As Attorney General Tom Reilly’s office continues to investigate Agawam-based Cambridge Credit Counseling Corp.’s business practices, alleging they funneled millions of dollars to insiders and misled consumers into paying high fees, the company says it has changed its ways and is committed to the credit counseling industry and its clients.
On June 1, Cambridge Credit, a national nonprofit provider of credit counseling and budget planning services, reorganized its business structure and implemented a new fee and refund policy, which the company says will allow it to service more consumers.
The “75/50” plan consists of an initial fee of $75 and a maximum monthly maintenance fee of $50. However, the fee can be adjusted based on an individual’s ability to pay.
Chris Viale, acting president and chief executive officer of Cambridge Credit, said the sliding fee scale accommodates between 30 percent to 40 percent more consumers who may have otherwise had to file for bankruptcy.
Reilly alleged in an April 5 statement that the previous fees were exorbitant.
“Cambridge charges an up-front fee typically ranging between $200 and $500, as well as monthly fees of either $25 or 10 percent of the client’s monthly debt payment, whichever is greater,” the statement reads. “These are the same fees charged by a for-profit credit counseling agency owned by the insiders, John and Richard Puccio.”
The credit company, operating since 1996, has also implemented a 90-day refund policy compared to the industry norm of between five and 10 days, said Viale.
“We stand alone [with the refund policy],” said Viale.
If a consumer cancels their participation for any reason in the first 90 days of enrollment, Cambridge Credit will refund the initial fee of $75.
The changes come a few months after national corporations AmeriDebt and DebtWorks, Minnesota’s community-based FamilyMeans Consumer Credit Counseling Services and Cambridge Credit were questioned about their business practices by the U.S. Senate Government Affairs Permanent Subcommittee on Investigations.
Witnesses told the Senate panel in March that Cambridge Credit did not pay creditor bills on time and employees were told to give fake names when talking to prospective clients.
In April, Reilly’s office filed a complaint in Suffolk Superior Court and sued Cambridge Credit Counseling Corp. and its controlling directors and officers, John Puccio, Richard Puccio, Kurt Meyer and Viale, for breaches of fiduciary obligations and unfair and deceptive practices under Massachusetts charities and consumer protection laws.
In May, Cambridge Credit said it would “enhance the independence of its board of directors with four additional outside directors who will help to ensure that the organization pursues activities and functions within its [nonprofit] status and mission.”
Montieth Illingworth, Cambridge Credit corporate spokesman, said no announcement on new directors had been made as of June 11.
Reilly alleges specific violations against Cambridge Credit which include not operating to meet its charitable mission, but rather to enrich John and Richard Puccio and other insiders, reaping the regulatory and tax benefits of Cambridge Credit’s nonprofit status, while at the same time channeling Cambridge Credit’s revenues to for-profit companies owned by the Puccios and other insiders through a series of no-bid contracts, a $14.1 million “intangible asset” transfer and low- to no-interest loans. Reilly alleges that more than $60 million was channeled from Cambridge Credit to these for-profit companies in the period between August 2000 and December 2002.
Other alleged violations include charging consumers high fees for Cambridge’s credit counseling services, while passing on to the insiders’ for-profit companies an amount equal to two-thirds of those consumer fees. Company insiders also are accused of enriching themselves by drawing high salaries from Cambridge Credit while at the same time receiving salaries and dividends from the affiliated for-profit companies they own and control and failing to disclose all of Cambridge Credit’s related party transactions. Reilly also claims the company mislead consumers about the benefits they would receive as a result of joining Cambridge’s credit counseling program.
Viale said the new fee structure and refund policy were being considered before any allegations were made.
But one local credit counseling industry practitioner said the changes only came about because of the complaint from Reilly’s office.
“They’re [Cambridge Credit] doing it as a direct result,” the source said. “They are trying to react to the Attorney General’s Office.
Rep. John F. Quinn, D-New Bedford, co-chairman of the Legislature’s bank committee, said he is confident the Attorney General’s Office will complete a thorough investigation, but in the meantime he is happy to hear about some of Cambridge Credit’s changes.
“Changing the fee structure is a step in the right direction,” said Quinn.
The industry source said changing the fee structure is only one part of the solution.
“It’s enough to remedy the problem of too high fees being charged to the clients,” the source said. “But it doesn’t get to the heart of the complaint filed by the Attorney General’s Office.”
However, Cambridge Credit has said it will reorganize its relationships with its for-profit affiliates, which include Debt Relief Clearinghouse, Brighton Credit Management Corp., Brighton Debt Management Services, Cypress Advertising and Promotion, and the Cambridge Consumer Credit Index.
‘Black Eye’ for Industry
Corey Welford, spokesman for the attorney general, could not name a definite time frame of when the investigation would be completed.
“It’s an ongoing case,” said Welford.
He said the new fee structure and refund policy were not part of any agreement between Cambridge Credit and the Attorney General’s Office.
Quinn is looking to do more to combat fraudulent credit counseling agencies. Quinn has sponsored and co-authored a bill, currently before the Senate, that would require credit-counseling services to obtain a license from the state Division of Banks, making them subject to oversight by the division. The bill stipulates that all fees paid to a consumer credit counseling service must be deposited into a trust account at a federally insured bank and mandates that the consumer credit counseling service must provide clearly written consent and full disclosure forms to all clients outlining costs associated with participating in a debt-management program and any effect it may have on the client’s consumer credit rating.
The industry source said legislation is crucial in combating the fraudulent practices that have been going on for more than five years.
“You need good, strong legislation that can try to get to the heart of what they are doing wrong and make it illegal,” the source said.
The source said things have gone awry in the last five to seven years when a “new breed” of credit counseling agencies emerged. Counseling services always included in-depth analysis to find the root of the consumer’s debt troubles, the source said, and a client was educated with budgeting tools. But in recent years, some companies have instead pushed consumers towards the debt-management plans without any education because it is more lucrative.
Quinn said consumers should be able to trust credit counseling agencies.
“Some of the allegations are very serious,” said Quinn. “If they prove to be true, it is a black eye for industry. People should [be able to] have confidence in the industry.”
But Illingworth said the company has bent over backwards to evolve with the marketplace.
“Cambridge Credit is committed to this industry and its clients,” said Illingworth.
Viale said Cambridge Credit is staying abreast of all developments in the credit counseling industry.
“It’s safe to say we are hearing what each agency has to say about the industry as a whole,” said Viale.
The Internal Revenue Service has begun auditing some credit counseling agencies to determine if they deserve tax-exempt status.
“That is one of the areas that we are looking at for abuse,” said Peggy Riley, Internal Revenue Service spokeswoman.
Viale blames abuses at AmeriDebt for national companies, like Cambridge Credit, being investigated for wrongdoing, but stands firm that the allegations against the Agawam-based company are false.
While Viale said business has not been hurt by the recent allegations except for a few concerned customers, the industry source disagreed, saying that because of the negative publicity currently surrounding the industry, business has been down slightly even at agencies not accused of wrongdoing.
Viale said he expects to reach an agreement with the Attorney General soon and said Cambridge Credit plans to make sure the credit counseling industry moves in the right direction.
