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Clients, employees tell Senate
of abuse
March 25, 2004
BY MARCY GORDON
ASSOCIATED PRESS
WASHINGTON -- Weighed down by $90,000 in credit card and bank
debt, retired museum director Raymond Schuck heard an ad on the
radio and called Cambridge Credit Counseling. He said he was promised
lower interest rates and was asked to make a monthly payment of
$1,946 -- but the money didn't make it to his creditors.
"My credit rating was completely ruined because
of late payments" and he eventually filed for bankruptcy,
Schuck said during a Senate hearing Wednesday.
Senate investigators have found consumers drowning
in credit card debt increasingly are victimized by poor service,
hidden charges and high fees charged by some credit counseling
agencies that often leave them even deeper in debt.
Former employees of Cambridge Credit and AmeriDebt
Inc., also testifying Wednesday, told of having to use fake names,
sweatshop sales operations and pressure on commission-paid counselors
to get consumers to pay stiff up-front fees, with no counseling
or debt education provided.
Officials of the two companies disputed the accounts
of the former customers and employees.
Chris Viale, chief operating officer of Cambridge
Credit, called them "unfair and distorted accusations."
"There is a popular notion that performance
incentives encourage counselors to act in their own best interests
rather than in the interests of consumers. This is not true,"
Viale said.
As senators on the investigative subcommittee grilled
the officials about industry practices, the president of Debtworks
Inc., Andris Pukke, invoked his Fifth Amendment right against
self-incrimination and refused to answer questions.
The for-profit Debtworks, Pukke and his brother
are among several parties named in a lawsuit filed by the State
of Missouri against AmeriDebt in September. Debtworks was formed
in 1999 when AmeriDebt spun off its processing function for consumer
debt plans and turned it into a for-profit business owned and
controlled by Pukke, according to the Senate investigators.
Consumer complaints are on the rise as new companies
come into the counseling business and abuses proliferate, according
to a report released by the bipartisan investigative panel of
the Senate Governmental Affairs Committee. The investigators found
a pattern of abuse among some counseling agencies, especially
new entrants to the field.
"Clearly, something is wrong with the credit
counseling industry," said Sen. Norm Coleman, R-Minn., chairman
of the investigative subcommittee. "Our investigation has
revealed common patterns of improper conduct" by new entrants.
With personal bankruptcies surging to record levels
in this country, there is a deep pool of customers for credit
counseling companies -- often the last stop before a bankruptcy
filing. Credit counselors historically have been financed by banks
that issue credit cards but those contributions have been declining,
forcing counseling agencies to charge fees.
AmeriDebt has been sued by the Federal Trade Commission,
five states and consumers.
The FTC alleged that the company used deceptive
marketing to bilk hundreds of thousands of customers and failed
to educate people about how to get out of debt.
The regulators also alleged that the Germantown,
Md.-based company made customers believe that an initial fee would
be part of their debt-reduction payments to creditors -- but it
instead went to AmeriDebt.
The company has disputed regulators' allegations.
It says it offers customers educational services, and that the
debt-reduction payments are "voluntary contributions."
The Senate subcommittee report said the investigation
"has revealed that AmeriDebt is not the only potential bad
actor in the industry. Indeed, many of AmeriDebt's practices represent
a pattern of abuse among several new entrants in the credit counseling
industry."
The counseling agencies say they act responsibly
and provide a valuable service to consumers.
Credit counseling works by putting consumers who
cannot afford to make all their payments into debt management
programs that allow them to consolidate their debts from several
credit cards, reduce their monthly payments and lower their interest
rates. Consumers agree to destroy their credit cards, not take
out new credit and make a monthly payment to the counseling agency,
which distributes it to creditors.
But new entrants -- rather than relying on contributions
to nonprofit counseling agencies from credit card companies or
small fees paid by consumers -- use a different structure.
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