Md. lifts for debt adviser

AmeriDebt is denied right to practice in home state

Weak financial condition noted

Four states, FTC suing big credit counselor

April 06, 2004|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

Maryland denied one of the nation's largest credit-counseling agencies permission yesterday to serve Maryland customers, the first time the state has rejected a nonprofit agency's application for a license under a new consumer protection law.

AmeriDebt of Montgomery County, which is helping to manage the finances of 5,000 to 6,000 Maryland debtors and more than 72,000 clients across the nation, has faced withering criticism in recent months for its practices.

The agency has been accused of high-pressure sales tactics and charging high fees to clients without fully disclosing them. The Federal Trade Commission and attorneys general in Illinois, Missouri, Texas and Minnesota have sued the nonprofit.

Some of the lawsuits accuse AmeriDebt of funneling tens of millions of dollars to for-profit affiliates for processing services.

In a letter faxed to AmeriDebt officials yesterday, Maryland said the agency's state license was being denied because of those issues and its weak financial condition. The letter was signed by Joseph E. Rooney, Maryland's deputy commissioner of financial regulation.

In fiscal 2002, AmeriDebt had revenues of $70 million and expenses of nearly $70.4 million, according to its annual report to the Internal Revenue Service. At the end of that year, AmeriDebt reported net assets of $52,549.

In his letter, Rooney said the lawsuits and an IRS investigation into AmeriDebt's nonprofit status threatened the agency's financial stability.

AmeriDebt has 30 days to appeal the decision. Company officials did not reveal yesterday whether they would appeal.

If AmeriDebt fails to secure a license, the accounts of Maryland clients will have to be transferred to another credit-counseling agency licensed to do business in the state, said Rooney.

He said he has opened negotiations with AmeriDebt about the possibility of transferring accounts.

In a statement released yesterday, AmeriDebt said: "Maryland consumers are in the forefront of our concerns, and we are going to make sure that their needs are taken care of in this matter. AmeriDebt is working to protect its Md. consumers."

`They charge too much'

Travis Plunkett, legislative director for the Consumer Federation of America said that "AmeriDebt has become symbolic of the problems of bad credit counseling. ... They charge too much.

"They didn't inform consumers adequately about what their real charges were. They put the hard sell on [consumers] to join up for a debt-management plan."

Last year, as consumer complaints about credit-counseling agencies climbed, Maryland passed one of the strongest laws in the country regulating the nonprofits. It requires them to be licensed and limits how much they can charge.

"We have thought AmeriDebt's operation has been problematic from the get-go," said Eric Friedman, of Montgomery County's Consumer Affairs Division.

The law requires agencies to have a minimum net worth of $50,000, but regulators raised the amount for AmeriDebt, based in part on the agency's volume of business and the quality of its assets and management.

Shift in charges

For decades, credit agencies charged consumers little or nothing for the services. Instead, they were supported by creditors paying agencies a percentage of the debt recovered from clients.

The industry made a sharp shift in the 1990s as consumer debt climbed. Hundreds of new agencies popped up, hawking their services on the Internet and late-night television.

Critics say unscrupulous newcomers pushed clients into debt-management plans to make money and began charging unsuspecting debtors hefty fees.

Md. starts licensing

Complaints of that sort prompted Maryland to begin licensing nonprofits last year. Twenty-seven groups have been licensed.

Maryland permits nonprofits to charge up to $50 to enroll a resident in a debt-management plan. The monthly maintenance can be up to $8 for each creditor but can total no more than $40 a month.

AmeriDebt asked debtors for a contribution equal to 3 percent of the total debt as an initial set-up fee, plus $7 per month per creditor, not to exceed $70. The agency maintains that the contributions were voluntary.

AmeriDebt was founded in late 1996 by Pamela Shuster, with the help of her husband, Andris Pukke, according to the FTC lawsuit.

A few years later, Pukke formed DebtWorks, a for-profit company that provided processing for AmeriDebt. In 2002, AmeriDebt paid DebtWorks more than $35 million for processing.

Pukke was named as defendant in the FTC lawsuit, which claims that AmeriDebt exists to make money for DebtWorks and Pukke.

Pukke also is named in at least two state lawsuits, and the Maryland's Consumer Protection Division has subpoenaed him to testify in an investigation.

`Warning sign'

Last month, during a U.S. Senate subcommittee hearing on the credit-counseling industry, Pukke invoked his Fifth Amendment right not to testify against himself.

Last fall, the agency said it would stop advertising and taking on new clients. At the time, AmeriDebt had about 92,000 customers.

Last year, it might have made sense for some consumers in an AmeriDebt repayment plan to continue with the agency, but not now, said Plunkett, of the Consumer Federation of America .

"If Maryland is questioning whether AmeriDebt can show reasonable net worth in order to continue doing business, that's a warning sign to all AmeriDebt customers, not just those in Maryland," he said.

"You don't want AmeriDebt to financially evaporate when you are in the middle of your debt management plan."

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