Va. law curbs credit counselors

BY CAROL HAZARD
TIMES-DISPATCH STAFF WRITER Jun 26, 2004

Some credit-counseling agencies do more harm than good, pushing consumers deeper into debt.

Free to do mostly as they pleased, they multiplied in the past couple of years and operated with little oversight - until now.

A new Virginia law strengthens consumer protections for people who seek help from credit counselors. But it's not a cure-all.

Consumers should be wary of unscrupulous and unlicensed operators, regulators say.

The law, which takes effect Thursday, gives the State Corporation Commission's Bureau of Financial Institutions more authority to crack down on abusive practices.

"Regulators have finally woken up," said Travis Plunkett, legislative director for the Consumer Federation of America. "They are no longer asleep at the switch."

Virginia is one of a handful of states that have passed legislation to deal with burgeoning problems associated with credit counselors.

Federal agencies are responding as well.

The Internal Revenue Service is examining the nonprofit status of the 50 largest agencies. The Federal Trade Commission shut down National Consumer Council of Santa Ana, Calif. It filed suit against Maryland-based AmeriDebt Inc. for deceptive practices. Both agencies claimed to be nonprofits.

"You have aggressive, unscrupulous agencies masquerading as nonprofit charitable organizations," Plunkett said.

Consumer advocates say the Virginia law is a start, but it doesn't go far enough to protect people who may need the services the most.

Starting July 1, credit-counseling agencies can charge Virginia clients a $75 setup fee and a maintenance fee of 15 percent of the monthly amount disbursed, but no more than $60 a month.

"We think it's good legisla- tion," said Irene Leech, president of the Virginia Citizens Consumer Council. "One concern is the fees are so high they will exclude some people who really need help."

The maximum fee under Virginia's old law was $20 a month.

Although consumers may be paying more, they get more protections. They can, for example, recover monetary damages from companies licensed to do business in Virginia. Before, they had no recourse.

The catch here is that the companies must be licensed in Virginia.

Most consumers are inundated with mail and Internet come-ons from companies that claim to consolidate and reduce debt. Some may be legitimate, most probably aren't, consumer advocates say.

Unlicensed companies are not supposed to do business with Virginia residents, but that doesn't stop them from trying.

Legitimate counselors negotiate with creditors to lower interest rates and waive fees and penalties before putting consumers on debt-consolidation and-management plans.

In a debt-management plan, money is funneled from the consumer through the counseling agency - for a setup charge and a monthly fee - to be disbursed to creditors.

"Legitimate agencies can help people whose debt is out of control get their financial lives back on track," said Virginia banking Commissioner E. Joseph Face Jr.

"Less-scrupulous agencies may only compound their clients' problems by charging them exorbitant fees, pressuring them into debt-management plans they don't need or failing to pay their bills on time, resulting in penalties," Face said.

The really bad ones abscond with the money and fail to make payments altogether.

G. Russell Boleman III, a bankruptcy attorney with the Boleman Law Firm in Richmond, said a client in Fredericksburg paid a total of $8,000 to an agency before she became suspicious. Not a penny went to her creditors.

A law-enforcement officer from Amelia lost $36,000 to an agency while trying to make good on his debts, Boleman said. He eventually filed for bankruptcy.

Some agencies can't be tracked or contacted because they are hidden behind layers of front organizations, Boleman said.

The new law puts teeth in licensing requirements, he said. "But it's not harsh enough."

The SCC had virtually no authority before. It will be able to charge $1,000 for every violation, and suspend or revoke licenses. Plus, agencies must be bonded, so consumers can seek restitution for overcharges.

Virginia deputy banking Commissioner Susan Hancock said consumers should check to ensure that agencies are licensed to do business in Virginia or they will not be protected.

For companies that aren't licensed, "there's no telling what they will charge or what they will do," she said.

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