I was approached not long ago by an knowledgeable industry insider with the statement that the CFPB may be already in the process of policy to outlaw credit counseling fairshare payments.
You know the first reaction you might have about that statement is that it would never happen. Fairshare is that commission the creditors pay when nonprofit credit counseling groups collect money from consumers in a debt management plan.
It is quite simply a pay for collection arrangement which helps to support nonprofit credit counseling groups and allows creditors to take those commission payments as a tax deduction.
The issue that makes this a possibility worth considering is that the fairshare payments could be said to create an unreasonable conflict of interest between the credit counseling agency that is supposed to be representing the consumer, but getting paid by the creditor. If the agency is getting paid by the creditor and the creditor controls critical policies, terms and procedures of the debt management plan then maybe the nonprofit credit counseling agency is really simply an agent for the creditor.
There is no doubt that the credit counseling – consumer – creditor relationship is muddied by this funding process and who knows, maybe in the interest of transparency and creating fiduciary relationships that protect consumers the CFPB may take a good hard look at the fairshare conflicts.
The National Foundation for Credit Counseling (NFCC) has been pushing back about being regulated by the CFPB, saying nonprofit credit counselors are watched over and regulated enough by the IRS. Seems like a nightly unfriendly consumer position for nonprofit groups to take, but hey, why not.
That “we are already regulated,” argument might have some merit if it wasn’t for the past cases of nonprofit credit counselors harming consumers. The latest being United Financial Systems in South Florida which set a record of the most number of FTC complaints since 2010. If you are not familiar with the United Financial Systems mess you should click here.
Testimony provided by the National Consumer Law Center, Consumer Federation of America, Consumers Union, U.S. PIRG and the National Association of Consumer Advocates expressed concern over the nonprofit credit counseling world and its lack of supervision.
Nevertheless, the CFPB should reserve the authority to supervise and examine larger nonprofit entities to guard against abuses. The IRS only examines non-profits for compliance with the internal revenue code—not to protect consumers. This difference in mission could allow anticonsumer conduct to survive IRS scrutiny. It would also be inappropriate to automatically assume that non-profits are universally safe when experience shows otherwise.
Non-profit credit counseling agencies, one of the most common forms of non-profit debt relief service, were invented by creditors to promote repayment of debts over bankruptcy. As a result many credit counselors once depended on creditors for a significant portion of their funding though a system known as “Fair Share.” This created a clear conflict of interest that lead the IRS to describe one applicant for tax-exempt status as a “collection agency” for credit card companies.
In 2004 NCLC published a report showing that abuses persisted despite increased attention from states. The IRS noted in a 2006 report that “many credit counseling organizations operating as tax-exempt charities are now primarily sellers of debt-reduction plans, motivated by profit, and offering little or no counseling or education.” While the IRS has been aggressively fighting this problem for several years now, the CFPB should not omit non-profit debt relief providers from CFPB’s supervisory jurisdiction on the assumption that the IRS will carry this burden forever. – Source
So what do you think. Post your comments below. Will the CFPB take a good hard look at the conflict created by the current fairshare system and should it be eliminated?
Will the CFPB Outlaw Fairshare to Credit Counseling Organizations? by Steve Rhode
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