Debt Settlement Companies May Want to Celebrate But Not So Fast. It Impacts Them As Well.
In a recent opinion handed down in Zimmerman v. Puccio it was determined that non-profit credit counseling organizations operate as a “credit repair organization” as defined under the Credit Repair Organizations Act (“CROA”). This is entirely bad news for all non-profit credit counseling groups.
This is not a new case. It has been winding it’s way through the courts since 2003 and it was filed by Andrew and Kelly Zimmerman against John and Richard Puccio (the defendants), Cambridge Credit Counseling Corp., Cambridge/Brighton Budget Planning Corp., Brighton Credit Management Corp., Cambridge Credit Corp., Brighton Credit Corp., Brighton Debt Management Services, Ltd., Brighton Credit Corp. of Massachusetts, Debt Relief Clearinghouse, Ltd., Cypress Advertising and Promotions, Southfork Asset Management Corp., and First Consumers Credit Management Corp.
Long since the time of this filing the Puccio control over Cambridge Credit Counseling was legally severed and Cambridge was able to restore itself to a compliant non-profit credit counseling organization and has fought hard to rid itself of the mess the Puccio’s made of the non-profit in the beginning.
In this case the Puccio’s, who then controlled a credit counseling group, had made statements that a debt management plan would help to improve or restore a consumer’s credit rating by participating in the credit counseling program. Statements at the time of Puccio control we also made that credit could be reestablished or rebuilt following participation in a debt management plan. Employees of the company told consumers their accounts would be reaged and that would help their credit.
In fact this part of the sales script from the case sounds very similar to that used by many companies, credit counseling or debt settlement, even today.
Sales script example from the case: “Our program is designed to help you get out of debt and improve your credit rating. You will reestablish a good payment history and improve your debt to income ratio. Over the course of the program your credit rating will improve.”
Statements like that are similar to those made in my recent undercover shopping calls to debt settlement companies as well. You can hear some of these calls below.
Real Undercover Calls With Promises I Think Run into Trouble as a Result of This Ruling
- Can Debt Settlement Hurt My Credit?
- Anything you do can impact your credit.
- While you are in the program the credit score will drop a little bit but it rebounds faster than any other debt management program out there and it has the least impact. You’ll see it drop a few points. *
- Score will be the same or better than when you started. *
- 100% of our clients don’t make payments to creditors once they start the program.
- Credit report will reflect negotiated $0 and you can have that removed. *
- In six to eight months you should be back in good credit status. *
- Program will help me to increase credit score more. *
- You’ll get more offers for credit while you are in the program because it looks like you can afford more with reduced debt levels. *
- The idea that I’d get more offers for credit after trashing my credit in the debt settlement program is non-sensical.
- Once you stop payments to let the accounts go delinquent it will show up as some late pays.
- Once we get your accounts paid off it will counteract it and your score will shoot right back up. *
- Accounts will be removed from credit report. *
- It will absolutely not hurt your credit. *
- Will You Be Able to Help Me Increase My Credit After I Finish The Program?
- After you get out of the program you have nowhere to go but up.
- What is going to get you back up and getting you credit worthy again is getting your debt to income ratio back in line and that’s what we work on. *
- Shows up with a real positive effect. *
- Credit score shoots right back up and you should finish the program with a higher credit score. *
- Credit score will be better than when you start the program. *
- Our program helps you get your credit score up to where it is now or even higher. *
Non-Profits Now Cross The Boundary Into Credit Repair
Even though the CROA exempts non-profit 501(c)3 organizations the court said that the credit counseling group had “crossed the boundary from credit counseling into credit repair with their continued and insistent representations to consumers that their services could only help improve clients’ credit.”
The court concluded, “By improving credit behavior prospectively, a consumer aims to improve a pre-existing credit record, credit history, and/or credit rating with a more favorable record, history, or rating in the future. Thus, credit counseling aimed at improving future creditworthy behavior is the quintessential credit repair service.”
If you have inside knowledge of how a credit counseling program works, you will see the following court decision creates a real problem for all credit counseling groups. The court found when a credit counseling group “contacted clients’ creditors to try to negotiate “re-aging” of accounts, a process designed to improve credit scores by relabeling delinquent accounts as current” that created an issue of engaging in credit repair.
The court also said that simply putting a disclaimer in the client contract stating that “[t]he CLIENT’S credit rating is outside of the scope of this Agreement” is not evidence that the credit counseling company did not represent that it would improve a client’s credit rating. Apparently, the Puccio’s believed incorrectly that a credit counseling organization could represent repeatedly in advertisements, on its website, and in its employee scripts, that it would help improve clients’ credit ratings, but escape liability under CROA by inserting a disclaimer in its contract about the relevance of its services to the credit rating of its clients. The court says, “That is an implausible position which captures the duplicity of the Puccios’ enterprises.”
Interview With Cambridge Credit Counseling About This Ruling
I thought it was important for readers to be able to put this ruling into context and to talk about the history of Cambridge and the troubled past the modern day Cambridge separated itself from a long time ago. I talked to Chris Viale, the president of Cambridge Credit Counseling about the history of the group and the impact the recent ruling would have on the credit counseling industry.
I’ve divided the interview into two sections which you can listen to below.
Implications of this Ruling
Many companies advertise and market their personal financial advisory services as having some relationship to a consumer’s credit record, credit history, or credit rating. Zimmerman calls into question Hillis and other cases that stand for a narrow reading of the definition of a credit repair organization and the distinction between purporting to repair or retroactively fix past credit problems (being credit repair) and purporting to improve credit in the future (not being credit repair). Further, Zimmerman raises the potential that virtually all services to contact clients’ creditors to try to “negotiate ‘re-aging’ of accounts, a process designed to improve credit scores by relabeling delinquent accounts as current” constitute credit repair activities that fall under CROA. As the First Circuit observed, “credit counseling aimed at improving future creditworthy behavior is the quintessential credit repair service.”
The First Circuit appears to leave scant room for credit counseling agencies that provide DMPs to consumers to fit outside of the scope of CROA. Moreover, in this line of cases, there already had been a decision that adopts a two-part test for bona fide tax-exempt nonprofit credit counseling agencies, requiring such agencies to: (1) be recognized by the IRS as being exempt from federal income taxation under section 501(c)(3) of the Internal Revenue Code; and (2) actually operate as a bona fide nonprofit organization. As a result, the First Circuit requires that a nonprofit that might otherwise be covered by CROA satisfy this two-part test in order to be exempt from the statute.
Put simply, the door is now wide open for class action lawsuits targeting credit counseling agencies – regardless of tax-exempt or nonprofit status – based on nothing more than the agencies’ provision of DMP plans (that are incidental to the education and counseling provided by the agencies). In other words, a plaintiff can make such an allegation against a bona fide tax-exempt, nonprofit credit counseling agency and then the agency must prove not only that the IRS has recognized its 501(c)(3) status, but that it is actually operating as a bona fide nonprofit organization if it wishes to be deemed exempt from CROA’s requirements.
In short, credit counseling agencies need to determine whether they can and should comply with CROA’s requirements, or whether they intend to rely on the nonprofit exemption. The latter can be an extremely costly (even if insurance coverage would be available), damaging decision, even if ultimately successful. While the FTC and state Attorneys General may not be lining up to bring CROA enforcement actions against bona fide nonprofit organizations, the plaintiff’s bar likely will be, especially because the per-client penalties for CROA violations are so high, and because they can recover their legal fees if successful.
While this case was poorly defended and involved egregious facts of alleged wrongdoing that bear no resemblance to the operations of present-day legitimate credit counseling agencies, including those of Cambridge itself, the court took a broad view of the definition of a credit repair organization and, as a result, the scope of CROA. Credit counseling agencies now face the unexpected challenge of an interpretation that brings them within the scope of a statute that was intended to apply to services completely unrelated to credit counseling.
The ruling heightens the risk, particularly for credit counseling agencies doing business in the First Circuit (encompassing Maine, Massachusetts, New Hampshire, Puerto Rico, and Rhode Island), that their activities, especially their DMPs and less-than-full balance repayment programs, may trigger coverage under CROA and give rise to class action litigation, forcing them – at great expense – to prove that they are actually operating as bona fide nonprofit organizations (in order to be exempt from CROA, particularly for what has transpired in the past), or, alternatively, to comply with CROA’s requirements prospectively. Of course, unfortunately, complying with CROA’s requirements going forward will provide no protection for what happened in the past.
Despite a stated exemption for tax-exempt, nonprofit organizations in CROA, the broad interpretation of the statute adopted by the First Circuit may, unfortunately, lead to a wave of litigation against legitimate nonprofit credit counseling agencies that provide invaluable assistance to consumers in financial distress.
If you think your credit counseling, debt relief or debt settlement group may need some guidance or assistance to navigate these troublesome waters, you may want to contact the following experts for help:
Jonathan L. Pompan
Jeffrey S. Tenenbaum
I happen to know Jeff Tenenbaum and he’s a good guy. I’ve just never met Pompan but I’m sure if he works with Jeff he must be a great guy as well.
You can read the full appeal here.
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