Credit counseling sanctions hinted

IRS official voices hope action will move agencies to `clean up their act'

March 25, 2004|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

The Internal Revenue Service appears headed toward revoking the nonprofit status of some credit counseling agencies and referring cases to the Justice Department for criminal prosecution.

Commissioner Mark W. Everson said yesterday that the IRS hopes that with its audits of credit counselors as well as anticipated criminal prosecutions and sanctions "word will get out and people will ... clean up their act."

"If we don't act to guarantee the integrity of our charities there is a risk that Americans will lose faith in charitable organizations in general, damaging a vital part of our nation's social fabric," said Everson, who didn't say which organizations might be targets for sanctions.

His comments came during testimony before the U.S. Senate's Permanent Subcommittee on Investigations, which is probing abuses in the credit counseling industry. Yesterday's hearing coincided with the release of the subcommittee's detailed and highly critical report, Profiteering in a Nonprofit Industry: Abusive Practices in Credit Counseling.

The report accuses some of the industry's largest players of abusive practices.

Some nonprofit credit counselors, the report claims, are essentially call centers with sales staff pushing consumers into debt management plans with hidden high fees. Debtors seeking help receive little or no counseling. And millions of dollars that debtors pay in fees end up going toward executive salaries or are funneled to for-profit affiliates that provide processing.

Some executives singled out in the report for criticism testified at the hearing in defense of their operations. A few acknowledged that they are amending some practices as a result of the subcommittee's investigation.

Andris Pukke, whose Maryland company once provided processing services for counseling giant AmeriDebt Inc. in Germantown, asserted his right not to testify under the Fifth Amendment. AmeriDebt was founded by Pukke's wife.

Pukke's lawyer told the subcommittee that his client would not testify because he is facing several lawsuits from state and federal regulators

John Puccio, founder and president of Massachusetts-based Cambridge Credit Counseling Corp., apparently suffered a stroke Tuesday and was unable to testify. A Cambridge Credit spokesman said the subcommittee's bias against it contributed to Puccio's illness.

Credit counseling agencies were developed decades ago as a means of helping consumers avoid filing for bankruptcy. The groups received nonprofit status because they would provide education to debtors. The nonprofits charged limited or no fees for their face-to-face counseling.

In serious cases, consumers were enrolled in debt management plans. Under such plans, the agency negotiated lower interest rates for the debtor and a waiver of late fees in return for the debtor making monthly payments.

Creditors supported the nonprofits by giving them a percentage of the debt they recovered from clients in debt management plans.

The industry began to change in the 1990s. Hundreds of nonprofits sprung up offering their services over the phone and Internet, promoting debt plans.

"Many of these new entrants in the credit counseling industry have developed a business model which is based on generating revenue rather than providing counseling to indebted consumers," said Republican Sen. Norm Coleman of Minnesota, chairman of the subcommittee.

Raymond Schuck, a retired Ohio museum employee, told the subcommittee yesterday that he didn't realize that his first payment of nearly $2,000 toward paying off $90,000 in debt would go to the Cambridge counseling firm and not his creditors. He found out when creditors called to complain that they hadn't been paid.

"I would not have agreed to give Cambridge $2,000 when that money could have gone to my creditors," Schuck said. He ended up filing for bankruptcy.

Former counseling agency employees told the subcommittee they were encouraged to sell debt plans.

John Pohlman, who briefly worked at Cambridge, said counselors who sold the most debt plans to consumers for the month had their names put on a board with flashing lights. Counselors also earned bonuses based on the fees they brought in or earned trips to Florida for high sales, he said.

Chris Viale, general manager with Cambridge, said his agency enrolls only 12 percent of its callers in a debt plan. He noted that Cambridge's fees have been approved by four states that license the agency.

Cambridge also recently improved its disclosure of fees, Viale said.

Cambridge's executive pay has raised eyebrows. The nonprofit's chief executive received $624,000 in 2002, and Viale is currently paid $400,000 a year. By comparison, a director of a traditional credit counseling agency in Minnesota testified that he earned $60,000.

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