A new group that claims to be an advocate for consumers seeking credit counseling was in fact created by players in the burgeoning debt- counseling industry.
The group, Consumers for Responsible Credit Solutions, recently issued a scathing report attacking traditional counseling agencies, charging that they act more in the interests of the banks that finance them than of indebted consumers.
The group's creation and its report highlight the growing schism between new and old-line debt-counseling agencies.
Demand for credit counseling is increasing as credit-card debt has soared to nearly $743 billion and personal bankruptcies set a new record of more than 1.6 million last year. Nearly 9 million debtors contact a credit-counseling agency each year, according to one estimate.
Ballenger Group, a for-profit company in Frederick that provides processing to about a dozen credit-counseling agencies, spearheaded the effort to create Consumers for Responsible Credit Solutions, according to Michael Barnhart, a Ballenger spokesman and principal with Public Strategies, a lobbying firm with offices in Washington.
Barnhart said Ballenger Group and a small number of others in the industry hired Public Strategies to launch the group as well as an industry coalition last fall to reform a counseling industry that "was and is pretty sick."
He declined to name the other industry members involved because, he said, they feared retribution from lenders.
"Frankly, they are a little afraid of them," said Barnhart, who served as Credit Solutions' first director.
Consumer advocates said the secrecy about the other members raised questions about the group's credibility.
"It makes you wonder, are they friend or foe?" said Eric Friedman, acting division chief for Montgomery County's division of consumer affairs. "It's one of those ambiguous names. Are they a pro-consumer group or an industry group posing as a pro-consumer group?"
Ballenger Group was formed early last year when its executives purchased the assets of the company that provided processing to AmeriDebt, a Germantown nonprofit agency that has been accused in federal and state lawsuits of gouging consumers. AmeriDebt is under bankruptcy court protection and is not accepting new clients.
In November, Ballenger Group agreed to settle a complaint by the Federal Trade Commission, which charged that the company failed to disclose to debtors that their first payment was pocketed by AmeriDebt and not forwarded to creditors.
Ballenger Group, which did not admit to any wrongdoing, was ordered to pay $750,000 in consumer redress and prohibited from making further misrepresentations.
Credit Solutions now includes about a dozen industry players and more than 800 individuals who have signed up online, the group said.
In an 80-page report released last week, Credit Solutions accused creditors of controlling the credit-counseling industry to the detriment of consumers.
But it aimed some of its harshest criticism at the National Foundation of Credit Counseling, a trade association for many of the traditional credit-counseling nonprofits.
The foundation responded by calling the Credit Solutions report "irresponsible and misleading."
Nonprofit credit-counseling agencies offer debt management plans to consumers in which creditors make concessions on late fees and interest in exchange for repayment of debt.
The nonprofits often receive a portion of the recovered debt from creditors. The decades-old industry, however, has been embroiled in controversy.
Some counseling agencies that have cropped up in the past decade have been accused of pushing consumers into debt management plans, charging high fees and leaving individuals deeper in debt.
Regulators have also accused some nonprofits of funneling millions of dollars in business to for-profit affiliates.
Credit Solutions' report argues that because of financial support from creditors, the older-line agencies, including members of the National Foundation of Credit Counseling, have a conflict of interest.
Credit Solutions said these agencies discourage debtors from filing for bankruptcy, even when warranted, because the counseling firms are financed by credit-card issuers who stand to lose when debts are wiped out in U.S. Bankruptcy Court.
It criticizes the foundation, saying the trade association and its member agencies are filled with current and former executives from credit-card companies.
The Credit Solutions report recommends opening the credit-counseling business, now handled by nonprofits, to for-profits that could compete for clients. And Credit Solutions said it favors establishing federal oversight of the industry instead of having a patchwork of state laws that are inconsistent and confusing.
In its statement, the National Foundation of Credit Counseling said its members must adhere to strict standards for accreditation, disclosure, fiscal integrity and fair fees. A congressional subcommittee investigating the industry has praised its standards, the NFCC noted.
"The NFCC is very forthcoming about member agencies receiving voluntary contributions from creditors," the group said. "Without these contributions, payment for credit counseling, debt reduction services and education for financial wellness would fall to the consumer who is often unable to pay even a nominal fee."
Consumer advocates say Credit Solutions' new report makes some valid points on conflicts of interest within the industry and the need for better disclosure. But they say the group's secrecy over its own membership undercuts its mission.
"They make a big point of full disclosure and consumers having full knowledge. I would assume they would do the same thing about themselves," said Deanne Loonin, a staff attorney with the National Consumer Law Center in Boston. The foundation has been criticized for its ties to creditors, but Credit Solutions' report is an "unwarranted hatchet job" on the NFCC, said Travis B. Plunkett, legislative director for the Consumer Federation of America.
"Overall, consumer groups consider the NFCC a credible trade association made up of agencies that by-and-large try to provide quality credit counseling to consumers at the lowest possible charge," Plunkett said.