FTC sues Md. credit counselor over fees

Agency says AmeriDebt misled its customers

November 20, 2003|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

The Federal Trade Commission filed a lawsuit yesterday accusing AmeriDebt, the Montgomery County-based consumer credit counseling giant, of falsely portraying itself as a nonprofit while making money off thousands of vulnerable debtors through high and hidden fees.

Minnesota and Texas announced yesterday that they had filed similar charges against AmeriDebt Inc. The credit counseling agency was sued earlier this year by Illinois and Missouri.

Also named in the FTC lawsuit was Andris N. Pukke, a 34-year-old Marylander who helped found AmeriDebt and whose data processing company reaped millions of dollars in business from AmeriDebt.

At the heart of the FTC's complaint is a charge that AmeriDebt isn't forthcoming about a large fee typically paid by clients when they enter one of its debt-management plans.

According to the FTC, AmeriDebt advertises that it doesn't charge any upfront fees because it's a nonprofit. But in practice, AmeriDebt often pockets a client's first month's payment, which is typically equal to 3 percent of outstanding debt, the FTC said.

"We think that any consumer that paid that fee and didn't know it was there was injured," said Howard Beales, director of the FTC's Bureau of Consumer Protection.

With debt-management plans, debtors make a consolidated payment each month to the agency, which distributes the money to creditors. Creditors typically reduce interest rates or waive certain fees for consumers enrolled in debt plans.

In its lawsuit, the FTC asks the U.S. District Court in Greenbelt to stop AmeriDebt from engaging in deceptive practices and to have the agency reimburse clients who were misled about the fee.

Beales declined to put a figure on the potential refunds but noted that clients generally paid several hundred dollars in upfront fees. AmeriDebt said it has worked with 400,000 customers over the past six years and has more than current 90,000 clients.

AmeriDebt has maintained that the fees it collects are voluntary and that it has served thousands of consumers for free.

AmeriDebt's lawyer, Zynda Sellers, said the service will vigorously defend itself against the FTC allegations and looks forward to telling its side of the story.

Weeks ago, AmeriDebt announced that it would no longer enroll new clients and would focus on current clients because of negative publicity. AmeriDebt has cut its staff to about a dozen from 50.

The AmeriDebt case is the first the FTC has filed against a credit counseling agency, although Beales indicated it might not be the last.

The industry has been undergoing greater regulatory scrutiny recently as consumer complaints have risen about substantial fees charged by nonprofit counseling agencies and reports of self-dealing between the agencies and for-profit companies owned by friends or relatives.

Consumer advocates applauded the FTC's action.

"First, they are exposing AmeriDebt for what it really is, an aggressive firm, focused on profit that is masquerading as a charitable nonprofit," said Travis Plunkett, legislative director for the Consumer Federation of America.

"This sends a shot across the bow of other credit counseling agencies that are masquerading as a nonprofit that they may be next," Plunkett said.

Eric Friedman, investigative administrator for Montgomery County's Division of Consumer Affairs, said it may not be possible for the embattled AmeriDebt to recover from the onslaught of lawsuits.

The debt-counseling agency was started in late 1996 by Andris Pukke's wife, Pamela Shuster.

The month AmeriDebt was launched, Pukke was sentenced in federal court in Pittsburgh for his role in a scheme in which clients were promised debt-consolidation loans that never came through.

He pleaded guilty to trying to defraud consumers and was sentenced to three years' probation and ordered to repay the $38,000 collected in advance loan fees from consumers, according to court records.

Three years later, in late 1999, Pukke again was in legal trouble, along with AmeriDebt, over consolidation loans that the District of Columbia's Office of Corporation Counsel said were often promised but not given.

Pukke, AmeriDebt and another company owned by Pukke settled the case in 2000 without admitting wrongdoing. As part of the settlement, $1.4 million was refunded to more than 5,000 consumers.

Months before the D.C. lawsuit, Pukke had formed DebtWorks, which was hired by AmeriDebt to provide processing for its growing list of clients.

In fiscal 1999, AmeriDebt's revenue reached $15.7 million, and $2.16 million of that was paid to DebtWorks. Last year, more than half of AmeriDebt's $70 million in revenue, $35.8 million, went to DebtWorks for data processing.

Yesterday, Pukke defended AmeriDebt's use of DebtWorks despite its close ties. "DebtWorks was chosen because it could service debt management programs better and more efficiently," he said.

This year, Pukke sold DebtWorks to a management team at the firm who created a holding company, Ballenger Holdings, which controls the former DebtWorks' assets.

Ballenger agreed yesterday to pay $750,000 to consumers to settle FTC charges that it misrepresented the costs of AmeriDebt's services in communications with clients of the credit counseling agency.

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