WE HAD TO check the calendar to confirm it was indeed May and not April Fool's Day when we heard about a bill sponsored by Rep. Dwight Evans that would allow for-profit credit-counseling agencies to practice in the commonwealth.
It's hard to overestimate the magnitude of stupidity - as well as bad timing - of this bill. It's as if lawmakers said, "Hmm, we've seen what happens when vulnerable consumers get sold bad products by financial companies that end up walking away with billions in profits and leave behind a foreclosure crisis that has battered the world economy. How can we make this situation even worse?"
The bill, the subject of hearings last week, addresses a problem that doesn't exist.
Nonprofit credit-counseling agencies help consumers in financial trouble who are having a hard time keeping up with credit-card and other payments. They provide financial education and advice for consumers to manage their debt. Sometimes, that includes a debt-management plan or advice to file for bankruptcy. Recent changes in the bankruptcy laws mandated that consumers consult a nonprofit credit-counseling agency.
The IRS has strict guidelines for qualifying for tax-exempt status: Credit-counseling agencies must not only offer advice and debt management but financial education. And applicants must prove that they are serving a public, rather than private interest.
There is no federal law requiring credit-counseling agencies to be nonprofit, but a recent shift to stricter regulation of for-profit credit-repair agencies led to an increase in nonprofit applications. That's what led to an IRS investigation of many of them. A U.S. Senate subcommittee hearing followed soon after.
The Senate report that followed the hearing documented many abuses: for-profit companies setting up "shell" nonprofits that would be charged with generating huge fees for the for-profit company. Those fees would come from "debt-management plans," which require a consumer to write a check to the counseling agency, which in turn is supposed to pay creditors. The investigation found cases in which payments were never made to creditors but kept as fees, a lack of education, and some who steered clients to debt-consolidation loans offered by the for-profit company.
The Senate report is succinct: "When profit motive is injected into a nonprofit industry, it should come as no surprise that harm to consumers will follow."
The profits of some of these companies are even more succinct: One reported gross revenues of $53 million in 2002, a 2,359 percent increase in revenues over three years.
We can't imagine why that report didn't stop Evans in his tracks.
Evans argues that the credit-counseling industry isn't regulated. The for-profit companies testifying in favor of the bill argue that tax-exempt status doesn't provide enough regulation and that the bill would provide oversight.
Last we checked, regulation of financial companies has not been the government's strong suit.
But the most abusrd argument came from a company that said that since an IRS crackdown closed a number of dodgy nonprofit agencies, consumers have fewer options for help. That's like the man who murdered his parents and begged for the court's mercy on account of his being an orphan.
Rep. Evans is considered a champion of the little guy and the poor.
This bill represents the opposite - and new way to make consumers more vulnerable. *