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Law regulates credit counseling, business
By Rachel Pleasant
Staff Writer
Credit counselors doing business in South Carolina have only a few more days to apply for a new state-issued license required by the Consumer Credit Counseling Act.
The act, passed earlier this year, mandates that credit organizations and counselors dealing in debt management, settlement or credit repair, apply for a license by a Dec. 2 deadline.
The S.C Department of Consumer Affairs had received about 10 applications as of mid-November, said Carri Grube, staff attorney, but she suspects many more applications will be submitted the week before the deadline. SCDCA hopes to process applications and issue licenses by the beginning of the year.
In addition to establishing a license for credit counselors, the law also puts a number of restrictions on those who work in the multimillion-dollar credit counseling industry.
Among those restrictions:
• Licenses issued by the SCDCA must be renewed annually.
• Credit counseling organizations must file paperwork issued by the SCDCA that addresses their financial responsibility.
• Organizations must provide information on its consumer education program, a copy of its standard debt management program, a surety bond and criminal background checks of its employees.
• Credit counselors and organizations must now complete 12 hours of continuing education classes every two years.
• Credit counselors will be required to undergo a criminal background check.
The law goes beyond screening and licensing of credit counselors to also put restrictions on the fees that can be charged to customers.
Those fees range from $20 for an initial consultation to $50 for a bankruptcy consultation.
It is not unheard of for some organizations to charge several hundred dollars for these services, said Michaele Pena, director of the consumer credit counseling division of Family Services Inc. in North Charleston.
The law also requires credit counseling organizations to maintain a separate account for consumers’ funds and bars them from charging consumers to cancel debt management plans, accepting referral fees, making loans to consumers or compensating employees based on how many consumers they sign up for a debt management plan.
The law was developed in response to scams and problems within the credit-counseling industry, Grube said. As an example, she pointed to the AmeriDebt scandal.
In 2003, the Federal Trade Commission filed a complaint against AmeriDebt, charging that the organization, despite its nonprofit status, was actually operating to make money for affiliated companies and individuals; that the organization didn’t teach consumers about finances or how to handle debt; that despite advertising to the contrary, AmeriDebt charged its customers an up-front fee; and that AmeriDebt kept the initial payment consumers paid to enroll in a debt management plan rather than disbursing it to creditors as promised.
AmeriDebt later filed for bankruptcy protection and, as part of its settlement with the FTC, agreed to shut down its debt management operation. The Internal Revenue Service, however, began cracking down on the credit counseling industry and questioning the nonprofit status held by such organizations.
In developing South Carolina’s law, Grube said the state looked at similar laws in other states, including Kansas, Michigan and Indiana. About half the states have similar laws.
The law has received scrutiny from some who say it won’t go far enough in regulating businesses that solicit customers via 1-800 numbers or the Internet. Such businesses are often based in other states.
“It’s going to be very difficult to enforce a law and make it work against them and sometimes they’re the worst,” said Sue Berkowitz, director of the South Carolina Appleseed Legal Justice Center.
Grube disagreed.
“We’re letting people know that we’re out there. We’re tracking them,” said Grube, who added she recently attended a conference in Arizona where she shared information about the new law. “We’re relying on consumer complaints to find anyone who is not complying, and we’re checking lists of people who service South Carolina.”
Grube said the SCDCA is also communicating with other states, sharing information back and forth about various credit counseling services, and monitoring industry reports.
At some point, it is possible that SCDCA will have investigators assigned to a credit counseling beat, making random checks of individuals and organizations.
Should an organization or individual be found to be in violation of the law, Grube said, they could face criminal, civil and administrative penalties including fines and jail time.
Pena said the law is welcome within her industry and that reputable organizations should have no problem abiding by it.
“It’s really very basic and standard information that’s required,” Pena said, adding that Family Services Inc. already requires background checks for its credit counselors.
“If you’re doing the correct thing and doing business under the spirit of nonprofit, an agency has nothing to worry about.”
The law will also level the playing field for the industry in South Carolina because the law determines what fees counselors can charge, Pena said.
Grube doesn’t know how many complaints the SCDCA has received from consumers regarding credit-counseling services because there is no clearcut category for tracking such comments, she said.
Rachel Pleasant is a staff writer for the Business Journal. E-mail her at rpleasant@charlestonbusiness.com.
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