I’ve been saying that the debt relief space is in a difficult spot right now. And I’ve provided warnings to all members of the debt relief community. Some have trounced me for being too “negative” in what I see just ahead.
But recently Jeff Tenenbaum gave a presentation at the recent credit counseling meetings of ACCPros. Here is what he had to say about what he sees.
In the close to 10 years that I have been speaking at credit counseling industry conferences, I have never seen the challenges and pressures facing the industry as great as what you are facing today. There is no question, in my mind, that the industry will look very different two years from now – maybe even in one year – than it does today. Not only mergers, consolidations and dissolutions, but the underlying business model and services provided to consumers likely will be very different.
So, where are these challenges and pressures coming from? Here are some of the highlights:
- The tightening of insured credit in recent years has led to less unsecured debt, reducing the need and demand for debt management plans.
- The federal CARD Act has led to a significant reduction in credit card fees (such as overlimit fees) the banks can charge, reducing the importance of debt management plan-based creditor concessions.
- As incomes have dropped, it has become harder and harder for consumers to qualify for full-balance debt management plans; fewer and lesser creditor concessions have not helped in this regard.
- Creditors have been less-than-speedy on moving forward with less-than-full-balance debt management plans (with reductions in principal, not just accrued interest). However, there are two notable, interesting pilot programs underway by folks in this room. Both are very different and take very different approaches to dealing with creditors. It will be very interesting to see how both turn out. Many have said that less-than-full-balance debt management plans are essential to the future survival of the industry.
- Pre-filing bankruptcy counseling has been under competitive challenge from largely taxable nonprofits that some refer to as online “certificate mills.” This has done significant harm to the quality of counseling; we have raised these issues repeatedly with the EOUST, as well as with supporters on Capitol Hill. Moreover, the bankruptcy counseling requirement remains under fire by some in Congress. We have been working with some of you to help protect this important consumer protection.
- Foreclosure prevention calls have dropped significantly as the housing crisis starts to subside, and there is no reason to think those prior call volumes will ever return. This is hitting hard those who ramped up to handle the higher call volumes. We are working with some of you to seek out mandated and funded housing counseling in other areas (such as pre-purchase counseling).
- The Uniform Debt-Management Services Act (“UDMSA”) – the model state debt adjusting law designed to regulate both nonprofit and for-profit credit counseling agencies (as well as debt settlement companies) – is in the process of being amended to conform to the Federal Trade Commission’s (FTC) amendments to the Telemarketing Sales Rule (“TSR”), including, most notably, a ban on collecting any fees until the first debt management plan payment goes to creditors. It should be finalized in July. These amendments are expected to make their way to the states in short order if and when approved this summer.
- The industry has a new federal regulator – as if you needed another regulator – called the Consumer Financial Protection Bureau (“CFPB”). This new regulator also has been granted the authority, if it so chooses, to enforce, among other things, the FTC’s amendments to the TSR regarding debt relief services. As you know, the FTC itself does not have jurisdiction over bona fide nonprofits, but the CFPB most certainly does. It also is not inconceivable that the CFPB will come up with other new ways to regulate the industry if it deems such regulation necessary. With a number of you in attendance, we had an initial meeting with many of the CFPB’s senior officials in this area; it went very well. Unlike the IRS in the early days of the credit counseling compliance project, the CFPB does not view nonprofit credit counseling agencies as bad actors; they very much do feel that way about the for-profit debt settlement industry, however.
- On the IRS front, while the credit counseling compliance project is working its way toward winding up – although there still are a handful of notable audits still underway on which we continue to work – the IRS is not going away. In a recent example, the IRS denied Section 501(c)(3) tax-exempt status to a largely online pre-filing bankruptcy counseling provider, aggressively enforcing both Sections 501(c)(3) and 501(q) of the federal tax code. While the IRS conclusion was correct, its reasoning and analysis was flawed. See our recent alert on this new ruling.
- It appears that some of the nation’s top class-action plaintiffs’ lawyers are evaluating whether and against whom to bring a new wave of class-action suits against nonprofit, tax-exempt credit counseling agencies under the federal Credit Repair Organizations Act (“CROA”). As we can tell you from personal experience with multiple clients, these suits are massive, bet-the-company cases that are not easily disposed of (they are very fact-based so do not lend themselves to summary judgment or motions to dismiss), are expensive, distracting, and the plaintiffs’ lawyers will not go away without significant monetary compensation. Consider prospective compliance with CROA’s requirements (they are not onerous at all), as well as evaluating your insurance coverage and making whatever changes you can to fill coverage gaps. We have been working with many of you in this regard.
- Now if you are not thoroughly depressed, there is one piece of good news on the legal front – a very recent U.S. Supreme Court decision has provided a road map for crafting defensible class-action arbitration waivers in your debt management plan agreements. Prospectively, if you do this, you can do a lot to prevent class-action lawsuits or arbitrations by your clients. Note, however, that a pending U.S. Supreme Court case may end up carving out CROA from these waivers. See our recent alert on this case.
As I said at the onset, these are the most challenging times facing the industry I have ever seen – far worse than even the doom and gloom days of the early 2000s with congressional hearings and investigations, and the launch of IRS audits that ended up reaching virtually every tax-exempt agency in the industry. The status quo will not continue, I assure you. If you don’t change, adapt, be creative, find other uses for your counselors, think outside the box, find new funding sources, and create new products and services, you will not be able to help consumers and survive for long.
Many of you are already doing some of these things, but many of you have not, or are not doing enough. It is challenging, to be sure, especially because the complex array of federal and state laws and regulations governing the industry very much limits what you can do, how you can do it, and how you can charge for it. But I can tell you one thing for sure – those who are sitting in the audience at the 2012 or 2013 ACCPros Spring Conference will be those who – creatively, aggressively and prudently – explored the bounds of their agencies’ legal limits and reshaped their organizations to adapt to the changing world around them. – Source
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