Congress Passes Massive Overhaul of Non-Profit Credit Counseling

In response to Congress passing H.R. 4, which contains significant changes to the law governing non-profit credit counseling, the American Association of Debt Management Organizations (AADMO) will hold a live audio conference on August 15 featuring industry and legal experts to explain the bill?s implications, content, meaning and important legislative history.

This is the most significant change in the law to impact the credit counseling industry in many years. This change is nationwide, affecting the entire industry. It makes the recent changes in state law pale by comparison. It will alter the way credit counseling agencies operate, whether they stay non-profit or become for-profit, how they receive assistance from creditors, how consumers pay for services, how they comply with state law and, most importantly the fact that they may now have to pay taxes”, said Mark Guimond, Executive Director of the AADMO.

“Given the complexity of the changes to the law of credit counseling, we are pleased to have Jeff Tenenbaum as our legal expert for the conference. Mr. Tenenbaum, the American Bar Association?s ‘Outstanding Nonprofit Lawyer for 2006′ is a partner at the Venable law firm in Washington, DC,” added Guimond.

The live audio conference will be on Tuesday, August 15, 2006 at 3:30 P.M. EST.

The legislation would prohibit 501(c)(3) and 501(c)(4) tax-exempt status for a credit counseling agency unless it:

• provides credit counseling tailored to the specific needs of individuals
• does not make loans or negotiate making loans
• does not provide or charge for credit repair
• does not refuse service for the inability to pay or enroll in a DMP

Further, the credit counseling agency:

• must charge only “reasonable” fees
• must waive fees if the consumer is unable to pay
• except as permitted by state law, not charge a fee based on a percentage of the debt or payment
• except as permitted by state law, not charge a fee based on a percentage of the amount of the payment savings (actual or projected)
• must not have a board without broad community representation and who are not employed nor may benefit from the agency?s activities (based on certain criteria)
• must not own more than 35 percent of “back-end” services
• must not pay for referrals or be paid for referrals

The language does include specific requirements solely for 501(c)(3) agencies. This includes:

• The organization cannot not solicit contributions from consumers during the initial counseling process or while the consumer is receiving services from the organization.

• The aggregate revenues of the organization which are from payments of creditors of consumers of the organization and which are attributable to debt management plan services do not exceed the applicable percentage of the total revenues of the organization. The amount is 50 percent.

There is a “ramp-down” mechanism for the aggregate revenue threshold of creditor contributions that goes into effect one year after the enactment of the law. That first year of the law when it is actually in effect provides that the threshold is 80 percent, 70 percent the next year, 60 percent the year after, then into the 50 percent level in perpetuity.

The legislation also declares “Debt Management Plan Services” to be unrelated business income. The term ?debt management plan services? means services related to the repayment, consolidation, or restructuring of a consumer?s debt, and includes the negotiation with creditors of lower interest rates, the waiver or reduction of fees, and the marketing and processing of debt management plans.