WASHINGTON – John Paul Allen was hired last summer as a debt counselor by AmeriDebt, but soon he found that his actual job at the Germantown non-profit was to make highly indebted people pay even more.
Allen told a Senate committee Wednesday that he was instructed to focus on enrolling clients in debt management plans rather than counseling, and was repeatedly reprimanded for explaining that the fees for the credit-counseling service were voluntary.
He finally quit when he started receiving phone calls from clients he had enrolled, who were asking why their creditors were not being paid.
“I felt helpless and responsible since it was me, personally, who had enrolled (them),” Allen testified Wednesday to a Senate Governmental Affairs subcommittee.
AmeriDebt was one of three credit counselors — two of them from Maryland — criticized by the Permanent Subcommittee on Investigations, operations described by Sen. Norm Coleman, R-Minn., little more than “telemarketing sweatshops designed to take advantage of thousands of people in bad financial positions.”
AmeriDebt and its subsidiaries — DebtWorks Inc. and Ballenger Group LLC — were identified in the subcommittee report along with Ascend One-Amerix of Columbia and Cambridge-Brighton of Massachusetts.
The report said the non-profits that recruited clients often worked hand in hand with for-profit firms that would tell clients to pay a certain amount to start the plan, without making clear that the money would go first to the for-profit, not to creditors.
Only when they started getting calls from creditors did the clients realize they gave their money to a business instead of paying their debt. Then they were told that they would have to pay again, plus monthly fees, if they wanted to continue in the plan.
Initial fees reached $2,000 in some cases, compared to only $20 charged in legitimate non-profits, the report said, and top salaries in the for-profits reached $600,000 compared to $60,000 per year in other non-profits. The clients, meanwhile, were often forced into bankruptcy.
Former Cambridge-Brighton worker John Pohlman said he was not allowed to use his own name when talking to clients and that while top-producing counselors were offered trips to Miami, the two lowest-producers had to clean “the refrigerator on Saturdays.”
The Federal Trade Commission in November sued AmeriDebt — which had gross revenues of $109 million from 1999 to 2002 — for deceptive practices, saying it misrepresented its policy on up-front fees and wrongly claimed to be a non-profit. The suit also said AmeriDebt provided no financial education to consumers — the reason the supposed non-profits are tax-exempt.
The attorneys general of Texas, Minnesota, Illinois and Missouri also sued the company and the Internal Revenue Service recently started 50 audits of credit-counseling agencies to determine if they perform the educational activities they claim, said IRS Commissioner Mark W. Everson.
The FTC settled with Ballenger Group, which agreed to pay $750,000 in consumer redress, and Chief Financial Officer Michael J. Malesardi told senators Wednesday that Ballenger currently has no relationship with AmeriDebt or DebtWorks.
DebtWorks President Andris Pukke invoked his Fifth Amendment right to avoid testifying.
But AmeriDebt Chief Executive Officer Matthew Case defended the service, telling senators that benefits to clients outweigh “any voluntary contribution made to the company.” He also said, however, that the company has stopped advertising and stopped enrolling new consumers since November.
Columbia-based Ascend One-Amerix made $386 million in gross revenues between 1998 and 2002 on clients who not only paid fees and contributions but got little or no counseling in return, the subcommittee report said. It also said the company profited when its subsidiaries marketed mortgages and other products to highly leveraged consumers.
But Amerix CEO Bernaldo Dancel challenged the claim that his company was “profiteering.” He added that Amerix is working to establish better standards for counseling clients and potential clients, plans to stop working in certain areas of the business and will offer more services to the community.
Cambridge Credit General Manager Chris Viale defended Cambridge-Brighton, saying it has many satisfied customers. Some things said about the company are false, he said, noting that in recent weeks its contracts explicitly specify the first payment is retained by the agency.
Despite those claims of improvement, the National Foundation for Credit Counseling advised consumers to use caution when seeking credit counseling and avoid services that sound predatory. And FTC Commissioner Thomas B. Leary said the oversight will continue.
“Last-minute conversions do not expunge them from the violations,” Leary said.
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