CARD Act's Counseling Challenge

By Aspan, Maria | American Banker, March 22, 2010 | Go to article overview

CARD Act's Counseling Challenge


Aspan, Maria, American Banker


Byline: Maria Aspan

One of the new credit card law's lesser-known provisions is funneling distressed borrowers to credit counselors, an industry once tarred as predatory. In an ironic twist, that outcome pleases consumer advocates more than it does some bankers.

The provision, which took effect last month, requires credit card issuers to refer cardholders to federally sanctioned counseling agencies. Such firms provide advice and workout plans to consumers falling behind on their loans.

Bankers had protested this provision, citing reputational as well as operational concerns. The American Bankers Association, for example, has repeatedly warned that following the law will give the appearance that banks are "endorsing" certain credit counselors.

Now that issuers have to comply, many are doing what they can to avoid creating the impression of favoritism.

"I don't think any issuer will want to take the chance of being seen as being biased in directing their customers to a particular credit counseling agency, particularly if they could ever be tarred with a brush of trying to direct customers to a credit counseling agency that results in better outcomes for the issuer," said Duncan Douglass, a partner in the law firm Alston & Bird LLP. "This information would be too available and there would be too much risk in trying to steer customers one way or another. I can't imagine that issuers would want to get into that game."

Consumer advocates, who long cast a skeptical eye on the credit counseling industry, nevertheless hailed the provision, especially the rules ensuring that only government-vetted counseling firms are eligible for issuer referrals.

"We've done a fair amount of work over the years in terms of evaluating credit counseling. There were some scandals in the credit counseling industry years ago, but I think this requirement takes care of that problem," said Travis Plunkett, the legislative director at the Consumer Federation of America. "Our general view is that credit counseling can be helpful for some people who encounter debt problems, especially if those people get help early."

And for the credit counseling industry itself - or at least some of its nonprofit members - the law's provision offers both more clients and a chance to burnish their profession's reputation.

"We hope that this clears up any reservations consumers may have about reaching out for legitimate help," said Gail Cunningham, a spokeswoman for the National Foundation for Credit Counseling, a trade group for nonprofit credit counselors. "I don't blame them for being confused. The unscrupulous among us have done a good job of blurring the lines. ... That's why we really applaud the government for including this."

All of her group's members are nonprofits, and most are eligible for issuer referrals under the law. Cunningham said some issuers are simply printing the Foundation's toll-free customer service number on their monthly statements.

The credit counseling industry came under increased scrutiny in the last decade over reports that some firms were using their nonprofit status to gouge consumers and funnel those fees over to for-profit sister companies. The Internal Revenue Service and the Federal Trade Commission launched investigations into the industry; in 2004 and 2005 the FTC shut down some firms and fined three firms a combined $6 million for consumer redress and required them to return more than $24 million to those customers.

But Plunkett and other industry observers said the process by which the government currently vets credit counseling firms is sufficient to keep bad actors off the approved list. Among other conditions, the Executive Office for U.S. Trustees requires agencies to have a governing body that "will not directly or indirectly benefit financially from the outcome of the counseling services provided." Counseling agencies, the office has said, "should avoid any conduct or transactions that generate or create the appearance of generating a private benefit" to affiliates. …

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