Credit- and Debt-Related Services

Background

According to a 2018 survey by the National Foundation for Credit Counseling, 55 percent of Americans struggle to minimize their debt. Struggling borrowers are turning to a variety of services that provide credit- and debt-related services but face potential risks of harm. These include:

  • Effective credit counseling can promote money management skills based on individual needs. Generally, nonprofit credit counselors are less conflicted, but the Federal Trade Commission warns that even nonprofit credit counselors can charge hidden fees or urge their clients to make “voluntary” contributions that increase debt.
  • Debt management companies help consumers manage high debt levels or consolidate their debt into one monthly payment. They can also arrange for more affordable payment plans with credit card companies and other creditors.
  • Debt settlement, debt termination, and debt elimination purportedly help consumers settle debts for less than the full amount of the outstanding debt. But they also expose people to risk. They often require consumers to stop paying their debts, penalty interest rates and fees can result.
  • Credit repair seeks to remove negative reports from a credit score A three-digit numerical score that estimates a consumer’s creditworthiness based on underlying information about the consumer’s borrowing history contained in his or her credit report. Lenders use credit scores to evaluate the possible risk of extending credit to a specific person… . Companies that offer this service may falsely represent that it will repair or improve a consumer’s credit score A three-digit numerical score that estimates a consumer’s creditworthiness based on underlying information about the consumer’s borrowing history contained in his or her credit report. Lenders use credit scores to evaluate the possible risk of extending credit to a specific person… .
  • Other businesses—such as subprime creditors and mortgage rescue scammers—market debt solutions through taking on even more high-cost credit. Their primary customers are consumers with unaffordable debt and low credit scores

Federal law prohibits unfair, deceptive, or abusive trade practices, charging advance fees, and failing to make required disclosures. Several states have enacted legislation targeting abuses. This includes legislation to regulate fees, prohibit advance or excessive fees, establish licensing and bonding requirements, require specific disclosures, and require that products be suitable for a client’s personal situation. Nevertheless, federal and state regulation has generally been inadequate to curb abusive practices.

Federal law requires consumers seeking bankruptcy to get credit counseling with a government-approved organization. Counseling must be received within six months of filing. Participants receive counseling over the telephone, or via the internet, or through in-person counseling.

CREDIT- AND DEBT-RELATED SERVICES: Policy

Licensing of providers of credit- and debt -related services

In this policy: State

Providers of credit- and debt-related services should be licensed in each state in which they operate.

Harmful practice

In this policy: FederalState

Policymakers should:

  • prohibit unfair, deceptive, or abusive acts and practices, including those that do not provide the relief offered or create unaffordable payments; and
  • require companies providing credit- and debt-related services to make sure that their services are in the best interest of the consumer.

Written contracts and disclosures

In this policy: FederalState

Policymakers should require providers of credit- and debt-related services to provide written contracts to consumers. At a minimum, the contracts should contain each of the following:

  • an individual financial analysis;
  • disclosure of the risks of the products or services being offered, including the possible impact on debt loads and credit scores and reports;
  • disclosure of any conflicts of interest;
  • the total cost of the services and payment schedule;
  • information on other options to deal with debt; and
  • the ability to cancel the service without being charged a penalty.