This article was originally published July 9, 2014
A proposal to legalize for-profit debt relief services in Massachusetts could win approval by the Legislature over the next few weeks, raising concerns among consumer advocates and nonprofit competitors, who say these firms prey on the poor, indebted, and desperate.
Massachusetts only allows nonprofit debt counseling services, which try to help financially struggling people get out of debt, to operate in the state.
Since 1971, Massachusetts has outlawed for-profit debt counselors because of unscrupulous practices by some that exacted high fees and left consumers deeper in debt. But a loophole in the statute has allowed affiliates of these for-profit companies to operate in the state in recent years, largely unregulated.
The proposed legislation, passed by the House last year and supported the administration of Governor Deval Patrick, would end the 43-year-old ban, but subject the firms to increased oversight by the state. The bill is now before the Senate Ways and Means Committee.
Barbara Anthony, undersecretary of the Massachusetts Office of Consumer Affairs and Business, said the legislation would allow the state to set rules and crack down on violators.
“This bill would require all previously unlicensed debt management, debt settlement companies, and for-profit debt counselors to become licensed to dispense advice to consumers and to be held accountable for any unfair or deceptive actions,” she said in a statement.
But consumer advocates say the proposal would undo four decades of consumer law in the state and extend the reach of for-profit debt counseling firms, which are legal in some states, into Massachusetts.
“We’d be opening the gate to welcome all kinds of questionable financial services into Massachusetts,” said Margaret Miley, head of the Midas Collaborative, an Allston-based non-profit that helps low and moderate-income families in Massachusetts to manage their finances.
It’s unclear when the bill might clear the Ways and Means Committee and come to the full Senate. But the House sponsor, Representative Michael Costello, said there is a high likelihood that the bill will pass before the Legislature adjourns at the end of this month.
“We’re not concerned if a company is for-profit or nonprofit,” said Costello, an Newburyport Democrat. “What we’re saying is, ‘Anyone can enter this business but you will be highly regulated in Massachusetts.,”
Debt relief counseling services aim to help financially strapped consumers reduce and manage their bills, acting as an intermediary between debtors and creditors. They typically work out a repayment plan that might include the waiving of penalty fees, the reduction of interest ,or both, and collect monthly payments from consumers, which they pass onto the creditors.
On average, nonprofit servicers charge a fee of $26 per month; for-profit firms can charge as much as 18 percent of outstanding debt, according to federal reports. For-profit firms have come under scrutiny for collecting these fees, but too-often doing little to help debt-ridden consumers.
A decade ago, the Federal Trade Commission found that for- profit firms, some masquerading as nonprofits, imposed undisclosed fees, made unrealistic promises about reducing debt and interest, and failed to pay creditors with money collected from their clients.
In 2010, with complaints about for-profit debt relief companies on the rise again, the FTC prohibited for-profit debt companies from taking money from consumers before providing significant help.
Massachusetts ban on for-profit debt counseling companies kept them out of the state for decades. But in recent years, the firms have exploited a loophole in the law through affiliates that call themselves “debt-settlement” rather than “debt counseling” firms.
Instead of collecting payments directly from consumers and passing it onto creditors, debt settlers advise consumers to stop all payments and put that money in a bank account.
The companies claim they then will persuade creditors to accept smaller, lump-sum settlements that will come out of bank account, from which the debt firms also take fees of as much as 18 percent. Consumers often end up worse than before, critics says, owing more money, having less, and facing lawsuits from creditors.
Three years ago, New York City’s Department of Consumer Affairs named debt settlement “Top Fraud of the Year.” Bob Linderman, a spokesman for the American Fair Credit Council, a trade group of the for-profit debt relief industry, said there are many reputable for-profit credit counseling and debt settlement firms that help consumers.
He said the Massachusetts legislation would rein in bad practices by debt settlement firms. But consumer advocates argue for a simpler approach: banning debt settlement firms from the state as well.
“In virtually every circumstance there is no benefit whatsoever to consumers,” said Stuart Rossman, director of litigation for the National Consumer Law Center, a Boston base-advocacy group.
Four years ago, Attorney General Martha Coakley and 19 other state attorneys general, won a settlement against a Maryland for-profit debt firm, alleging that it misled consumers by presenting itself as a nonprofit and charged them without providing any benefits.
Coakley’s spokesman, Brad Puffer, declined to comment on whether Coakley supported the legislation. Instead, he said that any changes to the law should “require strict licensing standards and regulatory oversight.”
