Maryland's Senate gave preliminary approval yesterday to legislation that would allow for-profit entities to provide debt management services in the state, a move that consumer advocates fear would open the door to further abuses of financially strapped people seeking help.
A final vote in the Senate is expected today.
"We're concerned," said Steve Sakamoto-Wengel, assistant attorney general in the Consumer Protection Division. "There is a history of abuse in allowing profit motives in the debt counseling industry."
Only nonprofits are licensed in Maryland to enroll consumers in negotiated repayment plans with their creditors. The push to permit for-profits into the business comes as the Internal Revenue Service is cracking down on nonprofits after a wave of credit counseling abuses that centered on Maryland-based AmeriDebt Inc.
The U.S. Senate also is proposing to further restrict nonprofits' activities in debt management if they want to retain their charitable status.
All this comes in a time when nonprofits are facing heavy demand for counseling services, since a federal law passed last year required people to undergo credit counseling with a nonprofit before filing for bankruptcy.
Maryland legislators considered allowing for-profits into debt management a year ago, but the effort failed. Legislators asked state regulators to study the issue and come back with a report by the end of this year. The report isn't finished, but the legislation is back.
Supporters, which include the state Department of Financial Regulation, say they have a new argument: With the IRS moving to yank many nonprofits' tax-exempt status, fewer credit counselors will be available to serve Marylanders.
The IRS is nearing the end of an extensive audit of 60 nonprofit credit counselors and has proposed revoking the tax-exempt status of about 30 of them. Those represent 40 percent to 50 percent of the industry's revenues, the IRS said.
In a survey of 42 licensed nonprofits in Maryland, eight have received an IRS letter challenging their tax-exempt status and are appealing, said Joseph E. Rooney, deputy commissioner of financial regulation. Another eight have been audited but haven't received word from the IRS, he said.
Currently, 54,000 Marylanders are enrolled in debt management plans with nonprofits, Rooney said. The eight nonprofits that received revocation letters have 8,000 Maryland clients. The other eight represent 10,000 consumers.
"I don't see [for-profits] as superior or inferior," Rooney said. "I see this as another alternative for Maryland consumers."
As long as the for-profit and nonprofit services "have to follow the same law, we don't see a difference," he said.
That law requires credit counselors providing debt management to be licensed by the state and sets caps on how much they can charge.
But opponents, which include the state attorney general's office, see a big difference. The bad apples in the industry were phony nonprofits that acted like for-profits, critics said.
"We still haven't seen any evidence that a for-profit company will provide consumers with ... education and counseling and not merely enroll people into debt management plans where they earn their money," Sakamoto-Wengel said.
Andrew Galli, executive director of the Maryland Consumer Rights Coalition, said he worries that for-profits will heavily advertise for clients and rush them into debt repayment plans that charge higher fees.
The now-defunct AmeriDebt was accused of similar practices. The Germantown nonprofit grew into one of the largest counseling agencies in the late 1990s through advertising. Regulators claimed that AmeriDebt charged high, hidden fees for its services and then channeled millions to its founder's for-profit processing company.
Several states and the Federal Trade Commission sued AmeriDebt, which shut down a year ago. Founder Andris Pukke settled a $172 million FTC lawsuit against him in January.
Legislators in the state House of Delegates are expected to take up for-profit legislation next week.
Gov. Robert L. Ehrlich Jr. hasn't taken an official position on the bill, said spokeswoman Shareese N. DeLeaver.
Meanwhile, legislation proposed in the U.S. Senate would eliminate the charitable status for credit counselors that get more than 25 percent of their revenue from debt management plans. Credit counselors could remain tax-exempt, but under a classification used by civic leagues, supporters say.
But nonprofit credit counseling groups argue that the effect of that could drive them out of business.
Most nonprofits get more than a quarter of their income from debt plans. And foundations that make grants to credit counselors typically require they have charitable status, said William Binzel, general counsel for the National Foundation for Credit Counseling.
The Consumer Federation of America is evaluating the federal legislation but is concerned that the proposal could have unwanted results, said Travis Plunkett, the federation's legislative director.
"The question is whether this legislation is overkill, whether it will have the unintended consequences of driving legitimate, good agencies out of business and leaving the field open for profiteering companies," Plunkett said.