"Educational" Credit Counseling Services Deemed Predatory
The IRS just figured out what the rest of the country already knew: credit counselers masquerading as non-profit educational services aren't serving the public good.
Shocking.
There's little chance that the reform bug will spread to the rest of the credit industry, but one can hope.
Here's an interesting twist found at the end of the article:
"Congress last year gave the financial counseling sector a new role in the nation's bankruptcy system by making it harder for people to wipe out debt and requiring consumers to consult with an approved credit counselor before they seek the protection of a bankruptcy court."
Okay, let's get this straight. First, Congress allows a largely unregulated credit and lending regime to use tricks and traps to push people into the red. Next, they pass lobbyist-driven legislation to strip away the bankruptcy safety net (while leaving corporate safety nets in place). Then, as part of that marvelous idea, they require that those with the most desperate financial need seek help from an admittedly predatory (but tax-favored) industry.
Three cheers for our elected representatives for all of their great work.
I'll be back in a few days to continue the "Credit Lenders Close the Courtroom Doors" series...
Yes but if we deny them the right to lobby Congress by giving tons of payola in return for no regulations we are somehow infringing on their 1st Amendment rights...
The poor maligned credit card industry can not be prohibited from exercising their bribery 1st amendment rights...
May 15, 2006 1:21 PM | Reply | Permalink
The state of Texas has made financial education mandatory in public schools. An effort that should be applauded. However, they made a mistake. They put the banks in charge of creating the curriculum to teach kids this stuff. You can bet that they'll make sure to teach them how to borrow money "responsibly" and how "leverage" is good financial strategy. They will have a new marketing channel for preparing the next generation to become credit card and loan customers.
I teach Junior Achievement in my kids school. Banks are the primary benefactors for JA. The 1st grade curriculum teaches the kids that credit cards are money, just the same as cash or checks.
Jim Anderson
The Truth About Credit
May 15, 2006 3:07 PM | Reply | Permalink
I know the posting was about the phoney financial advisers, but I'd like to expand it to discuss non-profits.
I worked for non-profits for my entire career (as did my wife), so I have seen the best and worst up close. The best is that non-profits (ours were educational) can do things that are uneconomical. Or they can do things that commercial firms can do, but cheaper. They are cheaper because people who work for non-profits (and government) do so for less money than they would get in comparable industry jobs. They are also cheaper because they don't have to make a profit and don't pay taxes.
The bad is that non-profits are run by self perpetuating boards of directors. This is worse than those of public firms because there aren't any elections, not even the nominal ones that stockholders participate in. The result is that if a bad management team gets installed it is almost impossible to dislodge them or get them to alter their policies. Recent examples include the attempt to stage a coup at the Sierra Club and the appointment of a new president at Boston University. The chancellor's control of the board forced the new person out at great expense. I know of several others that are less public.
I haven't seen any attempts to improve governance of non-profits, so abuses will just continue. People think that since these organizations are working for the public good that they don't need oversight. Not so.
--- Policies not Politics
Daily Landscape
May 15, 2006 3:53 PM | Reply | Permalink
You are a far more generous soul than I will ever be--I could never believe that was a mistake.
May 15, 2006 4:05 PM | Reply | Permalink
I guess it was a mistake. When you enter Hell, selling your soul does not seem such a good idea...
May 16, 2006 1:31 PM | Reply | Permalink
I had the misfortune of spending a couple of years in the credit counseling industry, at the center of the storm, and I can say with confidence that the reality is much worse -- and much, much different -- than recent regulatory action, media accounts and political blathering would suggest.
First some quick background:
Credit counseling was created by the bankcard industry. Contrary to what people might think, the industry did not initiate out of some do-gooder mission of the United Way or other charitable organization, but was instead launched as a "soft collections arm," a stop-loss mechanism for the big banks. In the 1950s, in search of another way to stave off bankruptcy charge-offs, the banks organized the first credit counseling operations, and ultimately imposed the "nonprofit" designation on the industry.
Then, from its founding until now, they have proceeded to dominate it via four primary levers of control:
1. nonprofit status
2. board and management control
3. "fairshare," the word for the collection fee the banks pay their so-called nonprofit collection agencies
4. DMP policies
I will dive into each of these levers in more detail in future posts, but it suffices to say that the credit counseling industry was created by Big Credit, for Big Credit, and is still dominated today and used as a collection tool by the bankcard companies.
The large, aggressive CCAs make a great target of media and political scorn, but, in some ways (though clearly not all), they are more consumer friendly than the old NFCC agencies. I know that's a controversial assertion, but it's true.
More later.
Kevin Fortuna
Dedalus Capital, Ltd.
www.dedaluscapital.com
May 27, 2006 9:00 AM | Reply | Permalink