October 2009

Will New Laws Help or Hinder Nonprofit Credit Counseling?

7 min

You can’t turn on the television or read a news article these days about the economic crisis and the impact on consumers without seeing some reference to the role of nonprofit credit counseling agencies as trusted sources for education and counseling.  At the same time, there has been an explosion in debt relief advertising matched by a steady stream of both nonpublic and publicly-disclosed law enforcement actions against marketers of such services.  On top of it all, financial institutions are in the crosshairs of lawmakers looking to overhaul the nation’s financial regulation system.

As a result, there are numerous legislative and regulatory proposals being considered that, if enacted, could hinder continued efforts to provide education and counseling by nonprofit, tax-exempt credit counseling agencies.  With this backdrop, there are three areas of legal changes on the horizon about which credit counseling agencies should be aware: 

(1)  Congress is considering a number of bills that would revise how financial firms and financial activities are regulated.  This includes the creation of a Consumer Financial Protection Agency that would regulate the consumer protection aspects of financial products and services for consumers;

(2) The Federal Trade Commission’s (“FTC”) proposal to amend its Telemarketing Sales Rule to address the sale of debt relief services and proposed rules to cover mortgage assistance relief services; and

(3)  Proposed bills and recent enactments on the state level related to state debt adjusting laws and mortgage foreclosure consultants. 

To be sure, there are other potential changes on the horizon, big and small, but these are the ones receiving the most attention and which would have the most widespread impact on nonprofit credit counseling agencies.

It can be difficult to predict which of these proposed changes will succeed and which will not.  There is a maze of legal and political issues underlying these efforts, most of which are unrelated to credit counseling.  Specific proposals, however, need to be carefully considered for unintended consequences.  The nonprofit credit counseling industry is, of course, heavily regulated like few other industries.  There are literally scores of federal and state requirements imposed on the operations of credit counseling agencies that already provide extensive protections to consumers.  These laws include layers of requirements which are already difficult and costly to digest and comply with.  The following chart provides an overview of the most notable of these requirements:

(Note: "•” indicates potentially applicable category of law and regulation. 
Will vary depending upon agency activities and others factors.)

Financial Education Debt and Budget Counseling Debt Management Plans Bankruptcy Counseling / Debtor Education Housing Counseling


    State Nonprofit Corporation Act (state of incorporation)


    26 U.S.C. § 501(c)(3) - Federal tax exemption under Internal Revenue Code Section 501(c)(3) is recognized only after a rigorous application and approval process through the Internal Revenue Service.
    26 U.S.C. § 501(q) - Enacted by Congress as part of the Pension Protection Act of 2006, establishes standards that a credit counseling organization must satisfy to qualify for exemption under section 501(c)(3) or 501(c)(4).


    11 U.S.C. §§ 111, 109 – Effective October 17, 2005, with limited exceptions, individual debtors under chapters 7, 13, and in some instances, chapter 11, must receive from an approved agency debt and budget counseling before they can file for bankruptcy and from a provider an instructional course concerning personal financial management before they can receive a discharge of their debts.      
    Interim Final Rule, 28 C.F.R. §§ 58.15 - 58.27 (71 Fed. Reg. 38076 (July 5, 2006)).      


    HUD Housing Counseling - Final Rule, 24 C.F.R. Part 214 (also see specific federal and state regulation for various types of specific housing counseling, e.g., HECM).        


    State Debt Adjusting Laws (approx. 49 states, applicability may vary).  
    State Money Services Business Acts (Approx. 48 states and DC) – Regulate money transmitting, etc. Limited applicability in some states due to exemption for “debt adjusters.”    
    State Credit Services Organization Acts (Approx. 40 states) – Regulate credit services and related activities including, in some cases, “debt adjusting.” Applicability will vary depending upon the state.
    State Mortgage Foreclosure Consultant Acts (Approx. 25 states) – Applicability will vary.        
    State Consumer Protection Laws (all states) – mini-“FTC Acts.”
    State Charitable Solicitation Registration Laws (approx. 40 states, applicability may vary).
    State Corporate Law / Authority to Do Business as Foreign Corporation (all states, depends on activities in the state)

Steps the Industry Can Take to Limit the Impact of Overbroad and Burdensome Regulation

While no list of suggestions can effectively capture all of the steps that may be taken to ensure the industry’s success, following are some steps the industry may be able to take to avoid getting caught up in new overbroad and burdensome regulation:

  • First and foremost, the industry must highlight the need for consumer protection and ensure compliance with existing regulations, as well as to continue to embrace and emphasize self-regulatory programs (such as industry trade association membership requirements and private accreditation programs).  The combination of existing regulation (which could still be modified to increase uniformity and consistency) and self-regulatory programs serves an important role in protecting consumers.  Existing requirements are comprehensive and cover numerous areas that a lawmaker or regulator may not even realize are already addressed.

  • Second, the industry must continue to promote research and actively engage policymakers.  Research and statistical or analytical data can be effectively used in advocacy efforts, in responding to media inquiries, and in public relations campaigns to dispel myths.  Research studies, such as the recent study on the effectiveness of bankruptcy counseling by the National Bankruptcy Research Center, can be critical to policy battles.  But not only should the industry focus on demonstrating the efficacy and benefits of its current program areas, it also could explore other areas such as the benefits of less-than-full balance repayment programs, the effectiveness of in-house single-creditor repayment plans, reverse mortgage counseling and other up and coming or established program areas.

  • Third, the industry must continue to invest in strong government relations programs – collectively and individually – such as the ones engaged in by industry associations and coalitions.  To support this advocacy, industry performance in assisting consumers, legal compliance, self-regulatory programs, and industry research must be communicated.  Moreover, the industry cannot be afraid to acknowledge that while they are nonprofit organizations, they also are running businesses.  In other words, it is okay to acknowledge that it costs money to provide services to consumers (at little or no charge) and to educate others on the impact of new laws and regulations that add significant costs to providing these services.

  • Lastly, credit counseling agencies must continue to deliver a high degree of service and satisfaction to consumers.  Success in the above categories depends upon consumers and lawmakers thinking highly of the contributions of members of the industry.  In today’s economic climate, this should not be difficult to maintain.

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Changes to the legal and regulatory landscape for nonprofit credit counseling agencies (and creditors) could change the ways in which you are able to assist consumers.  While some regulatory changes may be inevitable (and even supportable), the industry should work to steer lawmakers and policymakers away from proposals that could unintentionally hinder the industry’s provision of education and counseling to consumers in financial distress. 

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Jonathan L. Pompan, an attorney in the Washington, DC office of Venable LLP, represents nonprofit credit counseling agencies and others in a wide variety of areas including regulatory compliance, as well as in connection with federal and state investigations and law enforcement actions.  For more information, please contact Mr. Pompan at 202.344.4383 or jlpompan@venable.com

Jeffrey S. Tenenbaum, a partner in the Washington, DC office of Venable LLP, chairs the firm’s nonprofit organizations practice group as well as its credit counseling and debt settlement practice group.  

For more information about this and related industry topics, see www.venable.com/ccds/publications.

This article is not intended to provide legal advice or opinion and should not be relied on as such.  Legal advice can only be provided in response to a specific fact situation.