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We are creeping up on nearly two decades of account fee restrictions for nonprofit debt management plan providers. The counseling groups fought hard and heavy in the early 2000s to limit the fees they could charge consumers for budget advice and debt management plans.
For example, in 2003, the State of Maryland enacted The Debt Management Services Act that limited fees “to $50 for any up-front or consultation fee and a monthly maintenance fee of up to $8 for each of the consumer’s creditors listed in the agreement, up to $40 per month.” – Source
At the time, I was heavily involved in the debt relief industry and remembered the excitement of other companies that they had managed to limit fees, and that would keep out the for-profit companies that would charge more.
But the plan had a fatal obvious flaw that the debt management companies could not seem to understand. If you put fees in the law, they will be slow to increase without a mechanism to increase; even adjusted for inflation, you were in a position of lower value limited dollars with reducing creditor funding.
Those exciting fees in 2003 felt like a win, but 17-years later, inflation has taken its toll on the capped fees.
A $50 maximum consultation fee in 2003 is worth $35 in 2020, factoring in inflation.
An $8 maximum account fee in 2003 is worth $5.65 in 2020, factoring in inflation.
A $40 maximum account maintenance fee in 2003 is worth $28.27 in 2020, factoring in inflation.
Simultaneously, debt management plan providers were making less and less from allowed fees; the primary income source of funding from creditors has shrunk considerably.
In 2003, debt management plan providers earned around 15% of the money they collected from consumers and sent back to creditors.
Today in 2020, the amount is 3% or less and still declining with no real bottom in sight.
Misplaced Counseling Excitement
As the State of South Carolina said back in 2007, “The credit counseling law was very much needed in South Carolina. Businesses and ’non-profits’ were charging consumer enormous fees, but this law now regulates those fees,” said Schrendria F. Robinson, Former Director of Credit Counseling at Family Service Center of South Carolina. “This law is great.” Under the Act, a business cannot charge a fee other than what the Department allows per regulation. Currently, credit counseling organizations can charge the following fees, as applicable: a $50 initial consultation fee; $30 to set-up a DMP; $40 per month for maintenance of accounts; and a $25 reinstatement fee.” – Source
According to the IRS, the Family Service Center of South Carolina had its 501(c)3 nonprofit status revoked on November 11, 2014.
501(c)3 counseling charities are required to file some form of a 990 annual tax return. The last reported 990 return I can find for the Family Service Center of South Carolina is from 2011.
On the 2011 990 return for counseling services, they listed revenue of $172.969 and expenses of $210,460. They also reported on the 2010 990 return that revenue was $268,084 and expenses were $289,445. Just one more, on the 2009 990 return they listed that counseling revenue was $318,641 and expenses were $421,787.
Debt Management Counseling Fees in Other States
The State of Maryland is not an exception when it comes to fee limits. Nearly every state has gladly put debt management plan providers into the box they so desperately wanted.
In Colorado, “providers may charge an enrollment fee of $50.00 and a monthly fee of $10.00 times the number of debts remaining in the plan at the time the fee is assessed, but not more than $50.00 in any month.” – Source
Delaware limits consultation fees to $50 and $10 per account in a DMP, not exceeding $50 per month. – Source
Nevada has the same limits as Delaware. – Source
Utah is in as well. – Source
Other States Appear More Aligned With Reason
Florida allows debt management service nonprofits to “charge the greater of 7.5 percent of the amount paid monthly by the debtor to the person or $35 per month.” – Source
Michigan allows even more. The State law says, “a licensee may charge a reasonable fee for providing debt management services under a debt management plan. The fee under this subsection shall not exceed 15% of the amount of the debt to be liquidated during the express term of the plan.”
Minnesota is in the higher category as well. Their state law says, “The registrant may charge a periodic fee for account maintenance or other purposes, but only if the fee is reasonable for the services provided and does not exceed the lesser of 15 percent of the monthly payment amount or $75.” – Source
But even though some states can charge a fee of up to 15% of the debt the consumer brings into the debt management plan, that does not mean their fees might be limited by caps or that the consumer can afford it.
For example, if a consumer’s creditors can’t lower the monthly payment significantly, then the monthly debt management plan payment cannot be affordable with the extra fees of up to 15% of the debt.
On the other hand, when creditors helped fund counseling organizations by allowing them to withhold 15% of the money collected from the consumer yet credit the entire payment to the debtor’s account, that was a win-win-win for the creditor-consumer-and agency.
And Then There is California
The California statute that regulates debt management plans allows for a percentage of debt, 8%, to be collected from consumers in fees but it contains one phrase that limits the maximum monthly DMP fee to $35. It appears the code was amended in 2015 so each year that passes now, the maximum fee has less value. In 2020 dollars the $35 fee is now worth $31.86 and declining.
The crazy thing is fees limited in California critically hinge on the phrase “whichever is less” and DMP income could be future-proofed if the code read as Florida’s does to allow the monthly fee that is greater of either the percentage or X amount.
The Slowest Moving Train Wreck
You don’t have to be the smartest economist in the world to see how the declining value of legislation fixed fees and reduced funding from creditors for debt management agencies will not end well.
The debt management agencies continue to be squeezed, and ultimately the person that suffers is the consumer. Agencies might be non-profit, which helps since they don’t have to pay tax on exempt activity income, but they do have to operate as a business. They have rent, utilities, salaries, and everything else to pay like any company.
Continued Missed Opportunities
Ultimately counseling groups need to change their mindset and find a way out of the budget vice. They have several logical outcomes:
- Wind up unable to afford continued operations and go out of business. Most likely outcome unless mindsets change.
- Continue to reduce expenses and require less staff to do more and provide less service to consumers. Staffing is typically the largest expense. This is a race to the bottom.
- All the states go back to change their laws to allow for more sustainable fees. Don’t bet on this option.
- But there is an obvious alternative income solution.
Can I State the Obvious
Consumers need good advice. Nonprofit debt management groups could charge a substantial fee for that professional advice as well as provide the fee limited DMP.
I stand by my public testimony I offered in 2008 to the FTC.
That advice can’t be just steering people into a debt management plan. It needs to be comprehensive and fiduciary advice that helps guide a consumer with a detailed plan of action to tackle the debt issue which is the result of other factors in their lives.
Comprehensive plans include all factors of a debtor’s life. They are holistic, and they don’t guide a consumer to a specific product.
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Think about a financial planner that provides retirement advice to a person after examining their overall financial life. They charge a fee for this plan. Typically they charge $200 to $400 per hour with a pre-plan fee of $1,000 to $3,000. – Source
Not everyone wants to or can afford to pay that fee but those that do come out far ahead. The same outcomes are available in the debt world as well and I can demonstrate that in 30 seconds.
I optimistically believe that if debt management agencies could demonstrate this higher level of professional service it would create an opportunity to go back to the states and show they are doing more than just budget advice and debt management plans. Financial planners don’t have their fees capped at $50 per month.
Nonprofit hospitals sell medical advice. Nonprofit counseling agencies can sell financial advice.
The debt relief industry overlooks this revenue avenue because they either don’t know how to deliver the product or can’t see any value to the consumer by delivering a solution that puts the debtor’s needs first.
There is no magic solution that is going to blow air back into debt management plan revenue. But there are other income sources available to supplement agency income.
I’ve been talking about this for years, but I guess I’m just spitting into the wind. But maybe, hopefully, the time debt management plan providers will finally consider this is now.
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