Statement of David C. Jones, President, Association of Independent Consumer Credit Counseling Agencies, Fairfax, Virginia

Testimony Before the Subcommittee on Oversight
of the House Committee on Ways and Means

November 20, 2003

Chairman Houghton and members of the Subcommittee, for the past four years I have served as President of the Association of Independent Consumer Credit Counseling Agencies (AICCCA).  I am the retired President of a prominent consumer credit counseling and education services company.  I have been associated with the credit counseling industry for the past seven years.  Prior to that, I was President and CEO of a software development and consulting company.  I spent much of my career at Lockheed Corporation and ended my tenure there as Vice President of Marketing.  I currently dedicate my efforts to improving credit counseling and consumer education throughout the industry.  I hold BS, MBA, and Ph.D. degrees and I am a graduate of the Brookings Institution Center for Public Policy Education.

On behalf of AICCCA’s members, I want to thank the Subcommittee for inviting me to provide our views to you today. We share and support the Subcommittee’s goal of assuring that consumers facing substantial debt problems can consult with a non-profit credit counseling agency with the knowledge that they will receive assistance based on their own best interests, and not the best interest of the agency.

AICCCA FOUNDING AND STANDARDS

The AICCCA was formed in May of 1993 to support independent credit counseling agencies nationwide.  It currently has 50 members serving over 750,000 clients repaying their unsecured debts through legitimate debt management plans.  Together, these agencies annually return over $3.2 billion in consumer payments to the nation’s creditors.  The AICCCA has championed fair pricing, stringent ethical guidelines, and consumer protection standards governing the activities of its members.  Three years ago, the AICCCA instituted independent agency accreditation requirements through the International Standards Organization.  That accreditation to ISO-9001 includes thorough annual Code of Practice audits and represents the most rigorous, independent, audit-based accreditation and oversight in our industry today. Our current Code of Practice is attached to this testimony as an Appendix.

The AICCCA provides for self-regulation of its member agencies through strict membership standards and a Code of Practice that is the basis for independent accreditation by the International Standards Organization under ISO-9001.  This independent third-party accreditation, combined with an equally independent certification of all agency counselors by the Institute for Personal Finance-AFCPE, provides significant assurances for consumers needing counseling services that they will be treated fairly and competently.  The National Foundation for Credit Counseling (NFCC) has similar requirements for its members.  However, the many agencies that do not belong to either of these associations are not bound by such rigorous standards.

AN INDUSTRY FACING UNPRECEDENTED CHALLENGES

Traditionally, credit counseling has been supplied by non-profit agencies that offer debt-burdened consumers family budget counseling and personal finance education, as well as direct intervention with creditors to obtain their consent to a workout plan to pay down debt on an affordable schedule.  Only those consumers who would benefit from a debt management plan and who were likely to successfully complete it were enrolled.  This service was supplied largely free to consumers and was supported in large part by creditors who routinely returned 15% of the funds forwarded to them by the agency as a “fair share” contribution.  As credit cards and other forms of unsecured consumer credit proliferated,  so did the number of borrowers experiencing repayment difficulty.  Greater demand for credit counseling spawned more credit counseling companies.  With a bigger marketplace, some of the new agencies began to view the development of debt management plans as a source of profit.  Consequently, creditors began to see many more proposals for debt management plans to the extent that the traditional contribution amounts became quite large expenditures.

With large fair share expenditures beginning to become noticeable on their income statements, and with many more questionable debt management plans being received, creditors began to reduce the percentages paid to the credit counseling agencies.  All creditors gradually adopted that practice. The result today is an average fair share contribution of only about six percent, or about a sixty percent reduction over the past seven years. In addition, creditors have cut back significantly on interest rate reductions or other concessions to borrowers enrolling in debt management plans, making these plans less attractive and more difficult to fund for debtors in danger of bankruptcy.

The effect of reduced fair share support has been twofold.  To survive, credit counseling agencies have had to reduce traditional services or they have had to pass more of the costs for providing services on to consumers, or both. More recently, creditors have increasingly recognized that agencies which emphasize debt management plans and charge excessive fees are not operating in the best interests of either consumers or creditors and have terminated fair share contributions for such agencies. However, these agencies can afford to carry on without such creditor support and can stay in business so long as they can get their debt management plans accepted. It is not clear whether creditors could simply refuse to accept their plans, or whether additional regulatory support is required to avoid antitrust issues. Meanwhile, consumers who feel dissatisfied with or even exploited by a particular credit counseling agency and who switch to another often find that federal banking regulations bar them from receiving another “re-age” on their accounts, leaving them hopelessly past due on payments and often triggering a bankruptcy filing.

Compounding the challenges for counseling agencies have been the requirements imposed by creditors to use Electronic Funds Transfer, electronic transmission of proposals, and a plethora of varying creditor performance measurement systems that agencies have to respond to so that they can continue to receive fair share contributions. While these requirements make sense for individual creditors, they have collectively placed a substantial administrative compliance burden on counseling agencies; AICCCA is currently holding discussions with major creditors regarding the extent to which such requirements can at least be made uniform.

Add to this new set of requirements the legislative actions by states that wish to protect their citizens from unscrupulous agencies, and the industry is even more overwhelmed.  Recent examples are New York and Maryland, which have passed well-meaning laws requiring very high bonding levels.  In New York, a bond of $250,000 is prescribed and in Maryland the required bond is $350,000, which can be reduced under some circumstances. A medium-sized credit counseling agency usually can’t get a $250,000 bond, much less afford to pay for it.  This is compounded by the requirement to post similar bonds in multiple states.  This means that services from some responsible credit counseling agencies are being denied to the very citizens that these laws were meant to protect.  The agencies that may abuse the trust of these citizens are sometimes the only ones who can surmount these bonding hurdles and therefore their services are the only ones available for many of those consumers; some have become the largest agencies in the country.

These borderline agencies concentrate their efforts where they can receive the most profit: enrolling consumers in debt management plans.  Some pay little attention to the need for effective credit counseling and consumer education.  Consumers who don’t need or can’t qualify for a debt management plan may get little if any help in these cases -- or worse, they may be enrolled in a debt management plan that they cannot complete.  Some of these agencies have also established for-profit entities that provide “back office” services to the non-profit.  In some cases, the principals of the non-profit may be principals of the for-profit.  Such agencies also usually have large advertising budgets designed to provide an ample stream of prospects for their services.  In many cases, their fees or requested (but often required) voluntary contributions are very large, sometimes equal to the client’s total first month’s payment to all creditors.  Continuing monthly maintenance fees are also frequently high by industry standards.  These initial and monthly fees or contributions from consumers obviate the need for support from creditors and are sufficient to fuel the advertising costs as well as the services expense for the associated for-profit.  While these practices depart significantly from traditional ethical industry practices, they may not be considered illegal in many jurisdictions.  They also may or may not violate IRS standards that govern their non-profit status.

The reduction of fair share contributions from creditors combined with increasing operational costs has led to the industry-wide need for additional monetary support directly from consumers in order to continue to offer credit counseling services.  The need for the availability of quality credit counseling to debt-burdened consumers continues to increase as evidenced by unprecedented levels of personal bankruptcy filings.   Very low interest rates and the availability of affordable second mortgages or home refinancing have allowed consumers to take the equity from their homes to consolidate their other bills.  This situation, which appears to be advantageous for consumers today, could bode ill for the future if many find themselves in difficulty again due to poor spending and saving habits that result in even larger levels of debt.  Some of these consumers will not only be debt-burdened yet again but will be at risk of losing their homes to foreclosure and even more vulnerable to the practices of some predatory credit counseling agencies.

REGULATION IN FLUX

The current regulatory landscape represents a patchwork quilt of differing and sometimes conflicting laws in some states.  The industry, almost completely non-profit due to state law requirements, is subject to FTC regulations and IRS scrutiny.  AICCCA believes it is important to maintain the industry’s non-profit status. Allowing for-profit agencies to operate would place even more emphasis on income-generating activities while abandoning traditional education and counseling – unless pervasive regulation and supervision were put in place to assure that consumers’ best interests were served.

The state regulations are not generally well administered, leaving law-abiding agencies to strain for compliance while those who ignore the law operate without penalty, and apparently sometimes even without official notice or sanction.  The IRS oversight may also be lax, as many borderline agencies appear to be continuing practices that may be in conflict with tax-exempt regulations.  This situation has not escaped the notice of the press, the U.S. Congress, and some state legislators.  New laws have been introduced in Maryland, California, and Maine, and increased state administration efforts have been noted in other states.  However, many state laws seek to strictly and unrealistically limit fees and impose unreasonable surety bonding requirements.  These well-meaning statutes  often serve to reduce the ethical services available to their citizens rather than protect them.  As previously noted, bonding levels are so high in some states that the majority of credit counseling agencies cannot secure them.  Large borderline agencies can secure them and questionable practices such as selling useless add-ons or referring the consumer to a loan company allow them to operate within fee guidelines if they decide to comply with the statutes.  Some continue to operate outside of the statutes in defiance of them and go undetected, or at least unpunished.

This situation has attracted the attention of the National Conference of Commissioners on Uniform State Laws (NCCUSL).   A new committee to draft a uniform Consumer Debt Management Act was convened last week in Chicago,  and I attended that initial meeting.  This drafting effort is intended to erase the consumer abuses by some agencies while not harming those agencies that seek to serve consumers appropriately.   At its base is a rigorous licensing requirement designed to ensure consumer protection, and hopefully this process will produce a uniform state law proposal that meets that goal without placing undue burdens on ethical non-profit counseling agencies.  This committee is led by Judge William C. Hillman of the United States Bankruptcy Court in Boston and is supported by prominent commissioners from across the country.  Such a uniform statute, if enacted by the states, could provide the consumer protections that are badly needed.  Thoughtful federal legislation could very well accomplish the same end.  This Subcommittee may find discussions with Judge Hillman and the drafting committee helpful. What would not be helpful to the credit counseling industry would be to move from a situation of weak and inadequately enforced state regulation to one of excessive, duplicative and conflicting state and federal regulation.

The recent introduction of HR 3331 by Congresswoman Julia Carson is an attempt to control counseling industry abuses.  However as this legislation is not pre-emptive, the burden of dual state and federal regulation should this bill be enacted would be staggering.  In addition, rather than providing for regulatory control of industry practices, HR 3331 specifies a variety of litigation causes of action and penalties that could bankrupt the industry altogether.  Federal legislation may or may not be required depending upon state actions and strict enforcement and oversight activity by the IRS.  It must also be remembered that the pending bankruptcy reform legislation, passed by the House in March and awaiting Senate action, would have the beneficial effect of empowering the Department of Justice’s Executive Office of U.S. Trustee to establish minimum standards for agencies approved for bankruptcy pre-counseling for the Nation’s most needy consumers.

CONCLUSION

We recognize the need for strong consumer protections in the credit counseling industry.  The interests of these vulnerable citizens must come first and must not be overshadowed by the for-profit interests of a few who seek to take undue advantage of their personal financial situations. But Congress should not rush to impose new federal regulation until effective enforcement of existing law has been tried. And any federal intervention must be carefully coordinated with the rapidly evolving state regulatory regime to avoid driving small but beneficial agencies out of existence.

The AICCCA stands ready to assist the Oversight Subcommittee as this inquiry continues. Thank you again for this opportunity to testify today.

Appendix – Current AICCCA Code of Practice

Code of Practice

Addendum to the ISO 9001:2000 standard
For
Consumer Credit Counseling Agencies

October 8, 2003

CODE OF PRACTICE ADDENDUM TO ISO 900
Consumer Credit Counseling Code of Practice

1.  INTRODUCTION

This document has been produced in cooperation with BVQi-NA and the Association of Independent Consumer Credit Counseling Agencies (AICCCA), with the knowledge and review of major creditors to provide a universal Code of Practice for Consumer Credit Counseling Agencies.  This Code of Practice is viewed as a customer specific requirement and shall be an integral part of the audit for those seeking ISO 9001 certification under its requirements. The document is intended to comply with credit lenders certification requirements.  Consumer credit counseling agencies seeking this endorsement must achieve ISO 9001 certification and satisfy the requirements of this Code of Practice.

ISO Registration to this Code of Practice. Any ISO-certified independent registrar must agree to audit all consumer credit counseling agencies seeking their registration services to this Code of Practice regardless of their affiliation to any association and will refuse to issue certificates to such credit counseling agencies without their compliance to this Code of Practice.

This Code of Practice document has been created by AICCCA in conjunction with major creditors and an ISO registrar. The AICCCA Board of Trustees maintains proprietary responsibility for the control, ownership, and approval of this document and any subsequent revisions.

Where a service directly affecting the critical elements of the counseling function and/or the Debt Management Program is to be subcontracted, that subcontractor shall comply with this Code of Practice. If non-counseling elements are subcontracted, those vendor subcontracts will be audited to ensure that the contractual relationship embodies adequate controls with respect to the requirements of this Code of Practice.  Critical credit counseling elements must be performed by a non-profit entity and are defined as all activities that are performed by qualified counselors and client service activities that are not specifically related to payment processing.

This Code of Practice does not apply to Debt Settlement activities that may be performed by a credit counseling agency.

Compliance with the principles included within this Code of Practice does not absolve the individual consumer credit counseling organization from meeting and/or exceeding their legal responsibilities and the requirements of all state and federal laws relevant to the services or products offered.

2.  REFERENCES

Reference shall be made to the following documents and all relevant updates and amendments as applicable:

• ISO9001                    Quality Management System requirements.
• IRC 501 (c)(3)            Internal Revenue Code of the United States.
• All state and local regulations, codes, and other legal and customer requirements governing the conduct of business and consumer credit counseling agencies’ activities.

3. INDUSTRY DEFINITIONS

The following definitions apply to this Code of Practice In addition to the definitions given in the ISO 9001 standard:

Industry
Consumer credit counseling agencies, clients, credit lending organizations, trade associations, and subcontractors.

Agency
The entity seeking registration pursuant to this Code of Practice.

Business Day
Any day that the nation’s banks are open for business.

Client
The customer for whom a consumer credit counseling agency provides service.

Creditor
The credit lending entities.

Critical Credit Counseling Activities (performed by non-profit entities)
All activities that are performed by qualified counselors and client service activities that are not specifically related to payment processing (see Non-Critical Credit Counseling Activities below).  These activities are subject to full ISO audit.

Non-Critical Credit Counseling Activities (may be performed by subcontract)
Activities that need not be performed by qualified counselors or client services personnel such as payment processing (i.e., proposal processing, client payment receipt and distribution, changes to client payments, creditor payment receipt, and answering creditor issues about client payments) or other vendor relationships (e.g., telephone service, software, payroll, etc.).  These activities, if subcontracted, are subject to ISO audit of the contract only.  If not subcontracted, these activities are subject to a full ISO audit.

Counselor
Certified consumer credit counseling agency personnel who provide guidance and assistance to the client.

Education
Any service or product provided to improve the consumer’s knowledge of personal financial management that is provided over- and-above the enrollment process, whether the benefiting consumer actually enrolls in a debt management program or not.

Service
The counseling and coordination and other support provided by the consumer credit counseling agency on behalf of the client and creditor.

Standard
Refers to the ISO 9001 Quality Standard

Subcontractor
A third party who has been contracted by a consumer credit counseling agency to provide a service, product, or support to the agency.

4.  CODE OF PRACTICE REQUIREMENTS

The sub-clause numbers of this Code of Practice are not related to the sub-clause numbers of ISO 9001. Each sub-clause requirement is in addition to the ISO 9001 standard shall be complied with and be integral to the ISO 9001 Quality System and applies to all organizations seeking compliance to the Code of Practice. Procedures must be controlled and processes must be audited to demonstrate conformance to this Code of Practice.

This Code of Practice requires that documentation of the interaction and sequence of processes include those processes that are subcontracted except for those defined as Non-Critical Credit Counseling Activities. This documentation shall include a description of services that are provided and the legal description of the company providing those services.

5.  ACCESS TO SERVICE

The consumer credit counseling agency’s management shall define and document its policy and procedures for a client’s access to service. There shall be objective evidence of conformance to demonstrate the following:

1. The consumer credit counseling agency stands ready to serve all clients who seek service regardless of:
   1.  A client's ability to pay
   2.  The creditors owed
   3.  The dollar amount owed.
    
2. The consumer credit counseling agency shall provide service, or at minimum acknowledgement of the request for service, within two business days of receipt of the request, service at times convenient to the client, and service through means that are convenient to potential and existing clients.

6.  COMMUNITY EDUCATION

The consumer credit counseling agency shall establish and maintain records of activities which address the support of or conduct of community education on issues related to consumer credit and money management. Records shall be maintained documenting the extent to which community education has been delivered.

7.  COUNSELOR TRAINING

The consumer credit counseling agency shall establish and maintain documented records in accordance to ISO standards which address the qualifications and training of counselors. The consumer credit counseling agency shall be able to demonstrate that counselors are:

1. Adequately trained to meet the needs of the organization
    

2. Certified by a qualified independent authority as identified by AICCCA or the National Foundation for Credit Counseling (NFCC)
    

3. Each counselor must begin the certification process within six months of hire and complete it within 12 months of hire.

8.  SERVICE RESOURCES

The consumer credit counseling agency shall determine and provide the resources needed to:

1. Fulfill the client’s service requirements
    

2. Fulfill the creditor’s service requirements.

9.  SERVICE REQUIREMENTS

The consumer credit counseling agency shall be able to demonstrate that:

1. Counselors conduct comprehensive interviews, to include, at a minimum:
   1.  The client's complete financial position (e.g. assets, liabilities, income, and expenses)
   2.  Identify and explore the root cause of the client’s financial situation.
    
2. Counselors develop a solution which is optimum for both the client and the creditors, to include:
   1.  Possible alternatives such as liquidation or leveraging of assets
   2.  Financial counseling to clients who do not need payment assistance 
   3.  Providing a DMP to clients as an alternative to bankruptcy
   4.  Advise client to close all credit lines with consideration for business or employment related purposes
   5.  Encouragement to avoid additional debt while the client is improving their financial situation
   6.  Communicate the consequences that obtaining new revolving debt has on the success of the DMP
   7.  Identification of additional relevant community resources, which may include: family counseling, mental health counseling, and/or addiction treatment and counseling.
    

3. Provide the client with a documented evaluation of his/her financial status to include a recommended plan of action which addresses the identified issues.
    

4. D.Service shall be provided with documented disclosure to clients regarding the:
   1.  Fee structure for services provided: if a fee is not charged for the service, then any contribution requested by the agency from the client must be clearly identified and noted that it is voluntary
   2.  Creditors support of the consumer credit counseling agency through fair share contributions
   3.  Potential impact on the client’s personal credit report
   4.  Client’s responsibility to monitor financial statements/reports from creditors and the consumer credit counseling agency, to verify their accuracy, and to detect and report discrepancies.

10.  COMPENSATION AND FEES

The consumer credit counseling agency shall maintain documented evidence that demonstrates its ability to maintain a low fee structure for services, with specific focus upon:

1. Compensation is not paid to the counselor based upon the outcome of the counseling process.
    

2. Fees, voluntary contributions, or requested donations from clients for the enrollment into a Debt Management Plan (DMP) do not exceed the lesser of $75 or the maximum fee allowed by law in the state of residence of the client
    

3. Fees, voluntary contributions, or requested donations from clients for the maintenance of a DMP do not exceed the lesser of $50 or the maximum fee allowed by law in the state of residence of the client
    

4. Fairshare payments to the agency are voluntary contributions directly from creditors and are not considered part of B. and C. above.

11.  FISCAL INTEGRITY

The consumer credit counseling agency shall define, document and demonstrate procedures regarding their policies on financial disciplines and fiscal integrity to include, at a minimum:

1. An annual certified audit by an independent certified public accountant is conducted of all trust and operational books and records
    

2. Accurate accounting and records of all clients’ deposits and debits to creditors are maintained throughout the life of the DMP
    

3. Funds received from clients for a DMP must be disbursed to the creditors no later than 15 days from receipt of valid funds, or by scheduled disbursement date, whichever is later.

12.  LEGAL STATUS AND GOVERNANCE

The consumer credit counseling agency shall define and document their legal status, such that:

1. The consumer credit counseling agency is a non-profit organization which complies with Internal Revenue Code of the United States, IRC 501(c)(3) requirements
    

2. The consumer credit counseling agency is licensed in all states in which it conducts business as required by law
    

3. The consumer credit counseling agency has a diverse governing Board, the composition of which represents the interests of all its constituents
    

4. The consumer credit counseling agency shall have a majority of members of their governance Board who are not employed by the agency; will not benefit financially, directly or indirectly, from the outcomes of counseling sessions with clients; and who are not related by blood or marriage to other board members or employees of the consumer credit counseling agency.

13.  COMPLAINT / CONFLICT RESOLUTION

The consumer credit counseling agency shall respond to all consumer complaints within five (5) business days and will take necessary action to resolve the complaint in a timely manner. Records of the complaint and disposition shall be maintained.