Congress to limit credit counselors' DMPs

Anonymous poster "Joe" tried to comment about Congress' efforts to regulate DMP activity by commenting on the last post about Transunion's new scoring model for broadband/telecomm. Since the comment was way off-topic for that post, I'm moving it here to its own post so I can discuss it.

Highlights

LEGISLATIVE UPDATE

Debt Management Plans Take Direct Hit in Proposed Tax Bill

The Senate’s version of the tax reconciliation bill, now working its way through the Senate floor, takes direct aim at the large national credit counseling organizations that primarily use “debt managem ent plans” (DMPs) as a means to conduct credit counseling. The new provision, if it survives the legislative process, would limit DMP services to 25 percent of the organization’s total activities, if the entity is to qualify for nonprofit status under §501(c)(3) of the Internal Revenue Code. Moreover, the law would require DMP services to be treated as unrelated business income subject to taxation. The Senate provision, tucked away in the massive “reconciliation” bill, is authored by Sen. Chuck Grassley (R-Iowa), chairman of the Senate Finance Committee and also the chief sponsor of the recently enacted bankruptcy law (BAPCPA). Under the new bankruptcy law, all consumer debtors must go through credit counseling within 180 days of filing and receive a certificate from an approved nonprofit budget and credit counselor. The impact would be felt most directly by such entities as Springboard Credit Counseling, Money Management International and GreenPath, all of which rely on DMPs as a major part of their business model. The Senate leadership hopes to finish reconciliation tonight. However, the Senate provision is not in the companion House bill and, thus, would be subject to a House-Senate conference committee.

There's some truth in this; Congress is acting to limit DMP activity on the part of credit counseling agencies. This is part of an effort to answer concerns raised in a Senate subcommittee's investigation of profiteering in credit counseling. Not mentioned in Joe's post is the Senate's finding that the NFCC membership standards, if applied to the entire industry, would go a long way toward addressing the abusive practices that were rampant in some parts of the industry. I bring that up because GreenPath, MMI, and Springboard are all NFCC members. The fact that they are singled out here disturbs me, because it's an attempt yet again to link them to the profiteers in the industry, which they clearly aren't. Yes, they will be affected if this legislation passes, but no, they're not the reason this legislation was written.

At any rate, the stuff mentioned in Joe's post aren't really the problem; even several years ago, when I still worked for Springboard in California, we were talking about life after DMPs. The creditor funding model that DMPs are founded on is pretty ugly, giving the appearance of creditor control of the industry, and putting credit counseling agencies at the mercy of hostile forces. I've known for years that DMPs would someday become a thing of the past--I just didn't know it would happen quite this soon. And so that part about Springboard, GreenPath and MMI relying "on DMPs as a major part of their business model" is hyperbole.

There are other things in this legislation, though, that are disturbing, and not mentioned in the post above. They want to forbid non-profit credit counselors from "providing or promoting any service for the purpose of improving any consumer's credit record, credit history, or credit rating." That's a bad idea. There are brands of credit repair that are fraudulent, and those should exclude an agency from 501(c)3 status. But legally and legitimately helping a client improve his/her credit is a vital part of the package, both for consumers and for the credit counselors who serve them, especially in a post-DMP age.

The way I see it, the agencies hardest hit by these suggested restrictions are the growing number of non-profit agencies who have created for-profit spin-offs and subsidiaries, which to my knowledge doesn't include the three mentioned in the post.

In general, I'm not sure how they expect the industry to survive under some of these restrictions, so I'm predicting the proposal won't pass in its current form. But even this attempt is significant and raises a lot of other issues about bankruptcy and credit counseling--I'll discuss those some other time.

Comments

[George Holman]

This was an incredibly useful article on DMP regulation. I hope that you will continue to post things like this: It put complex financial terms in language I could understand.