one-time charitable donation,' but there was no way to opt out of it," she said.

Coran said she started getting letters from creditors, and eventually was able to get her money back with the help of the Montgomery County Division of Consumer Affairs.

David Hensel, executive director of Debtscape, said his company took steps to solve Coran's problem.

"When we recognized the problem, we attempted to rectify it with her creditors," Hensel said.

Debtscape this year also stopped taking contributions from Marylanders, he said. Hensel added that he supports Maryland's legislation to regulate his industry.

State regulators estimate there are at least 39 debt- and credit-counseling groups based in Maryland, and another 150 to 200 outside the state offering services to Marylanders.

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