So often, people come into my office to talk about debt, after talking to a “consumer credit counselor”. The counselor has recommended a budget to them, lean on basics but heavy on consumer debt payments. After a few months, the budget collapses under the strain of unrealistic expectations. Why are these “counselors” so unrealistic about budgets?
This entire industry was studied in a Senate Report in 2005. The title of that report is: “Profiteering in a non-profit industry: abusive practices in credit counseling”. The U.S. Senate Homeland Security Committee was up in arms over “the marketing of debt management plans”, and the practices of the industry as a whole were examined. See the Senate Report: Credit Counseling, Senate report.
That report reviews that “credit counseling” was first started and funded by credit card companies in the mid-60s to stem losses from customers who did not pay. The theory was that a “kinder, gentler” collector might increase yields for credit card lenders. By encouraging the consumer to “tighten his belt” and use the lender’s “counseling service” to collect monies for credit card and debt payments, more money could be collected.
Of course, referrals to any third party source of information, such as attorneys, are actively discouraged, (which I’ve found in my experience). The lender doesn’t want his collection agent to lose control over the consumer’s cash flow.
The arrangement is quite cozy. The consumer is charged an extremely modest amount for the “credit counseling” service, say $15 per month. Of course, the goal is not to raise funds from consumer fees. The goal is to get as much of the consumer’s income as possible, for debt payments. Modest changes in interest rate and payment are made with some lenders who use the collection service, other lenders refuse to alter any payment terms but will still pay the “counseling service” for collecting payments for them. All the while, the consumer is told that this collection agent is “in his corner”.
And this is the key: As long as the debtor doesn’t know that the credit counselor is actually a collector working on a percentage, then any payment plan seems to make sense. But what the counselor rarely reveals, and the consumer who trusts his counselor doesn’t know: the counselor is a collector working on commission, to be paid a percentage of what he collects. Lenders who pay these collection fees understand that this is just another business expense, a cost of collection. Why lower interest rates or payments? The more the counselor/collector collects, the bigger the payoff for all.
What are the percentage fees collected as a kickback? See on page 33 of the report, footnote 164: up to 30% of the monies collected is the kickback. At this rate, everybody makes money…except the consumer.
It is no stretch of the imagination to believe that lenders have controlled the “credit counselors” they fund, and that they have done it for years. See footnote 166: “Some creditors also began issuing more detailed…standards, in effect becoming a regulator of credit counseling practices”. Clearly, with the majority of credit counseling monies coming from lenders, this is an industry that has been “bought and paid for”. Footnote 177 makes it clear that the credit counselor get the majority of his revenue from kickbacks, and is “obligated to comply with creditor standards”.
Wisely, the Senate Report insists in its’ last page on full disclosure of the “existence and nature of any financial relationship with a creditor of the consumer”. Armed with information on kickbacks, any consumer would be well advised to steer clear of the conflicted consumer credit collector who portrays himself as a counselor.