State regulation of credit counselors takes effect today

But only 13 nonprofits have applied for license to keep operating in Md.

October 01, 2003|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

Maryland's attempt to regulate the growing number of nonprofit companies that offer debt management and credit counseling takes effect today, but it may prove a slow-moving process with only 13 groups applying so far for a license out of 1,500 contacted by the state.

"I expected 100 or more" applications, said Joseph Rooney, assistant commissioner for Maryland's division of financial regulation, which will license the nonprofits.

Most states have laws overseeing such groups, but often there are so many exemptions that the industry remains loosely regulated, experts said. The industry has ballooned in recent years - along with the proliferation of credit-card use and other revolving consumer debt, which reached $726.9 billion in July.

As more debt management and credit counseling businesses have sprung up, the number of complaints has risen. A new breed of nonprofit counselors often requests contributions from those they help, but consumers have complained of excessive or poorly disclosed fees. More attempts at regulation, oversight and legal action have followed.

Two states have filed lawsuits this year against Maryland-based AmeriDebt, one of the nation's largest debt management companies.

With its new law, Maryland becomes one of about a dozen states to require licensing in an effort to curb abuses, such as excessive fees. Nonprofits nationwide that offer debt management or credit counseling to Marylanders will have 60 days to apply for a license from the state. The new law also allows them to charge limited fees for their services.

While there are legitimate groups, "there are a lot of deceptive practices in this industry," Rooney said. The law will give regulators the authority to stop those practices when they find them, he said.

Maryland has "passed one of the stronger, consumer-friendly laws in this area," said Deanne Loonin, a staff attorney with the National Consumer Law Center in Boston, which issued a report recently on industry abuses.

"Experience in other states shows so far that these laws are only as good as the enforcement behind them," she said.

To get a Maryland license, a nonprofit must pay $1,000 for an investigation that includes criminal background checks on its officers and directors, plus $2,000 for a two-year license.

The law sets certain financial hurdles for nonprofits to meet, and requires that each client receive a plan agreement that discloses fees and payment schedules. Violators are to pay a fine of up to $1,000 for the first offense, and $5,000 for each one thereafter.

Thirty-nine such groups have Maryland addresses, but hundreds more outside the state can do business with Marylanders, often through the Internet, Rooney said.

Over the summer, Rooney's office sent 1,500 letters to debt and credit groups nationwide informing them of the new law. Only one of the 13 that applied so far is from Maryland.

Debt and credit counseling groups generally negotiate with credit card issuers and other unsecured creditors to reduce or eliminate interest rates and late fees. Consumers make a monthly payment to the nonprofit, which sends payments to creditors. At least 70,000 Marylanders are enrolled in such programs, Rooney said.

For years in Maryland, nonprofits have been able to provide debt management and credit counseling services as long as they didn't charge a fee. Creditors support these nonprofits by giving them a percentage of the debt they recover from consumers.

Creditors have been cutting back on what they pay nonprofits, and some groups ask for voluntary contributions. Critics claim that these contributions are not always voluntary and amount to hundreds or thousands of dollars. In some cases, too, nonprofits have failed to turn clients' money over to creditors, putting clients deeper in debt as late fees mounted, critics said.

Under Maryland's new law, a resident cannot be charged more than $50 to sign up for a plan. Nonprofits can also charge a monthly maintenance fee of up to $8 for each creditor in the debtor's plan, but no more than $40 per month.

The federal government and other states are also giving greater scrutiny to debt and credit groups.

The Internal Revenue Service advised its examiners this year to be on the lookout for credit counseling groups that "prey on the vulnerability of the clients they are supposed to be helping."

Illinois filed a lawsuit in February against debt manager AmeriDebt, which is based in Germantown. The suit claimed the nonprofit charged excessive fees, while putting debtors deeper into debt and failing to forward their payments to creditors.

Last month, Missouri filed a similar lawsuit against AmeriDebt, claiming that the company acted more like a for-profit enterprise and failed to provide credit counseling.

That lawsuit states that AmeriDebt falsely represents that it doesn't have upfront fees but actually charges an advance fee equal to 3 percent of consumers' outstanding debt, for an average of $327.

Many consumers' first payment is pocketed by AmeriDebt rather than forwarded to creditors as consumers expect, the lawsuit claims.

In written statements after both lawsuits were filed, AmeriDebt said it has worked with many states to fight fraud and deceptive practices in the industry. It said that less than 1 percent of its customers have made a formal complaint to the company.

The company said it will cooperate with attorneys general in both states.

AmeriDebt has not applied for a Maryland license, but the suits won't necessarily prevent it from getting a license, Rooney said. AmeriDebt has told the state it does plan to apply.

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