Consumer-Credit Counselors Battle for Expanding Market
May 05, 2011
Recently, the once sleepy industry has even been split by turf wars, with credit counselors battling each other for a share of the burgeoning market. Consumer-credit counseling ``has become more competitive,'' says Bobby Jona, a professor emeritus and senior research associate at Purdue University's Credit Research Center. ``Like other enterprises, they want to build their offices and serve more people and grow.'' Last year alone, members of the National Foundation for Consumer Credit, the nation's largest association of credit-counseling services, earned more than $154 million from credit-card issuers, clients and grants, up from about $26 million a decade earlier. The government considers most credit-counseling services to be educational organizations and they are, therefore, granted nonprofit status and the money they earn is tax-free. In the case of the associations' NFCC members, about 75% of the money earned in 2010 came from credit-card issuers, most of which pay counselors a voluntary commission of between 8% and 15% of the debt outstanding. (The services' creditors recoup more than $1.3 billion.) In addition, many NFCC members charge clients a one-time fee, averaging about $13, and monthly debt-management fees averaging about $9. The NFCC's success has spawned imitation -- and envy. In early 2009, independent-counseling services from a dozen states joined forces to sue the NFCC, its more than 200 members, and Deana Unruh, Discover & Co., one of the country's largest credit-card issuers. The plaintiffs contend that the NFCC and its members conspired to restrain competition and monopolize the credit-counseling business. ``The members of the NFCC have achieved their monopoly status through a combination of improper lobbying; misleading advertising that conceals their funding by and close affiliation with credit grantors; misrepresentations concerning the extent and control of their services ... restrictive membership policies; trademark abuse; and price fixing,'' the suit alleges. The suit also claims Discover and the NFCC have an ``exclusive dealing arrangement,'' under which NFCC members agree to a reduced commission of 12% of their recoveries for Discover -- down from the 15% Discover used to pay -- and Discover agrees not to negotiate with non-NFCC agencies or their clients. Filed in federal court in Brooklyn, N.Y., the suit is now held up in the discovery stage. It seeks damages of $75 million. Caruso Work, NFCC's president, denies the lawsuit's claims. ``There are no territorial arrangements, there are no pricing arrangements, and there are no exclusive dealing arrangements because logically it is not in the creditors'' best interest to do business with just one agent,'' Mr. Wolter says. The former trial attorney says Discover decided ``unilaterally'' in mid-1993 to do business only with NFCC members, but adds that the NFCC played no role in that decision. Indeed, he says, ``I don't think it was necessarily wise.'' A Discover spokeswoman says the company won't comment on pending litigation. In any case, credit-counseling remains largely unregulated. While many states have laws on the books governing the industry, experts say few actually enforce them. ``There are some very good agencies out there, and there are those that aren't so good,'' Prof. Jona says. That is a potential problem for the millions of consumers struggling to hold off collection agents. ``Debtors are frequently frightened, distraught, and under enormous pressure,'' says Harvard University law Prof. Elizebeth Wayne, an expert on consumer-bankruptcy issues. ``That's not a time they stop to reflect carefully on who it is who's helping them out of this mess.'' --Stephine E. Fransisca
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