PAGENO="0001" DEBT ADJUSTING BUSINESS ( 7O(~ i ;~ / DECI *961 T-TPAPJNGS ~JL~A Jt~JrO~rORE ~R0PERTY OF LUIC ~S UF COLLEGE OF ~OUO1 JE~ ~~I~TEE NO. 5 CAMD~, N. J. 03102 OF THE COMMITTEE ON THE DISTRICT OF COLUMBIA HOUSE OF REPRESENTATIVES NINETIETH CONGRESS FIRST SESSION ON H.R. 8929 TO REGULATE THE BUSINESS OF DEBT ADJUSTING H.R. 9806 TO PROHIBiT' THE BUSINESS OF DEBT' ADJUSTING SEPTEMBER 14 AND 15, 1967 Printed for the use of the Committee on the District of Columbia V~ DOC~ o G3/( / U.S. GOVERNMENT PRINTING OFFICE ID ~is5_/ ~ WASHINGTON :I~)67 V ~ PAGENO="0002" COMMITTEE ON THE DISTRICT OF COLUMBIA JOHN L. MCMILLAN, South Carolina, Chairman THOMAS 0. ABERNETHY, Mississippi ANCHER NELSEN, Minnesota WILLIAM L. DAWSON, Illinois WILLIAM L. `SPRINGER, Illinois ABRAHAM J. MULTER, New York ALVIN E. O'KONSKI, Wisconsin JOHN DOWDY, Texas WILLIAM H. HARSHA, Ohio BASIL L. WHITENER, North Carolina CHARLES McC. MATHIAS, Ja., Maryland B F. 515K, California FRANK HORTON, New York~ CHARLES C. DIGGS, JR., Michigan JOEL T. BROYHILL, Virginia G ELLIOTT HAGAN, Georgia LARRY WINN, JR., Kansas DON FUQUA, Florida GILBERT GUDE, Maryland DONALD M FRASER, Minnesota JOHN M. ZWACH, Minnesota BItOCK ADAMS, Washington SAM~STEIGER, Arizona ANDREW JACOBS, JR., Indiana B, S. JOHNNY WALKER, New Mexico JAMES ~r. CLARK, Clerk CLAYToN S. GASQUE, E~taff Director HAYDEN S. GARBER, Counsel SUBCOMiIITTEE No. 5 B. F. 515K, California, Chairmai& BASIL L. WHIT1~NER, North CarolinA FRANK HORTON, New York 0. ELLIOTT HAGAN, Georgia WILLIAM H. HARSHA, Ohio ANDREW JACOBS, Ja., Indiana GILBERT GUDE, Maryland E. S. JOHNNY WALKER, New Mexico JOHN M ZWACH, Minnesota II F PAGENO="0003" CONTENTS H.R. 8929 (Diggs), a bill to regulate the business of debt adjusting in the Page District of Columbia other than as an incident to the practice of law_ - 1 H.R. 9806 (Broyhill), a bill to prohibit the business of debt adjusting in the District of Columbia except as an incident to the lawful practice of law or as an activity engaged in by a nonprofit corporation or association - 1 Summary of State laws prohibiting or regulating the business of debt pooling 44 STATEMENTS American Association of Credit Counselors, Morris Rabinowitch, legisla- tive director (also president, California Association of Credit Counselors, and of Financial Counselors, San Francisco, Calif.) 62 Barden Investment Management Corp., Elliott Holland, general manager 93 Broyhill, Hon. Joel T., a Representative in Congress from. the State of Virginia 29 District of Columbia Government, Robert F. Kneipp, assistant corpora- tion counsel 38 Metropolitan Washington Board of Trade, Ralph E. Becker, general coun- sel, statement presented by Charles C. Coon, assistant executive vice president 152 MATERIAL SUBMITTED FOR THE RECORD AFL-CIO, F. H. McGuigan, legislative representative, statement 159 Amendments: American Association of Credit Counselors, suggested language for a bill licensing and regulating credit counseling and financial man- agement 82 American Association of Credit Counselors: Code of Ethics, adopted at Indianapolis, Ind., March 5, 1955 80 Suggested language for a bill licensing and regulating the business of credit counseling and financial management 82 Bar Association of the District of Columbia, John E. Powell, president, letter dated Nov. 14, 1967 to Chairman McMillan 169 Barden Investment Management Corp., Lawrence F. Scalise, attorney, statement 93 Blum, Miss Mary Agnes, letter dated Oct. 3, 1967 Hon. Joel T. BroyhilL.. 169 Budget Counselors, Inc., B. H. Feldman, president, statement 156 Cases included: Commonwealth v. Stone, 190 Pa. Sup. 17, 155 Atlantic 2d 453 56 Ferguson v. Kansas, 10 L. Ed. 2d 93, ~372 U.S. 726 63 Consumer Credit Counselcvrs, Decatur, Ill., Mrs. Josephin F. Shaffer, assistant general manager, letter dated August 14, 1967, to Chairman Sisk 143 Credit Management Co., Des Moines, Iowa, letter dated August 9, 1967, to Chairman Sisk 159 Department of Labor, Bureau of Labor Standards, "Summary of State Laws Prohibiting or Regulating the Business of Debt Pooling," July 1967~. 44, 168 (111) PAGENO="0004" IV CONTEWI'S District of Columbia Government; Hon. Walter Tobriner, president, Board of Commissioners: Letter dated May 1, 1967, to the Speaker of the House of Representa- tives, transmitting draft of proposed legislation (introduced as H.R. 9806) 37 Letter dated May 9, 1967, to Chairman McMillan, reporting on H.R. 8929 38 Family Financial Counseling Service of Greater Chicago, Price Patton, executive director, statement - 130 Federation of Citizens Associations of the District of Columbia, John R. Immer, president, and James A. Willey, chairman, law and legislation committee, report on H.R. 8929 -- 158 Finance Management Co., Rock Island, Ill., R. A. Bowers, general manager, letter dated August 18, 1967, to Chairman Sisk 142 Financial Adjustment Co., Minneapolis, Minn.: Genosky, C. T., president, statement 88 The story behind 90 Macomb Credit Adjusters, Mount Clemens, Mich., Erwin R. King, letter dated August 21, 1967, to Chairman Sisk 160 National Better Business Bureau, Inc., K. B. Wilson, president, letter dated September 18, 1967, to Donald J. Tubridy and enclosures 135 Navy Federal Credit Union, Ronald L. Shellings, director, Member Services Divisicn, statement 143 Standards for Advertising Services of Consumer Credit Counselin~g, issued jointly by Better Business Bureau of Metrol?olitan Chicago, Inc., and the Illinois Assn. of Credit Counselors 133 Stewart, Robert A., Esq., of Bogle, Gates, Dobrin, Wakefield & Long, Seattle, Wash., letter dated September 12, 1967, to Congressman Brock Adams, enclosing Washington State law on debt adjusting 162 Washington Star, series entitled "Debtor Beware," by Miriam Ottenberg - 7 Zimmer, Andrew P., attorney, statement 154 PAGENO="0005" DEBT ADJUSTING BUSINESS THURSDAY, SEPTEMBER 14, 1967 HousE OF REPRESENTATIVES, SUBCOMMITTEE No. 5 OF THE COMMITTEE ON THE DISTRICT OF COLUMBIA, Washington, D.C. The Subcommittee met, pursuant to notice, at 10 o'clock a.m. in room 1310, Longworth House Office Building, Hon. B. F. Sisk (Subcommit- tee Chairman) presiding. Members Present: Representatives Sisk (Chairman), Whitener, Walker, Horton, and Gude, also Representative Broyhill. Also Present: James T. Clark, Clerk; Hayden S. Garber, Counsel; Donald Tubridy, Minority Clerk; and Leonard 0. Hilder, Investigator. Mr. SISK. Subcommittee No. 5 will come to order. The first order of business before the Subcommittee this morning has to do with the subject of debt adjusting. There has been a considerable amount of discussion about apparent problems that have developed in the District of Columbia regarding this subject. Over the last several Congresses legislation has been introduced dealing with this subject. Early this session a bill, H.R. 8929, was introduced by our colleague from Michigan, Mr. Diggs, calling for the regulation of the debt adjustment business in t.he District. Without objection I will ask that that bill be made a part of the record. Later a bill, H.R. 9806, was introduced by our colleague from Vir- ginia, Mr. Broyhill, to prohibit the business of debt adjustment. With- out objection, that bill will be made a part of the record at this point. (H.R. 8929 and H.R. 9806 follow:) [H.R. 8929, 90th Cong., 1st sess., by Mr. Diggs on April 20, 1967] A BILL To regulate the business of debt adjusting in the District of Columbia other than as an incident to the practice of law Be it enacted by the ~5enate and house of' Representatives of' the United ~S~tates of America in Congress assembled, That as used in this Act the term~- (1) "Debt adjusting" means an activity, whether referred to by the term "budget counseling", "budget planning", "budget service", "credit advising". "debt adjusting", "debt counseling", "debt help", "financial adjusting," "financial arranging", `prorating", or some other term of like import, which involves a particular debtor's entering into an express' or implied contract whereby the debtor agrees to pay an amount or amounts of money periodically or otherwise to a person who agrees, for a consideration, to distribute such money among specified creditors in accordance with a plan agreed upon be- tween the debtor' and the person to whom the debtor makes or agrees to make such payments. (2) "Person" does not include an individual admitted to the bar of the United States District Court for the District of Columbia. 1 PAGENO="0006" 2 DEBT ADJUSTING BUSINESS "(3) "Partnership" does not include a partnership all the members of which are admitted to the bar of the United States District Court for the District of Columbia. Sze. 2. (a) No person, partnership, association, or corporation shall engage in the business of debt adjusting in the District of Columbia other than under the conditions and subject to the restrictions contained in this Act. (b) Any person engaged in debt management shall be deemed to be rendering financial planning service, but this Act shall not apply to the following when engaged in the regular course of their respective businesses and professions. (1) Attorneys at law. (2) Banks and fiduciaries, as duly authorized and admitted to transact business in the District of Columbia and performing credit and financial adjusting in the regular course of their principal business. (3) Title insurers and abstract companies, while doing an escrow business. (4) Employees of licensees under this Act. (5) Judicial officers or others acting under court orders. (6) Nonprofit religious, fraternal, or cooperative organizations offering debt management service exclusively for their members. (c) After January 1, 1964, it shall be unlawful for any person to engage in the business of debt management without first obtain a license as required in this Act. (ci) Any person desiring to obtain a license to engage in the debt management business in the District of Columbia shall file with the Board of Commissioners an application in writing, under oath, setting forth his business name, the exact location of his office, names and addresses of all officers and directors if an association or a corporation, and if a partnership, the partnership name and the names and addresses of all partners, and a copy of the certificate of assumed name or certificate of copartnership or articles of incorporation. At the time of filing the application the applicant shall pay to the Board of Commissioners a license fee of $50 for each office and an investigation fee of $100. At the time of filing the application the applicant shall furnish a bond to the people of the District of Columbia in the sum of $5,000, conditioned upon accounts entrusted to such person engaged in debt management, and their employees and agents. The bond or bonds shall be approved by the Board of Commissioners and filed in their office. No person, firm, or corporation shall engage in the business of debt management until a good and sufficient bond is filed in accordance with the provisions of this Act. (e) Each licensee shall furnish with his application a blank copy of the contract he intends to use between himself and the debtor and shall notify the Board of Commissioners of all charges and amendments thereto. (f) The license issued under this Act shall expire on December 31 next following its issuance unless sooner surrendered, revoked, or suspended, but may be renewed as provided in this Act. (g) The application shall be accompanied by an appointment of the Board of Commissioners as agent of the applicant for service of process in the District of Columbia. Service upon the Board of Commissioners shall be sufficient service upon any licensee under this Act. (h) Upon the filing of the application and the payment of the fees and the approval of the bond, the Board of Commissioners shall investigate the facts, and if they find that the financial responsibility, experience, character, and gen- eral fitness of the applicant and of the members thereof, if the applicant is a partnership or an association and of the officers and directors thereof, if the applicant is a corporation, are such as to command the confidence of the com- munity to warrant belief that the business will be operated fairly and honestly within the purposes of this Act and that the applicant or the applicant and the members thereof or the applicant and the officers and directors thereof have not been convicted of any crime involving moral turpitude, or that such person has not had a record of having defaulted in the payment of money collected for others. including the discharge of such debts through bankruptcy proceedings, the Board of Commissioners shall issue the applicant a license to engage in the debt mail- agement business in acccordance with the provisions of the Act. The Board of Commissioners may require as part of the application a credit report and other information. (i) Each licensee on or before December 1. may make application to the Board of Commissioners for renewal of its license. The application shall be on the form prescribed by the Board of Commissioners and shall be accompanied by a fee of PAGENO="0007" DEBT ADJUSTING BUSINESS 3 $50, together with a bond as in the case of an original application. A separate appli- cation shall be made for each office. SEc. 3. Any person lawfully engaged in debt management in the District of Columbia of at least two years immediately prior to the effective date of this Act shall be entitled to receive a license within the provisions of this Act by filing an application, furnishing a bond, and paying the annual fee as herein specified within ninety days after the effective date of this Act. SEC. 4. (a) The Board of Commissioners may deny, revoke, or suspend any license issued or applied for under this Act for the following causes: (1) Conviction of a felony or a misdemeanor involving mortal turpitude. (2) For violating any of the provisions of this Act. (3) For fraud or deceit in procuring the issuance of a license under this Act. (4) For indulging in a continuous course of unfair conduct. (5) For insolvency, filing in bankruptcy, receivership, or assigning for the benefit of creditors by any licensee or applicant for a license under this Act. (b) The denial, revocation, or suspension shall only be made upon specific charges in writing, under oath, filed with the Board of Commissioners, whereupon a hearing shall be had as to the reasons for any denial, revocation, or suspension and a certified copy of the charges shall be served on the licensee or applicant for license not less than ten days prior to the hearing. (c) No license shall be transferable or assignable. SEC. 5. Each licensee shall make a written contract between himself and a debtor and immediately furnish the debtor with a true copy of the contract. The contract shall set forth the complete list of debtor's obligations to be adjusted, a complete list of the creditors holding such obligations, the total charges agreed upon for the services of the licensee, and the beginning and expiration date of the contract. No contract shall extend for a period longer than twenty-four months. SEC. 6. Each licensee shall maintain a separate bank account for the benefit of debtors in which all payments received from the debtor for the benefit of cred- itors shall be deposited and in which all payments shall remain until a remittance is made to either the debtor or the creditor. Every licensee shall keep, and use in his business, books, accounts. and records which will enable the Board of Com- missioners to determine whether such licensee is complying with the provisions of this Act and with the rules and regulations of the Board of Commissioners. Every licensee shall preserve such books, accounts, and records for at least seven years after making the final entry on any transaction recorded therein. SEC. 7. (a) The Board of Commissioners may examine upon five-day notice given the licensee the condition and affairs of said licensee. Tn connection with any examination, the Board of Commissioners may examine on oath any licensee, and any director, officer, employee, customer, creditor, or stockholder of a license. concerning the affairs and business of the licensee. The Board of Commissioners shall ascertain whether the licensee transacts its business in the manner pre- scribed by law and the rules and regulations issued thereunder. The licensee shall pay the cost of the examination as determined by the Board of Commissioners. w-hich fee shall not exceed the sum of $50 per day of examination; said fee shall l)e deposited in the Treasury of the fnited States to the credit of the District of Columbia. Failure to pay the examination fee within thirty days of receipt of demand from the Board of Commissioners shall automatically suspend the license until the fee is paid. (b) In the investigation of alleged violations of this Act, the Board of Com- niissioners may compel the attendance of any person or the production of any books, accounts, records, and files used therein; and may examine under oath all persons in attendance pursuant thereto. SEC. 8. (a) The fee of the licensee shall be agreed upon in advance and stated in the contract and provision for settlement in case of cancellation or prepay- ment shall be clearly stated in the contract. The fee of the licensee shall not ex- ceed 12 per centum of the total indebtedness of the debtor. The fee of the licensee shall be prorated monthly over the life of the contract. In addition to the pro- rated amount, the licensee shall be allowed to deduct from the first month pay- ments a reasonable amount for filing fees, said amount not to exceed $25. In the event of total payment of the contract before the term of the contract has ex- pired, the licensee shall be entitled to an amount equal to not more than 25 per centum of the remaining fee. (b) Each licensee shall- (1) Keep complete and adequate records during the term of the contract and for a period of seven years from the date of cancellation or completion PAGENO="0008" 4 DEBT ADJUSTING BUSINESS of the contract with each debtor, which records shall contain complete infor- mation regarding the contract, extensions thereof, payments, disbursements, and charges, which records shall be open to inspection by the Board of (Jom- missioners during normal business hours. (2) Make remittances to creditors within two working days after receipt of any funds, less fees and costs, unless the reasonable payment of one or more of the debtor's obligations requires that such funds be held for a longer period so as to accumulate a sum certain. (3) Upon request furnish the debtor a written statement of his account each ninety days, or a verbal accounting at any time the debtor may request it during normal business hours. (c) No licensee shall accept an account unless a written and thorough budget analysis indicates that the debtor can reasonably meet the requirements required by the budget analysis. (d) In the event a compromise of a debt is arranged by the licensee with any one or more creditors, the debtor shall have the full benefit of that compromise. (e) No licensee shall- (1) Purchase from a creditor any obligation of a debtor. (2) Operate as a collection agent and as a licensee as to the same debtor's account. (3) Execute any contract or agreement to be signed by the debtor un- less the contract or agreement is fully and completely filled in and finished. (4) Receive or charge any fee in the form of a promissory note or other promise to pay, or receive or accept any mortgage or other security for any fee, both as to real or personal property. (5) Pay any bonus or other consideration to any person for the referral of a debtor to his business nor shall he accept or receive any bonus', commission, or other consideration for referring any debtor to any person for any reason. (6) Advertise his services, display, distribute, broadcast, or televise or permit to be displayed, advertised, distributed, broadcasted, or televised his services in any manner inconsistent with existing law. SEC. 9. (a) Any person, partnership, association, corporation, or any other group of individuals, however organized, or any owner, partner, member, officer, director, employee, agent, or representative thereof who willfully or knowingly engages in the business of debt management without the license required by this Act, is guilty of a misdemeanor and shall be fined not more than $1,000 for each violation or imprisoned for not more than six months, or both. (b) Any licensee under this Act who violates any provision of this Act is guilty of a misdemeanor and shall be fined not more than $1,000 for the first offense, and for each subsequent offense a like fine or imprisonment not to exceed one year, or both. (c) Prosecution for violations of this Act shall be conducted in the name of the District of Columbia by the Corporation Counsel or any of his assistants. [H.R. 9806, 90th Cong., 1st sess., by Mr. Broyhill on May 9, 19671 A BILL To prohibit the business of debt adjusting In the District of Columbia except as an incident to the lawful practice of law or as an activity engaged in by a nonprofit corporation or association Be it enacted by the ~Senote and House of Representatives of the United states of America in Congress assembled, That as used in this Act the term- (1) "Debt adjusting" means an activity, whether referred to by the term "budget counseling", "budget planning", "budget service", "credit advising", "debt adjusting", "debt counseling", "debt help", "financial adjusting", "financial arranging", "prorating" or some other term of like import, which involves a particular debtor's entering into an express or implied contract whereby the debtor agrees to pay an amount or amounts of money periodically or otherwise to a person who agrees, for a consideration, to distribute such money among specified creditors in acoerdance with a plan agreed upon between the debtor and the person to whom the debtor makes or agrees to make such payments. (2) "Person" does not include an individual admitted to the bar of the United States District Court for the District of Columbia. (3) "Partnership" does not include a partnership all the members of which are admitted to the bar of the United states Digtriot Court for~ ttio Digtr!et of Columbia. PAGENO="0009" DEBT ADJUSTING BUSINESS 5 SEc. 2. Except as provided in section 3, no person, partnership, association, or corporation shall engage in the business of debt adjusting in the Distirct of Columbia. SEC. 3. The provisions of this Act shall not apply to those situations involving debt adjusting incurred incidentally in the lawful practice of law in the District of Columbia nor shall anything in this Act be construed to apply to any nonprofit or charitable corporation or association which engages in debt adjusting even though the nonprofit corporation or association may charge and collect nominal sums as reimbursement for expenses in connection with such services. SEC. 4. (a) Whoever violates section 2 of this Act shall be subject to a fine of not more than $1,000 and to imprisonment for not more than six months, or to both. (b) Prosecutions for violatiomis of this Act shall be conducted in the name of the District of Columbia by the Corporation Counsel or any of his assistants. Mr. SISK. The~ Subcommittee, of course, will try to determine as nearly as we can the facts regarding this subject and what would be in the best interest of the people of the District of Columbia. Upon the development of the facts, to the extent that we can, the Committee, I feel sure, will proceed accordingly. Also at this time we will make a part of the record, without objection, a series of articles entitled "Debtor Beware," written by Miss Miriam Ot.tenberg, Staff Writer of the Washington Star, dealing with the subject of debt adjusters. (The series of articles follow:) PAGENO="0010" PAGENO="0011" BE BTOR B EWARE By Pulitzer Prize Winner Miriam Ottenberg STAR STAFF WRITER A series exposing the "debt-consolidating~ firms in the Washington area published by The Washington Star 1O~ 7 PAGENO="0012" 8 DEBT ADJUSTING BUSINESS Payments Adjustor Won't Solve Your Money Problems By MIRIAM OTTENBERG Star Staff Writer A plumber and his wife burdened with hospital ~ipenses for a new baby, saw their bills mounting and signed up with a nearby Maryland firm to "adjust" their debts. They were adjusted right out of their $4,000 trailer borne. A Distriet policeman, saddled with moving bills and getting further behind because his overtime stopped when be entered the police academy, also sought help from a so.called debt adjustor. He had paid in more than $250 before he found out only a few dollars had reached a creditor. A day worker, who prided herself on paying her bills promptly, listened to a debt adjustor's advertising and fl~ured she could save interest if she paid off everything in six months instead of 12 She wound up paying more interest because the debt adjustor neglected the first month's payment to take out his fee. These are typical victims of the debt adjustors, debt poolers, debt consolida- tors or pro-raters now preying on Washington area families. They are called by those names-and a few less flattering ones, such as parasites and profiteers of poverty. Actually, they're not interested in the true poverty class. They prefer people with a regular paycheck and a conscien- tious desire to extricate themselves from a mire of debt. They promise to consolidate bills Into one low monthly payment the customer `can afford, avoid garnishmentsand free the customer to live happily ever after. They put in no money of their own-no loan, no advance, nothing out of their pockets. For sending each creditor something -if the customer keeps paying-they charge a "filing" or "installation" fee of $25 more plus a percentage of the debt they are "adjusting"-usually from 12 to 15 per cent. If the customer stays with the adjus- ter to the end-and that's a big if-he may get his "filing" fee back, but from everything The Star could find out, he'll never get back a unsullied credit rating. Debt consolidators are capitalizing on the money problems that have made the personal bankruptcy rate sour across the nation, fllled.the divorce courts with debt-prompted family crises and contri- buted to suicides, alcoholism and men- tal illness. The runaway family debts that prompt these excesses are usually blamed on too-easy credit, too avail- able charge accounts, the plethora of credit cards and the go-now-pay-later philosophy. Problems that are unique to the Washington area make the Nation's Capital even more attractive to the debt adjustors. Here they find the transients -Government people coming and going with each administration, service people putting in their tour of duty beside the Potomac, people who run ~into heavy debt while closing their home ~back home and finding a place to live close to schools and stores here. DEBTOR BEWARE PAGENO="0013" DEBT ADJUSTING BUSINESS 9 In the Washington area also they find the innocent and the ignorant, the Southern families migrating northward, the small-town girls pounding Govern- ment typewriters in the big city. The largest of the debt firms now doing business in this area, Credit Advisors, Inc., has described its cus- torners as "debtors who are relatively unsophisticated in matters relatmg to their outstanding debts, interest rates, penalty charges and the like." The description was given in a suit filed here last month by Credit Ad- visors against another debt adjuster- Credit Budget, Inc.. In the course of ac- cusing its competitor of "unfair com- petition and. "misappropriation of trade secrets" Credit Advisors pulled back a bit of its own veil of secrecy. In the suit, Credit Advisors empha- sized how much it had spent on adver- tising and how much value it placed on its advertising copy used "repeatedly and successfully." Without saying how much it harvested from "extensive advertising," Credit Advisors charged that its competitor bad already derived "large income, profits and advantages" which rightful- ly belonged to Credit Advisors. The suit predicts the future will find more rather than fewer debt consolida- tors in the Washington area. Credit Advisors says Credit Budget is going to expand its debt adjustment business unless restrained. The court action was cited by Credit Advisors' local attorney as the reason why the firm couldn't answer any of a dozen questions asked by The Star about its methods of operations-easy questions like how much time the "counselors" spend on a customer and whether they ever give the customer a budget to follow to help get himself out Df debt and why they don't say in their ads how long it will take to pay off a $1,- 000 debt at $15 a week. Since Credit Advisors wouldn't talk, The Star got the answers to these and other questions from the customers. None of those interviewed had ever been given a budget to follow. More time reportedly was spent by the coun- sellor on how much money the custom- ers could pay to Credit Advisors than how they were going to live on what was left. As for how long it would take to pay off a $1,000 debt at $15 a week, the answer was obvious-a discouraging span of months, particularly after interest and Credit 4dvjsprs' tees were piled onto the indebtedness. There was no point in even asking about the advertised promise of "gar- ~iishments avoided" after The Star learned one creditor after another has from l2to15percent~ If the customer stays with the adjus- ter to the end-and that's a big if-he may get his "filing" fee back, but from everything The Star could find out, he'll never get back a unsullied credit ratine. for deceptive acts, although salaries continue to be garnisheed and automo- biles repossessed despite the services of the debt consolidators, the bait of a debt-free future continues to lure cus- tomers here. Adjustors Increasing Despite a widespread impression that the debt consolidators are on the wane here, The Star found just the opposite tobetrue. - The regional credit sales manager of a national chain of department stores reported more of the store's customers in this area had become involved with the debt adjustors in the last two or three years than ever before. He attri- buted the rise to the "tremendous advertising program." Department stores, discount ap- pliance stores and finance companies in the area all note a growing trend toward the debt consolidators-a trend they don't like at all. Why are more debt adjustors thriving here when they're on the wane in many states? They came to Washington after they were outlawed or at least regulat- ed elsewhere. Debt adjusters by any name are banned in 21 states, including Virginia. They are regulated in 10 other states, which discourages some-but not all-of them. Rhode Island is among the states that prohibit them but several outfits oper- ate a mail order business from there, getting their customers from every- where but Rhode Island through magaz- ine and newspaper advertising. Since they can operate freely here, at least one of these Rhode Island-based outfits lists a Washington address and tele- phone number. Repeated calls to that number have produced nothing but a tape recorded announcement of a number to call-a Rhode Island num- ber. Ban in Baltimore Debt adjusting firms are banned in Baltimore, which is one reason why more of them are opening for business in nearbh Maryland. Credit Advisors of Baltimore, Inc., now operates from Mt. Rainier, Md., and another has estab- lished itself as Credit Advisors of Laurel, Md. Unprotected by any law, Washington and nearby Maryland debtors likewise lack the free budget counselling service that puts the paid debt adjustors out of business almost as fast as a law. PAGENO="0014" 10 DEBT ADJUSTING BUSINESS When a man, free of charge, can get counselling on his debts and expert help in reducing his indebtedness to a mana- gable level, when all he can afford to pay on his debts goes to his creditors, he has no use for a paid debt adjuster. Some 63 communities across the coun- try provide that free service to debtors now-but not Washington. That's why we have become a haven for debt adjusters. By MIRXAM OTTENBERG ~tar Staff WrIt~ Debt. consolidators can't guarant~ protectlóti from garnsthment and dunning. be~ cause' most creditors refuse to do business with them, -a Star survey shows. The survey covered depart- ment ~nd discount stores,. areawide chain stores and national chains; credit unions and banks, finance and loan companies-a cross-section of creditors. Although the stores and some lenders accept partial payments sent in by the debt adjusters, they will ,continue to dun the debtor, not the adjuster, ii a regular payment is missed. When a customer tells his reditors a debt arranger i~ now handling the bills, the reply is always the same: "Our contract is with you, not anybody else." That's why the Washington Better Business Bureau suggests to anyone asking about debt consolidators that the check with his creditors before signing up with a debt adjusting !irm. In most cases, the BBB is aware, the creditor will discourage him from signing. "You shou!d understand," the BBB answers inquiries, "that If you go to a bill consolidator with 10 creditors, you come out with 11." The debt adjusting agency theoretically pools or consoli- dates a debtor's bills and pro- rates what the debtor can afford to pay among all his creditors. That would mean a slice for each of them which, in theory, a creditor would accept eagerly to. recover something on an over- due bill. Also theoreticilly, the size of the payments is worked out through days or even weeks of negotiation between the debt adjuster and the creditors. But that'~ only In theory. In practice, the adjuster Just sends the creditors a formsaying what they're going to receive and asking them to accept it. All the creditors checked by The Star said flatly they throw away the form and make no agreement witi the paid justers. One went even further. While talking with The Star, a finance company creditor manager~ found in his mall a notice from a ~ebt'- adjuster. that he would receive $5 a month In payment for a $174 television set bought only two months earlier. "I'm going to send the check back," the credit manager said. "We Just checked this custom- er's credit in February. If he can't pay $17 a month now, we'll have to take back the set." DEBTOR. BEWARE Adjusters Shunned By Most Creditors. PAGENO="0015" DEBT ADJUSTING BUSINESS 11 Stores Willing to Help All stores checked by The Star said if the debtor had told them he was in trouble and wanted to pay less until he was over the hump, they would have gone along with him if at all possible, And usually it's possible. Unless the debtor is a known deadbeat who shouldn't have been allowed to buy on credit in the first place, most stores will skip one or two payments until a customer gets back on his feet aud tack those payments onto the end of the bill. Or they'll accept token payments for a while. Banks may be able to arrange refinancing. Credit unions will l~elp through counseling and negotiating with other creditors. Some merchants will cooperate with customers faced with an unexpected expenses by taking back the merchandise and marking it as a cancellation.- saving their customer the stigma of a bad debt. Several businessmen stressed that the man or woman who goes to a debt consolidator, is usually the very type who would get the most sympathetic hear- ing from his creditors because *he's conscientious about his debts and concerned about maintaining his credit. * More than one creditor added, however, that a debtor ruins his credit by seeking the help of paid adjusters. A loan company spokesman said he will never approve another loan, for any customer who has gone to a debt consolidator. Some stores with complex bookkeeping systems expressed concern-for customers lulled into. a false sense of security when they: assume the debt consolida- tor ~has taken care of everything because they are not dunned: It may, be as much as three month~ before a store's Recount- ing machinery catches up with the debt consolidator's shrunken payments ,.and the. c~btor is dunned. A mail oi~der house com- plained that customers who go to debt adjusters here may not get credit even' for the short payments because the checks come in without the bill, without the customer's code number and sometims even without hiS home address. Several creditors have been made rueful~y aware that the debt consolidators instruct their customers to have nothing to do with their creditors. It doesn't make a store official any hap- pier to have a telephone banged down, when he calls someone who owes him money. Creditors don't like a middle- man, coming between them and their customers. They don't like hearing a customer say,"But I paid the debt pooler every week. I don't understand why he hasn't paid you." And creditors recog- nize with the cynicism born of txperience that the creditor who screams the loudest and duns his customers the most will get the largest slice of the available money. They don't like any part of it. A number of firms make a practice of telephoning a cus- tomer as soofl as a debt consoli- dator sends in the notice that from now on the consolidator will be paying the bill-or part of it. Credit managers urge their customers to get clear of the debt adjusters. They point out that the customer cOuld pay off his smaller bill~ with the money he's paying these people to write che~s for...~..... The AFL-CIO Executive Council has gone on record against the debt adjustment business' as an arrangement which, in too many cases has~ turned out to be an "abusive scheme" for deceiving and overcharging the debtor. The debt adjustor, the council said, frequently imposes a PAGENO="0016" 12 DEBT ADJUSTING BUSINESS heavy economic burden on the already overloaded debtor who gets no effective relief In return since his property may be seized and his salary attached anyhow. Even the best intentioned and most extensively regulated prorater, it Was found, can't render effective relief without the consent of the creditors. $ince The Star found that' most creditors here don't consent and the proraters are free to operate any way they want here, labor's warning is particularly mean- ingful in the Washington area. A formal statement from the AFL-CIO executive council concluded: "The AFL-CIO, therefore, is of the view that the debt adjustment business, regulated or unregulated, is not economically or socially desira- ble as a commercial activity and should be eliminated." The statement came out In 1961 and Leo Perils, national director of the AFL-CIO Depart- ment of Community' Services, said that's still the official position. "We're against debt consolida~ tors," he explained, "because they atd anetherclebton top of all the others. They don't sOlve the problem." Story of One Brochure The largest of the debt adjust- ing chains tries to give the impression that the Labor, Department takes a different view. The Barden Investment Management Corp., which is under the same ownership as Credit Advisors, Inc., issued a brochure which played up this quotation from the Labor De- partment's Bureau of Labor Standards: "If honestly operated, these agencies can perform a real service for persons deeply enmeshed in debt." The quotation, it developed, was only a fragment of the whole message, like the one favorable line in a column-long unfavorable movie review. The "if honestly operated" sentence was followed immedi- ately by this: "Unfortunately, this has not always been the case. Sometimes the money has not been paid to the creditors at all, or only part `of it paid.., Frequently, creditors refuse to participate in the debt pooler's plan but the agency does not so notify the debtor. "On many occasions the debtl poolers have paid themselves their entire fee first, and it has~ been some time before money' was available to pay the credi.~ tors. "Accepting the services of i debt pooler has not always prevented garnishment proceed- ings. Frequently the debtor finds that instead of getting out of debt, he simply has another creditor-the debt pooler. "Because of the distress caused by unethical debt pool- era, many states have found it necessary to take legislative action." The debt consolidator's bro- chure which neglected to include this part of the Labor Depart- ment's statement waxed en- thusiastic about the debt man- agement company's contribution to the debtor's welfare. "Perhaps the agencies (sic) most important function," the Barden brochure stated, "is providing the debtor with a learning experience. With help, the debtor learns by the judi- cious handling of his monies to unentangle himself from the nightmare of oppressive' debts. He finds himself no longer a victim of a too easy credit system; but, instead, master of his own financial ship." Maybe, but The Star found a number of debtors whose "learning experience" consisted of plunging deeper Into debt by dealing with a paid debt adjus- tor. PAGENO="0017" DEBT ADJUSTING BUSINESS 13 By MIRIAM OTTENBERG Star Staff Wraer One large mail order house reports more customers are getting jnvolved with d~bt ad- justers. In the Wash1~gLOn area than `n~Where,,else~1fl the'Maine- to W~t Virginia region. Like area business leaders, the mall o!'der company spokes~- man noticed more debt-con-- solidated customers here now than two or three years ago. Nobody knows exactly how many debtors have signed up with the adjusters here, but the largest of them, Credit Advisors, Inc., claims to have 5,000 cus- tómers in~ the city and nearby Maryland. Credit Mi4eorS, however, has no monopoly on custorners~ as dozens of complaints reaching The Star indicate. In The Star's collection of complainers are several who blame their financial nightmare on a' firm manned most days by an answering service. Before getting into the debt adjusting b~Isiness, the owner of this firm pleaded guilty to mail fraud ill Baltimore in 1965 and received a suspended sentence. Others are stifi smartthg under losses suffered from two firms convicted here last year. Some complained of being plunged deeper into debt by newer arrivals in this wide-open market, while several `blamed the loss' of their cars and their credit on firms that have now moved On. Among those who brought their' troubles to - The Star"s Action Line was one invoi~!ed, by long distance. A divorcee with three children to support, she agreed to pay $35 a week to Nationwide Acceptance; 1nc~ on the understanding that the firm would start paying her bills as soon as she sent in her first payment and payment books. When her first payment pro duced nothing but duns from h*creJitors, she scrambled to find money to pay them and started trying to get her $35 hack `from the debt consolidator. Calling the firm's Washington office brought only a tape-re-- corded message to telephone a number in Cranston, R.I. Na- tfdnwide is one of several debt adjustment outfits now being investigated by the Postal In- spection Service. in~açIdition to. Action Line amers, ~he dovered other debtor victims ~ checking Neighborhood L~e,g~1 Services offices, credit Unions and creditors who took ~ty, on families in financial troji)le$. ~ )iumber of thgse interviewed ~p6ke of other families they `knew who had also been vic- timized and sometimes forced to pay up to $150 to extricate themselves from the debt con- sqfldater. More often' than not, however, these victims don't complain public1y~ Suffer in Silence Attorneys, counsellors and investigators gave various reasons why victims suffer in silence. One said victims have been so brain-washed by fast-- talking debt adjusters that they DEBTOR BEWARE ~onso1I I dotion F i ms .1 ncreasi ng. `Clientele. 84-181 0 - 67 - 2 PAGENO="0018" 14 DEBT ADJUSTING BUSINESS are easy to convince that what- ever went Wrong was their own fault. Thus, when creditors start dunning them again, the debt, adjuster often says they are to blame for missing a pay- ment. Since they have no re- ceipts to prove they paid, they swallow the story. Others know they have been taken but are too ashamed to tell anyone either that they sought help with their debts or put their trust in the wrong place. What makes them turn to a debt adjuster? Either misman- agemeiit or misfortune has overstrained their resources. They may have over-extended themselves because credit is too easy to get and have long forgotten the old maxim about not buying anything you can't afford. Bordering on Panic Just as often, however, a sudden illness in the family has brought unexpected demands. Or income has shrunk through lost overtime or lay-off. They are strapped but not poverty- stricken. Most of the victims interviewed were in the $6,000 to $10,000 income class. Some made a bit less and, at the other end of the scale, an $18,000 victim was reported. Fear bordering on panic drove them to the debt poolers. some were afraid of being fired because most large em- ployers follow a standing rule that if garnishment proceedings are started against an employe, out. he goes. m~rè~the' car they had to have for their work would be repossessed.' And some worried about their crèdlt-the charge accounts they counted on to keep their children fed and clothed. They could see debts mount- lag. They `kneW they couldn't pay `all the, bills, that the next notice of. an `overdue account would be less ,polite. Some in sensitive' government jobs wor- ried about losing their security clearance. Less pressed but looking to the future was the engaged couple who wanted to start married life in solvent blessed- ness by pooling and paying off all their bills now. They not only got further behind but nearly lost the groom's car. - Youthful inexperience brought some of the `victims to the pro- raters. A 17-year-old couple, just married and up to their necks in debt for trousseaa and furniture, thotight"the debt- con- solidator ~ould"pay off alI'thëlr bills at once and then they would gradually repay him. Th~üñg~liWei~iiJi~ut to pay their $59.32 installment on their car but the debt-ad- justing salesman told them to give him the money and he would take care of it. There- after, they started sending the debt consoliditor a $31 money order each week. They had paid out more than $250, when they began getting calls from everybody they owed. Their friend, the debt adjuster, told them not to worry because he was taking care ot every- thing. The rude awakening came when the bride's mother, who had signed for the car because the girl was under age, was called at' her job and Informed that her sa~ary would be gar- nisheed' if she didn't make a'car payment at once. In three months, the debt consolidator had paid $7 on the car-not even the $5L32 install- ment the couple had turned `over to him on the night they signed his, debt adjusting con- tract. In almost every case inves- tigated by The Star where the PAGENO="0019" DEBT ADJUSTING BUSINESS 15 debtor lost by dealing with a debt adjuster, genuine coun~ seling and some frankness with creditors would have given the story a different ending. But their fear and desperation made the debtors tongue4ied and wary of their creditors. Sometimes, a fellow worker will convince someone a debt pooler will solve all their money problems just as his own prob- lems have been solved. That's how a Rockville, couple with a new_baby~gnt involved~ .`me~oung ~iildT~an at her.husband's,place of work told him how much help he was getting from a debt conso11da~ tor. She didn't knOw then that the debt firm would deduct from $5 up to $100 from a debtor's bill as a reward for referring other customers. She and her husband signed a contract to, pay. ~$43 a week until ali their bills were paid Within a month, they were being dunned by their creditors. The debt consolidator told her the creditors were just trying to get more money out of her and she wasn't to pay any attention to them. Trailer. Repossessed "Then, on May 6, 1966," the wife said, "our trailer was re~ possessed. The man gave us 15 minutes to get our furniture and baby out of' ~ur home. A few weeks later, our car was taken from us. I called all our creditors and found that none of them had gotten"any of the money we paid to the debt ad juster. "We lost everything we had. Our credit was ruined. We didn't even have, money, for food. It's been' over a year now `and we're just, getting back on our feet. I'm "glad of just ofle thing I `think I would kill my- self if I had taken even $5 to refer anyone else to these people." Another~ young couple also learned the hard way. In seven years of marriage, they had never been in a financial bind until moving expenses ate up their reserves and a debt pooler promised to bring their bills up to date. "This man sounded on the up..and-up but after I. start~ed payin~ out $65 every two weeks, the bills I received were the same or larger than the ones I `had before I started," the hus- band said. Bank Sends Letter "These people. gave me the impression that all my creditors would be satisfied Immediately but none of them were," he went on. "I ~figure the $260 I have given, him was just pay- ing his commission." He was shaken when the bank he owed money back home sent him a copy of a letter the bank had written to notify the debt adjuster the bank refused to enter into an arrangement with him and "payments. will be expected as contracted for by the borrower." Finally, one of his creditors, a one-stop shopping center, warned him on debt consolida- tors. ±~Wh~ .~ ,d_~ou~pay them?" thë~ center's cIF'üimniger asked him., "Pay us directly and if you c~n't, just `call and tell us. We'll work something out." The wife, picked up the story there. "If it hadn't been for the way that credit manager helped us," she said "we might still bih~th"that so-c~á1l~ debt pooler. YQu know, you `don't think pf a ~creditor as a mend. You avoid him. "Now I reel that if we have a problem, `we are going to level with our creditors. They'll do ~~re for us than any debt adjuster. At least, that's whet happened thus." PAGENO="0020" 16 DEBT ADJUSTING BUSINESS DEBTOR BEWARE Tricky Wording Baits The Adjuster's Hook By MIRIAM OTTENBERG Star Staff Writer A debt consolidator convicted of mail fraud blames carefully worded advertising and double- talking "counselors" foi~ giving debtors the false impression that debt adjusters will pay all their bills now and collect from them later. It's a matter of total impres- siofl, explained the former consolidator. Neither the ads nor the salesmen promise in so many words that the debt pooler will advance any money. The fact is, though, that many debtors start out believing that, and nobody disabuses them. Victims interviewed by The Star said they thought all their creditors would be paid off at once and they would reimburse the debt adjuster in easy stages. That's how they misinterpreted the ads that say, "If you owe $1,000, pay as low as $15 a week." The ex-adjuster illustrated the technique used with this phrase from his former spiel; "At no time do we advance any cash directly to you." True enough, but it leaves the debtor with the impression that while he's not going to get any cash, his credit tors will. Victims cited such advertisjng messages as "garnishment avoided," "no co-signers or security" and "now you can pay all your bills regardless of condition" as meaning-to them, at least-that the debt adjuster would take care of everything for them. Even the phrase "not a loan" failed to straighten them out since they didn't expect any loan in the sense of cash. From the former debt adjus- ter, from federal investigators, from victims and from the spiels of the pro-raters themselves, The Star collected these tricks of the debt-adjusting trade: THE COME-ON In addition to newspaper, magazine, radio and television advertising, the debt adjusters solicit prospects by postcard. They get names from court records of people sued for debt, from telephone crisscross (street address) directories for "good" neighborhoods and from some loan companies with whom they have an understand- ~g. Post cards to prospects simply say, "Please contact me on a matter of mutual importance." If the prospect is curious enough to call and ask for the man whose phony name is listed on the card, the salesman goes right into his opening pitch. "We understand from a mutual friend that you're having a little problem with some of yoUr bills. We wonder if we could be of service to you." If the prospect starts asking questions, the salesman knows he has hooked a live one and immediately makes a date to explain "exactly what we're going to do for you." Debt adjusters who rely most on radio and television promo- PAGENO="0021" DEBT ADJUSTING BUSINESS 17 tion usually have their salesmei~ cruising the area so they can speedily contact anyone who calls in response to a broadcast before he changes his mind. Most of the victims interviewed by The Star said a salesman or "counselor" came to their home within half an hour of their call expressing interest. In every case, their visitor was more salesman than "coun- selor." In the 20 to 25 minutes he stayed with them, he (1) found out how much they owed, (2) how much they used for living expenses, (3) how much money they could give him that night and (4) how much they could pay weekly. As soon as be had their names on a contract, he rushed off with their payment books and their first payment. Those who described the encounter said the salesman talked so fast they never had a chance to ask questions about how their money was to be used. All one woman remembered was that she had only $70 in the bank and the salesman took $60 of it. Several victims were positive that the salesman had told them that payments to all their credi- tors would start immediately. They found out soon enough that that wasn't true. The come-on that requires the least salesmanship and nets an important share of the customer is the referral technique. Debt- ors already signed up with debt firms will either get a small check to reward them for each new customer they refer or anywhere from $5 to $100 will be deducted from their outstanding debt. THE SPIEL Once he faces a prospective customer, the "counselor" finds some negative selling frequently pays off. "Shame on you," he chides the bill-weary prospect. "Poor management got you into this. You really don't need our services. With what you make, you could take care of all these bills yourself." The prospective victim falls for the reverse psychology. "No, I can't," he says, right on schedule. "My wife blows everything I make and forgets o enter the checks." "Well, maybe we can help you after all," the salesman con- cedes and the contract is signed. Sometimes, there's a more direct sales pitch. "You pay us and we'll take care of all your bills. You'll be out of debt in half the time it would take by your- self." "Within four weeks all your creditors will be paid and you'll be on easy street." "Be- cause of our reputation and volume, we can work better in your behalf than you can for yourself." "One check to the store covering many accounts will be more acceptable than your one little check covering only part of your bill." (Not true, the stores say.) THE CONTRACT Since they base their fee on what the debtor owes and they can collect, the adjustors try to include everything in their con- tract - even car payments that must be paid in full and on schedule. They will pro-rate all the debts whether or not that's the right solution for the debtor. It's always the right solution for the pro-rater. The to bind the debt9~j~y~ a con a warning~~"This contract cancellable only by 90 days' written notice." That's on the Credit Advisors, Inc., con- tract, and debtors get the idea they have to pay to get out sooner, but a spokesman for Credit Advisors, Inc., insisted that the firm never sues to col- lect. PAGENO="0022" DEBT ADJUSTING BUSINESS 18 When: a debtor plugs along with his weekly payments to the debt adjustor until the end is in sight, he may be kept on the hook by an informal letter in longhand from a "counselor." "In reviewing your account," the debtor is told, "I find that I can now reduce your payments to $13 per Monday. If this will help you at this time please sign and return the enclosed" What sounded as welcome as a gift actually meant the debtor was stringing out his payments longer and increasing his inter est And that friendly letter virtually invited the debtor to take on a new load of debt. The contract sets up a pay- ment schedule for the debtor but says nothing about how the debtor is supposed to live while he's meeting that schedule Theoretically, the debtor is counseled about his living expenses but since the "counse br" is more con man than economist, he sets up a budget so unrealistic that.even the ~nost determined debtor is rarely able to meet it. A GS-6 Navy stenographer with take home pay of $340.80 a month signed up to pay the debt adjuster $170 a month. When her rent was deducted from what was left, she had $90 a month to cover food, clothes, medical bills, cosmetics and car mainte- nance. Obviously, she couldn't make it. Nor can others. Many write off the fifing fee they paid the debt adjuster as a bad guessand * look for a more realistic way to get out of d.t~t. AFTER THE CONTRACT Both debtors and creditors must be pacified, when bills aren't promptly paid by the debt adjuster. Credit Advisors ban- dlés the complaints they know are coming with a 16-point sheet of "customer advice." In addition to cautioning customers against buying anything or payingany creditors without checking witl~ Credit Advisors first, the "customer advice" warns: "There may be a possible negative reaction from your creditors at first. There may be harassing phone calls at first. There may be routine duns and delinquent notices at first. It takes four to five weeks to get all creditors notified and make arrangements with them after the first full payment." As for the creditors, most debi adjusters seek to pacify them by giving the biggest payment* to the one who bothers the cus- tomer most. Doctors are put at the bottom of the list on the theory that you can't -repossess a baby or an appendix. Sometimes they can forestall creditors a while by saying they are cleaning up the small bills first and if he'll just wait a while, he'll get the biggest slice of the debtor's payment. When the creditor gets tired of waiting, he sends the debtor a summons to appear in court to answer a judgment or garnish- ment. The debtor sends it on to the debt adjuster, who may try to get the creditor todrqpthe case. If the creditor refuses, some debt adjusters fail to tell their customers and the case is lost by default because the debtor isn't there to defend himself. The debtor learns what happened when his salary is garnisheed or he's notified there's a judgment outstanding against him. Both dbtors add Action Line, in behalf of debtors, have run into the same answer when things go wrong. It was used when a woman discovered the PAGENO="0023" DEBT ADJUSTING BUSINESS 19 figures had been changed on her contract after she signed. It was the explanation given Action Line after a car on which the debtor had paid regularly via DEBTOR BEWARE the debt consolidator was repos- ,sessed. Said the debt consolidator: "The employe who did that has been fired." Firms Seek Controls To Forestall a Ban By MIRIAM OTTENBERG Star Staff Writer The commercial debt adjust- ers, who make a tidy living from the fees they charge debtors, are trying to stay in business by the unique device of campaigning for laws to reg- ulate themselves. Since the adjusters, also known as debt consolidators, managers, liquidators, poolers and pro-raters, are now out- lawed in 21 states, they strive to forestall more such laws by pushing regulation as an alter- native. They were behind efforts here to get laws regulating them. They didn't succeed but they confused the issue enough through several sessions of Congress to prevent passage of a law to put them out of busi- ness in the District. They succeeded in pushing through a regulatory measure recently in the state of Washing- ton-the 12th state to regulate to some extent rather than ban. They are making a determined push to keep Connecticut among the regulated states while the Hartford Times editorially cam- paigns for Connecticut to be- come the 22nd state to prdhibit debt pooling. To the debt adjusters, Mary- land is very much a key state, since Baltimore already out- laws them, and they don't want the rest of the state to do likewise - particularly when business is booming for ex- `Baltimore firms soliciting Wash- ington area debtors from new locations in Mount Rainier, Hyattsville, Laurel and Marlow Heights. Ci~edit Advisors Inc., the largest of the adjuster firms with several offices in nearby Maryland as well as Washing- ton, boasts of supplying every member of the Maryland Leg- islature with information on regulating the consolidators. They didn't win regulation at the latest session of the legis- lature, but you couldn't say they lost. A bill to outlaw debt con- solidation throughout Maryland died. Dr. Arthur Dorman, Prince Georges County delegate in the Maryland legislature, had in- troduced the outlawing measure and was joined by two other delegates concerned about debt poolers in their counties. Their combined measure passed the House, but opponents had flown in a spokesman from the Mid- west to testify against it, and the bill was "lobbied to death" in the Maryland Senate. Dr. Dorman said he and his col- leagues are going to try again at the start of the next session. The abuses of debt adjusters, from back-breaking, fees to pocketing of funds entrusted to PAGENO="0024" 20 DEBT ADJUSTING BUSINESS them, began prompting mea- sures to prohibit the business in 1955 when three states- Ma in e, Massachusetts an d Pennsylvania-outlawed them. A year later, when Sen. Jacob K. Javits, R-N.Y., was New York's attorney general, that state outlawed them. At the time, Javits faced head-on the issue of regulation versus pro- hibition. "As a matter of basic policy," Javits said, "I am opposed to outlawing any business, yet my office could suggest to the legis- lature no practical way to regulate properly such activi- ties." Baltimore's Experience In Baltimore, City Councilman Leon A. Rubenstein did the same kind of soul searching as Javits bad done a decade earlier in New York and arrived at the same conclusion. Rubenstein, an attorney, got interested in the debt adjust- ment business when several clients complained that money they gave the pro-raters to spread among their creditors never got that far. After he found these firms were handling other people's money with no control whatever, he announced that he would introduce appro-- priate legislation. Predictably, he was contacted at once by a debt pooler who said he wanted to cooperate and had just what Rubenstein would want-a nifty bill to regulate the business. After thinking it over, Rubenstein drafted an ordinance to get them out of town and both proposals went to the City Council Judiciary Committee. The council chose to outlaw them, but the debt poolers made one more pitch. They tried to persuade Baltimore Mayor Theodore R. MeKeldin to veto the ordinance. The death knell for the debt poolers in. Balti- more was sounded at a mayor's hearing where the Legal Aid Bureau, a Bar Association com- mittee, the Better Business Bureau, installment houses, finance companies, labor unions and retail merchants all urged the mayor to sign the ordinance. He did. States Join Ban The move by state legislatures to outlaw rather than try to control the debt poolers has attracted more advocates every year. Virginia and Georgia join- ed New York in outlawing them in 1956 Rhode Island started out among the states regulating them but switched to an out- right ban and now is fignring out what to do about the debt poolers who use Rhode Island as home base but prey on debtors all over the country- including Washington. Other states which now for- bid commercial debt consoli- dators are Arkansas, Delaware, Florida, Kansas, Missouri, New Jersey, New Mexico, North Caroilna, Ohio, Oklahoma, South Carolina, Texas, West Virginia and Wyoming. The Case Against Regulating Why do so many state legis- latures, confronting the problem of debt pooling for profit, choose to outlaw rather than regulate the business? The Star got these answers: 1. If the business were reg- ulated, official sanction would be at least implied and debtors would be misled into believing that the government was pro- tecting their interests and that the debt liquidator would per- form the miracles he promises. Since many creditors will have nothing to do with a pro-rater, he can't follow through on his assurance that creditors will agree to his terms. PAGENO="0025" DEBT ADJUSTING BUSINESS 21 2. None of the states which regulate instead of outlawing the debt poolers are said to have any effective supervision. It takes trained staffs to audit, examine and supervise. In the case of the pro-raters, license fees wouldn't pay for a staff large enough to police the debt poolers and make sure the money went where the debtor thought it was going. 3. Commercial debt `pooling may constitute the unauthorized practice of law and cannot properly be authorized and reg- ulated by statute. That was the reason given by the governors of Indiana and Nebraska for vetoing bills to regulate the pro- rater. The Dis~trict Commis- sioners have taken the same position every time the debt poolers propose regulation here. Opposed Diggs Bill In 1965, the commissioners gave this last argument in op- posing a bill introduced by Rep. `Charles C. Diggs Jr., D-Mich. Detroit, Diggs' home town, is also home to Credit Advisors, Inc. An organization of debt pooliers, the American Associ- ation of Credit Counsellors, was credited with interesting Diggs in the measure. Asked for comment on the Diggs bill, Commissioner Wal- ter N. Tobriner wrote House District Committee Chairman John L. McMillan, D-S.C., that the business of debt adjusting is "of such a nature as to lend itself to grave abuses against ti)Q~ in the lower income brackets." "The commissioners," said Tobriner, "are inclined to the `view that debt adjusting creates a relationship of trust in which the debt adjuster may, in a situation of insolvency, be en- gaged in marshaling assets in the' manner of a proceeding in bankruptcy. "The commissioners believe that under such circumstances the debt adjuster's client may need advice as to the legality of the various claims against him, legal remedies governing debtor-creditor relationships and provisions of the Bank- ruptcy Act." Tobriner said the commis- sioners would not recommend the Diggs bill but would favor a measure banning the business of debt adjusting except as an incident to the lawful practice of law. Typical of Moves The 1965 effort by the debt poolers was typical of several moves to regulate rather than outlaw them here. Once they mana ed to switch the Ho~se District ommittee fi~óiiiTout- lawing to regulating on the ground that any state violated the Constitution when it passed laws prohibiting the business. That argument collapsed, however, when the Supreme Court in April, 1963, upheld the right of Kansas to make it a misdemeanor for any person to engage in the business of debt adjusting except as an incident to the lawful practice of the law. The high court thus ruled against Frank C. Skrupa, doing business as Credit Advisors. Credit Advisors across the country, all 45 offices, are owned by Rudolph Barden of Detroit, whose Barden Invest- ment Management Corp. is cur- rently circulating a brochure- four years after the Supreme Court decision - which still raises a "serious question of constitutionality" about restrict- ing debt adjusting to nonprofit agencies. The profit-making Credit Ad- visors can be expected to fight any effort here to take the profit out of debt. PAGENO="0026" 22 DEBT ADJUSTING BUSINESS DEBTOR BEWARE Free Aid Ousts Adjusters By MIRIAM OTTENBERG Star Staff Writer Across the nation thousands of people are freeing themselves from the mire of debt and avoiding the stigma of bank- ruptcy without paying fancy fees to commercial debt adjusters. They are lucky enough to live in the 63 metropolitan areas and medium-sized towns where a community answer has been found for the individual's debt problems. The answer: Nonpro- fit, free or nominal-cost debt counseling services sponsored by a cross-section of community leaders. Where these services are in full operation, the so-called "counselors" who make a business of debt management leave town for lack of custom-' ers. That's what The Star found in surveying more than a dozen cities with community counseling services. A measure of the effectiveness of these services is the viru- lence of attacks against them by the commercial debt adjust ers. The head of the nation's largest commercial adjuster network calls the nonprofit services "diabolical in terms of any understanding of finance and the free enterprise sys- tem." The Star's survey showed why debtors shun the commercial adjusters when nonprofit serv- ices open. The fact that these services are free or nominal cost is only one reason. Here are others: 1. Instead of being "coun- seled" b~ salesmen for the commercial debt adjuster, the. debtor is advised and, where necessary, his debt payments are pro-rated by such experts, as longtime credit managers, budget counselors or retired bankers. 2. While in many places- including Washington - most creditors refuse to do business with the commercial pro-raters, any creditor will go along with a nonprofit communi- ty service which is largely creditor-supported and numbers ereditors as well as consumirs on its board of directors afld advisory committee. 3. Duns cease and reposses- sions and garnishments are avoided when creditors are informed by the counseling service that the debtor is work- ing his way out of debt with the help of the service. 4. The debtor knows that every dollar he can manage to `put on his debts is going to the people he owes-and is not being held back by a commercial adjustor who takes his own cut first. 5. The community's counseling service is frank with the debtor from the start. Unlike the commercial adjuster who may convey the impression that he will advance the money to pay all the bills, the nonprofit coun- selor makes it plain that he's there to help the debtor help himself, that any money paid to creditors will be the debtor's money. PAGENO="0027" DEBT ADJUSTING BUSINESS 23 Uke the Washington area now, a number of cities had experienced an invasion of commercial debt consolidators before business and civic lead- ers mobilized the community behind a nonprofit counseling service. New Orleans had some profes- sional pro-raters charging customers between 40 and 50 percent interest a year on the unpaid balance of their debts plus a $17 monthly service charge. In Salt Lake City, only two of the 10 consolidators were. operating on a basis acceptable to the Better Business Bureau. In Kansas City, Mo., where the paid adjusters were charg- ing 18 percent of the debt to do anything for the debtor, busi- nessmen launched a two- pronged attack. First, they went to the state legislature to get the fee-charging debt adjusters outlawed. Then their firms chipped in $1,000 apiece to launch the city's counseling service. Baltimore followed a similar pattern. First, City Councilman Leon A. Rubenstein led the fight for local legislation to outlaw the commercial adjusters. Then he worked with civic and business interests to develop the nonpro- fit service. Baltimore had been so badly burned by the commercial debt consolidators that the managing director of the new counseling service fears many potential supporters still associate any debt counseling with the outfits of the past. The new and the old couldn't be more different. In addition to exploitation of the debtors by many commer- cial debt adjusters, ~ increasing community services have been prompted by the nonstop surge of personal bank- ruptcies, as well as the credit binge which is driving more and more once-solid citizens into hopeless debt. Indianapolis launched its service in January, 1965, after 2,824 bankruptcy cases had been processed there the previous year, a whopping 450 percent increase over the 1958 rate. Salt Lake City's community service was started in April, 1964, primarily because of the zooming bankruptcy rate in Utah. The rising tide of personal bankruptcies in California, now amounting to 18 percent of the national total, led to establish- ment of the only statewide organization to encourage local communities to set up counsel- ing services. The California pilot project proved its worth in its first year of operation. The amount of money involved in personal bankruptcies in Sacramento, after it was started, decreased from $7 million in 1964 to $4.3 million in 1965. In the same period, dollar losses through bankruptcy in neighboring areas without a nonprofit counseling service increased by 7 percent. The decrease in bankruptcies is one of many benefits commu- nities have derived from their investment in these services. Businessmen who take the lead in sponsoring and footing the bills for nonprofit counseling cite ~such intangibles as mar- riages kept out of divorce courts, debtors' jobs saved, a healthier economic climate in office or factory when employes don't lose time from work to answer debtor's summonses. There are many tangible results, too, as The Star's sur- vey showed. For instance: * In Phoenix, Ariz., where the first community supported counseling service was begun in 1958, the service distributed $884,252 from debtors to their creditors in 1966. PAGENO="0028" 24 DEBT ADJUSTING BUSINESS * The Atlanta service has helped some 3,500 debtors since its founding in 1964, and so far none of them have returned with another load of debt-possibly because they are given an education in budgeting while freeing themselves from debt. * In St. Paul, where both the increase in personal bank- ruptcies and the influx of vir- tually uncontrolled commercial debt adjusters spurred business- men to launch the commtinity service, debt payments to creditors via the service totalled $481,000 in 1966 and are expected to exceed half-a-million dollars this year. * Chicago's non-profit counsel- ing service, in addition to its counseling, educating and pro- rating successes, has chalked up another plus. It has bailed out several victims of the Chicago crime syndicate's juicey loan racket-with loans at such exorbitant rates of interest that the debtor is often forced into crime to pay off. Of the many functions per- formed by the noncommercial counseling services, education is given top billing as the best hope for rescuing what has become a mortgaged generation. Organized labor particularly has stressed the preventive role that a counseling service can play in showing workers how to use their credit wisely. Busi- nessmen are concerned about young people who learn early bow to drive a car but not how to pay for it. To fill this void, counseling services are going into educa- tional programs as soon as they can afford it. The Phoenix service sponsors a speakers bureau which visits high school, college and adult groups with lectures on money handling. The Albuquerque, N.M., service offers an educational movie. Atlanta has scheduled six educational television pro- grams for this spring and sum- mer. In Kansas City, members of the service's board of direc~ tors take on the speaking chores. Audiences for their lectures on wise budgeting have ranged from high school seniors to mothers of preschool chil- dren. Recently, a group of ex~ convicts attended. The director of the New Orleans service teaches a course in consumer credit to the in- mates of the Orleans parish * prison every week. Her "stu- dents" are mostly nonsupport and allm~~n offenders. - The great rise in nonprolit counseling services has occurred since 1963, and the catalyst has been the National Foundation for Consumer Credit, nonprofit, business-supported organization doing research and education in t~onsumer credit. The foundation has provided staff help and guidance to any bona fide community group interested in developing .a nonprofit counseling service. Of the 63 such services now in operation across the country, about two-thirds were created with the foundation's aid, use the foundation's plans and suggestions and have adopted the same name, "Consumer Credit Counseling Service." The uniformity of name and copy- righted insignia assures the creditor that he's dealing with a responsible nonprofit organiza- tion when he's asked to cooper- ate in the rehabilitation of a hard-pressed debtor. The deb- tors are sure that they haven't again fallen in with the com- mercial pro-raters. In an unusual gesture to a private organization, the Ohio Senate officially commended the foundation in February for sponsoring the nonprofit coun- seling services, especially Ohio's PAGENO="0029" DEBT ADJUSTING BUSINESS 25 owniñClèvelàñd and Columbus. The most successful counsel- ing services, the foundation has emphasized, are those with the broadest support. In the cities surveyed by The Star, the board of directors and advisory com- mittee of each service covers the spectrum of the city's busi- ness and professional life. All the bankers and finance company executives, the family service officials and labor leaders, the doctors lawyers and merchant chiefs share one common interest. They want to help debtors wake up from their financial nightmare and regain both their credit rating and their self-respect, PAGENO="0030" 26 DEBT ADJUSTING BUSINESS 2-Pronged Move On Adjusters Near By MIRIAM 0T1'ENBERG Star Staff Writer A Maryland Senator and a Virginia Congressman yesterday announced plans to push for legislation to outlaw the corn *mercial debt adjusters now preying on Washington area debtors. At the same time, the business community moved forward with Its plans to replace the commer- cial pm-raters with a nonprofit ~Cón~irner Credit Couna~Ing~ Service similar to services now aiding the debt-ridden in 63 communities across the country. The two.ptonged move to Improve both the debtors' and the city's economic health was the immediate response to The Star's "Debtor Beware" series 01 last week. Plans to Offer Bill On the Senate side, Senator Joseph C. Tydings (D-Md.), chairman of the Senate District Committee's business and ThiTáñce subcommittee, saidThe was shocked to learn of the practices taking advantage of those in need of financial coun- seling. He said he will introduce legislation "to outlaw these deceptive practices." This will W~one of the measures included wñen he opens hearings soon on the need for consumer protec- tion in a number of activities here. In the House, Representative Joel Broyhill (R-Va.) said The Star had pinpointed a problem which should have been correct- ed years ago "and which I attempted to do at the time through legislation." Broyhill recalled that at ear- lier hearings on legislation to outlaw commercial debt inanag- ers, a "smoke screen was built up around the old argument of regulation versus prohibition and enough confusion was gen- erated to prevent any positive action." "We have now had enough time since the hearings," he said, "for evidence to be collect- ed that protection of the public desperately requires outlawing rather than regulating the commercial debt adjusters." Predicts Co-Sponsors He predicted that there would be to-sponsors for the legislation because of thö number of vic- tims of the debt consolidators. Recalling instances where he had personally counseled people who had got into financial jams, Broyhill also emphasized the need for a nonprofit, communi- ty-sponsored debt counseling service here. Aftermath: PAGENO="0031" DEBT ADJUSTING BUSINESS 27 "The lack of such a service in this area," he said, "is what leaves the door wide open for the unscrupulous to rob people in despair." Both Tydings and Broyhill emphasized that the proposed legislation to outlaw the com- mercial debt poolers should specifically exempt nonprofit debt counseling services. Meanwhile, District Commis- sioner Walter N. Tobriner disclosed that the Commission- ers have approved legislation to prohibit the commerical budgetS planners and plan to send it to Capitol Hill soon. As the Maryland and Virginia legislators emphasized, the Commissioners' measure will open the door to non-profit debt adjusting while slamming shut the door on the debt profiteers. Strong endorsement for `a non- profit consumer counseling~ service und er community aus- pi.ces came from Assistant Secretary of Labor Esther Peterson. At the Labor Department, she pointed out, an experiment in such counseling is now under way. The two-phase program starts with a series of consumer education lectures which La- bor's employes are given time off tO attend. The second phase is the development and training of 30 consumer advisers who will be available to all depart- ment employes for advice and counseling. Mrs. Peterson, who until recently was also the Presi- dent's special adviser for con- sumer affairs, said she hoped that the Labor Department's program for its own employes will illustrate the value of counseling and consumer educa- tion not only for other depart- ments but for the Washington area under community auspices. Plans for establishing a free credit counseling service in the metropolitan area have been in the t~lking stage here for the last year. Now, community action appears less remote. Edward F. Garretson, secre- tary of the Retail Credit Associ- ation of Metropolitan Washing- ton and vice president and general manager of Credit Bureau, Inc., heads the associa- tion's committee working on the counseling service in coopera- tion with the National Founda- tion for Consumer Credit, the Better Business Bureau, indus- try and civic leaders. Garretson said support al- ready has been offered by many national chains as well as local stores and financial institutions. The committee, he said, plans to contact all elements of the community for thern key roles they are expected to play in the formation of the service. Meeting Expected Soon An organization meeting Is expected as soon as sufficient support has been mobilized. The support, if it follows the pattern The Star found in other cities, will encompass educators, attorneys, family service offi- cials, psychiatrists and other medical authorities, a represent- ative of the military, and civic, labor and business leaders. In other cities, the business world is widely represented on both the board of directors and the advisory committee of the counseling service. Banks, stores, finance and loan compa- nies usually foot the bills for the counseling service~ They also provide considerable expertise in using credit wisely. Until a nonprofit service is launched here, Garretson sug- gested that those who need credit advice should talk either to some of their own creditors or write an account of their partic- ular problem to the Credit Bureau Inc., P.O. Box 1617, Washington 13, D.C. PAGENO="0032" 28 DEBT ADJUSTING BUSINESS The. Writer MIRIAM OTTENBERG The author of "Debtor Beware" won a Pulitzer Prize in 1960 for a series exposing the used car rack- et in the Washington area. As an investigative reporter for The Washington Star, she has uncovered crime and corruption on ev- ery level and campaigned successfully for new laws to correct old abuses. Her stories have led to stronger enforcement tools against law breakers as well as pioneering laws in the fields of mental illness, sexual psychopathy, narcotics addiction and commitment of the crimi- nally insane. She was the first to reveal publicly that the Mafia still thrives in America as the Cosa Nostra. In the field of white collar crime, she has exposed the baby broker racket, phony marriage counselors, the wig racket and fake charities. Her exposes of the used car and home improve- ment rackets as well a~ shoddy investment firms alerted the public to consumer pitfalls while trig- gering corrective legislation. Her series on the ina- dequacy of safety measures on many "pleasure" cruises was credited by maritime authorities with spurring "safety-at-sea" legislation. Among her civic and journalistic honors are sev- en awards from the Washington Newspaper Guild, including two grand awards; testimonials from both her high school and her university, two citations for service to the armed forces and many others. In an unprecedented tribute to a newspaper re- porter, the law enforcement community and civic leaders gave a reception in her honor where she was presented with a plaque signed by the Attorney Gen- eral of the United States, congressional leaders, judges, prosecutors and the chief of police. PAGENO="0033" DEBT ADJUSTING BUSINESS 29 Mr. SIsK. We are happy to have with us the gentleman from Vir- ginia, the author of H.R. 9806. The Chair is happy to recognize Mr. Broyhill for any statement he would like to make as I understand his services are needed in the Committee on Ways and Means. STATEMENT OP HON. JOEL T. BROYHILL, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF VIRGINIA Mr. BROYHILL. Thank you, Mr. Chairman. I have a prepared statement which I would like to submit for the record. Mr. 515K. Without objection, the entire statement will be made a part of the record at this point. (The statement follows:) STATEMENT OF THE HONORABLE JOEL T. BROYHILL ON H.R. 9806 BEFORE SuBcoM- MITTEE No. 5 OF THE HOUSE COMMITTEE ON TIlE DISTRICT OF COLUMBIA, THURSDAY, SEPTEMBER 14, 1967 Mr. Chairman: You are to be commended on holding hearings on the so-called debt-adjuster operations now proliferating in the District of Columbia. They are proliferating here because the District is one of the few jurisdictions left where the debt-adjuster can operate relatively unrestrained. The practice of so-called professional debt-adjusting or debt-pooling is generally a subterfuge to bilk the unwary; the shabby record nationally and locally proves this. The victims of the debt-adjuster are almost invariably those who are most vulnerable in our society- the untutored, the gullible and the poor. It seems to me that the Committee is confronted at this point with three options concerning debt-adjusters: (1) ignore them-which we cannot-and which they'd love; (2) regulate them-which they would accept as a poor second to our first option; or (3) outlaw them. It is my earnest hope that the Committee will take the third option and completely ban professional debt-adjusters from the District because there is absolutely no valid economic or social justification for their existence. H.R. 9806, which I sponsored, would completely outlaw-with certain excep- tions-the practice of debt-adjusting, debt-counseling, debt-pooling or whatever else it ~5 called in the District. This is not the first time I have sponsored legislation outlawing debt-adjusting in the District; I did so initially in the 85th Congress by introducing H.R. 573. However, the Committee at that time elected instead to regulate the practice fear- ing that an outright ban might be unconstitutional on the grounds that Congress could not outlaw a "legitimate" business. My feeling at that time was, and still is, that there is absolutely nothing legitimate about the practice of debt-adjusting as it is currently practiced. Stealing is not a "legitimate business". My opinion was verified on April 22, 1963, when the Supreme Court upheld the Kansas statute which outlawed the practice of debt-adjusting in that State. The Court's decision resulted from the case of Ferguson v. $krupa, 372 U.S. 726. The Court found that the Kansas Legislature could, indeed, in the public interest ban such activities and that there was no constitutional bar to enacting such legislation. My bill, inci- dentally, is patterned after the Kansas statute. What are debt-adjusters? Theoretically, the debt-adjuster operates by taking charge of a debtor's income and spreads it thin among his creditors charging him a small percentage of the amounts they pay on his bills, and leaving him a small living allowance. That is the theory; but, in practice, it is just another detestable gimmick to gouge the public-especially those who in spite of their plight have every Sincere intention of paying off their debts. The debt-adjuster has lured thousands of debt- ridden families into a scheme of paying off all their financial obligations. it's an incredibly vicious, parasitic racket. The adjuster takes a whopping fee and usually leaves his victim more hopelessly in debt than ever. Who should seek the services of a debt-adjuster? The people who turn to debt- adjusters are truly desperate. In most cases they are the poor, the untutored and the gullible. Generally they owe about $2,500 to $3,000 to small loan coin- 84-181-67---3 PAGENO="0034" 30 DEBT ADJUSTING BUSINESS panics, automobile finance firms and installment houses. There are myriad reasons why they get into debt. One might be that overtime work is no longer available or a costly crisis illness suddenly makes their burden of debt unbear- able. Easy credit and the proliferation of easy-to-obtain credit cards form tho- quicksand into which the less sophisticated and more gullible sink. They quickly find themselves almost inextricably up to their necks in debt with the resultant dunning by creditors from every direction. In their desperation, they become- easy prey to the glib debt-adjuster. The debt-adjuster, through craftily-designed misleading advertising, seems to offer these debtors a way out of their predicament. One need only read the- newspaper ads and the yellow pages and note the clever way in which the ads are written. These ads do not offer to pay off the debtor's creditors nor do they offer credit to the debtor, but the less sophisticated could easily interpret other- wise. This is the bait. Once the debtor is in the hands of the debt-adjuster, the adjuster usually takes his fee right off the top and frequently this fee runs up to phenomenal amounts- 25% is not unusual-and the creditors are not satisfied. So instead of the creditors receiving partial payments on a pro-rain basis, in most cases they receive nothing with the result that the original debt is not only increased but. that the payment of the debt is delayed even longer and the dunning of the debtor by his creditors increases to a shrill pitch. Meanwhile, the debt-adjuster invariably has airily advised the debtor to ignore his creditors and assures the debtor that be, the adjuster, will handle everything. For instance, I was recently advised by the credit manager of one of Wasliington's major department stores that even though be had cautioned an individual that his credit card for that. particular store should no longer be used, a debt-adjuster advised the individual to go right ahead and use the credit card. The truth is that once the adjuster takes his fat fee right off the top, it isn't surprising that he is no longer inter- ested in whether the debtor maintains his payments-in fact, if the debtor drops out it relieves the adjuster of further paper work. The adjuster has made his. killing and the debtor is left holding the bag. Many of the firms currently operating in the District are chiseling outfits that migrated here because they have been outlawed in 22 States including, happily, my own State of Virginia. The State of Maryland is currently considering legis- lation; the City of Baltimore, to its credit, has itself adopted an ordinance coni- pletely outlawing debt~adjusting in that City. It is important to note that all those States and local jurisdictions, which approximate 70 in number, have- outlawed debt adjusting as an evil. To summarize the major reasons why professional debt-adjusters should be outlawed, I would underscore: 1. Their use of deceptive advertising. They use no description of their methodT or the fees they charge. 2. The fees are unconscionable. 3. A careful questioning of creditors fails to Show even a reasonable per-- centage of cases where a debtor's credit problems were solved. 4. Consistent failure to fulfill agreements. 5. The debtor's debts are actually increased by the adjuster'S high charges for. a service which a debtor could do for himself. Most of the debt-adjusters take all or a major part of their initial fees out of the first monies paid in by the debtor. By doing so debt~adjusters brashly exhibit their unwillingness to place them- selves and their fees on an equal pro-rated basis with the debtor's creditors. Iii this regard they completely unmask the pose of sincerity which they present to the public and the debtors. It seems reasonable to ask how can debt adjusters pretend ability to act as acceptable liaison agents with a debtor's creditors when they cynically collect their fees ahead of these creditors and before they perform the service for which they charge the debtor? ~. Most important, many creditors absolutely refuse to deal with debt-ad- justers. This is easily verifiable in t~e District. That alone should prove the use- lessness of the debt-adjuster. According to the District authorities, the complaints against debt-adjusters, in addition to those just mentioned, fall into approximately three major categories: 1. The adjuster, upon receipt of the debtor's pay check, fails to make any part of it or enough of it available to the debtor to live on. 2. The adjuster fails to pay a creditor with whom he has made an arrangement on behalf of the debtor resulting in the creditor attaching the debtor's salary. ~3. Some adjusters have favored certain creditors over others for hid. own ~êf-~ sonal gain but at the expense of the debtor. PAGENO="0035" DEBT ADJUSTING BUSINESS 31 A. question invariably might be asked-what have the District Commissioners done to control this type of operation? It is my understanding that the District Comniissioners, under Title 47 of the D. C. Code, have the general authority to require licensing and regulation of this business, but have chosen not to do so on the grounds that such would be a tacit admission of the worth of this type of practice. The Commissioners see absolutely no value in so-called debt-adjusting and have consistently supported my position of outlawing debt-adjusters in the District. The next question might be asked-what do the District authorities do about complaints they receive against debt-adjusters? The problem, I'm led to believer lies in the apparent difficulty that a prosecutor has in pressing such cases be- cause the elements of embezzlement or some other type of fraud are difficult to prove in court. However, in 1963 the U. S. Postal Inspection Service nationally conducted 20 investigations of debt-ad4usters who were alleged to have used the mails for fraudulent purposes. The outcome of these investigations was the conviction for mail fraud of 7 local debt1adjusters in the U. S. District Court for the District of Columbia on July 1, 1966. At this point, Mr. Chairman, may I respectfully suggest that appropriate spokes- men from both the Justice Department, which prosecuted the aforementioned cases-and the Post Office Department, which made the investigations-be asked to give their viewpoints on this problem. It was most heartening to me to learn that approximately 70 jurisdictions. including many of our large cities such as Baltimore, have undertaken to sweep their areas free of the professional debt-adjuster by setting up non-profit credit counseling services which are financially supported by the various businesses, labor and civic interests in those jurisdictions. The profit motive is thereby re- moved and debtors are counseled free of charge. This is a commendable step forward and has resulted in the drying up of the debt-adjuster con-men in those areas, I am even more heartened to learn that such an organization is curreiitly on the drafting board here in the District. T understand that this organization will coriie to fruition very shortly. Also, I want to take this opportunity to commend kS'TAJ? reporter, Miriam Ottenberg, for her excellent series entitled "Debtor Beware", which exposed in great deall this obnoxious con-game. Mr. Chairman, the so-called professional debt-adjusters, as I have outlined, not only deserve severe condemnation, but should have been outlawed in the District many years ago. As is usual, everytime a jurisdiction threatens to outlaw this operation, the operators flock in crying for regulation; but when the subject is quiescent, the operators are deathly silent. The debt-adjusters beat their breasts for regulation in 1958; they did a repeat performance again before the Committee in 1963; and I'll wager they'll be here today loaded for bear. I am hopeful that the Committee will act expeditiously and in favor of this bill to outlaw the practice of professional debt-adjusting in the District. Thank you. Mr. BRoYlTIi~L. I will briefly hit some of the high spots about the nature and intent of this bill. I would also like to express my appreciation to the Chairman for arranging those hearings. I know the Chairman has a lot of legislation he is interested in, pending both in this Committee and in the Rules Committee, and it is not easy to arrange hearings on all of the bills. So am grateful to the Chairman for arranging this hearing. As pointed out by the Chairman, H.R. 9806 will prohibit the so- called debt-adjusting, debt-counseling or debt-pooling busine~ s that has been going on in the District of Columbia. At best it is a shoddy busi- ness; it serves absolutely no useful ~mrpose and makes no contribution to the people of the I)istric~ of Columbia. Also, the people who are engaged in it put up no capital of then' owii and assume no risks what- soever, and the victims are, without exception, the poor, the Ui educated, the untutored, or the gullible. They are people who are desperate, hav- ing gotten over their heads in debt and having the garnishment of their salaries hanging over them. They hear of these so-called debt-counsel- ing or debt-servicing outfits-their advertisements are in the news- PAGENO="0036" 32 DEBT ADJUSTING BUSINESS papers and in the telephone book-and they call on these people for help and as a rule pay 12.5 to 25 percent of their total debt as a fee for their services. And generally the people who are in debt will turn over their entire pay check to these so-called debt counselors, and the debt counselors take their fees right off the top. They get theirs first, and then they tell the people who are in debt they will consolidate all their debts, get in touch with the creditors and pay to them a certain amount of their pay check. Frequently the amount left out of the pay check is not sufficient for the person in debt to live on. Then in many instances the debt adjusters fail to pay the creditors, and the creditors turn around and attach the salaries of those in debt. in many cases the debt counselors favor certain creditors at the expense ~of others. In many instances, the people who have paid these debt ~counselors in advance, even though the so-called debt counselors have provided no services whatsoever, are given no refund, and thus the people who are in debt wind up being more in debt after having con- tacted these debt counselors than they were before. Many of my constituents, Mr. Chairman, have been victims of this type of operation. In many instances people have come to me-and I mu sure they have gone to the Chairman and members of the Com- mittee-in desperate financial trouble, having many creditors threat- ening to attach their salaries. I know I have in many instances served in the capacity of a debt counselor myself, and have contacted the creditors and arranged for some other means of payment, stretching out the payments over a longer period of time in order for these people to get by. Bu~t, unfortunately, many of the people who have come to me had gone to the debt-adjusters first, and thus were hun- dreds of dollars deeper in debt than they were before. They have been the victims of these unscrupulous debt counselors. Ten years ago, I introduced a bill similar to the one I have now introduced, H.R. 573. At that time, the constitutionality of the bill was challenged and there was a question whether Congress could pro- hibit an operation such as this. As a result of these questions, we amended the bill to provide for the regulation and policing of the practice. That bill was passed by the House on August 12, 1958, but it failed of action in the Senate. However, Mr. Chairman, subsequent to this action back in 1958, the Supreme Court ruled that the prohibition of this type of business is constitutional. The Supreme Court ruled on a similar law approved by the Kansas Legislature in the case of Fergu$on v. SAn~upa in 1963. This cleared up the constitutional question as to whether the Congress has the right to prohibit this debt counseling business. Furthermore, there have been 22 States, including Virginia, that have outlawed debt-adjusting and debt-pooling services. As recently as last year, convictions were obtained against seven people involved in two debt-counseling firms in the District of Columbia and Balti- more for fraudulent use of the mail. The Post Office Department investigated, and the convictions were obtained by the Department of Justice. So we have actual court cases showing that this type of opera- tion is sometimes illegal. Now, the Committee is confronted as far as this legislation is con- cerned with three options concerning debt adjusters. First, we can ignore them, which in my opinion is unthinkable because the victims PAGENO="0037" DEBT ADJUSTING BUSINESS 33 are the poor, the uneducated, or the gullible. Or, we could regulate them; but as I understand it, the District Commissioners, under Title 47 of the District of Columbia Code, have the general authority to require licensing and regulation of this business, but they have chosen not to do so on the grounds that it would give official recognition to this type of unscrupulous operation. Thirdly, we can outlaw this type of business in the District of Co- lumbia, There is no reason whatsoever for the existence of this type of business. The legislation I have introduced will outlaw this type of operation but will not prohibit debt-adjusting services incurred inci- dentally in the practice of law, nor will it prohibit nonprofit or charita- ble corporations or associations from providing debt-counseling serv- ices. Neither will it prohibit public officials from helping their constituents who have problems of this kind, but it will prohibit the type of practices brought out by Miss Ottenberg, and I might say I am glad the Chairman has inserted in the record the articles on this subject written by Miss Ottenberg, of th.e Evening Star. I believe that if the House and the Congress will pass this legislation, we will perform a real service in protecting the unfortunate people in the District of Columbia and in the area who have been the victims of these unscrupulous operators. Thank you. Mr. SIsK. I thank my colleague, Mr. Broyhill of Virginia, for his statement. I might say to my colleagues who arrived in the room. since Mr. Broyhill began his statement that we have inserted in the record two bills, one by Mr. Broyhill that would prohibit the debt adjustment business in the District of Columbia, and one by Mr. Diggs which would regulate the practice of debt adjustment in the District. The Committee, of course, is attempting to gather as many facts as; possible in order to determine the type of legislation needed. I might mention to you gentlemen Mr. Broyhill has another appoint- ment in the Ways and Means Committee this morning and we were happy to give him an opportunity to make his statement first. I believe the gentleman from North Carolina has a question. Mr. WHITENER. I wondered why the gentleman from Virginia ap- p.roached the problem in the manner set out in H.R.. 9806 rather than the approach of Mr. Diggs in H.R. 8929? Mr. BROYHILL. Mr. Diggs' bill, as I understand it, is to regulate th,e industry, and it is my understanding that legislation is not necessary to regulate this business because the Commissioners have that authority now. Secondly, enacting legislation to regulate the business would in effect be acknowledging that the business is needed and would give dig- nity to these debt-adjusting services which I think are not needed and are actually injurious to the people of the District of Columbia. They furnish no real service to the people who are in trouble. They give them no money, they charge them a fee off the top of their salary, and the people in debt wind up being in more trouble than they were before. Mr. WHITENER. Of course in your bill certain other business organ- izations would be prohibited from managing debtors' debts, while in Mr. Diggs' bill it provides they might. This could, it seems to me, run into trouble with a non-la;wyer giving advice and working with a debtor under Chapter 13 pro'ceedings, which are provided for in the Bankruptcy Act. And there are many other areas in which you could PAGENO="0038" 34 DEBT ADJUSTING BUSINESS run into trouble. As I understand Chapter 13 proceedings, you do not necessarily have to have a lawyer. I do not think there is anything in the Bankruptcy Act that requires that the petition in Chapter 13 proceedings be prepared by an attorney. Mr. SISK. If my colleague will yield, we will have testimony on that shortly. Mr. WHITENER. I worked with this problem in the Judiciary Com- mittee and have tried to encourage a broader use of the Chapter XIII proceedings, the so-called Wage Earner's Plan under the Bankruptcy Act (11 U.S. Code 1046 et seq.). I think it is one of the best approaches available in the United States now for an honest debtor or wage earner to manage his debts. I certainly would not want to see us do anything here on a local level which would in ally way interfere with the proper utilization of Chapter 13 ~~roceedings. I appreciate your position and I think this is a field to look into, but I think we ought to be very careful that we not take the approach of outlawing debt management if regulation would turn out to be a more salutary approach to it. I do not know enough about the background of your bill to make any other comment. Mr. BROYHILL. In section 3 of the bill we make it clear- Mr. WHITENER. That it does not apply to debt-adjusting incurred incidentally in the lawful practice of law, but when you go on down it applies to everybody else. Mr. BROYHILL. I would like to point out that it is my understanding that this bill is similar to the North Carolina law. North Carolina is one of the 22 States which has prohibited so-called debt-counseling business. Mr. WHITENER. The Legislature of North Carolina has no right to outlaw anybody operating under Chapter 13 of the Bankruptcy Act. Mr. BROYHILL. And the Supreme Court, in 1963, upheld a similar act passed by the Kansas Legislature and declared it constitutional. Mr. WHITENER. Let me say there are a lot of things the Supreme Court does that I do not agree with. Mr. HoRToN. Will the gentleman from North Carolina yield. I think the point you are trying to make is that by our enacting a bill prohibiting this business we would have to specifically except the pro- visions of the Bankruptcy Act. Is that your point? Mr. WHITENER. I certainly think we would have to do that. Mr. HORTON. In other words, we are not acting as a State Legislature but as the Congress and by implication it might appear we repealed Chapter 13. Mr. WHITENER. Maybe not repealed it- Mr. HORTON. But affected it materially? Mr. WHITENER. Yes. Mr. SIsK. Does the gentleman from New York have any questions of the gentleman from Virginia? Mr. HORTON. I have no questions. I will say I am in agreement with his statement but I certainly agree with Mr. Whitener that the matter he points out should be considered. I notice my own State of New York has a law prohibiting debt-adjusters and I see no reason why debt-adjusters should be tolerated in the District of Columbia. It seems to me it is a wide-open opportunity for the unscrupulous to PAGENO="0039" DEBT ADJUSTING BUSINESS 35 take advantage of an individual who has financial problems. I would ~end to agree with the gentleman from Virginia. Mr. SI5K. Does the gentleman from New Mexico have any question? Mr. WALKER. No questions. Mr. SISK. The gentleman from Maryland. Mr. GUDE. Thank you, Mr. Chairman. I would like to commend my ~co1league from Virginia for his interest in this matter. I also would like to commend Miss Ottenberg, who has written these excellent articles on the subject. The State of Maryland does not have a statute on the books dealing with debt-adjusters, but the City of Baltimore has outlawed debt-adjusters, and certainly the conditions in Baltimore have a great similarity to those in the District of Columbia. This debt-adjuster operation seems to be a part of the fiber of the poverty problem and where we have low economic conditions we seem to have the so-called debt-adjuster. So I hope these hearings are fruitful. Mr. SI5K. I thank the gentleman from Maryland and we thank our colleague from Virginia, Mr. Broyhill, for his testimony this morning. Prior to the time these gentlemen came in we had placed a complete sta~ernent of the gentleman from. Virginia in the record. Mr. WHITENER. Mr. Chairman, before the gentleman from Virginia goes I might point out to him also, and to the other members of the Sub- committee, that pending in Subcommittee No. 4 of the Judiciary Com- mittee is a bill which was inbroduced by Mr. Poff of Virginia which would have the effect of creating a compulsory Chapter 13 proceeding giving the Federal Courts authority to require that a wage earner debtor go into a proceeding whereby he parcels out his salary to his creditors. That has not come out of the Committee yet, but if it comes out you will have a proceeding in a compulsory way. I have serious reservations about that bill. Mr. Poff thinks it is a good one, but if you get that you may really have some debt adjustment going on. Mr. BROYHILL. Mr. Chairman, may I include in the record certain debt-adjuster advertisements that have appeared in our Washington newspapers. Mr. SI5K. Yes, without objection they will be made a part of the record. (Another news item and the advertisements referred to follow:) [From the Washington (D.C.) Post, July 2, 1960] 7 BUSINESSMEN CONVICTED IN MAIL FRAUD SCHEME Seven local businessmen were convicted in District Court yesterday on charges of luring financially troubled persons into a phony scheme for paying off their debts. The six-week trial before Judge Howard F. Corcoran was against the officers and managers of two now defunct "debt consolidation services," called National Budget $erviees, Inc. and General Budget Corporation. The firms were headquartered in Washington and Baltimore and had branch offices throughout the central and south Atlantic states. Justice Department prosecutors Thomas A. Kennelly and John R. Risher Jr. charged that they schemed by mail to attract cu:stomers to "consolidate" their debts by paying them off through the firms in installments tailored to their income. Witnesses testified they were charged "initiation" and "service" fees, which aubsequently were increased without their consent. Also, they said, they were PAGENO="0040" 36 DEBT ADJTJSTING BUSINESS GET OUT OF DEBT Without Borrowing Eat Vs Coe.ottdsfa beg Puyrs.stYosCasAIIOrd II you ow. Pay as law as $ODB__________ $12 per woolt $IBOD__-..---_~- $20 per wook $30D0 - $30 per wool lie Co.Slgnors or S.oa,lty CALL 63B~I25O FOR ROME OR 000200 6.P?r~ FAMILY BUDGET PLAN Z~. 411.711 OWe., 711 14th55.N.W. WesNlsgtos Osly. Mambo Il ffia Amer. Lu's. sj Cradll CessstEe?e STOP DEBT PROBLEMS without borrowing money Wo Will Conuotld] Your Bills Into Ono Cow Poyrnent you con Afford NO CO.SIGNER$ OR SECURITY CALL NOW FOR FREE HOME APPOINTMENTS 864-3722 OPEN 7 DAYS 9 A.M.-9 P.M. FINANCIAL ADVISORS Washington Post Wedoeeday,Se~t,13,I96? 1) P~SONALS SLASH BILL PAYMENTS WE R0DGE~.'OUR~ INCOM~I EVENTS AND CREDIT FIGIITD1 menteeohpoJ~y. ~ 2. Crodltor sells at nisht'TO pool'. 3. Worry use,- ureeld 01115.70 cots. I ~` ~ ~ healthtO $ 880 LOANS NO CO-SIGNERS FREE-Prluelo 00100 or office oo. Credit Advisors10 Inc. 1413 II 27. NW.. 2ND FLR. 393-7865 ~ 423-4850 i ~ 277-8181 420 Woshlnstoie RIud. D.C2 Telephone Directory TIle yellow Pages, 1967 Debf Adiosles COMMUNITY BUUGETSER~4~47317~2 CeedltAdosoes Icc- - 393.7060 4l65Oraw0A2MOrltoIIIO. 423.4850 3510 RI As 01821cr 2770101 608WeAII,d LeAcel 7767820 Credit Outset Ito 14G0HeoVotkAoN~ ---6207000 CREDIT BUDGET INC''~"'''" CREDIT BUDGET INC SOO4NeoVsrkAoNso - 6287800 Ceeditladoet leo 3200 OlioMIRclrr -...927-7462 Dooe:osCollechaeAsCy C6StNloIttls#oSW562-5633 FAdeeol0luSees 152211 Nw -.-----...6590244 Vtashington Post BILLS IF YOU OWE YOU MA~ PAY $ 750 $10 PER WEEK $1000 $15 PER WEEK $2000 $25 PER WEEK $3000 $35 PER WEEK BoNDED FOR YOUR PROTECTION AVOID - . GARNISHMENTS REPOSSESSIONS FREE HOME APPOINTMENT 393-2772 FINANCIAL ARRANGERS OF DEBT. WitI~u10t~ wing P~1M ~ T LA ONE PLACE TO PAY No Co-Signers or Security CALL 638-1250 FAPN~tLEYOP~3DGCET PLAN ~A DEBT PLAN LET 51$ CONSOLIDATE your bIIle,1 NOT A LOAN ~ETk%~TE~TMOST CRE~TAD'~1SORS INC. 393-7865 012 EV NO BUILDING 1420 NEW YORK AVE. NW. to wr. RAINIER. MD. 3510 Rhode Is. Ave. NE. 1st FLOOR 277-8181 Coo. oftloe or howe ey4~InOnIS u~öME TAX RETURNS 78 WashIngton Daily News Sept. 8, 196li PERSJNALS $ MONEY $ Credit Bad? Slow? yes, we mean one. low eeoethty porn?. Cell today toes appoiotrnent.' 332-2990 LOAN ARRANGERS AEnenoislrnenegernentflrrn 9:30 AM. TO 8 FiM. Mon-FRI. & SAT. 9:30.1 P.M. A DEBT PLAN LET US CONSOLIDATE your bIll.. pest doe or cot Into one low payrneet youoeeeflord. G.rnlshrnents aooldod. IF YOU OWE PAY AS LOW AS stow sts per wools 03.000 too ~eP week 33.000 530 eor week NOT A LOAN NO CO-SIGNERS OR SECURITY AMERICA'S LARGEST & MOST Eeput.ble Credit Menegnrnene Co. CREDIT ADVISORS INC. 393.7865 812 EVANS ELDO. 1420 NEW YORK AVE. NW. MT. RAINIER, MO. 2774181 3510 RHODE ISLAND AVE. SECOND FLOOR EVE. OFFICE & HOME APPTS. BILLS PRESSING? ~Y toO;:_Ol~hA~e $ 750 $10 PER WEEK $1000 $15 PER WEEK $2000 $25 PER WEEK $3000 $35 PER WEEK BONDED FOE YOUR PROTECTION AVOID 6ARNISHMENTS REPOSSESSIONS FREE HOME APPOINTMENT CALL COLLECT 393-2772 FINANCIAL ARRANGERS -lit 4th 51. NW. blew 014j * Like Autos and Rocis ? Ryan Ev Gosrdeoer in The New3. ___________ ,.i, ç~r. z, `~ told the firms would make arrangements with the creditors for the debt consoli- dations but later were told they would `have to do it themselves. Several witnesses said they continued to be dunned by creditors even though the firms said they would handle such matters. Kennelly and Risher charged that officers of `the firms diverted more than $30,000 of the customers' payments for their own tose between July, 1959, a.nd August, 1903, wben the firn~s folded. All their bank accounts were overdrawn -and they -owed $38,000 to creditors of 300 of their customers, the prosecution charged. The convicted men are Michael D. Callahan, Ralph Galope, Joseph 0. MdHale, Robert L. Mdllal-e, Francis R. Miller Sr. and James E. -Moser, all of Washington, PAGENO="0041" DEBT' ADJuSTING BtSINESS 37 and Martin J. Mc'Ha'le of Baltimore. The Mdllales are brothers. One other defendant, Peter J. Firra is still at large `and has not be~en tried. Kennelly said tbi~s is the first mail fraud conviction against a debt consolida- ton business in the country. Several states, including Virginia, have outlawed such businesse'es. Judge Oorcoran will sentence them later. Mr. SIsK. The Committee will now hear from Mr. Robert F. Kneipp, Assistant Corporation Counsel `of the District of Columbia. Mr. Kneipp, if you have anybody you want to bring to the table with you we will be happy to have them. I might add we do have the report `of the `Commissioners on this legislation. Without objection, a copy of the letter of May 1, 1967, on Mr. Broyhill's bill, ELR. 9806, signed by Mr. Walter N. Tobriner, President of the Board of Commissioners of the District of Columbia, on behalf of the Commissioners, will be made a part of the record; and a copy of a letter dated May 9, 1967, dealing with the subject of the bill introduced by our colleague from Michigan, Mr. Diggs, and signed again by Mr. Tobriner will be made a part of the record. (The letters follow:) GOVERNMENT OF THE DISTRICT OF COLUMBIA, EXECUTIVE OFFICE, Washington, May 1, 1067. The Honorable `the SPEAKER Uf~. House of Representatives, Washington, D.C. M~ DEAR MR. SPEAKER: The Commissioners of the District of Columbia have the honor to submit herewith a draft bill "To prohibit the business of debt adjust- ing in the District of Columbia except as an incident to the lawful practice of law or as an activity engaged in by a non-profit `corporation or association." The Clommissioners are of the view that the business of "debt adjusting" as de- fined in the bill, is of such nature as th lend itself to grave abuses against distressed debtors, particularly those in the lower income brackets. The Com- missioners are informed that the City of Baltimore and twenty-one States, including the nearby States `of Pennsylvania, Delaware, West Virgini'a, Virginia, and North Carolina, have found these abuse's to be of such gravity as to justify the prohibition of the business, while `ten other States have found it necessary, in `the public interest, to regulate the business. The Commissioners believe tha't the business of debt adjusting can give rise to a relationship of trust in which the debt adjuster, in a `situation of insolvency, `may be engaged in marshalling assets in the manner of a proceeding in bank- rup'tcy. Under such circumstances, the debt adjuster's `client may need advice `as to the legality of `the various claim's against him,, legal remedies governing debtor- creditor relationships, `and the applicability of the Bankruptcy Act. In view of this, the Oommissioners believe tha't the ac'tivity known as "debt `adjusting" `should be an activity engaged in in the District `of Columbia principally by per- sons who have been admitted to the `bar of t'he United States' District Co'ur't fo'r the District of Columbia. However, sin'ce, in some areas of he country, non-profit or charitable corporations or associations have performed a service to their corn,- the Distric't of Columbia. However, since, in some areas of the country, non-profit inunities by providing a debt adjusting service, section 3 of the bill also would allow any non-profit or charitable corporation or association to engage in debt adjusting, even `though it might charge nominal fees to cover its expenses in connection with providing these services. Accordingly, the Commissioners urge the enactment of legislation prohibiting the business of "debt adjusting" in the District of Columbia, and strongly re'c- ommend enactment `of the bill. Sincerely yours, (5) WALTER N. TOBRINER, President, Board of Commissioners, D.C. PAGENO="0042" 38 DEBT ADJUSTING BUSINESS GOVERNMENT OF THE DISTRICT OF COLUMBIA, EXECUTIVE OFFICE, Washington, May 9, 1967. Hon. JOHN L. MCMILLAN, Chairman, Committee on the District of Columbia, U.S. Hoi~se of Representatives, Washington, D.C. Mv DEAR Mn. MCMILLAN: The Commissioners of the District of Columbia have for report HR. 8929, 90th Congress, a bill `~To regulate the busines-~ of debt adjusting in the District of Columbia other than as an incident to the practice of law." The Commissioners are of the view that the business of "debt adjusting", as defined in the bill, is of such a nature as to lend itself to grave abuses against distressed debtors, particularly those in the lower income brackets. The Com- missioners are informed that the City of Baltimore and twenty-one States, in- cluding the nearby States of Pennsylvania, Delaware, West Virginia, Virginia and North Carolina, have found these abuses to be of such gravity as to justify the prohibition of the business, while ten other States have found it necessary, in the public interest, to regulaite the business. The Commissioners believe that the business of debt adjusting can give rise to a relationship of trust in which the detk adjuster, in a situation of insolvency, may be engaged in marshalling assets in the manner of a proceeding in bank- ruptcy. Under such circumstances, the debt adjuster's client may need advice as to the legality of the various claims against him, legal remedies governing debtor-creditor relationships, and the applicability of the Bankruptcy Act. In view of this, the Commissioners believe that the activity known as "debt adjusting" should be an activity engaged in in the District of Columbia prin- cipally by persons who have been admitted to the bar of the United States District Clourt for the District of Columbia. However, since, in some areas of the country, non-profit or charitable corporations or associations have performed a service to their communities by providing a debt adjusting service, the Gommissioners believe that such organizations also should be allow-ed to engage in debt adjust- ing, even `though they might charge nominal fees to cover their expenses in con- nection with providing these services. Accordingly, the Commissioners do not recommend the enactment of H.R. 8929. They would, in lieu thereof, recommend enactment of the draft bill "To prohibit the business of debt adjusting in the District of Columbia except as an incident to the lawful practice of law or as an activity engaged in by a non-profit corpora- tion or association", which they submitted to the Speaker of the United States House of Representatives on May 1, 1967. Sincerely yours, (5) WALTER N. TOBRINLR, President, Board of Commissioners, D.C. STATEMENT OF ROBERT F. KNEIPP, ASSISTANT CORPORATION COUNSEL, DISTRICT OF COLUMBIA Mr. KNEIFF. I am Robert F. Kneipp, Assistant Corporation Counsel of the District of Columbia. I am appearing here this morning repre- senting the Commissioners of the District of Columbia on }I.R. 9806 and H.R. 8929. Mr. SI5K. Mr. Kneipp, I notice we have a copy of your statement which, without objection, will be made a part of the record and you may proceed by reading it or making an oral statement. (The proposed statement of Mr. Kneipp follows:) STATEMENT OF ROBERT F. KNEIPP, ASSISTANT CORPORATION COUNSEL, D.C., REPRESENTING THE COMMISSIONERS OF THE DISTRICT OF COLUMBIA Thank you, Mr. Chairman, for giving me this opportunity to present the views of the Commissioners of H.R. 9806, a bill "To prohibit the business of debt adjusting in the District of Columbia except as an incident to the lawful practice of law or as an activity engaged in by a nonprofit corproation or association", and HR. 8929, a bill "To regulate the business of debt adjusting in the District of Columbia other than as an incident to the practice of law." PAGENO="0043" DEBT ADJUSTING BUSINESS 39 As the Commissioners have stated in their letter transmitting to the Congress the proposed legislation which has been introduced as HR. 98O6~ they are of the view that the business of debt adjusting is of such a nature as to lend its.eif~ to grave abuses against distressed debtors, particularly those in the lower income brackets. The Commissioners, in their consideration of the problem created by the debt adjusters, recognized that even at best the practice works to the dis- advantage of the debtor, since an additional debt is added to the debts he al- ready flnd.s burdensome. Further, in their consideration of the matter the Corn- missioners could find no economic justification for the so-called "service" which allegedly is provided by the debt adjusters. Accordingly, in the belief that the whole situation was one which could and according to the articles by Miss Miriam Ottenberg in the Star last April, does, lead to grave abuses, the Commissioners. determined to recommend that the practice be prohibited. CONSTITUTIONALITY With respect to the constitutionality of the proposed legislation, the Supreme Court of the United States, in the case of Ferguson v. ~/~rnpa (372 U.S. 726, decided April 22, 1963), reversed the decision of a three-judae District Court enjoining the enforcement of a Kansas~ statute making it a misdemeanor for a person to engage in the business of debt adjusting except as an incident to the lawful practice of law, and held constiutional the type of law here under con- sideration. In Ferguson, the Court rejected the contention that the Kansas statute prohibiting time business of debt adjusting was in violation of the Due Process Clause of the Fourteenth Amendment (in the District of Columbia, the Fifth Amendment), stating that- "* * * the Kansas legislature was free to decide for itself that legisla- tion was needed to deal with the business of debt adjusting. * `~ We refuse to sit as a `superlegislature to weigh the wisdom of legislation.' and and we emphatically refuse to go hack to the time when courts used the Due Process Clause `to strike down state laws, regulatory of business and industrial conditions, because they may be unwise, improvident, or out of harmony with a particular school of thought.'" The general tenor of Fergxson is that it is for the legislatures rather than the courts to decide on the wisdom and utility of legislation, and that the legislatures have the power to legislate against what are found to be injurious practices in the internal commercial and business affairs of the States (or the District of Columbia, as the case may be) so long as time laws do not run afoul of sonic spe- cific federal constitutional prohibition or some valid federal law, In Ferguson the Supreme Court also rejected the contention that the Kansas statute's exception of lawyers was a denial of equal protection of time law-s to non-lawyers in violation of the Fourteenth Amendment, stating "Statutes create many classifications which do not deny equal protection; it is only `individions discrimination' which offends the Constitution." Pointing out that the business of debt adjusting gives rise to a relationship of trust in which the debt adjuster will ~n a situation of insolvency be marsh iliac' aeset in the manner of i pro ceeding in bankruptcy, the Court stated that if a State wants to limit debt ad- justing to lawyers, the Equal Protection Clause *of the Fourteenth Amendment does not forbid it. The Commissioners, in addition to recognizing that lawyers in the course of their practice may find it necessary to engage in activities in the nature of "debt adjusting", also recognize that in some areas of the country nonprofit or charit- able corporations or associations have performed a service to their communities by providing, a debt adjusting service, at no expense to the debtor except for charges designed `to cover expenses in connection with providing such serrices. in the belief that such a nonprofit service might be `of use to those dehtor'~ seek- lag advice on how to manage their debts, without further increasing them, the Commissioners believe that the bill should also except from its application any such nonprofit or charitable organization. which provides this kind of service. I thinlr, therefore, Mr. Chairman, that any question with respect to the con- stitutionality of I-lB. 9806 has been resolved by the Supreme Court in Ferguson and that there exists no legal impediment to the enactment of thi bill by the Congress if Congress finds that the potentiality of grave abuses inherent in the business of debt adjusting is such as `to justify the enactment of legislation prohibiting it. PAGENO="0044" 40 DEBT ADJ1JSTING BUSINESS COMMISSIONERS' POSITION The Commissioners are opposed to the regulation of the business of debt adjust- ing, as provided by U,R. 89~9, for the reasons stated in their letter of May 9, .196~', which I ask be included in the record. In that letter, the Commissioners stated that they believe that the business of debt adjusting can give rise to a relationship of trust in which the debt adjuster, in a situation of insolvency, and, I might note, this is probably the case in the majority of the transactions, may be engaged in marshalling assets in the manner of a proceeding in bankruptcy. As the Commissioners point out, under such circumstances the dept adjuster's client may need advice as to the legality of the various claims against him, the `egal remedies governing debtor-credit relationships, and the applicability of the Bankruptcy Act. This nileans that in virtually every debt adjusting transaction, there is need for careful scrutiny of the underlying contracts which gave rise to the debts which have been accumulated by the debtor. It is quite possible that one or more of the underlying contracts are unconscionable within the meaning of section 28:2-302 of the Uniform Commercial Code, and, if subjected to a court test, would not be enforceable. If the debt is one cwing a finance company, the finance company may not be a holder in due course. The debtor may have a real defense against the person with whom he contracted or any subsequent holder of a note which the debtor may have given, in that the note may lack legal efficacy in its inception, as, for example, where there was fraud in the execution, or where there was an illegality making the security void, as opposed to voidable. ObViously, determinations as to the legal rights of the debtor with respect to the claims against him are within the province of the lawyer, and their deter- inination by any other person, no matter how capable he may be, of necessity involves the unauthorized practice of law. It is, however, greatly to be questioned whether those in the debt-adjusting business even approach the necessary level of capability. I understand that the average employee in the business has two years of college education. It would hardly be conceivable that employees with this level of education are qualified to advise a debtor conce~ning his legal rights and any defenses he may have to the claims against him, and it could be said, in a situation where the debt adjuster fails to recognize that the debtor has a defense to a claim against him, that it is a case of the blind misleading the blind. Moreover, the debt adjuster has a vested interest in not advising a debtor that the underlying contract giving rise to some portion of the debtor's total debt is not a valid one, or that the debtor has a defense to a claim against him. Obvious- 17, since the fee of the debt adjuster is a percentage of the debtor's total debt, it Is to the debt adjuster's advantage to maximize that debt, rather than minimize it, and there could be present in such a situation a tendency to find that all of the underlying contracts are valid and enforceable, and that the debtor han no de- fenses to the claims against him. This is, of course, the exact opposite of the situation which would obtain were the debtor to seek legal advice, since the duty and self-interest of the attorney would dictate that he make every effort to minimize the debtor's obligations, challenging those which give indication of being unenforceable or invalid, and compromising the others to the maximum artent possible. This means that there is involved in the business of debt ad- justing a very high potential for deceit and actual fraud. COURT ACTION In this last connection, the Committee may take note of the fact that on July 1, 1966, seven persons who operated two debt consolidation services headquartered in Washington and Baltimore, with branch offices throughout the central and south Atlantic States, were convicted in the United States District Court for the District of Columbia on mail fraud charges. It is this high potential for deceit and fraud that would seem to indicate that regulation of the business is just not feasible. If there is to be protection of the debtor from being taken advantage of by the debt adjuster, and if there is to be protection of the legal rights of each such debtor, then it is necessary that every transaction be carefully scrutinized by the regulatory agency. And I think it obvious that the regulatory personnel required to scrutinize these transactions would have to be qualified to determine, and be able to determine, whether the legal rights of the debtor h~'cl been given the fullest consideration. This means, of course, that those exanilning a debt- adjusting transaction would have to be given access to the underlying contracts PAGENO="0045" DEBT ADJIJSTING BUSINESS 41 and other data supporting the claims against the debtor to determine whether in every instance there was a valid, enforceable claim, Obviously the adminis- trative burden would be considerable. To a certain extent this burden could be reduced by a requirement, either in the bill or in regulations adopted by the District government (and I note, incidentally, that H.R. 8929 does not, except by implication, authorize the District govern- ment to make regulations), that no debt adjuster shall enter into a contract with a debtor until there has been a determination, by impartiaZ coi~nse~ (not "house" counsel), that the claims against the debtor are valid and enforceable. There still would remain the problem of fair dealing, but at least the validity of the claims against the debtor would be established. REGULATIONS Those who urge the regulation of the debt-adjusting business have suggested some twenty-one regulatory conditions. Perhaps chief among these are the re~ quirements that those licensed as debt adjusters give bond (the bill establishes the amount of the bond at $5,000), that they be limited in the maximum rates they may charge, and that they be prohibited from making any charge unless the licensee has been able to secure the approval and consent of the majority of creditors, both in number and amount of indebtedness. With respect to the bond, it is to be questioned whether this would be of any value to a debtor who may have had his wages garnished and perhaps have lost his job as a result, by rea- son of the failure of the debt adjuster to make payment to a creditor. The bond requirement would seem to be of value only if it were coupled with a self-policing provision whereby any debtor injured by an act of commission or ormission on the part of a debt adjuster could claim treble damages, and proceed against the surety for this amount of damages. Such a requirement would offer considerable incentive for the debtor to bring to the attention of the appropriate authorities any incident indicating that he is being misled, deceived, or defrauded, or the debt adjuster is not performing in accordance with the agreement. The third of the suggestions set forth above also poses an interesting question. Those urging the regulation of debt adjusters would require a licensee to secure the approval and consent of only a majority of the creditors. This means that if a debtor has eleven creditors, the licensee need secure approval and consent of only six, whereupon he can fix his fee on the basis of the debtor's total debt. But the remaining five creditors may not accept the arrangement, and may insist on dealing directly with the debtor. I find nothing in any of the suggestions made by those urging regulation that the debt adjuster shall make a rebate to the debtor of so much of his fee as may have been based on the debts owing those creditors who refuse to deal with the debt adjuster, or basing his fee only on the total of the debts owing those creditors who have given their approval and consent to the transaction. DEBT ADJUSTING CHARGES Mr. Chairman, as lengthy as my testimony has been, I have touched only the fringes of what must be considered a grave problem. According to the debt ad- justers, the average debt of those who patronize them is of the order of $3,000. I understand that the fees of the debt adjusters range from twelve percent to as high as twenty-five percent. If we take fifteen percent as a conservative av- erage, this means that the total debt owed by the average person patronizing a debt adjuster is increased $450. In return for this amount, the debt adjusters have indicated that each such transaction may involve one or two hours at the inception of the transaction and perhaps fifteen minutes a month thereafter for the life of the transaction. Even were there no potential for deceit or fraud. there seems little justification for increasing the total debt of a group of per- sons the majority, and perhaps the great majority, of whom are already in- solvent. Obviously, with this amount of money involved, and this financial bur- den imposed on those of the community who can least affort it, there would devolve on the government of the District of Columbia the duty of scrutinizing in the greatest detail the transactions engaged in by debt adjusters, and even then it might be impossible to prevent injury to these persons. In view of this, the regulation of the debt adjusting business does not appear to be appropriate, and in view of the great potential for deceit and fraud inherent in this type of activity, its prohibition, in the view of the Commissioners, is the desirable course of action-a course of action presently effective in the City of Baltimore and in PAGENO="0046" 42 DEBT ADJUSTING BUSINESS 22 of the States, including Rhode Island, which after attempting for little more than two years to regulate the debt adjusting business, now prohibits it. Thank you, Mr. Chairman, for permitting me to take this statement, and, Un- Jess there are questions, this concludes my testimony. Mr. KNEIPP. I would like to proceed extemporaneously. Mr. Broy- hill has covered the constitutional question so well in his opening state- ment that I see no reason for repeating it, so I will skip on to page 5 ot~ the prepared statement that I furnished the Committee. Mr. SISK. If I might interrupt, Mr. Kneipp, you do take the posi- tion there is no constitutional question involved in the provisions of the Broyhill bill? Mr. KNEIPP. That is correct. The Broyhill bill is patterned after the Kansas statute that was considered in the case of Ferguson v. Skrupa referred to in my statement, and the constitutionality was affirmed by the Supreme Court in 1~63. The Broyhill bill has been modified to a slight extent but it is substantially the same as the Kansas statute. JI would like to say I disqualify myself as an expert on the wage earner provisions of Chapter 13 of the Bankruptcy Act. I understand there is someone in the room who is an expert on that and I defer to him. I see no reason, however, why there should not be inserted in the bill a new section saying nothing in the bill shall be construed as superseding or amending the Bankruptcy Act, so that the two are parallel to the extent necessary. But I would like to ask for an oppor- tunity to study that, if I may, `because I am not an expert on Chapter 13 bankruptcy proceedings. Mr. SI5K. I hope we can get to a witness representing the Bar Association. Mr. WHITENER. It might be helpful for Mr. Kneipp to talk to Mr. Ben Zelenko of the Judiciary Committee, who has studied Chapter 13 a great deal. Mr. KNEIPP. Twill do that. LICENSING As Mr. Broyhill has indicated, there is already general statutory authority for the Commissioners to regulate the debt adjustment busi- ness. They have not done so because, first, the administrative burden would `be considerable; and second, they did not want to give the im- pression of government approval of a business they felt there was no need for. Licensing debt-adjusters would be tantamount to licensing lions to eat lambs, and the Commissioners have avoided giving any semblance of approval of this business. Mr. SIsK. Title 47 of the District of Columbia Code has to do with general authority to require licensing and regulation of businesses? Mr. KNEIPP. I `think `so. I `think there is general authority in the Licensing Act. Mr. SISK. `So actually the Commissioners do have authority to regu- late at the present time? Mr. KNEIFF. Yes, under that provision the Commissioners have from time to time licensed about 80 businesses that are not specified in the Licensing Act, and they have licensed under the Licensing Act about 80 more. Debt adjustment could be one of those businesses and this has been within the authority of the Commissioners for some years, but they have indicated they prefer the prohibition of the business. PAGENO="0047" DEBT ADJUSTING BUSINESS 43 Starting at page 5 of my statement, the Commissioners feel this type of business involves the marshalling of assets and, more impor- tant, under these circumstances the debt adjustment client may need advice as to the legality of the various claims against him, the legal remedies governing debtor-credit relationships, and the applicability of the Bankruptcy Act. This means that in virtually every debt- adjusting transaction there is need for careful scrutiny of the under- lying contracts which gave rise to the debts which have been accumu- lated by the debtor. But this does not seem to be done in the debt adjustment business. On page 7 of the pamphlet that you have included in the record (the articles written by Miss Miriam Ottenberg), it seems that the debt adjusters ask four questions of their clients: (1) How much they owed; (2) how much they used for living expenses; (3) how much money they could give them that night; and (4) how much they could pay weekly. Where is the determination as to whether the creditor has a valid claim against him? For example, he himself might consider he owed a debt to the Scrooge Finance Company, but the contract may be an invalid contract that the debtor just presumes is valid. The debt adjuster makes no determination thereon. So here there is every op- portunity for the debt to be increased needlessly and, as I point out in my statement the debt adjuster has a vested interest in maximizing the debt because his fee is a portion of the debt. Obviously, determinations as to the legal rights of the debtor with respect to the claims against him are within the province of a lawyer, who has an interest in mini- mizing the debt. I go on to say that these legal determinations by non- lawyers are in fact the unauthorized practice of law. According to testimony given in the other body the average em- ployee in the business of debt adjustment has two years of college education, and it would hardly be conceivable that employees with this level of education are qualified to advise a debtor concerning his legal rights and any defenses he may have to the claims against him. It could be said, in a situation where the debt adjuster fails to recognize that the debtor has a defense to a claim against him, that it is a case of the blind misleading the blind, because the debt adjuster doesn't know there is this defense and, moreover, he probably does not care because the higher the debt the higher the fee. Mr. HORTON. Would you mind an interruption there? Has the Dis- trict of Columbia Bar Association made any recommendation in this matter to your knowledge ~ Mr. KNi3aPP. I do not know. Mr. HORTON. Has this been brought to the attention of the District of Columbia Bar Association? Mr. KNEIPP. I cannot answer that but I will find out. Mr. SIsK. If I may interupt, the American Bar Association has a representative here who will testify, we are advised. I do not have a request from the local Bar Association to appear. Mr. KNEIPP. Mr. Broyhill has already mentioned the fact that last July 1, a year ago, seven persons who operated two debt consolidation services headquartered in Washington and Baltimore were convicted ~n the United States District Court for the District of Columbia on mail faud charges. Three of them, I believe, have taken an appeal and the case is pending in the United States Court of Appeals. But the PAGENO="0048" 44 DEBT ADJUSTING BUSINESS nature of the business, really, is such that if. the public is to be pro- tected it will requires careful scrutiny of every transaction. This means that the regulatory personnel would have to be given access to the un- derlyin~ contracts and other data supporting the claims against the debtor in order to determine if there was a valid and enforsceable claim against him. The bill H.R. 8929 makes a brave show of allow- ing the District to have access to the books of the debt adjustment concern. But of what value is that from the standpoint of determining whether there was a valid claim against the debtor in the first in- stance? It is of some value, perhaps, in determining whether there were excess charges agamst the debtor. The maximum, incidentally, is 12 percent. In your own State it is 12 peruent for the first $3,000; 11 percent for the next $2,000; and 10 percent for any amount there- after. Also, I might mention California has a bond requirement of $10,000, whereas the bill requires only $5,000. And the conditions of the California bill regulating this business `are more stringent, in my opinion, than those in H.R. 8929. I have been furnished by Mrs. Frank Sinatra of the Department of Labor, Bureau of Labor Standards, who is in the room, a copy of a publication published by the United States Department of Labor, entitled "Summary of State Laws Prohibiting or Regulating the Business of Debt Pooling." I would like, if I may, to offer this to the' Committee as a quick summary of all the State laws on the subject in question. I see Mr. Horton has a copy. Mr. SISK. What is the date of the publication? Mr. KNEIPP. July, 1967. Mr. SISK. Without objection, it will be made a part of the record at this point. (The document follows:) SUMMARY OF STATE LAWS PROHIBITING OR REGULATING THE BUSINESS OF DEBT POOLING U.S. Department of Labor, Bureau of Labor Standards, Washington, D.C., July, 1967 The spiraling increase in consumer credit since World War II has resulted In problems of overindebtedness to a great many wage earners and their families. The Federal Reserve Board estimated that the personal indebtedness of Amer- ican consumers at `the beginning of 1967 was almost 95 billion dollars. This estimate covers installment buying of automobiles, other consumer goods, and loans to individuals for household, family, and other personal expenditures, except real estate mortgage loans. For many people the debt is manageable, but any unforeseen occurrences such as illness in the family, a job layoff, or an accident makes repayment at the proper time difficult. It may also lead to addi- tional indebtedness. To extricate themselves from debt and the harassment of creditors, many individuals have turned for help to debt-pooling firms.' Debt pooling firms are not loan companies; they do not use their own funds in assisting the debtor to pay off his creditors. Rather, their purpose is to work out a plan with the debtor and his creditors for payin.g off the debts over a period of time. The debtor `agrees to turn over to the firm a certain portion of his earn- ings each payday, which the firm agrees to pay to the creditors, less specified fees and expenses. Putting the plan into operation depends on the voluntary consent of the creditors. The agency's fee is usually a percentage of the indebted- ness listed by the debtor. 1 called "debt consolidation," "debt adjustment," "debt management," "budget planning," "financial management," "debt lumping," "prorating," and other names. PAGENO="0049" DEBT ADJUSTING BUSINESS 45 CIRCUMSTANCES LEADING TO LEGISLATION Complaints to the Better Business Bureau the National Legal Aid Society and court cases in several of the States have indicated that unscrupulous debt poolers, instead of helping the debt-ridden, have actually created additional problems for them. Freqeuntly, creditors have refused to participate in the debt-pooler's plan but the debtor has not been notified of this fact. Sometimes the debt-poolers have paid themselves their entire fee first, and it has been some time before money was available to pay the creditors. Accepting the services of the debt-pooler has not prevented garnishment or repossession of merchandise although contrary promises had been made or implied. Because of these and other abuses the S:tates found it necessary to take legislative action. EARLY LAWS The first two laws dealing with debt pooling as a commercial business were enacted in Minnesota in 1935 and in Wisconsin in 1937. These laws regulate the business by requiring operators to obtain a license post a bond and meet other specified requirements However until 1955 debt pooling firms were gen erally~ free, to operate unhampered. Numerous abuses by some of these firms, followed by indictments in Several instances, led to pressure for enactment of laws curbing their activities That year Maine Massachusetts and Pennsyl vania enacted laws prohibiting the business of debt pooling. Similar laws were enacted in Georgia New York and Virginia the following year PRESENT STATUS There are now 34 States with laws prohibiting or regulating the business of debt pooling. The following 22 States prohibit debt pooling as a commercial business ~: Year Year State enacted State enacted Arkansas 1967 New' York 156 Delaware 1966 North Carolina 1963 Florida 1959 Ohio 1957 Georgia 1956 Oklahoma 1957 Hawaii 1967 Pennsylvania 161 Kansas 1961 Rhode Island 1964 Maine 1955 South Carolina 1963 Massachusetts 1955 Texas 165 Missouri 1966 Virginia 1956 New Jersey 1963 West Virginia 1957 New Mexico 1965 Wyoming 1957 The following 12 States regulate this `type of business: Year Year State enacted State enacted California 1957 Minnesota 1935 Colorado 1965 Nebraska 1967 Connecticut3 1967 Oregon 1963 Idaho 1963 Utah 1963 Illinois 1957 Washington 1967 Michigan j961 Wisconsin 1937 LA1~S PROHIBITING THE BUSINE55 øF DEBT POOLING Most of the 22 State laws prohibiting the business of debt pooling outlaw debt-pooling activities, as defined, and provide penalties for violations. The laws of Massachusetts, South Carolina, and Virginia differ from the majority in that they provide that the furnishing of .advice or services for a debtor in con- nection with a debt-pooling plan is deemed the practice of law. Thus, debt 2 In addition, the city of Baltimore, Maryland has an ordinance prohibiting the business of debt pooling. In Connecticut a regulatory provision enacted in 1955 as an amendment to the collec- tion agency law was repealed in 1967 and replaced by a separate law, which becomes effective Jan. 1, 1968. ~ The Nebraska law is not effective until Jan. 1, 1969. By addendum subsequently filed with the committee, Iowa should be added to this list. (See p. 168 hereof.) 84-181---67----4 PAGENO="0050" 46 DEBT ADJUSTING BUSINESS pooling as a business is prohibited as the unauthorized practice of law. The West Virginia law also differs from the majority. That law makes it unlawful to solicit the rendering of advice and services to a debtor in connection with a debt-pooling plan, and provides that those who are exempt from the law (e.g., attorneys or voluntary associations) who render such service may not charge more than 2 percent of the total money collected pursuant to the plan. Eccemptions The most common exemption is that of attorneys, which is found in 19 of the prohibitory laws, i.e., all but the North Carolina, Ohio, and Oklahoma. Five of these States, Delaware, Georgia, Kansas, Virginia, and Wyoming, qualify the exemption by limiting it to the performance of debt-pooling services as an inci- dence to the regular practice of law. In 10 of these States it is the only exemp- tion; Florida, Georgia, Kansas, Maine, Massachusetts, New York, South Caro- lina, Rhode Island, Virginia, and Wyoming. A few examples of some of the other types of exemptions are: Judicial officers or others acting pursuant to court order are exempted in seven States: Arkansas, Hawaii, Missouri, New Jersey, New Mexico, North Carolina, and Texas. Five States exempt nonprofit organizations. Arkansas exempts such orga- nizations if no charge is made for the service. Delaware and Hawaii permit a nominal charge as reimbursement for expenses. New Mexico exempts such an organization when it is organized as a community effort to assist debtors. Pennsylvania exempts welfare agencies which act as debt poolers on behalf of debtors without compensation or profit. Hawaii and Pennsylvania exempt Legal Aid Bureaus. Five States exempt full-time employees of a debtor who act as an adjuster of his employer's debts: Hawaii, Missouri, New Jersey, New Mexico, and North Carolina. Four States exempt a creditor of the debtor rendering adjustment service without charge: Missouri, New Jersey, New Mexico, and North Garolina. The only exemption in the Ohio law is for a person who was licensed and regulated by the legislative authority of the political subdivision in which sach person operated prior to January 1, 1958 (the effective date of the act); and Oklahoma exempts only retail merchants' trade associations and nonprofit groups formed to collect accounts and exchange credit information. Constitutiona7~ity Five prohibitory laws, Massachusetts, New Jersey, Pennsylvania, Kansas, and Ohio, have been challenged in the courts. The Supreme Judicial Court of Massachusetts in 1957 held in a declaratory decree5 that the statute providing that debt-pooling services constitute tj~e practice of law "is not unconstitutional as an interference with the purely judicial function to determine who may practice law `but is a valid enactment in aid of the court's powers to make such a determination." The Pennsylvania Supreme Court in 19606 unheld the decision of the Superior Court that the State law (Act 224, L. 1955) prohibiting the business of budget planning is an unconstitutional exercise of the police power, notwithstanding that the planner's activity in collecting and distributing the debtor's money may afford the planner the opportunity to defraud the public. Following the court's decision, the Governor recommended and the legislature enacted a new law in 1961. It differs from the earlier law in that it does not outlaw budget planning, but only debt pooling for a fee. The new law has not been chhllenged. The New Jersey Superior Court in 1961 upheld the constitutionality of t1~ State law. The court implied its agreement with the decision of the Massachu- setts court and disagreement with the decision reached by Pennsylvania, in what were apparently similar laws. The U.S. District Court for the District of Kansas found that the State law prohibiting the business of debt adjusting was unconstitutional.8 In a decision issued April 22, 1963, the U.S. Supreme Court reversed the lower court.9 The Court said that Kansas statute does not violate the due process clause of the 14th amendment; that `States `have power to legislate against injurous practices Home Budget Stervice, Inc. V. Boston Bar Association, 335 Mass. 228 139 N.E. 2d (387) (1957). Commonwealth v. stone, 191 Pa. Super 117; 155 A. 2d (453) (1960). American Budget Corp. v. Furman, 170 A. 2d 63 (1961). S ~krupa v. &inborn, 210 F. Supp. 200 (1961). 5Ferguson v. $lcrupa, d/b/a Credit Advisors, 372 U.S. 726 (1963). PAGENO="0051" DEBT ADJUSTING BUSINESS 47 in their internal affairs, so long as their laws do not conflict with a Federal constitutional provision or law; the statute's exception of lawyers is not a denial of equal protection of the law to nonlawyers. The Court said further that there are arguments showing that the business of d'~bt adjusting has social utility, but such arguments should be addressed to the legislature rather than the courts. The Ohio Supreme Court upheld its law, in a case decided March 10, 1965.1~ LAWS REGULATING THE BUSINE5S OF DEBT POOLING The States which enacted laws prohibiting the business of debt pooling did so because `it was believed that regulating the activities of such businesses would prove `too difficult; that the only way to cope with the unethical practices of `such firms was to outlaw their activities completely. Other States believed the busi- ness could be regulated. An example of such a S'tate is California. Until 1957, California had no law relating to debt poolers, as such, but covered them, by interpretation, under its law regulating collection agencies. However, an increasing stream of complaints `from businessmen `and the general public led the California `Senate to create an Interim Committee which was directed "to gather facts regarding collection agencies, debt liquidators, `and private detectives, the regulation thereof, and the enforcement of all laws relating there- to." The Interim Committee held hearings in several cities, and reported, in part, that: "* * * As for the debt liqui'dators and proraters, the chief malpractic~s' in their field seemed to involve misleading advertising and doubling as collection agencies. "False advertising, especially on television and radio, has been used to make the debt-ridden think the proraters can prevent wage `attachments, loss of jobs, and repossessions. Phrases like `No Security,' `No Co-signers,' and `Our Low Rates' give the impression tha't the prorater pays creditors from his own funds, asking only that the `debtor repay him with reasonable interest. The facts are that the prorater does not `consolidate' the debts `and pay `off creditors w'ith `his own money; the debtor `continues to owe each and every creditor severally, regardless of the plan the operator purports to offer. `The unscrupulous prorater attracts the debt-ridden into his office largely for the purpose o'f collecting fees from them. "The committee also learned *that several firms operate a debt-liquidation agency and a collection agency under `the same roof with identical personnel. The prorater end of the business' acquires from the client a list of his creditors. Then, acting as collectors, the agency solicits the creditors to assign it the accounts for collection. The creditor who refuses to hand over the account gen- erally finds himself at the end of the line when the debtor's payments are prorated." U As a result California passed a law regulating the `debt-pooling `business, completely separate from the law regulating collection agencies; the two la'ws are administered in different departments. The regulatory laws are separ'ate laws, applicable only to `debt-pooling firms, except in Idaho where it is a part of the collection agency law. Licenses and investigations All of the regulatory laws require an applicant to obtain a license, renewable annually. (`See Table 1, p. 7.) As a prerequisite to the issuance of a license, the applicant must be `investigated for financial responsibility and good moral character. Usually the applicant pays the cost of the investigation. If, following investigation, the applicant is denied a license, the license fee is returned to him, `but not the investigation fee. Most of the laws provide th'at an applicant may appeal the denial of a license; if he does, a hearing must `be held. Final `appeal is usually to the courts'. Bond Each law requires the operator to post a bond. The amount of the bond varies from $5,000 `to $25,000. Some o'f the laws permit an operator to make a cash deposit in lieu o'f posting a bond. ~° state or rel. Clark v. Brown, ,Secretary of fltate, 205 N.E. 2d 377 Supreme Court of OhIo (1965). 11 Report of the Senate Interim Committee on Collection Agencies, Private Detectives, and Debt Liquldators. (Senate Resolution No. 155, 1957, CalIfornia.) PAGENO="0052" 48 DEBT ADJuSTING BUSINESS TABLE 1. -LICENSE AND INVESTIGATION FEES; AMOUNT OF BOND Initial in- Amount of State License fee vestigation fee bond California Colorado Connecticut 1 Idaho Illinois Michigan Minnesota Nebraska 5 Oregon Utah Washington Wisconsin $100 for principal office; $20 for each branch office $50 foreach office $100 for each office $25 foreach office $100 for each office $S0foreach office $10 for each office $100 for principal office; $50 for each branch office $150 for principal office; $100 for each branch offlce_ - -- $50foreach office $S0foreach office $100 for each office location with population of 25,000 or more; $50 for each office location with population of less than 25,000. $50 100 50 (2) 30 50 (4) 100 (0) 50 50 (3) $10,000 25,000 110,000 35,000 7,500 35,000 5,000 10, 000 10,000 25,000 10,000 5,000 1 The Connecticut law becomes effective 1/1/68. The administrator is authorized to require a larger bond if he deter- mines it is warranted by the business circumstances of the licensee. 2 In Idaho and Wisconsin, the applicant must pay the entire cost of the investigation. $ For each office. 4 In Minnesota, investigatIon is required but the law does not require the applicant to pay the cost. `The Nebraska law becomes effective 1/1/69. $ No provision. Ewem,ptions The usual exemptions in these laws are for: (1) attorneys; (2) banks, fiduci- aries, financing, and lending institutions duly authorized and admitted to trans- act business in the `State; (3) title insurers and abstract companies while doing an escrow `business; (4) employees `of licensees when acting in the normal course of their eimiployment; (5) judicial officers or others acting pursuant to. court order; (6) nonprofIt, religious, fraternal, or cooperative organizations offering debt-~pooling services for their members; and (7) employers offering debt-pooling services exclusively for their employees. The exemption of attorneys under the laws of `California, Colorado, `Connecti- cut, Illinois, Michigan, Nebraska, Utah, and Wasthimgton is applicable only when the debt pooling occurs in the normal course of their practice; in Oregon it is applicable to attorneys who do not specialize in the business of debt pooling. There are no exemptionh in the Wisconsin law. (Jon$ent of creditors Unless the creditors consent to the debt-pooling plan, sacifi a plan is useless. The laws of `California, Michigan, and Utah require that consent must be ob- tained from the holders of at least 51 percent of the total amount of the indebt- edness and of the total numiber of ereditoi~s listed in the contract between the li- censee and the debtor. The Connecticut law is similar, except that a "anajo,rity'~ is `stipulated, rather than 51 percent. Colorado requires the consent of 80 percent of the creditors listed in the contract, and Illinois requires that a majority of the creditors listed must agree to the plan. Unlike any ol' the other laws, Connecticut grants credito~ts or their attorneys access to all records relative to such consent for verification. Before snaking any charges, Orugon and Washington require the debt-pooling firm to notify all of the debtor's creditors that the debtor has engaged the serv- ices of the licensee. The laws of Idaho, Minnesota, Nebraska, and Wisconsin are silent on this point. Fees Fe~s charged by `debt~pooling businesses are `based on a percentage ott the in- debtedness as listed by the debtor. Ten of the 12 regulatory laws (all but Michigan and Minnesota) fix the snaxinium fee which `may be charged, ranging from 10 to 15 percent. All of the regulatory laws except Idaho provide that the fee of the licensee must be agreed upon and stated in the contract, and that a copy of the contract must be furnished to the debtor. PAGENO="0053" DEBT ADJUSTING BUSINESS 49 The laws of California, Oregon, and Washington require the contract to set forth in precise tern~s the amount of the payments, which must be within the ability of the debtor to pay. California and Wa~s1hington also require disclosure to the debtor of the approximate number and amount of installments required to pay the debts in full. The laws of Colorado, Connecticut, Illinois, Michigan, Ne- braska, and Utah require the fee of the licensee to be amortized over the life of the contract, while Oregon prohibits the debt pooler from taking his fee at a faster rate than the rate of distribution to any unescured creditor who is willing to accept payment. T~&nLE 2.-Mawimum fees established by law or by administrative authority California _______ 12 percent for the first $3,000 of indebtedness; 11 percent for the next $2,000; 10 percent for any of the remaining payments distributed to creditors. Colorado 12'/2 percent of the total indebtedness of the debtor. Connecticut 10 percent of the amount required to pay the indebte'dness when the plan of payment is for a period of 10 months or less; 121/2 percent when the plan of payment is for more than 10 months but less than 18 months; 15 percent when the plan of payment is for a period of 18 months or more. Idaho 15 percent of the amount received at any one time from the debtor. Illinois 10 percent of the amount required to pay the indebtednes~ when the plan of payment is for a period of 10 months or less; 121/2 percent when the plan of payment is for more than 10 months but less than 20 months; 15 percent when the plan of payment is for a period of 20 ~nonths or more. Michigan No specific maximum. Minnesota No `provision. Nebraska 15 percent of the amount of money agreed to be paid through the licensee. Oregon 15 ~ercent of the amount actually paid to creditors. Utah 10 `per'cent of the payments actually distributed to creditors. Washington 15 percent of the total debts listed by the debtor. Wisconsin 10 percent of the total indebtedness. Report to debtors; remittances to creditors Most of the 1aw~s require the debt~pooling agency to keep the debtor informed of his account. Remittances to creditors must he made by the agen'cy within a specified perio'd after re'ceipt of funds from debtors for this purpose. As `shown in Table No. 3, this period of ti'me varies from "promptly" upon receipt of fund's' in Illinois to at least once each 40 days in Washington. TABLE 3.-Permissible time lapse between remittance from debtor and disburse- ment by debt pooler California Once each month. Colorado Within 2 working `days. Connecticut Within 10 days. Idaho Within 30 days after close of each calendar month. Illinois Promptly. Michigan Within 15 clays. Minnesota Within 35 days. Nebraska Within 15 days, or 7 `days if funds are in the form of cash. Oregon Within 30 days after close of eadh calendar month. Utah Within 15 days. Washington At least once each 40 day~ Wisconsin Within 5 days. PAGENO="0054" 50 DEBT ADJUSTING BUSINESS Prohibited practices All of these laws prohibit some activities. Practices most commonly prohibited are: 1. Purchasing from a creditor any obligation of a debtor; 2. Operating both as a collection agent and as a debt pooler; 3. Receiving or charging any fee in the form of a promissory note or other promise to pay, or receiving or accepting any mortgage or other security for any fee, both as to real or personal property; 4. Advertising falsely, or making misleading or deceptive statements or representations as to the services to be performed or the charges to be made; 5. Using a contract form which has not been approved by the administrator. A provision in the Connecticut law not found in any other law prohibits any licensee from using any word or phrase which states or implies that "he is bonded,. approved, bonded by the State or approved by the State." Investigation authority Most of the laws authorize the administrator to investigate the business of debt pooling at any time and/or upon complaint. Usually, the licensee pays the cost of the investigation. Only Washington has no specific provision of this nature. The Washington law does, however, require that books and records be kept open for inspection. The laws of Connecticut, Michigan, Nebraska, and Utah permit the adminis- trator to examine, without notice, the conditions and affairs of each licensee. Colorado requires that the licensee be given 5 days' notice that the examination is to be made, and that he pay the cost of the actual examination, .not to exceed $50 a day. Illinois `specifies that the business must be examined at least once a year, and limits the cost of such examination to $50 a day. Only Minnesota, of the States authorizing investigations, has no provision as to payment of such investigation. The other laws provide that the actual cost of the examination bust be paid by the licensee; failure to pay such cost within a specified period is cause for revocation of the license. Beparate accounts The majority of the States (California, Colorado, Connecticut, Idaho, Illinois, Michigan, Nebraska, Oregon, Utah, and Washington) require licensees to main- tain separate trust accounts of funds received from debtors; commingling of their own funds with those received from debtors for payment to creditors is prohibited. Maintenance of records All of the laws require debt poolers to maintain specified records, which must be available for inspection. Ten laws specify the length of time such records must be preserved after the final entry is made: 2 years in Illinois and Minne- sota, 4 years in California, 5 years in Idaho and Nebraska, 6 years in Washington, and 7 years in Colorado, Connecticut, Michigan, and Utah. Miscellaneous provisions The laws of California, Connecticut, Michigan, Nebraska, and Oregon provide that a contract shall not be effective untiJ a debtor has made a payment to the debt pooler for distribution to his creditors. Colorado, Connecticut, Michigan, and Nebraska do not permit a licensee to accept an account unless a thorough financial analysis indicates that the debtor can reasonably meet the requirements of the contract. Idaho, Oregon, and Washington require applicants for a license to take an examination which may be either written or oral or both. Several of the laws require citizenship and minimum age (usually 21) before a license may `be granted. Annual reports California and Oregon require a licensee to file an annual report with the administrator concerning their business and operations. The report must in- clude money paid by debtors which has not been transmitted to creditors. California requires a certified audit report prepared by an independent public accountant, while Oregon requires a "verified" reporc. Coii~iecticut requires the PAGENO="0055" DEBT ADJUSTING BUSINESS 51 application and renewal of a license to be accompanied by a certified financial statement. Admilnistration Administration of the regulatory laws is vested in the following: California Commissioner of Corporations. Colorado Bank Commissioner. Connecticut Bank Commissioner. Idaho Commissioner of Finance. Illinois Director of Financial Institutions. Michigan Department of Commerce. Minnesota Secretary of State. Nebraska Secretary of State. Oregon Commissioner of Real Estate. Utah Department of Registration. Washington Director of the Department of Motor Vehicles. Wisconsin Bank Commissioner. Mr. SIsK. Mr. Whitener would like to take a look at it. Mr. KNEIPP. I think, Mr. Chairman, it is obvious that if there is to be regulation of this type of business, it will be a very great administra- tive burden on the District of Columbia. To a certain extent this bur- den could be reduced either by amendment of the bill or in regulations adopted by the District Government. I note, incidentally, that H.R. 8929 does not, except by implication, authorize the District Govern- mont to make regulations--that no debt adjuster shall enter into a contract with a debtor until there has been a detcrminatioii, by impar- tial counsel-not "house" counsel-that the claims against the debtor are valid and enforceable. There still would remain the problem of I aim dealing, but at least the validity of the claims against the debt or would be established. BOND REQUIREMENT I have already mentioned the bond requirement. There is a question in my mind, what value is this $5,000 bond to a man who may have had his wages garnisheed and lost his job as a result. Recently a maim came into the law enforcement division of the Corporation Counsei's Office. It seems he had had dealings with Creditors Advisors, Inc. They had failed to make payments as they had agreed, the creditor sued the debtor, the debtor, upon being sued by the creditor, stopped payment to Credit Advisors, Inc., whereup Credit Advisors, Inc., sued him for their fee. So the debtor is being sued both by the creditor and by the debt adjustment firm. Now, what is the measure of damage to a person who may have suffered grave economic injury by reason of this? I suggest in my statement that the bond requirement would he of value only if it were coupled with a self-policing provision whereby any debtor injured by an act of commissiomi or omission on the part of a debt adjuster could claim treble damages and proceed agaiw-t the surity for this amount of damages. Such a requirement would offer considerable incentive for the debtor to bring to the attention of the appropriate authorities any incident indicating that he is being misled, deceived, or defrauded, or the debt adjuster is not performing in ac- cordance with the agreement. If a debt adjuster or a prorater, a~ they PAGENO="0056" 52 DEBT ADJUSTING BUSINESS call them in California, charges excessively and is caught he merely has to give back the fees. I suppose there is a license action taken against him also, but just taking what he was paid I do not feel is a severe enough sanction. Mr. Broyhill has already mentioned that if the debt adjuster fails to perform in accordance with the contract there is no record, at least to my mind, of his making reimbursement to the debtor for a prorata part of the fee. Most important, Mr. Chairman, the average debt, according to testimony in the other body, of the debtor who patronizes a debt adjuster is on the order of $3,000. Now, if you take as a con- servative average a 15 per cent debt adjusting fee on top of that, $450 more is added to that debt. You spread that through the community and you can see this is a tremendous econOmic burden on the commu- nity. What does the debtor get for his $450? Testimony before the committee in the other body indicates he may get an hour or two of consultation at the inception of the transaction and thereafter for the life of the transaction, 15 minutes per month, assuming the life of the transaction is 24 months. There is 6 hours plus an hour or two at the start, seven or eight hours for $450. I think the committee can recog-. nize a considerable amount of legal services could be procured f or that $450, possibly even resulting in the reduction of the total debt of the debtor instead of an increase in it. So, for all of these reasons, Mr. Chairman, the Commissioners of the District of Columbia strongly believe that the business of debt adjust- ing in the District of Columbia should be prohibited and not be regulated. I might mention, incidentally, that 22. states, as Mr. Broyhill has indicated, now prohibit debt adjusting whereas only thirteen regulate it. They are as follows: STATES PROHIBITING DEBT ADJUSTING Busnixss Arkansas Missouri Rhode Island Delaware New Jersey South Carolina Florida New Mexico Texas <~eorgia New York Virginia Hawaii North Carolina West Virginia Kansas Ohio Wyoming Maine Oklahoma Massachusetts Pennsylvania City of Baltimore STATES REGULATING DEBT ADJUSTING BUSINESS California Iowa TJtaIi Colorado Michigan Washingto~i Connecticut Minnesota Wisconsin Idaho Nebraska Illinois Oregon Interestingly enough, there is something that the debt adjusting people have very carefully refrained from mentioning in the Senate. They may mention it here today, but I question whether it will be in their prepared statements. That is that Rhode Island tried to regulate the business of debt adjusting. They enacted a law in April of 1962 regulating the business. Then by a law enacted May 1st, 1964, they have prohibited the business of debt adjusting in Rhode Isla.nd. I can surmise two reasons for that. Either they found that regulation PAGENO="0057" DEBT ADJUSTING BUSINESS 53 of the business was not effective or they found that it was administra- tively burdensome, or both. A state that once tried to regulate the business of debt adjusting found it necessary, in something like 25.5 months, to enact legislation prohibiting it. Perhaps representatives of the business here today can explain why Rhode Island did that, but I find it very interesting. I have nothing more, Mr. Chairman, unless there are some ques- tions. Mr. SISK. Thank you, Mr. Kneipp. I understand from your state- ment that the Commissioners support the Bro'yhill bill? Is that correct? Mr. KNEIPP. Yes, Mr. Chairman. Mr. SISK. I believe you mentioned Chapter 13 in relation to the question raised by our colleague from North Carolina. The bill might require some revision or possibly a new section. As I understand your comments, you indicate that that is possibly a unique feature in that bill. Mr. KNEIPP. I will discuss the question with Mr. Zelenko of the Judiciary Committee, and I will make known to the staff what might have to be done in this regard. Mr. SISK. Based on some of my own experiences, I have one ques- tion, Mr. Kneipp, that concerns me. Also, I think it would concern most people who have had contact with a variety of people over a period of years. Was your statement of the reasons why the District Commissioners have not found it advisable to go ahead and use existing `authority to regulate the business of .debt adjusting, based on the fact that it was their feeling no need existed for it. Mr. KNEIPP. No, Mr. Chairman. That there is no economic justifica- tion for this. I think by that `they mean with regard to the matter of charging for this service-I think everyone recognizes a person in debt may need some guidance and for `this reason the bill does pro- vide `that it shall not be applicable to `the non-profit type of `budget c'ounselling service, `but it is `the lack `of economic justification. This business of increasing the total debt by 15, perhaps to as high as 25 per cent-although on the average it may not be that much, but the resul't of `increasing the debt of an already insolvent group of people seems `to have little economic justification. Certainly they may need `help in managing their debts, but t'hey don't nee'd help that jus't shoves them further in'to debt, and `thi's is the basis- Mr. SISK. If I can cl'arify the intent `of my question based on what I understood you to `say. Let's say that in the morning a gentleman comes into my office. He has debt problems and has reached the en'd of the `line, so to speak. I am referring t'o a situation where a man becomes so burdened down thro'ugh mismanagement, or being "gul- lible," that he finds `himself with `a variety of `bills which he simply cannot pay. In `this case, `to whom `should I send him in the District of Columbia? I think it is fine if this service was on a non-profit ba'sis and free of `charge to the public. Is such `an `organization, `or are such services available in the District of Columbia? Are you advocating that it should be a taxp'ayer-suppo'rted institution? PAGENO="0058" 54 DEBT ADJUSTING BUSINESS Mr. KNEIPP. No, sir. There is in the making a non-profit counseling service of this `sort. If Mr. William Press of the Metropolitan Board of Trade is to be heard today, I think he will discuss this with the committee. There is already in existence in the City of Baltimore a very- I suppose a good word would be "potent"-non-profit counseling service supported by the business people and a number of others. I have no data setting that forth, but I am aware there is in Balti- more such a `service and I am aware there is in the making here in the District of Columbia such a non-profit services. As has been pointed out, the creditors themselves would be willing to help some- one manage `hi's debts but at the moment I don't think there has been established a formal service of the kind you mention. Mr. SI5K. I. have `approached this matter with a completely open mind. I recognize there have been serious abuses in this area here in the city of Washington. I think that the committee d'oes have a responsibility to try to get the fact's as best we can and then move to try to do something `about it. I don't want to indicate by my questioning to be in opposition to your po'sition. I think, however, we all recognize there are people who find themselves in pretty dire straits at times and who do need some advice and assi'stance. Before I firmly commit myself, I wish to carefully scrutinize any- thing that would outlaw completely the right to furnish `such `a service under legitimate procedures and proper policing. You will agree with me there is `a need for this service. It is a matter of how the service is going to be rendered. Mr. KNEIPP. I think that is the question. Mr. `SIsK. The gentleman from North Carolina ~ Mr. WHITENER. My questions should not indicate any hostility "to the thinking of proponents of the regulation or the proponents of the `ot'her side. I notice `in the Commissioner `bill that included is "budget planning." Now, in the very fine publication of the Department of Labor they point out the Pennsylv'ania `Supreme `Court in 1960 upheld a decision of the Superior Court that the state law prohibiting the `business of "budget planning" is an unconstitutional exercise `of police powers. `Comimonwealth `vs. Stone, 191 Pa. Super. 117, 155 Atlantic 2d 453. Have you taken into accoui~t the reasoning of the Pennsylvania Supreme Court in that ease when you use the term "budget planning" as one of the prohibited acts under H.R. 98O6~ Mr. KNEIPP. No, I have not read that Pensylvania `case, Mr. Whit- ener, but I think it has probably been superseded by the Fergu~son Case in 1963 in the Supreme Court of `the TJnited States. Mr. WHITENER. You are talking now about the Kansas case? Mr. KNEIPP. Yes sir. Mr. WHITENER. ~krupa against Sanborn. Mr. KNEIPP. No, it is Ferguson against Skrupa in the Supreme Court. I think the Ferguson against Sanborn case was in the Kansas `Court. Mr. WHITENER. That is a 1963 case. Again I oniy have this `Department of Labor publication. PAGENO="0059" DEBT ADJUSTING BUSINESS 55 The U.S. District Court for the District of Kansas found the state law prohibited the business of debt adjusting. Mr. KNEIPP. That was a three-judge district court. Mr. Wrn1~NER. It refers to "budget planning." Now, budget planning and debt adjustment are two entirely differ- ent things it seems `to me. I may need a little assista~nce at times in planning how to use my meager income. Now, I may go to a banker or a minister, or any other friend and ask them to assist me in budget planning. It seems to me that is an entirely different thing from debt adjusting. He is trying to keep me out of debt through budget planning, isn"t he? Mr. KNEIPP. The Ferguson Case in 1963, Mr. Whitener, went straight to that point. I quote from pa:ge 3 of the split decision of the Supreme Court in the Ferguson case: "Finding debt adjusting, called `budget planning' in the Pennsyl- `vania statute not to be against the public interest" and they go on discussing that Pennsylvania case. But in the Supreme Court in the Ferguson case they referred to budget planning as being tantamount to debt t~djusting. Mr. WHITENER. In other words, keeping you out of debt is the same as getting you out of debt. Mr. KNEIPP. No, I don't think so, sir. I think `budget planning within the meaning of `the Pennsylvania statute is what we were referring to as debt adjusting here. This matter of the d~bt adjuster taking your paycheck to pay your debts and charging you a fee for it. Mr. WHITENER. I wonder if th'e clerk could get the Pennsylvania case for us and make it a part of the record? Mr. SIsK. I `think that is an excellent sugge~tion on the part of the gentleman from North `Carolina. Without objection, we will make that a part of the record. (The case referred to appears on pp. 56H-59.) Mr. WHITENER. Mr. Kneipp, I note further from the Department of Labor publication that many of the states d'o exempt att'orneys'as this bill, H.R. 9806, would. Five of those states qualify the exemption by limiting it to the performance of debt pooling services, incident to the regular practice of la;w. Now, d'o you think this qualification should be attached to your exemption of attorneys? Under y'our bill, as now written, it seems to me that I, as a member of `the District of Columbia Bar, could open up a "debt adjusting service" and do the same things which you now say are bad, simply because I have a law license. Mr. KNEIFF. Section 3 `of the Broyhili bill provides that the bill shall not `apply to those situations involving debt adjusting incurred incidentally in the la~wful practice of law in the District of Columbia. Mr. WHITENER. Subsection 3 of Section 1 says: Partnership does not include a partnership, all the members of which are admitted to the bar of the United States District Court of the District of `Columbia. Mr. KNEIPP. If by that, sir, you mean that a partnership of lawyers were to engage in the debt adjusting business, not as incidental to the practice of law, I `think the bill would prohibit it. PAGENO="0060" COMMONWEALTH of Pennsylvania, Appellant, V. Stanley S. STONE. COMMONWEALTH of Pennsylvania, Appellant, V. PhIlIp J. DE BLASIO. COMMONWEALTH of Pennsylvania, Appellant, V. ceive money from debtor periodically and distribute such money among certain speci- fied creditors in accordance with a plan- agreed upon, unreasonably interferes with and nullifies a vital factor of budget/plan- fling business and is unconstitutional/exer- cise of the police power, notwithstanding that planner's activity in collecting and dis- tributing the debtor's money may afford the planner the opportunity to defraud the public. P.S.Const. art. 1, §~ 1, 9; art. 3, § 7; U.S.C.A.Const. Amend. 14; 18 P.s. § 4897. 2. ConstItutIonal Law ~8l The mere possibility that one engaged in a lawful business may also engage in unlawful practices is no justification for. prohibiting the business, if it be a legitimate: one in the first instance. 3. EvIdence ~5(2) It is well known, that millions of sales are made in the United States on the in- stallment. plan and that billions of dollars are involved in such transactions. Before RHODES, P. J., and WRIGHT,. WOODSIDE, . ERVIN and WATKINS, JJ. ERVIN, Judge. [1] The sole question involved in these appeals is whetherthe Act of 1955 making it a misdemeanor to engage in the budget planning business, as therein defined, is an unconstitutional exercise of the' police powers of the state in violation of art. I, §~ 1 and 9, art. III, § 7, of the Pennsylvania Constitution, P.S. or the 14th Amendrnent~ to the Constitution of the United States~ 56 DEBT ADJ1JSTING BUSINESS COMMONWEALTH v. STONE 191 Pa.Super. 117k A.2d 453 Stanley S. STONE, PhIlIp J. DeBlaslo and R. E. Butler. Superior Court of Pennsylvania. Nov. 11, 1959. James W. Evans, Hari~isburg, for appel- Prosecudnus for violations of statute making it a misdemeanor to engage in the budget planning business. From orders of the Court of Ouartcr Sessions `of Dauph~ in County at Nos. 57 to 61 mcI., June Sessions, 1958, Homer L. Kreider, quashing the indictments, the Common- wealth appealed. The Superior Court, Nos. 32 to 36, March Te~ U f960, `Ervin, J., held. . Iluette Dowling, Dist. Atty., Frederic that statute making it a misdemeanor for G. Antoun, Deputy Atty. Geii., Anne X. budget planner, at request of debtor, to Alpern, Atty. Gcn., for appellant. receive money from debtor periodically and distribute Such money among certain speci- fied creditors in accordance with a plan lee. agreed upon, unreasonably interferes with and nullifies a vital factor of budget plan-. fling business and is unconstitutional exer- cise of the police power, notwithstanding that planner's activity .in collecting and distributing the debtor's money may afford the planner the opportunity to defraud the public. Orders affirmed. .1. ConstItutIonal Law c~az~295 Pawnbrokers and Money Lenders cZ~2 Statute making it a misdemeanor for budget planner, at request of debtor,.to re- PAGENO="0061" DEBT ADJUSTING BUSINESS 57 of America. Tl~e cbOrt below held that the act was unconstitutional and quashed the indictments. The Commonwealth ap- pealed. The Act of 1955, P.L. 755, 18 PS, § 4897, provides as follows: "(a) `Budget Planning', as used in this section, means the making of a contract, express or im- plied, with a particular debtor whereby the debtor agrees to pay a certain amount of money periodically to the person engaged in the budget planning business, who shall, for a consideration, distribute the same among certain specified creditors in accord- *ance with a plan agreed upon. "(b) Whoever engages in the businesS of budget planning is guilty of a misde- meanor, and upon conviction thereof, shall'. be sentenced to pay a fine of not more than five hundred dollars ($500), or undergo imprisonment of not more than one (1) year, or "both; Provided That the provi- sions of this act shall not apply to those situations involving ~`budget planning as herein defined incurred incidentally' in the practice of law in the Commonwealth." :The defendants argue that the act is an absolute prohibition, not a mere regulation, of the budget planning business and violates their right to engage in a legitimate busi- ness under the due process clauses of the State and Federal Constitutions. The Commonwealth argues that the act does not arbitrarily, `unreasonably and un- necessarily interfere with private business or property and that despite its title "An act * * `~ prohibiting budget planning business, and prescribing penalties for vio- lation' thereof.", the act in fact does not prohibit the business of budget planning. The Commonwealth says the act is regula- tory only, that it allows budget planning hut does not allow the budget planner to collect and distribute the debtor's `moneyto the `debtor's creditors.', While the act does not prohibit all phases of budget planning, to deny the budget planner the right, at the request of the debtor, to receive money from the debtor and "distribute the same among certain specified~ creditors in accordance with a plan agreed upon" constitutes a nullifica- tion of a vital factor of the budget plan- ning business and we can see no justifica- tion for such. interference. * In Com. ex rd. Woodside v. Sun Ray Drug Co., 383 Pa. 1, 10, 11, 116 A,2d 833, 837, our Supreme Court said: "The scope of the police power o'f the Commonwealth `is necessarily very broad. As was stated in Commonwealth v. Stofchck, 322 Pa. 513, at page 519; 185 A. 840, at page 844: `* * * the state possesses inherently a broad police power, which transcends all other powers of government. There is therefore: no unqualified right to acquire, possess, and enjoy property if the exercise of the right is inimical to the fundamental precepts underlying the police power. * * *` However, the basis of every exercise of the police power must be to promote or maintain the health, safety or general welfare of the public. White's Appeal, 287 Pa. 259, 134 A. 409, 53 A.L.R. 1215. , * * * "The standard to he applied in this type of case was well stated by Mr. Chief justice Stern in the recent case of Cott Beverage Corporation v. Horst, 1955, 380 Pa. 11.3, 110 A2d 405. In that case the Chief justice, quoting from Gambone v. Commonwealth, 375 Pa. 547, `101 A.2d 634, stated, 380' Pa. at page 118,110 A.2d at page 407: `"* * By a host of authorities, Federal and State alike, it has been held that a law which purports to be an exercise of the police power must not be unreasonable, unduly oppressive qy patently beyond the neces- sities of the case, and the means which it employs roust have a real and substantial relation to the objects sought to be attained. Under the guise `of protecting the public interests the legislature may not arbitrarily interfere with Private i)USiflCSS or impose unusual or unnecessary restrictions upon law fol occupations. The question whether. any partcoiar statutor~.' provision is so re- late'S to the public good and so reasonable PAGENO="0062" in the means it prescribes as to justify the exercise of the police power, is one for the judgment, in the first instance, of the law- making branch of the government, but its final determination is fur the courts" `." [2] Is budget planning, as defined in the act, against the public interest? It should be noted that the act does not specifically say that it is. The act does permit lawyers to do it if it is incidental to their general practice of law. The Commoawealth ar- gues that the planner's activity in collecting and distributing the debtor's money "af- fords the budget planner the opportunity to defraud the public." The mere possibil- ity, however, that one engaged in a lawful business may also engage in unlawful prac- tices is no justification for prohibiting the business, if it be a legitimate one in the first instance. Practically every business and profession affords an onurtunity for those engaging in it to perform reprehensi- ble acts but this is no reason why persons should be denied the opportunity to engage in a lawful business, A similar contention was made by the Conimor.weaithi but re- jected by the Supreme Court in Corn. ex tel. WOOd~i3~ v. Sun Ray Drug Co., supra, 3d3 Pa. at page ii, 116 A.2d at page 838, ~shereLi the Court stated "The contention of tIe Commonwealth when reduced to its esseutiala is that the common good or general welfare is protected by the prohibi- tion of the silo of Malt-A-Plenty base as such to retailers because such sales create a possihi6~y of confusing, defrauding or de- ceiving the public in that the retailer may sell the base as ice cream. As has been prsvuu ~i' po~nteil out, Commonwealth v. Crcwi [2 PaSuper. ~ did not go that far. it merely sustained the legislation as The enormous growth of installment buying is graphically set forth in the news letter of July 13, 1959 issued by Business News Associates, Inc., New York, where-* in it is stated: `Consumers hiked their outstanding instalment debt load by a seasonally adjusted $443 million in May, the largest single monthly increase since September 1955 (at the peak of the last credit surge). Moreover, the increase constitutional on the assumption that it prohibited the sale of such products as ice cream where such products have less than the minimum butterfat content. in such a case the deception or possibility of decep- tion is obvious. If, in the instant case, there had been any evidence of sales of the Malt-A-Plenty base as ice cream, such sales could unquestionably be restrained." In the instant case, it goes without say- ing that should any one engage in repre- hci~siblc practices as a business budget planner, the Commonwealth has a speedy and adequate remedy by criminal prosecu- tion as well as other methods oi legal re- str~ mt. [3] In this connection we approve what Judge Homer L. Kreider so wOil said: "It cannot be denied that credit buying today is the keystone of economics in she consumer goods field. It is well knon tint ndltons of sales are made in the Uni'ed States on the installment plan and that bilisons of tied- lars are involved in such transactions.t The public is constantly being urged to buy nowand pay later and this seems to include almost everything from the cradle to the grave. This frequently results in persons or families over-extending them- selves and their ability to pay for the many items they have purchased on credit. An * unexpected cessation of employment or other untoward event may cause a drastic curtailment of installment payments and the consequent threat of repossession of the goods purchased on the time payment plan. When this melancholy moment arrives, the creditor may turn his claim over to a col- lection agency and thereby relieve himself to some extent of the stress and strain at- tendant upon the collection of the debc.I~I carried outstanding instalment debt to a record $35 billion, toppling the $34.5 bil- lion record set only a month earlier. New credit extended during the month spurtel to more than $4 billion on an adjusted basis, alSo setting a new record.'" [2] In Corn. v. United States Commercial Services, Inc., 179 Pa.Super. 395, 1113. A.2d 745, the gist of the offease was thst 58 DEBT ADJUSTING BUSINESS COMMONWEALTH v. STONE Cite as 153 A.2d 453 PAGENO="0063" DEBT ADJUSTING BUSINESS 59 The debtor, on the other hand, is prohilitec by the Act of Ass& mbly in question from paying a certain amount of money period- ically to a person engaged in the budget planuhig business, who shall, for a consid- erafini, `disti ibute the same among certain specilied creditors in accordance with a plan agreed upon.' We see no sound rea- son for thus discriminating against the. del tor. Counsel for the defcnd~ nt in his brief says that research fails to disrlcsc a similar statute in any other state in the Union, that it appears this statute is unique and original in its prohibition. * * * In Adams v, Tanner, 244 US. 590 37 S. Ct. 662. 61 L.El. 1336, a state statute nub- ing ~t a misdemeanor to engage in the em- ployment agency business for a fee was held unconstitutional because it was in io- lation of the 14th Amendment to the Con- stitution of the United States of America. The Supreme Court of the tJnitcd States held that the business was not inherently immoral er dangerous to the public welfare and therefore should not be prohibited, al- though it could he regulated. That Court, 244 LbS. at page 593, 37 S.Ct. at page 663, said: The statute is one of prohibition, rot regulation. * * * "VtTe have held employment agencies are subject to police regulation and control. `The general nature of the business is such that, unless regulated, many persons may be exposed to misfortunes against which the legislature can properly protect them.' Brazee v, People or State of Michigan, 241 U.S. 349 3t3, 36 S.Ct. 561, 60 LEd. 1034, 1036, But we think it plain that there is nothing inherently immoral or dangerous to public welfare in acting as ~a4 representative of another to find a position in which he can earn an honest living. On the contrary, such service is useful, commendable, and in great demand, In Spokane v. Macho, 51 Wash. 322, 324, 98 P. 75~, 21 L.R.A.,N.S., 263, the supreme though the collection agency could repre- sent; a creditor and charge a reasonable fee for such services, it could not repre- court of Washington said ft canoe I (lenied that the business of the employr 1 agent is a legitimate business; as much so as is that of the hanker, broker, or seer- chant; and under the methods prevailing in the modern business world it iiay be id to be a necessary adjunct in the I rosecuti it of business enterprises.' Orders affirmed flIRT and GUNTTIEI1 IT., ai sent, PAGENO="0064" 60 DEBT ADJUSTING BUSINESS Mr. WHITENER. Now, I note that this publication further says that another type of exemption is-and maybe this would cover our Chap- ter 13 propos~!tion-" judicial officers or others acting pursuant to court order." Do you think that exemption might properly be written into H.R. 9806? Mr. KNEIPP. Yes, sir, I think so. Or, as an alternative, the language I suggested earlier. "Nothing herein contained shall be construed as superseding or amending-" Mr. WHITENER. It occurs to me if these seven states have identical language `already, it may be better to follow the accepted language. I note they say that five states exempt non-profit organizations. "The exemption is only if no charge is made for the service." Delaware and Hawaii permit a nominal charge, the reimbursement of expenses. New Mexico exempts such an organization when it is organized as a community effort to assist debtors. Pennsylvania exempts welfare agencies which act as debt poolers on behalf of debtors without com- pensation and profit. Under your bill the non-profit organization would have no limita. tion on charges. Mr. KNEIPP. A nominal sum. They are authorized to charge and collect nominal sums for reimbursement for expenses in connection with such services. The last part of Section 3 of the Broyhill bill. Mr. WHITENER. You would interpret that to mean a non-profit orga- nization could do no more than recoup its out-of-pocket expenses? Mr. KNETPP. Yes, sir. Mr. WHITENER. Now, they say here that five states exempt full- time employees of a debtor to act as the adjuster of his employer's debt. Four states exempt a creditor when he adjusts a service without charge. What do you think of those exemptions? Mr. KNEIPP. They seem reasonable, but there may be room for abuse unless they are very carefully circumscribed. I can see what might be involved. For instance, a person who owes money to Woociward & Lothrop and Hecht's and Garfinkel's might have somebody in Woodward & Lothrop help him adjust his debt and prorate the payments among the three stores. I think that that might be a reasonable approach and it may be part of the Board of Trade's approach. I am not aware of it. Mr. WHITENER. It appears also that Oklahoma excepts retail mer- chants trade associations `and non-profit groups formed to collect ac- counts and exchange credit information. I suppose you agree that `such an organization might have a credit bureau attached to it? Mr. KNEIPP. I don't believe the Metropolitan Washington Board of Trade has such a facility and I don't believe the D.C. Chamber of Commerce does. Mr. WHITENER. On page 8 of the Department of Labor publica- tion-perhaps some of these are repetitious, but is says the usual ex- emptions are, (1) attorneys; (2) banks, fiduciaries, banks and lend- ing institutions duly authorized and permitted to do business in the states. This bill does not exempt those institutions. (3) Title insurors and abstract companies while doing an escrow business. Do you think that would be a worthwhile addition? PAGENO="0065" DEBT ADJUSTING BUSINESS 61 Mr. KNEIPE. Mr. Whitener, I haven't really analyzed the type of operation that might be engaged in by a bank or title company under these circumstances. The business, in m.y view, is one where an indi- vidual turns over his paycheck and then has it parceled out among his debtors for a fee. Now, whether a bank or `~ title comp my ~ ould be in this same posi tion, I don't quite see how they would. Mr. WiIu~NER. Perhaps we should hear from them or their asso- idation before we act finally. Have they been advi's:ed of our hearings? Mr. SISK. I think t'he suggestion is a good one that at least they be given an opportunity to m~tke a st iternurit or to testify I am not shire how long these hearings will be kept open. Mr. WHITENER. Exemption (4) is employees of licensees when act- ing in the normal course of their employment. I suppose that is a licensee under the state law. (5) Judicial `officers or others acting pursuant to court `order. `We have already dealt with that. (6) Non-profit religious, fraternal or cooperative organizations of- fering debt pooling services for their members. We haven't discussed that one. What do you think about an exemption where these~ organi- zations are limited to rendering this service for their members? Mr. KNEIPP. I think that `would be included within Section 3 of the Broyhill Bill. Mr. WHITENER. Exemption (7) Employers offering debt pooling services exclusively for their employees. Mr. KWEIPP. I think that would be a good addition; yes. M~. WHITENER. Now, I note further that the exemption of attorney's under the laws of several shtes is applic'thle only uhen the debt pool ing oecurs in the normal course of their practice, as `we have discussed. In Oregon, it is is applicable to attorneys, who do not sp'eciali~e in the business of debt pooling. in.Wis'consin it says there are no exemptions. I think those are things we should consider. I think we might also point out to you and the other interested parties that Mr. Adams advises that his state legislature, in `the State of Washington, has also recently enacted a regulatory statute whi'ch he has furnished us. What type of situation did you have in mind `when you were dis- cussing the inability of the lender to counsel the type of debtor we are talking about the legality of the contract or the debt? Mr. KNEIPP. For example, under the District of Columbia Motor Vehicle installment Sales Act there is a requirement tha't contracts shall be fully filled out before they are signed by the buyer and the seller and that the notes that might be given be filled out, Now if, for example, the buyer signs the contract in blank without all of the blanks having been filled i'n, this would be in violation `of District law. It might come about, and I `think it has in the past, that the amounts are changed after the `papers have been executed by the buyer. Now, this, to me, would be fraud. Then this would be fraud, in the inception of the contract. It `would be a real defense that the buyer would have against the seller. Yet he may not know this and the debt adjuster merely wants to know how much he owes. The man says, "Vi' eli, I owe the ABC Motor `Company $500,,, not knowing that the 84-181--67-5 PAGENO="0066" 62 DEBT ADJUSTING BUSINESS contract was not a valid one to start with. This is what I have in mind, sir. Mr. WHITENER. There may be a wife whose `husband has accepted obligations that are not legally her `obligation, or a minor may be involved. Mr. KNEIFF. As I indicated in my statement, the debt adjuster has a vested interest in not finding any infirmities in the underlying contracts. Mr. WHITENER. His fee is geared to his pay-out? Mr. KNEIFF. Yes. Mr. WHITENER. Somewhat like the executor of an estate. Mr. SI5K. The gentleman from Maryland? * Mr. GtmE. I have no questions at this time, Mr. Sisk. But, I think it would be appropriate to insert in the record the U.S. Supreme Court's opinion in the case of Ferguson vs. S1e~upa, and I ask permission to have it inserted in the record. The Court in this case upheld the con- stitutionality of the Kanas law outlawing debt-adjusting in that State. Mr. 515K. Without objection, the copy of the opinion will be placed in the record. (The document referred to appears on pp. 63-69:) Mr. SISK. Mr. Kneipp, we thank you very much for your testimony this morning. The committee might wish to discuss some points further for pos- sible amendments. I would assume you would be available should we call you? Mr. KNEIPP. I will be glad to be, sir. Thank you, Mr. Chairman. Mr. SISK. At this time the committee will be glad to hear from Mr. Morris Rabinowitch, President, California Association of Credit Counselors, and of Financial Counselors, San Francisco, California. I might say to the committee that I know Mr. Rabinowitch and something about his operation in California. I know him to be a gentleman of integrity and he is certainly a highly respected citizen of our state of California. Without additional stating of my position one way or another on the testimony he will be giving, I do welcome' a fellow citizen from our great state of California. At this time the committee will be glad to hear you, Morris. Were there other attachments you also wanted to make a part of the record? STATEMENT OF MORRIS RABINOWITCH, LEGISLATIVE DIRECTOR, AMERICAN ASSOCIATION OF CREDIT COUNSELORS, AJND PRESI- DENT, CALIFORNIA ASSOCIATION OF OkEDIT COUNSELORS, AND OF FINANCIAL COUNSELORS, SAN FRANCISCO, CALIFORNIA * Mr. RABINOWITOH. Yes, there was, `Congressman. I think I have submitted copies of the surveys of `the State of Illinois Financial Advisory Board on Financial Institutions. I will leave you with a copy of letters. from the National Better Business Bureaus and letters from various officials and credit grantors and people throughout the country as an exhibit for this committee if I may, after the testimony. Mr. SISK. At this point your statement will be made a part of the record, without objection. PAGENO="0067" DEBT ADJ1JSTING BUSINESS 63 *[372 US 726] *WJLLJAM M. FERGUSON, Attorney General for the State of Kansas, et al., Appellants, V FRANK C. SKRUPA, doing business as Credit Advisors 372 US 726, 10 L ed 2d 93, 83 S Ct 1028, 95 ALR2d 1347 [No. 111] Argued March 20, 1963. Decided April 22, 1963. SUMMARY 93 A Kansas.statute makes it a misdemeanor for any person to engage "in the business of debt adjusting" except as an incident to the lawful practke of law, the statute defining "debt adjusting" as the making of a contract with a particular debtor whereby the debtor agrees to pay a certain amount of money periodically to the adjuster, who shall for a consideration dis- tribute the money among specified creditors in accordance with a plan agreed upon. The plaintiff, engaged in the business of "debt adjusting," instituted the present suit in the United States District Court for the District of Kansas to enjoin the enforcement of the statute on the ground that it violated plaintiff's rights under the due. process clause of the Fourteenth Amend- ment. The District Court, sitting as a three-judge court, granted the relief asked for. (210 F Supp 200.) On appeal, the Supreme Court of the United States reversed. In an opinion by BLAcK, J., expressing the views of eight members of the Court, it was held that the statute did not violate the due process clause nor, by excepting lawyers, deny the equal protection of.. the laws to nonlawyers. HARLAN, J., concurred in the judgment on. the ground that the state statute bore a rational relation to a constitutionally permissible objective, HEADNOTES Classified to U. S. Supreme Court Digest, Annotated Appeal and Error § 327 - to Supreme Court - from three-judge Dis. trict Court - injunction. 1. Under 28 USC § 1253, a judgment of a three-judge District Court enjoin- ing, as being in violation of the due process clause of the Fourteenth Amendment, a state statute making it a misdemeanor to engage in the busi- ness of "debt adjusting" except as an incident to the lawful practice of law, is properly brought before the United States Supreme Court by appeal, Courts § 103 - inquiry into, wisdom and utility of legislation. 2. Under the system of government created by the Federal Constitution it is up to legislatures, not courts, to decide on the wisdom and utility of legislation. PAGENO="0068" DEBT ADJUSTING BUSINESS U. S. SUPREME COURT REPORTS lOLed2d Comd it utional law § 51 3 - due proc- ess - funclions of courts. ~. line process does not authorize courts to hold laws unconstitutional when they believe the legislature has acted unwisely. Courts § 103 - inquiry into appropri- ateness of legislation. 4. Courts do not substitute their social and economic beliefs for the judgment of legislative bodies, and are not concerned with the wisdom, need, or appropriateness of legislation. Courts § 92.7 - judicial and legisla- tive functions distinguished. 5. Legislative bodies have broad scope to experiment with economic problems, and the United States Su- preme Court does not sit to subject a state to an intolerable supervision hos- tile to the basic principles of American government and wholly beyond the protection which the general clause of the Fourteenth Amendment is in- tended to secure. Constitutional Law § 634 - due proc- ess - state power to legislate. 6. The due process clause of the Fourteenth Amendment does not deny a state the power to legislate against what are found to be injurious prac- tices in their internal commercial and business affairs, so long as its laws do not run afoul of some specific fed- eral constitutional prohibition or of some valid federal law. Constitutional Law § 710 - prohibi- tion of business of "debt adjust- ing." 7. The due process clause of the Fourteenth Amendment is not violated by a state statute making it a misde- meanor to engage in the business of "debt adjusting" except as an incident to the lawful practice of law; a state legislature is free to decide for itself that legislation is needed to deal with that business. Constitutional Law § 634 - due proc- ess - "prohibitory" or ~`regula- tory" statutes. 8. In determining whether a state statute (1OLLliJ~ with a bUSIneSS vio- lates the (tue process c1aie~c of the Fourteenth Amendment, the Un ite(l States Supreme Court will not draw lines by calling the statute "prohibi- tory" or "regulatory." Courts § 153 - wisdom of statute deal- ing with business of "debt adjust- ing." 9. Relief against a state statute dealing with the business of "debt ad- justing," if any be needed because the statute is unwise, lies not with the courts but with the body constituted to pass laws for the state. Constitutional Law § 440.5 - equal protection of laws - statute pro- hibiting business of "debt adjust- ing" - exception of lawyers. 10. A state statute making it a mis- demeanor for any person to engage in the business of "debt adjusting" ex- cept as an incident to the lawful prac- tice of law does not deny to nonlaw- yers the equal protection of the laws. Constitutional Law §~ 316, 317- equal protection of laws - discrimina- tion - classification. 11. Statutes create many classifica- tions which do not deny equal protec- tion; it is only invidious discrimina- tion which offends the Federal Consti- tution. Debtor and Creditor § 1 - business of "debt adjusting." 12. The business of "debt adjust- ing" gives rise to a relationship of trust in which the debt adjuster will, in a situation of insolvency, be mar- shaling assets in the manner of a pro- ceeding in bankruptcy. Constitutional Law §~ 440.5, 710 - equal protection of laws - due process - title of statute dealing with "debt adjusting." 13. The Fourteenth Amendment ~s not violated by the failure of the title of a state statute dealing with "debt adjusting" to be as specific as required under the state constitution. PAGENO="0069" DEBT ADJUSTING BUSINESS 65 FEItGTJSON v SKRUPA US ~26, U) b ed 2d 03, 83 ~ CL I ()i~3, ~ A L1~2d 1' i~ APPE2\UANCI~S OF (3)UNt4EI~ William M. Fergusofl argued the cause for appellant~~ Lawrence Weiganzl argued the cause for appcllee. Briefs of Counsel, P. 1113, infra. OPINION OF TILE COURT 95 Mr. ,Iustiee Black delivered the opinion of the Court. In this case, properly here on ap- peal under 28 Usc § 1253, we are asked to review the ~udg- Headnote 1 meat of a three-judge District Court enjoining, as being in violation of the 1)ue Proc- ess Clause of the Fourteenth Amend- ment, a Kansas statute making it a misdemeanor for any person to en- gage "in the business of debt ad- *[372 US 727] justing" except as *an incident to "the lawful practice of law in this state."1 The statute defines "debt adjusting" as "the making of a con- tract, express, or implied with a par- ticular debtor whereby the debtor agrees to pay a certain amount of money periodically to the person en- gaged in the debt adjusting business who shall for a consideration dis- tribute the same among certain spec- ified creditors in accordance with a plan agreed upon." The complaint, filed by appellee Skrupa doing business as "Credit Advisors," alleged that Skrupa was engaged in the business of "debt ad- justing" as defined by the statute, 1. Kan Gen Stat (Supp 1961) § 21-2464. 2. Twelve other States have outlawed the business of debt adjusting. Fla Stat Ann (1962) §1559.10-559.13; Ga Code Ann (Supp .1961) §~ 84-3601 to 84-3603; Me Rev Stat Ann (Supp .1961) c. 137, §~ 51-53; Mass Gen Laws Ann (1958) c. 221, §46C; NJ Stat Ann (Supp 1962) 2A:99A-1 to 2A:99A-4; NY Penal Law (Supp 1962) §1410-412; Ohio Rev Code Ann (1962 Supp) §~ 4710.01-4710.99; Okia Stat Ann (Supp 1962) Tit 24, §~ 15- 18; Pa Stat Ann (Supp 1961) Tit 18, §4899; Va Code Ann (1958) § 54-44.1; W Va Code Ann (1961) § 6112(4); Wyo Stat Ann (1957) §133-190 to 33-192. that his business was a "u~cful and desirabl&' one, that his business ac- tivities were not "inherently im- moral or dangerous" or in any way contrary to the public welfare, and that therefore the bus incss could not be "absolutely prohibited" by Kan- sas. The three-judge court heard evidence by Skrupa tending to show the usefulness and (lesirabiiity of his business and evidence by the state officials tending to. show that "debt adjusting" lends itself to grave abuses against distressed debtors, particularly in the lower income brackets, and that these abuses are of such gravity that a number of States have strictly regulated "debt adjusting" or prohibited it alto- *1372 US 728] gether.2 The *court found that Skrupa's business did fall within the Act's proscription and concluded, one judge dissenting, that the Act was prohibitory, not regulatory, but that even if construed in part as reg- ulatory it ~vas an unreasonable regu- lation of a "lawful business," which the court held amounted to a viola- tion of the Due Process Clause of the Fourteenth Amendment. The court Seven other States regulate debt adjusting. Cal Fin Code Ann (1955 and Supp 1962) §112200-12331; 111 Stat Ann (Supp 1962) c. 161, §1 251-272; Mich Stat Ann (Supp 1961) §123.G30(1)-23.630(18); Minn Stat Ann (1947 and 1962 Supp) §1 332.04- 332.11; Ore Rev Stat (1961) §~ 697.610- 697.992; RI Gen Laws (Supp 1962) §~ 5- 42-i to 5--42-9; Wis Stat Ann (1957) § 218.02. The courts of New Jersey have upheld a New Jersey statute like the Kansas statute here in question. Amen- can Budget Corp. v Furman, 67 NJ Super 134, 170 A2d 63, affd per curiam, 36 NJ 129, 175 A2d 622 (1961). PAGENO="0070" 66 DEBT ADJuSTING BUSINESS The only case discussed by the court below as support for its in- validation of the statute was Com- monwealth v Stone, 191 Pa Super 117, 155 A2d 453 (1959), in which the Superior Court of Pennsylvania struck down a statute almost iden- tical to the Kansas act involved here. In Stone the Pennsylvania court held that the State could regulate, but could not prohibit, a "legitimate" business. Finding debt adjusting, called "budget planning" in the Pennsylvania statute, not to be "against the public interest" and concluding that it could "see no jus- tification for such interference" with this business, the Pennsylvania court ruled that State's statute to be un- constitutional. In doing so, the Pennsylvania court relied heavily on Adams v Tanner, 244 US 590, 61 L ed 1336, 37 S Ct 662, LRA1917F 1163 (1917), which held that the Due Process Clause forbids a State to prohibit a business which is "use- ful" and not "inherently immoral or dangerous to public welfare." Both the District Court in the present case and the Pennsylvania court in Stone adopted the philos- ophy of Adams v Tanner, and cases like it, that it is the province of courts to draw on their own views as *[372 Us 729] to the morality, *legitimacy, and use- fulness of a particular business in order to d,ecide whether a statute bears too heavily upon that business and by so doing violates Headnote 2 due process. Under the system of government created by our Constitution, it is up 3. Skrupa v Sanborn, 210 F Supp 200 (DC D Kan 1961). 4. Tyson & Bro. - United Theatre Ticket Officers v Banton, 273 US 418, 445, 446, 71 L ed 718, 729, 47 S Ct 426, 58 ALR 1236 (1927) (dissenting opinion). lOLcd2d Id legislatures, riot courts, to decide on the wisdom and utility of legisla- tion. There was a time when the Due Process Clause was used by this Court to strike down laws which were thought unreasonable, that is, unwise or incompatible. wiLli some particular economic or social philos- ophy. In this manner the Due Proc- ess Clause was used, for example, to nullify laws prescribing maximum hours for work in bakeries, Lochner v New York, 198 US 45, 49 L ed 937, 25 S Ct 539 (1905), outlawing "yellow dog" contracts, Coppage v Kansas, 236 US 1, 59 L ed 441, 35 S Ct 240, LRA1915C 960 (1915), setting minimum wages for women, Adkins v Children's Hospital, 261 US 525, 67 L ed 785, 43 S Ct 394, 24 ALR 1238 (1923), and fixing the weight of loaves of bread, Jay Burns Baking Co. v Bryan, 264 US 504, 68 L ed813, 44 S Ct 412, 32 ALR 661 (1924). This intrusion by the judiciary into the realm of legisla- tive value judgments was strongly objected to at the time, particularly by Mr. Justice Holmes and Mr. Jus- tice Brandeis. Dissenting from the Court's invalidating a state statute which regulated the resale price of theatre and other tickets, Mr. Jus- tice Holmes said, "I think the proper course is to recognize that a state legislature can do whatever it sees fit to do unless it is restrained by some express prohibition in the Con- stitution of the United States or of the State, and that Courts should be careful not to extend such prohibi- tions beyond their obvious meaning by reading into them conceptions of public policy that the particular Court may happen to entertain."4 Mr. Justice Brandeis joined in this dissent, and Mr. Justice Stone dissented in an opinion joined by Mr. Justice Holmes and Mr. Justice Brandeis. Mr. Justice Sanford dissented separately. ~96 U; S. SUPREME COURT REPORTS accordingly enjoined enf~r~en'ient of the statute.3 PAGENO="0071" DEBT ADJUSTING BUSINESS 67 The doctrine that prevailed in Lechner, Coppage, Adkins, Burns, and like cases-that due neadnote 3 process authorizes courts to hold laws unconstitu- tional when they believe the legisla- ture has acted unwisely-has long since been discarded. We have re- turned to the original constitutional proposition that courts do iiot sub- stitute their social and Headnote 4 economic beliefs for the judgment of legisiMive bodies, who are elected to pass laws. As this Court stated in a unanimous opinion in 1941, "We are not con- cerned . . . with the wisdom, need, or appropriateness of the legis- lation."6 Legislative bodies have broad scope to experi- !lead&iote 5 nient with economic problems, and this Court does not sit to "subject the State to an intolerable supervision hostile to the basic principles of our Govern- 5. Adkins v Children's Hospital, 261 US 525, 567, 570, 67 L ed 785, 800, 801, 43 S Ct 394, 24 ALR 1238 (1923) (dissenting opinion). Chief Justice Taft, joined by M~. Justice Sanford, also dissenfcd. Mr. Justice Brandeis took no part. 6. Olsen v Nebraska, 313 US 236, 246, 85 L ed 1305, 1309, 61 S Ct 862, 133 ALR 1500 (1911) (upholding a Nebraska stat- ute limiting the amount of the fee which could be charged by private employment agencies). 7. Sproles v Binford, 286 US 374, 388, 76 L ed 1167, 1178, 52 S Ct 581 (1932). t~nd Chief Justice Hughes, for a unani- mous Court, added, "When the subject lies within the police power of the State, de- batable questions as to reasonableness are not for the courts but for the legislature, which is entitled to form its own judgment, and i~s sction within its range of discretion cannot be set aside because compliance is burdensome." 286 US at 338, 389. ~lOL sd2dj"-7 In the face of our abandonment of the use of the "vague contours"9 of the Due Process Clause to nullify laws which a majority of the Court believed to be economically unwise, reliance on Adams v Tanner is as mistaken as would be adherence to Adkins v Children's Hospital, over- ruled by West Coast Hotel Co. v Par- rish, 300 US 379, 81 L ed 703, 57 S Ct 578, 108 ALR 1330 (1937). Not only has the ~ihilosophy of Adams been abandoned, but also this Court almost 15 years ago expressly pointed to another opinion of this Court as having "clearly under.. mined" Adams.1° We conclude that 8. Lincoln Federal Labor Union, A. F. L. vNorthwestern Iron & Metal Co. 335 US 525, 536, 93 L ed 212, 220, 69 S Ct 251, 260, 267, 6 ALII2d 473 (1949). Mr. Justice Holmes even went so far as to say that "subject to compensation when compensation is due, the legislature may forbid or restrict any business when it has a sufficient force of public opinion behind it." Tyson & Bro.-Unitcd Theatre Ticket Officers v Banton, 273 US 418, 445, 446, 71 L ed 718, 729, 47 S Ct 426, 58 ALR 1236 (1927) (dissenting opinion). 9. See Adkins v Children's Hospital, 261 US 525, 567, 568, *67 L ed 785, 800, 43 S Ct 394, 24 ALR 1238 (1923) (Holmes, J., dissenting). 10. Lincoln Federal Labor Union, A. F. L. v Northwestern Iron & Metal Co. 335 US 525, 535, 93 L ed 212, 220, 69 S Ct 251, 260, 267, 6 ALR2d 473 (1949), re- ferring to Olsen v Nebraska, 313 US 236, FERGUSON v SKRUPA 97 372 US 726, 10 L ed 2d 93, 83 S Ct 1028, 95 ALI12d 1317 *[372 US 7301 nlent and wholly beyond the protec- ~`And in an earlier case he had em- tion which the general clause of the phasized that, "The criterion of COIl- Fourteenth Amendment was in- st~tutionality is not whether we tenued to scenic."7 it is now settled believe the law to be for the public that States "have power tO legislate good."9 agcinst what are found Ucadnote 6 to be injurious practices in their internal commer- cial and business affairs, so long as *[372 US 7311 their laws do ~not run afoul of some specific federal constitutional pro- hibitioii, or of some valid federal law,"8 PAGENO="0072" ~98 the Kansas Legislature was free to decide for itself that Ileadnote 7 legislation was needed to deal with the business of debt adjusting. Unquestionably, there are arguments showing that the business of debt adjusting has social utility, but such arguments are properly addressed to the legis- lature, not to us. We refuse to sit as a "superlegislature to weigh the wisdom of legislation,"1' and we em- phatically refuse to go back to the time when courts used the Due Proë-\ ess Clause "to strike down state laws, regulatory of business and in- dustrial conditions, because they *[372 US 732] may be unwise, improvident, *or out of harmony with a particular school of thought."2 Nor are we able or willing to draw lines by lieadnote 8 calling a law "prohibi- Ileadnote 9 tory" or "regulatory." Whether the legislature takes for its textbook Adam Smith, Herbert Spencer, Lord Keynes, or some other is no concern of ours.'3 The Kans~ts debt adjasting statute may be wise or unwise. But relief, if any be needed, lies not with us but with the body constituted to pass laws for the State of Kansas.14 Nor is the statute's exception of 85 L ed 1305, 61 5 Ct 862, 133-ALR 1500 (1941). Ten years later, in Breard v Alexandria, 341 US 622, 631, 632, 95 L ed 1233, 1242, 71 S Ct 920, 35 ALR2d 335 (1951), this Court again commented on the infirmity of Adams. 11. Day-Brlte Lighting, Inc. v Missouri, 342 US 421, 423, 96 L ed 469, 472, 72 S Ct 405 (1952). 12. Williamson v Lee Optical of Okia., Inc. 348 US 483, 488, 99 L ed 563, 572, 75 S Ct 461 (1955). 13. "The Fourteenth Amendment does not enact Mr. Herbert Spencer's Social Statics." Lochner v New York, 198 US 45, 74, 75, 49 L ed 937, 948, 949, 25 S Ct 539 (1905) (Holmes, J., dissenting). 14, See Daniel v Family Secur. Life Ins. 1OLed2d~ lawyers a denial of equal protection of the laws to nonlaw- Headnote 10 yers. Statutes create Headnute 11 many classifications- which do not deny equal protection; it is only "invidious dis- crimination" which offends the Con- ~titution.'5 The business . of debt adjusting gives rise to a relationship of trust in which the debt- Headnote 12 adjuster will, in a situa-- tion of insolvency, be marshalling assets in the manner of a proceeding in bankruptcy. The debt adjuster's client may need ad- vice as to the legality of the various claims against him, remedies exist- ing under state laws governing debtor-creditor relationships, or pro- visions of the Bankruptcy Act-. advice which a nonlawyer cannot. lawfully give him. If the State of Kansas wants to limit debt adjusting to lawyers,'6 the Equal Protection *[372 Us 7331 *Clause does not forbid it. We aiso~ find no merit in the con-~ Headnote 13 tention that the Four- teenth Amendment is violated by the failure of the Kansas. statute's title to be as specific as appellee thinks it ought to be under the Kansas Constitution. Reversed. Co. 336 Us 220, 224, 93 L ed 632, 636, 60 S Ct 550, 10 ALR2d 945 (1949); Secretary of Agriculture v Central Roig Refining Co. 338 US 604, 618, 94 L ed 381, 392, 70 S Ct 403 (1950). 15. See Williamson v Lee Optical of Okia., Inc. 348 US 483, 488, 489, 99 L ed 563, 572, 573, 75 S Ct 461 (1955); Lindsley V Natural Carbonic Gas Co. 220 Us 61~ 78, 79, 55 L ed 369, 377, 31 5 Ct 337 (1911). 16. Massachusetts and Virginia prohibit debt pooling by laymen by declaring it t~ constitute the practice of law. Mass Gen. Laws Ann (1958) c. 221, § 460; Va Code Ann (1958) § 54-44.1. The Massachusetta statute was upheld in Home Budget Serv- ice, Inc. v Boston Bar Asso. 335 Mass 228, 139 NE2d 387 (1957). 68 DEEP ADJUSTING BUSINESS U. S. SUPREME COURT REPORTS [10 Led 2dj PAGENO="0073" DEBT ADJUSTING BUSINESS 69 FERGUSON v SKRUPA 99 372 Us 720, 10 L ed 2d 03, 83 S. Ct i.028, 05 ALR2d 1317 Mr. Justice Harlan concurs in the sible objective. See \ViIi}amson v judgment on the ground that this Lee Optical of OkIa., Inc. 348 US state measure bears a rational rela- 483, 491, 99 L ed 563, 574, 75 S Ct tion to a constitutionally permis- 461. (The prepared statement of Mr. Rabinowitch follows:) Congressman Sisk, Members of the Committee My name is Morris Rabinowitch, of California, representing the American Association of Credit Counselors and s~~eaking to the two bills, HR8929 and RR9806, which are now before this Committee. it is my intention, on behalf of the members of the Association and affiliated members throughout the United States to clarify our position in the current discussions regarding credit counselling and financial management. Neither I nor the Association has nor do we at any time intend to defend, excuse or alibi for any abuses that may have occurred, whether it be in the District of Columbia or any other community. Our purpose in being here today is to request strict regulatory legislation and enforcement thereof in the field of credit coun- selling for the protection and benefit of the consumer. While we in the field of credit counselling are no more anxious than any other business or service to have government regulation, we have long recog- nized the necessity for such regulation. We know that, acting as fiduciaries as we do, we must have regulation and enforcement beyond that which the industry itself can provide. It is for this reason that the American Association of Credit Counsellors has, openly, actively and continuously, worked for such legislation and the enforcement thereof. As far back as the early 1950's, a number of us who had pioneered in the field became alarmed at certain abuses, of the kind that have been alleged in the District of Columbia. We recognized the need for fixed standards of professional conduct in the interest of the consumer and the creditor. Although at the time we were well aware that adverse publicity would reflect on the innocent as well as the guilty, nevertheless, in strategic areas across the country, we set about to bring offences to light, to expose them to the glare of publicity, and to use the resultant publicity in our efforts to obtain regulatory legislation. In Chicago, where abuses to consumers were extreme, Mr. Price Patton headed a campaign to unearth instances of malpractice, bring them to the attention of civic leaders and public officials and, eventually, to sponsor and finally obtain regulatory legislation in Illinois. We are proud that the administrative body of the State of Illinois adopted a code for acceptance or rejection of advertising which was developed by our Association, in conjunction with the Better Business Bureau of Chicago. In June of 1967, a survey made by the Illinois Advisory Board on Financial Planning showed not only that the results of financial coun- selling services were beneficial, but that in communities where no such service was in existence, it is actively needed and desired. Copies of this survey are here provided. In the State of Oregon, prior to the enactment of regulatory legislation, there was a serious case of defalcation by one individual. Again, it was a member of the Association, Mr. Lewis Finney, who came forward to lead the fight for con- structive legislation. Since the enactment of this legislation in the state of Oregon, we have been unable to find any instances of abuses in that state. In Michigan, Mr. Morris Purdy, one of our senior members, together with others in the American Association of Credit Counsellors, was finaUy successful in his efforts to obtain regulatory legislation which has since worked effectively in the interest of the consumer. I am very proud of the results we have had in California, where in 1957 legislation was enacted that has served as a model for other states. Since the enactment of this legislation, not one instance of malpractice has been proved in California. To substantiate this, I am providing copies of my wire to the Cali- fornia Better Business Bureaus in the major population centers and the replies thereto. I would like to point out the unanimity of the replies in stating that there have been. no reports of abuses. I would also like to quote two paragraphs from one letter of reply which points up the difference regulation makes by PAGENO="0074" 70 DEBT ADJUSTING BUSINESS comparing the situation in California to that in another state which is un- regulated: "Our files here on two such firms operating in this area are complaint free, however the files do not go as far back in information as 1957, when you advised legislation was enacted in this field. Therefore I cannot compare today's situation with w~hat may have existed prior to that legislation. "I do know, however, that because there was a lack of such state legislation in Nevada, our office in Reno had many complaints about debt prorating services. However, those complaints were mainly against one or twp proraters and were not evenly spread amongst all those in that field of business." Financial counselling services have developed in response to demand. At the present time in this country, consumer credit is being extended at the rate ~of one-half billion dollars a month. In 1946, credit extended to consumers amounted to only 6 billion. By 1967 it amounts to a figure in excess of 97 billion. $11.6 billion is absorbed annually in interest charges on this consumer indebtedness alone. This does not include interest on home mortgages. There has also been a serious lag in education in consumer credit living to keep pace with the rapid expansion of consumer credit extension. It has been estimated that 30% of families in California are unable to meet the monthly obligations they have incurred. Throughout the past decade there has been a tremendous increase in wageearners' bankruptcies and home foreclosures, even in these times of prosperity. Federal Reserve Board figures indicate that 32% of families are spending more than they earn. Thus, the need is to help such families work out plans to pay off their obligations, and educate them in learn- ing to live within their incomes. For the professional in financial counselling does not just help "pay the bills," he advises, counsels, and--as one national magazine puts it-"Is part father, part psychiatrist, part accountant and even the `economic confessor' to his clients." In 1965, a survey indicated that in that year professional credit counsellors interviewed 189,150 families. Of this number, 58,800 were counseled without fee. This number included two categories of consumer-debtors: those whose prob- lems could be solved with some advice and a few telephone calls to creditors on their behalf. The remainder were those so hopelessly mired down in debt that they could not be helped by credit counselling services. One hundred and thirty thousand family financial programs were instituted by counsellors, which means that 130,000 families are being returned to good credit standing as a result of being taught principles of sound financial management. It cannot be overemphasized that the primary and continuing responsibility of the credit counsellor is to relieve the consumer of the burden of indebtedness and teach him to live within his means. It should be noted that the small business man has long had available to him similar services to those we offer the individual. Boards of Trade, Wholesale Credit Managers Associations, and so on, do for the business man just what we do-give him the opportunity to rehabilitate himself and liquidate his obligations in an orderly way. Now, recognizing that a need has been created and a service developed to fill that need, why should there be opposition to regulatory legislation for the pro- tection of the consumer using such services? Where there is such opposition, three questions should be asked: Who opposes it? Why? Whose interest is served by such opposition? There is a segment of the financial community which specializes in high rate loans. There is a tendency on their part to prefer that the consumer-debtor re- sort to Chapter Thirteen as a solution for his difficulties, rather than use the services of credit counsellors. In 1956, for instance, I visited an individual who is a representative of one of the national loan companies. At that time, he was disturbed and upset because I bad taken issue publicly with certain credit grantors, feeling as I did that they were concerned more with the quantity of credit they could extend than they were with the quality of it. I felt this was a danger to the debtor and the cred- itor, as well as to the economy itself. This individual tol~d me that I was fanning the flames of Communism and giving them material to use in their criticism of capitalistic Practices. He also contended that there was no danger of delinquencies as a result of overextended credit. Ten years later, this same person is lamenting the~ tremendous increase in personal bankrupticies, but he attributes this to every other cause but his own industry's practices, still denying that overextension of credit is the root cause of the problem. PAGENO="0075" DEBT ADJUSTING BUSINESS 71 Oddly enough, in the publication of which this man is an editor, an article appeared which estimated that 78.G% of the personal indebtedness in this coun- try is made up of personal loans owed to financial institutions. ~ As credit counsellors, we deplore the practices of those who have abandoned all morality in regard to the consumer and who employ every possible technique available to prevent the consumer-debtor from becoming debt-free. The same in- dividual who spoke so sharply to me is an avowed advocate of Chapter XIII pro- ceedings for the consumer-debtor as a lowcost means of getting relief. I have figures with me, of which I have made copies available to you, to show that Chap- ter XIII costs-as an average-are over twice as much as would be the cost of professional counselling. This study made of Chapter XIII proceedings in Northern California uses the actual case numbers for ready verification of the facts shown here. Exhibit "A" shows the cost of Chapter XIII to the consumer ranging from 17.6% to 35.5% of the total indebtedness, as against an absolute maximum in California of 12% for credit counselling. Exhibit "B" is a dollars and cents breakdown showing savings in actual dollars-said savings to the debtor would have ranged from $212 to $292, as per the exhibit. It was as a result of this survey that I wrote to President Johnson as long ago as February of 1964, protesting the exorbitant cost to the debtor of Chapter XIII. In the matter of nonprofit counselling services, it has been wrongly asserted that our industry opposes such services, fearing competition. Actually, the re- verse is true. We are well aware that credit counselling services should be avail- able to the public from a variety of sources. As far back as 1959, through the efforts of our then president, Mr. Henry Kasson, we began a program of offering services, assistance, and printed materials to be distributed to consumer-oriented organizations. On August 27, 1962, when I was president of the Association, replying to a letter from Paul Mendenhall, of the AFL-CIO, I extended an offer to assist them and any organization attempting to establish such services with any means at our command. This letter is submitted herewith in a collection of correspondence, articles and other documents which clearly show that our organization has been functioning in an active way to promote the entire field of credit counselling- along regulated lines. It is not only in the matter of regulatory legislation that we have been active, incidentally. There have consistently been two opposite points of view with re- gard to "truth in lending," and "truth in advertising" laws. I believe you will find that the American Association of Credit Counsellors has provided the only support such legislation has received from the business and financial communi- ties (of course, with the exception of the credit unions). We have without ex- ception held that the consumer has the right and should have the opportunity to determine his purchases of goods and services on the basis of complete, accu- rate information. We do feel that, profit or non-profit, any individual handling public funds should be bonded, licensed, have a sound background of training and experience in the extension of consumer credit, and be financially sound. Most importantly, we would insist that their purpose be sincerely and primarily to help the con- sumer relieve himself of debt. In California, our personal experience with the establishing of nonprofit credit counselling has been quite beneficial to us in that, first, we are relieved of the responsibility and expense of counselling the indigent consumer, and, second, consumers are alerted to the existence and availability of our services. You now have before you two proposed bills. One would abolish credit coun- selling service `to the consumer unless it is dominated and controlled by creditors. The other is a regulatory bill. Returning to my contention that sound regulation eliminates malpractice, let me state unequivocally that to destroy or outlaw a sound, needed and growing service because of the dishonesty or incompetence of a few is an emotional, rather than a realistic approach. In any field, whether it be law, banking, the clergy, medicine, or philanthropy, there will be instances where isolated individuals exploit the confidence placed in them. Over `the past fifteen years a program of study has included: the testimony at various state legislative sessions; correspondence with Legal Aid Societies; correspondence of Better Business Bureaus; consultations with attorneys, credit unions and judicial offices. This has enabled us to put together a set of stand- ards which we are convinced will eliminate any current abuses and prevent future ones. These standards have been incorporated in the proposed regulatory PAGENO="0076" 72 DEBT ADJUSTING BUSINESS act which has been submitted to you. Let me abstract from it the following points: ~ugge8tions for regulation of credit coun~elling: 1. Investigation of licensee, officers, etc., prior to issuing license. 2. Bonding of licensee. 3. Audit by the department administering said license, at the cost of the licensee. 4. Control and approval of advertising by the administrative authority. 5. Establishing of a maximum rate of charge. 6. Allowing no charge unless the licensee has been able to secure the approval and consent from the majority of creditors, both in number and amount of indebtedness. 7. Allowing the fee to be taken only on proportionate amount as said funds are distributed to creditors. 8. Preventing the licensee from taking any contracts, note, etc., which has any blank space when signed by consumer-debtor. 9. Preventing any licensee from taking any negotiable instruments for his un- earned fee. 10. Preventing licensee from taking any notes, wage assignments or security to secure the licensee's unearned charges. 11. Preventing the licensee from taking a confession of judgment or power of attorney to cover judgment. 12. Providing that all contracts and forms must be approved by the administrative body. 13. The contract must list every obligation to be adjusted and disclose total of obligations 14. The application must show that the payments required for the liquidation of the obligations must be within the ability of the individual to pay. 15. The rate and amount of licensee's fee must be disclosed. 16. The approximate number of installments necessary to pay obligations in full must be disclosed. 17. A copy of the contract must be given to the consumer-debtor. 18. The contract, even though signed at the time of application, should not become effective until the applicant has made payment to licensee for distribution to creditors. 19. Receipts must be written for each payment. 20 ~t least every six months the licensee shall render an accounting to the consumer debtor which shall show the total amount received total paid to his creditors the amount of charges deducted and any amount held in reserve. 21. Licensee must also render an accounting within seven days after written request. Some of the points selected here for regulation may seem trival. However, our experience has shown us the importance of having every aspect clearly covered in the regulatory provisions. And wherever there has been a choice serving between serving the interest of the consumer and imposing additional restric- tions on the licensee, we have always acted in the interest of the consumer. Let me repeat, in ten years of working under regulatory legislation, there has been to my knowledge not one instance of a substantiated complaint in the State of California. May I urge that you give this proposed regulatory legislation your careful consideration with a view to making additions which might be incorporated to further strengthen its provisions. Thank you for the opportunity to appear before you. I am ready and willing to answer any questions you may have now and in the future. Mr. SIsK. Without objection the other material which you have enumerated will be furnished to the committee and will be made a part of the files and that portion made a part of the record which we feel the record can contain. Mrs. Sinatra, a question has been raised. Has there been any addi- tional information or updating of the .July Labor Department Report ~ Mrs SINATJI ~ This is the ]atest one and it has all the state legislative enactments in 1967, so it is current PAGENO="0077" DEBT ADJUSTING BUSINESS 73 Mr. SISK. You have at the present time no additional supplements to this? Mrs. SINATRA. No, sir, The State of Washington is included in there. Mr. SIsK. We have made this a part of the record. Mr. Rabinowitch, the committee will be glad to hear from you now. Mr. IRABINOWITCIl. To save the committee time, I am only going to review part of the prepared statement. I would like to set forth at this particular time that while I am here as a representative of the American Association of Credit Counselors, our position has been and will continue to be that we will never at any time take any position to defend any of the abuses ever perpetrated on a consumer. You heard today testimony and statements regarding the situation in Maryland and in Washington, D.C., where indictments have been brought and people convicted. I would like to take full credit on the question of our association being instrumental in initiating these proceedings. Our association has attempted through the Post Office Department, through the Federal Trade Commission, to establish various rules and guidelines to prevent these abuses. You have heard that the state of Rhode Island has elimi- nated this type of activity. This is true. But if you are also aware, it has opened up an avenue of complete fraud and deceit simply by doing it by mail, Our position as an association has been very simple: Regulation and very tight, stringent regulation. I might also say we have heard comments of the American Bar As- sociation and their position. The act we established in California in 1957 was written in conjunc- tion, with assistance of the California State Bar Association. Amend- rnents and reading the bill will indicate their amendments and what they requested. It is extremely delightful on my part to have incorporated as part of the testimony and part of the statement-and I would like to take this opportunity to read it-a copy of a wire I sent dated September 2, 1957 to the Better Business Bureaus throughout California, In that I questioned, "From your records, can you advise the number of un- satisfied complaints against licensed proraters in your area since 1957 legislation?" Next question "Any indications of consumer dissatisfaction, any comment comparing problems prior to legislation and today the reason for query is legislative hearing re proposed regulatory act." The answers, including the Better Business Bureaus of San Fran- cisco, San Jose, Oakland, Stockton, Fresno, Los Angeles, San Matco and Bakersfield, were all unanimous that there was not. a problem since 1957 in the State of California. I would like to read a quote from the Better Business Bureau of Sacramento. Fortunately there was an ind~vidual who had just taken charge and in his letter, which is attached to my statement, it says this: "Our files here on two such proraters operating in this area are client free. However, the files do not go as far back as the information in `57 when you advised legislation was enacted in this field. Therefore, I PAGENO="0078" 74 DEEP ADJUSTING BUSINESS cannot compare today's legislation with what may have existed prior to that legislation." I do know, however, that because there was a lack of such state regulation in Nevada our office in Reno has many complaints about debt prorating services However, those complaints were mainly against one or two proraters and were not evenly spread amongst all of those in the field The major problem, as I recall, was in regard to a firm who adver tised nationally in various types of publications listing a iReno address which was simply a mail drop with all mail and phone calls routed to a Rhode Island office. What I am attempting to point out is that in the states where there has been strict regulation controlling the activity, and enforcement thereof, there have been no conzplaints. * I have heard the comment that in Maryland and in Washington because there have been convictions of individuals in this field that this field should be eliminated I merely ask this committee-and I may set this forth now-that I feel every regulated legitimate business has its place, whether it be the banking, the credit unions, the loan companies or what-not. But because certain loan companies in Boston, Massachusetts, were convicted of conspiracy and bribery, should they be eliminated? I say no. I say regulate them and regulate them tightly. We are opposed to excessive fees. We are not looking for any more legislation or regulation than any other service or business, but as we are fiduciary agent and we are handling the needs of the individual and the con sumer who is the backbone of this country, we must-whether we enjoy it or not-protect that consumer, and it is therefore that we ask legislation that will control every phase of our operation from a state audit that we pay for, `an independent audit, and a complete control. As to excessive charges, if they were made, as pointed out in Cali- fornia, that we return a portion of our fee, this is not true. First of all, our own outside auditor must audit and submit a report to the state. The state auditor comes in at a cost factor to us of $50 per day, which we pay, and in the event there is an overcharge, the entire fee charged on that account is refundable to the client As far as financial responsibility is concerned, this is one of the things that we require, and we ask that the licensee be financially sound ~nd financially reliable `Lnd subject to any law suit or any other action that may be necessary to protect the consumer Over the 15 years, in the past 15 years, a study has been made by members of this industry throughout the country. We have done this with correspondence, including the National Better Business Bureau~, of which I will submit letters, the local Better Business Bureaus, the Legal Aid Societies, the business firms, and through their endorsement and support have we been able to grow and deliver a service It has been brought out that there is a question of securing the rights or preventing the individual from losing his opportunity to file a Chapter 13 proceeding I have certain reservations regarding Chapter 13 proceedings Not on its purpose, not on its effectiveness, but in some areas unfortunately it has been abused by certain individuals and we are concerned with the cost factor to the individual. PAGENO="0079" DEBT ADJUSTING BUSINESS 75 We recognize and we acknowledge that the need for Chapter 13 for wage-earner proceedings must be on the books of this country when creditors will not cooperate in working extensively with the individual in establishing him free of debt. But we are concerned when it is used as a collection tool by certain credit-granting segments of this economy because, supposedly, as a secured creditor, they get a priority. They also secure a certain amount of interest while all other creditors are held back and in most instances throughout the country as statistics will show from the administrative body, do not work out effectively. In the legislation-I just want to touch on an outline of the legisla- tion that I have recommended: 1. Investigation of licensee, officers, etc., prior to issuing license. 2. Bonding of licensee. 3. Audit by the department administering said license, at the cost of the licensee. 4. Control and approval of advertising by the administrative authority. 5. Establishing of a maximum rate of charge. 6. Allowing no charge unless the licensee has been able to secure the approval and consent from the majority of creditors, both in number and amount of indebtedness. 7. Allowing the fee to be taken only on proportionate amount as said funds are distributed to creditors. 8. Preventing the licensee from taking any contract, note, etc., which has any blank spare when signed by consumer-debtor. 9. Preventing any licensee from taking any negotiable instruments for his unearned fee. 10. Preventing licensee from taking any notes, wage assignments or security to secure the licensee's unearned charges. 11. Preventing the licensee from taking a confession of judgment or power of attorney to cover judgment. 12. Providing that all contracts and forms must be approved by the administrative body. 13. The contract must list every obligation to be adjusted and dis- close total of obligations. 14. The application must show that the payments required for the liquidation of the obligations must be within the ability of the indi- vidual to pay. 15. The rate and amount of licensee's fee must be disclosed. 16. The approximate number of installments necessary to pay obli- gations in full must be disclosed. 17. A copy of the contract must be given to the consumer-debtor. 18. The contract, even though signed at the time of application, should not become effective until the applicant has made payment to licensee for distribution to creditors. 19. Receipts must be written for each payment. 20. At least every six months the licensee shall render an accounting to the consumer-debtor, which shall show the total amount received, total paid to his creditors, the amount of charges deducted, and any amount held in reserve. 21. Licensee must also render an accounting within seven days after written request. PAGENO="0080" 76 DEBT ADJTJSflNG BUSINESS I can only say this after personal knowledge, after almost 25 years in this field, that the field of consumer credit has expanded and is con- tinuing to expand. The bankruptcy rates have increased. The economic morality of the individual is being discouraged by a certain segment of the credit industry by the encouragement of bankruptcy and the encouragement of avoiding obligations. I also ask you to consider who in the business world has supported the Truth in Lending Bills, the Truth in Advertising bills? Who has taken the position for the consumer? If it was not individuals and members of the Association of Credit Counselors. Have those who have opposed the "outlaw legislation" as I term it- is it done in the benefit of the public interest or are they attempting to create an avenue where the individual has no escape from this happen- ing, mounting of indebtedness. We have been accused as an association of being opposed to the non-profit organizations being established. This is completely untrue and false. As far back as 1959 our association, through its president,. Harry Katzen, offered services and continued help to any organization. In 1962 when I was president of the Association, I wrote to the AFL-CIO and a copy of the letter will be presented to you, offering our services. Our only objection is, we refuse to allow the consumer to be held in the clutches of a certain segment of the credit industry who dominate,. finance and control this. The cost factor of the non-profit organizations throughout the country are almost identical with the charges that the ordinary pro- fessional credit counselor is charging. It is certainly not excessive, and these are figures that are taken out of the publications-quarterly reports by some of the finance companies. In the State of New York certain bar associations attacked vocifer- ously the outlawing of this bill in this field. It so happened to land on Governor Harriman's `desk the day an indictment was filed against a firm called Silver Shield. Strange as it may seem, the Silver Shield, as `the National Better Business Bureau records will document, was owned and controlled by attorneys. I don't believe any profession is beyond the point where certain individuals will not abuse it, but I certainly believe that ten years of complete, clear, ethical operation without one justifiable complaint in the state of California will prove that regulation will work. In comparison with Chapter 13, our organization alone last year distributed almost one-third as much funds back to creditors as Chap- ter 13 did throughout the entire country. it is `effective. It is a service and it works for the benefit of the consumer, and notwithstanding certain segments of the credit-oriented industry, it works to their benefit. I would like to also present at this time the written testimony of an individual who could not appear, Mr. Charles Genosky of Minnesota, which has been submitted to the Clerk of the Committee. I would like at this time `to basically submit this material to suggest some language f'or a bill. Mr. 518K. His statement will be made a part of the record at the' conclusion of your testimony. PAGENO="0081" DEBT ADJUSTING BUSINESS 77 There are a number of personal letters attached here to Mr. Genosky's statement. The question arises as to the propriety of making them a part of the record without the permission of the individuals whose signatures appear on these. I am not sure whether or not approval was sought or obtained for the use of these. Have you any comment to make on that. Mr. IRABIN0wITCH. No. I would merely like to say if there is any question about their being deleted, I have no knowledge as to the permission granted, but I would like to say that letters are available from Mr. Genosky and other members of our organization `both from creditors and clients at any time the committee requests them. I would say under those circumstances possibly we had better delete them from the presentation. Mr. SIsK. I think at this point we will withhold them from the record in view of the protection of the privacy of the individuals who have not necessarily given their consent. Mr. RABINOWITCH. In conclusion all I ask is the opportunity to regulate a service but regulate it strictly and give it the teeth that it needs. In outlawing it, all you are going to attempt to do is drive it underground and withdraw from the consumer a way of coming back to a place where he can walk the streets as a human being rather than being oppressed and harassed. I would like to answer any ques- tions any members of the committee may have. Mr. SI5K. Thank you very much, Mr. Rabinowitch. The committee appreciates your statement. There are, I am sure, many questions the members would like to ask you. At this time I would like to recognize the gentleman from North Carolina for such questions as lie may have. Mr. WHITENER. Does your organization or members of your asso- ciation engage in extending credit to your clients under any circumstances? Mr. RABINOWITCH. No. It is forbidden by statute. Mr. WHITENER. It depends on where you are whether it is fothid- den by statute, but do any members of your organization anywhere in the United States so far as you know engage in the financing of the debt or debts of the client? Mr. RABINOWITCH. No, none whatsoever to my knowledge. Mr. WHITENER. AU you do is seek the consent of the creditors for a pay-out arrangement and manage this, is that correct? Mr. RABINOWITCH. Well, it is much more extensive than that, Mr. Whitener. The ultimate objective is to liquidate the man's indebted- ness within his ability- Mr. WHITENER. With his money? Mr. RABINOWITCH, With his money, right. Mr. WHITENER. And he sends you a certain amount periodically and then you apportion that out among his creditors who have agreed to this proposition, is that right? Mr. RABIN0WITCIT. That is about as simple as you can define it. I w'ish it was that simple. Mr. WHITENER. What do you do about the accounts of creditors who do not want to go along? Suppose ninety per cent of them want 54-181-67-----6 PAGENO="0082" 78 DEBT ADJUSTING BUSINESS to go along with a long-term pay-out and ten per cent decline? How do you handle that? Mr. RABINOWITCH. Well, frankly, let me say this: I have only had that experience up until the last ten years. In the last ten years the creditor is no~ our problem. The creditor goes along. Mr. WHITENER. Even small loan companies? Mr. RABIN0wITOH. Without any question. Without any question. Including some of those who are openly and overtly encouraging the outlaw bill. `I can substantiate this in writing. I can substantiate this through records of not alone our office, but many offices where these organiza- tions refer people to organizations such as ours. Mr. WHITENER. And most creditors will go along? Mr. RABINOWITCH. Yes. Creditors are anxious to work with the in- dividual basically, regardless of what anyone may say. In the period of time that I have been in operation, I cannot think of one hundred accounts that we have not been able to secure creditors a cent. I can also demonstrate that in the city of Fresno, in the city of Bakersfield, Eureka, Stockton, we are there only at the invitation of the credit-grantors, after meetings with them where they ask us to come in to offer a solution to the individual. Mr. WHITENER. You have made some reference to the comparing of costs and you have an exhibit relating to it, the Chapter 13 fees as com- pared to your experience with an approximate 15 per cent cost to the debtor? Mr. RABINOWITCH. Our charge is only 12. Mr. WHITENER. I believe Mr. Genosky said something about 15 per cent would be a fair figure but he gives specific cases where it has ranged up to 40 per cent for Chapter 13. Mr. RABINOWITCH. That is true. Mr. WHITENER. He also mentioned the difference between Chapter 13 *and your operation from a creditor's standpoint, where the un- secured creditor does not have to face the issue of a secured creditor having priority under Chapter 13. Mr. RABINOWITCH. It goes deeper than that. As a typical example, I had written to DeWitt Paul, Chairman of Beneficial Finance, on this. This is my first experience in having dealt with this. We had made arrangements with the branch office of this company to liquidate the obligation of a military man instead of at the rate of $28 a month, which he could not afford, at the rate of $14 a month. We made arrangements for five months, I believe. The sixth month we got the check back from the manager of that office saying that he will only accept $28 and will not accept any reduced payments. Of course, I called because we had an agreement. Well, this was a new manager. In the course of the conversation he said, "I would pre- fer him going into Chapter 13 because I will get my full payment as a secured creditor." I asked, "What are you secured with?" He said, "Well, I don't know. This was an account transferred from out of state." I said, "Well, as far as I am concerned, I am sending you the $17 you credited. I am advising our client that you are attempting to re- PAGENO="0083" DEBT ADJUSTL~G BUSINESS 79 negotiate your situation, that it is impossible for you to meet this com- mitment, and I am going to take the liberty of directing a copy of this letter to DeWitt Paul, Chairman of the Board of Beneficial Finance." I have. I have not had a reply as yet, but I can almost assure you th~it this is simply the area of one man who feels a new broom is going to sweep clean and is not concerned with the individual consumed. This is one instance. The one instance. This is also a sort of a sense of policy this individual picked up from another area he comes from where Chapter 13 is being used as a collection agency. Mr. WHITENER. We have had some real problems with Chapter 13 1)ro(edures but we do have the problem that the debi or has to have his money to pay counsel and so forth. Mr. RABIN0wITcII. I don't know about tine initial charges, hut let me say I am not opposed to Chapter 13. 1 think there is a strong ileed for it. Mr. WHITENER. The trouble is, we can't seem to get anybody to use it except in a few areas of the nation. I inserted in the Congressional Record an explanation of Chapter 13 and how it works and how the lawyers could help so many people. I personally paid to have it printed and have it sent to every lawyer in 1ny district. I don't believe there has been a Chapter 13 proceeding filed in my district since. So I don't know what we can do to get folks to try to rehabilitate themselves without a bankruptcy proceeding. Mr. RAmN0wITOII. It will become worse with this computer age be- cause future employment is going to be dependent 111)011 identification through credit reports. Mr. WHITENER. Perhaps regulation would be better than prohibi- tion. Btit there again you run into this matter which I know enters the minds of the District Commissions arid any other governmental group and that is you have to create mew costs of government in order to regulate, Mr. RABINowITcI~. But these are self-supporting. Mr. WhITENER. hardly anything is self-supporting in the government. Mr. RABINOWTTCTT. Unfortunately, in California we, as an industry, h~o7e had to make it a self-supporting one and I think it should be maintained that way throughout the area. I think industry who is at- tempting to earn a profit, which we constantly hope for, and hope some we will attain, should afford the privilege of paying for this super- vision, the audits and the control. In California it is a very minor phase of its operation, hut tine audit bi1i~ and licensing fees are completely cost-free to the state. Mr. WITITENER. Of course, you folks don't get in debt. Mr. RAmN0WITcIT. You should see Los Angeles. Mr. WHITENER. This is why I wonder about this budget planning. I think if we had a better system of helping people plan their budgets, we may avoid some of these unfortunate consequences. We congress- men get calls where people can't get their old mother admitted to a hospital because of a credit rating. Mr. IIABINOWITOIT. May I point out something else that has not been touched on? That at the present time we eliminate the assistance to people. The approach was 15 years ago that we are dealing with the indigent. PAGENO="0084" 80 DEBT ADJUSTING BUSINESS The indigent today are being serviced by the professional credit counsellors, such as myself and others. In the areas where there is a community counseling service, we take advantage of it by referring them there, or we refer them to a Legal Aid Society or we refer them to the OEO now, that has established this type of service. Our average client today is no longer the indigent. He is anywhere from a $5,000 to a $10,000 income. Are we also going to deprive- whether it be a congressman or Frank Sinatra, of being able to secure a financial advisor to maintain his activities, his financial activities? We handled Sterling Hayden. for a short period of time and found the fees he was paying in certain areas for services may have been too high as far as we were concerned, but they were performing a service. Are we going to deprive them of it? Are we going to deprive,, for example, Willie Mays, of the opportunity of getting professional service in the handling of his funds? Isn't this what this bill will do, an outlaw bill? We talk about the banks. I think if you will read last night's paper, the Washington Post, Riggs National is considering a computer ar- rangement with another firm and going into the "cashless check so- ciety" where you send your bills and your check to the bank and they take care of all of it. I am not an attorney, but I would assume that this would also pro- hibit that. Where are we going with it? What is the purpose? Is it to keep the indigent down? Keep him involved to the point where he can't breathe any more? Or is it a question of attempting to close off everybody from every avenue of escape except to walk in and borrow money and live in this world of oppression in the financial world ~ Let's look at the consumer and consider who is behind the move to eliminate this assistance. That is all I request. Mr. WHITENER. Thank you very much. Mr. SI5K. Thank you very much. Does my colleague from New Mexico have any questions? Mr. WALKER. I have no questions. Mr. Sisn. Mr. Rabinowitch, in regard to the material which you furnished, I certainly want to be sure that at least a part of it gets in the record. Without objection, I want the Code of Ethics of the American Association of Credit Counselors adopted at Indianapolis, Indiana, on March 5, 1955, to be a part of the record. (The document referred to follows:) CODE OF ETHICS AMERICAN ASSOCIATION OF CREDIT COUNSIDLORS ADOPTED AT INDIANAPOLIS, INDIANA, MARCH 5TH, 1955 Resolved by the American Association of Credit Counselors in regular An- nual Convention assembled, that the following Code of Bthics be and the same is hereby made a part of the By-Laws of this Association for the purpose of determining the rights of the members of this Association. By this Code of Ethics all members of this Association are firmly bound in that all members shall- 1. Furnish a clear statement of the charges, terms, and list of all accounts to be paid. 2. Amortize charges over the number of months necessary to liquidate the obligations and take no more than the amortized amount due at any time. 3. Take no fee until the debt payment program is arranged. 4. Take no account unless a written and thorough Budget Analysis indi- cated the term pf payment can be met. PAGENO="0085" DEBT ADJUSTING BUSINESS 81 5. Make a concientious effort to follow every program to a successful conclusion. 6. Present the services on its own merits, permit no misleading advertis- ing and avoid any encouragement of Bankruptcy. 7. Make no payments or reward of any nature for referral of potential customers. 8. Strive to preserve friendly relations between Debtor and Creditor and to re~establish credit. 9. Distribute money received for creditors promptly and to the best in- terest of the customer. 10. Protect in common the best interests and the dignity of Credit Coun- seling and be vigilant in the correction of abuses wherever found. AMERICAN ASSOCIATION OF CREDIT COUNSELORS. Mr. SISK. Any questions? Mr. WHITENER. Mr. Rabinowitch, Mr. Kneipp made reference to the lack of qualifications of a person like you, a non-lawyer, to advise *a client on the legality of a claim. Mr. RABINOWITCH. This has been a double-edged sword that every- body used against all of us in the field over the years. If I was an attorney and knew the answer and reviewed every document coming in, without any question I would be practicing law. If I don't I am being accused of depriving the man of that opportunity. All I can say is we have reviewed this in California and it is an acknowledged fact the individual coming to us recognizes his obliga- tions and, quite frankly, if we are concerned about some illegitimate charges there are legal aid organizations and others that will help and some attorneys that will determine it. We cannot determine every obligation. If he says he owes Sears and Roebuck twelve bucks and it turns out to be $12.32 because of service charges, I don't believe the responsibility is on us to determine the legality. If there is a question, yes, we have a moral obligation to see that he gets the service and care and attention he needs, the same as if he is going to a quack or an unlicensed psychiatrist. This is why the Bar Association joined us in drafting our bill in 1957. In fact, they opposed us. They appointed Archibold Mull to appear in opposition to it and it finally resulted in certain amendments. You have a Member of Congress who in 1957 opposed me and authored an outlaw bill in California, and just the other night I had the opportunity of meeting him-it is Gus I-law- kins-and he said he wanted to thank me for showing him he was wrong and there was a way of regulating the business. This was one of the greatest sources of satisfaction I ever had. Mr. SI5K. I would like to direct your attention to the draft of a bill headed "Suggested Language For a Bill Licensing and Regulating the Business of Credit Counselling and Financing Management" which was forwarded to me. Do I understand that this is in accordance with existing California law? Mr. RABINOWITCH. There are some slight modifications strengthen- ing certain areas and affecting the fee structure. Our fee structure in California is lower than suggested there. It is 12 percent on the first $3,000, 11 percent on the next $2,000, and 10 percent on the next $5,000. This is a straight 15 percent of the money disbursed to credi- tors, not on the total obligation. It is earned as we distribute the funds to the creditors. But it is almost identical to that in California in every other respect. PAGENO="0086" 82 DEBT ADJUSTING BUSINESS Mr. SIsK. Without objection I will ask that this document be made a part of the record at this point. (The document follows:) SUGGESTED LANGUAGE FOR A BILL LICENSING AND REGULATING THE BUSINESS OF CREDIT COUNSELLING AND FINANCIAL MANAGEMENT Section I. Definitions. For the purpose of this act: A. A credit counsellor is a person who, for the benefit of a debtor, engages in whole or part in the business of receii~ing money or evidences thereof for the purpose of distributing the money or evidences thereof among creditors in payment or partial payment of obligations of the debtor. B. This definition does not include the following activities when per- formed in the regular course of businesses and professions hereinafter listed when the performance of credit counselling and financial management service is performed only incidental to such businesses or professions. The provisions of this division do not apply to any of the following: 1. Persons or their authorized agents doing business under license and authority of the Superintendent `of Banks of the Stafe to , or under any law of this State or of the United States relating to banks, trust companies, building or savings and loan asso- ciations, title insurance companies or underwritten title companies and escrow agents. 2. Persons or their authorized agents engaged in the business of pay- lug to others bills, invoices, or accounts of an obligor or of selling or cashing checks, drafts, or money orders issued `by a person who has been licensed under and complied with the Statutes of the State of 3. Phe services of a person licensed to practice law in this State, when such person renders services in the course of his practice as an attorney at law, and the fees and disbursements of such person whether paid by the debtor or other person, are not charges or costs and expenses regu- lated by or subject to the limitations of this chapter; provided such fees and disbursements shall not be shared, directly or indirectly with the licensee, check seller or casher. 4. Any transactions in which money or other property is paid to a "joint control agent" for dispersal or use in payment of the cost of labor, materials, services, `permits, fees, or other items of expense incurred in construction of improvements upon real property. 5. A common law or statutor~y `assignment for the benefit of creditors or the operation or liquidation of property or a business enterprise under supervision of a creditor's committee. 6. The services of a person licensed as a certified `public accountant or a public accountant in this State, when such person renders services incidental to his practice as a certified public accountant or a public accountant, and the fees and disbursements of such person whether paid by the debtor or other person, are not charges or costs and expenses regulated by or subject to the limitations of this chapter; provided, such fees and disbursements shall not be shared, directly or indirectly, with the licensee, cheek seller, or caslier. 7. Regular employees of licensees under this act when acting in the normal course of their employment; 8. Judicial `officers or any person acting under au'thority or order' of a court of this State or the United S'tates; 9. Employers offering credit counseling services exclusively for their' employees; and at no charge or expense to debtor. 10. A creditor of a debtor whose credit counselling services are ren- dered without any cost to the debtor. C. "Debtor" means a person from whom monies are being accepted for' disbursement to creditors and whose principal income `is derived from wages, salaries, commissions, pensions or annuities. P. "Licensee" means any person licensed by the Administrator to engage in the business of credit counselling or financial management pursuant to the provisions of this act. B. "Administrator" means the officer designated to administer this act,. or his designee. PAGENO="0087" DEBT ADJUSTING BUSINESS 83 Section II. Prohibition of Credit Counselling and Fina~wial Management with- out a License. It shall be unlawful for any person to engage in the business af credit counselling or financial management without a license, except these exempted in Section I-B. Se~tion III. A~plieation for license; Contents. An application for a license to engage in credit counsellin.g and financial management shall be in writing, under oath, and in a form described by the Administrator. The application shall contain: A. The name of the applicant; B. The date of incorporation, if incorporated; C. The address of the applicant's principal place of business within the State and that of any branch office or offices within the State of the applicant; D. The name and resident address of the owner or partners, or if a corpo- ration or association, of the threcto'rs, trustees, and principal officers (and such other information as the Administrator may require). E. Each applicant shall submit, as part of his application for a license, for approval by the Administrator, a copy of the contract form that is pro~ posed for use in the business. Any change to any such contract form shall be submitted for approval to the Administrator by the applicant or licensee. F. A copy of the certificate of any assumed name or articles of partner- ship, if the applicant is a partnership, or of the articles of incorporation, if the applicant is a corporation, shall be filed with, and comprise a pant of, the application G. Each application for a license shall be accompanied by a licensee fee of $100.00 and an investigation fee of $100.00. II. A separate license fee of $50.00 shall be paid for each branch office maintained by the applicant. Section IV. Nonassignability and nontransferability of license; posting of license. All licenses issued under this act shall be nonassignable and nontrans- ferable, and shall be posted in a conspicuous place in the credit counselling or financial management office. Section V. Bupiration Date of License. A license shall expire on December 31, unless sooner surrendered, revoked, or suspended, but may be renewed as `provided in Section VI of this act. If an initial application for a license is filed after June 30 in any year, the payment shall be one-half of the stated license fee in addition to the fee for investigation. Section VI. License Renewals. Each licensee on or before December 15 may make application to the Administrator for renewal of his license. The applica- tion shall be on a form prescribed by the Administrator and shall be accompanied by a fee of $100.00 (together with) and a bond as in the case of an original application Except that the original application shall be accompanied by an additional $100.00 fee. Section VII. Bond. Each ` applica:tion for a license, including any renewal thereof, shall be accomplished by a bond, to be approved by the Administrator, in the sum of $10,000.00, in which an insurance company, which is duly author- ized by the State of to `transact the business of fidelity and surety insurance, shall be surety. The Administrator may accept in lieu of the surety bond, a deposit in cash or a certified check payable to the Administrator, or United States Government Bonds. The obligee shall be the State' of for the use of the State and of any person or persons who may have a cause of action against the obligor on the bond by virtue of the provisions of this act. Such bond shall provide that said `obligor will faithfully conform to arid abide by the provisions' of this act and of all rules and regulations' issued there- under, and will pay to the obligee any and all money that may become due or owing to any person by virtue of the provisions of this' act. No person shall engage in the business of credit counselling and financial management until a good and sufficient bond is filed in `accordance with the provisions of this act. Section VIII. Investigation; Issuance of License. A. Upon the filing of the application, the payment of the fees, and the approval of the bond, the Administrator shall investigate the facts, and he finds that: 1. The financial responsibility, experience, character and general fitness of the applicant and of the members thereof if the applicant is a partnership or an association, and of the officers' and directors thereof, if the applicant is a corporation, are such as to command the confidence' PAGENO="0088" 84 DEBT ADJUSTING BUSINESS of the community to warrant belief that the business will be operated fairly and honestly and beneficially to the debtor; and 2. A licensee in the conduct of its business at all times shall maintain assets of at least ten thousand dollars ($10,000.00) in excess of its lia- bilities, of which assets at least five thousands dollars ($5,000) shall be liquid assets. The Administrator may determine by general rule what assets are liquid assets within the meaning of this section and may determine by specific ruling that a particular asset is or is not a liquid asset within the meaning of this section. 3. The applicant (or the applicant and the members thereof if a part- nership or association, or the applicant and the officers and directors thereof if the applicant is a corporation) has not been convicted of any crime involving moral turpitude; or 4. That the applicant does not have a history of having defaulted in the payment of money or other things of value collected for others, including the discharge of debts through bankruptcy proceedings, the Administrator shall issue to the applicant a license to engage in credit counselling and financial management in accordance with the provisions of this act. No collection agency loan company, finance company, firm or agency representing creditors directly or indirectly shall be entitled to a license under this act. B. If the Administrator does not so find, he shall deny such application, aad forthwith notify the applicant of such denial and the reasons therefor. (Within. 15 days after the entry of such order, he shall prepare written find- ings and shall forthwith deliver a copy thereof to the applicant.) The appli- cant shall be given an opportunity to be heard on reconsideration of his application within 15 days of the notice of denial. In the event of denial. the license fee shall be returned after the opportunity for reconsideration prescribed in this section, but the investigation fee shall be retained to cover the cost of investigation. section IX. Requirements of Contract between Debtor and Licensee. A. List every debt to be paid with the creditor's name and disclose the total of all listed debts; B. Provide payments reasonably within the ability of the debtor to pay in precise terms; C. Disclose in precise terms the rate and amount of the licensee's charge; D. Disclose the approximate number and amount of installments required to pay the debts in full; E. Disclose the name and address of the Licensee and of the debtor: F. Contain such other provision or disclosures as the Administrator shall determine is necessary for the protection of the debtor and the proper con- duct of business by a licensee. 1. No licensee shall accept an account unless a written and thorough budget analysis permits a reasonable conclusion that the debtor is able to meet the required payments as set forth in the contract, and a copy of said budget analysis shall be signed by the, debtor and retained by the licensee in the debtor's file. G. Provide that the contract may not be cancelled by the licensee without the debtor's written authorization, unless the debtor fails to make payments as agreed. H. Licensee shall deliver a copy of any contract or agreement between the licensee and the debtor to the debtor immediately after the debtor executes it, and the debtor's copy shall be executed by the licensee. A contract shall not be effective until a debtor has made a payment to the licensee for distri- bution to his creditors. I. All contracts must be completed and signed by both the debtor and ilcensee or its agent, at the address of licensee. J. No contract shall be written for a period longer than 24 months. A debtor may cancel said contract upon 30 days written notice to the licensee. in which event the licensee shall be entitled to such charges as are provided `for in this act in Section XII. K. A licensee shall not take: 1. Any contract, promise to pay, or other instrument which has any blank spaces when signed by a debtor; 2. Any negotiable instrument for the licensee's unearned charges; 3. Any note, wage assignment, real estate or chattle mortgage, or other security to secure the licensee's charges; PAGENO="0089" DEBT ADJUSTING BUSINESS 85 4. Any confession of judgment or power of attorney to confe~s judg- ment against the debtor or to appear for the debtor in a judicial pro- ceeding. 5. Concurrent with the signing of the contract or as part of the con- tract or as part of the application for the contract a release of any obligation to be performed on the part of the licensee. Section X. Consent of Creditors. A licensee shall not receive any fee unless he has the consent of at least 51 per cent of the total amount of indebtedness and of the number of creditors listed in the licensee's contract with the debtor, or such like number of creditors have accepted a distribution of payment. Section XI. IS'tatements to Debtors. Every licensee shall make a semi-annual report to each debtor showing the total amount the creditors have been paid by the licensee on the debt of the debtor and the amount of fees withdrawn by the licensee. Licensee must render accounting as set forth within ten days or written request. Section XII. Charges and fees. The total charges received by a licensee for his services may not exceed 15% of the monies distributed by the licensee, to the creditors of the debtor, unless the debtor cancels or defaults on the performance of his contract with the licensee, in which event the licensee may collect in ad- dition thereto, 7% of the remaining indebtedness listed by said debtor for pay- ment to the creditors. In relation to obligations included in the contract which are secured by a mortgage or trust deed on real property, fees may be collected only as to payments made by the licensee to the creditor. In the event of can- cellation or default on performance of the contract by the debtor, the licensee must distribute or have distributed to the creditors of the debtor at least 85% of the funds of the debtor paid to the licensee. Section XIII. $eparate Accounts. A licensee shall not commingle payments received by him from debtors with the licensee's own property or funds, but shall maintain a separate account in which all payments received from debtors for the benefit of creditors shall be deposited and in which all payments shall remain until disbursements are made on behalf of the debtor or returned to the debtor. The Administrator may verify the amount of money on deposit in any such account in any bank or depository. Section XIV. Maintenance of Records. Every licensee shall keep, and use in his `business, books, accounts and records which will enable the Adnilnistrator to determine whether such licensee is complying with the provisions of this act and with the rules and regulations issued thereunder. Every licensee shall pre- serve such books, accounts, and records for at least 5 years after making the final entry on any transaction recorded therein. Section XV. Investigation of Business; Ewaiaination of Records. The Adinin- istrator shall at least annually and such other times as he considers necessary investigate the business and examine the books, accounts, records, and files used therein of any licensee and any person who the Administrator has reason to believe is engaging in the business of credit counselling in violation of the pro- visions of this act. The actual cost of every examination of a licensee shall be paid by the licensee examined. Failure to pay the examination fee within 45 days of receipt of demand from the Administrator shall automatically suspend the license until the fee is paid. In the investigation of alleged violations of this act, the Administrator may' compel the attendance of any person or the production of any books, accounts, records, and files used, and may examine under oath all persons in attendance. Section XVI. Annual Report. Each licensee shall annually, on or before the day of , and at such other times as the Administrator may request file with the Administrator a certified audit report prepared by an independent public accountant containing such relevant information as the Administrator may reasonably require concerning the business and opecations during the preceding calendar year of each licensee. Section XVII. Prohibited Practices. No licensee shall: A. Purchase from a creditor any obligation of a debtor; B. Operate as a collection agency, loan company or finance company; C. Pay any bonus, commission, or other consideration to any person for the referral of a debtor to his business, nor shall he accept or reodve any bonus, commission or other consideration for referring any debtor to any person for any reason; D. Advertise his services, display, distribute, broadcast, or televise or permit to be displayed, advertised, distributed, broadcast or televised his. PAGENO="0090" 86 DEBT ADJUSTING BUSINESS services in any manner whatsoever wherein any false, misleading or de- ceptive statement or representation is made with regard to the services to be performed by the licensee or the charges to be made therefor. All advertising shall be submitted to the Administrator for approval; B. Require as a part of the contract between the licensee and the debtor, the purchase by the debtor of any stock, insurance, commodity, or other property or any interest therein. Section XVIII. S'nspension or Revocation of License. The Administrator shall have power and authority to refuse the granting of a license far good cause shown. He may, upon notice and reasonable opportunity to be beard, suspend or revoke any license issued pursuant to this act if he finds that: A. The licensee has failed to pay any fee required by this act. B. The licensee has violated any provision of this act or any rule or regulation issued thereunder; C. Any condition or fact exists which, if it had existed at the time of the original application for such license reasonably would have warranted the Administrator in refusing originally to issue such license. 13. Indulging in a continuous course of unfair conduct. B. For insolvency, bankruptcy, receivership or assignment for the benefit of creditors by a licensee. F. For a licensee to disclose the list of creditors of a debtor to any indi- vidual or firm for the purpose of any individual or firm's soliciting the ac- counts for collection or loans. Section XIX. Enles and Regwlations. The Administrator may promulgate rules and regulations and make general and specific rulings, demands and findings for the enforcement of this act. He shall also prescribe the contract and such other forms as be may deem necessary or appropriate to be used by licensees and applicants for licenses under this act. Section XX. Injunction. To engage in the business of credit counseling and financial management as defined in this act, and to accept individuals' funds for this purpose without a valid existing license to do so, is hereby declared to be inimical to the public welfare and to constitute a public nuisance. The admin- istrator shall direct the Attorney General of the State of or the State's Attorney of any county in the State of to apply for an injunction in any court of competent jurisdiction, to enjoin such person from engaging in said business and any such court may, as in cases relating to injunction in the State of , issue a temporary or per- manent injunction as the circumstances shall require. Such injunction proceeding shall be in addition to, and not in lieu of, penalties and remedies otherwise provided in this act. Section XXI. Violation; Penalties. A. Any person other than a licensee who engages in the business of credit counselling and financial management without a license shall be guilty of a misdemeanor and shall be fined not more than $1,000 for each violation or imprisoned for not more than 6 months or both. B. Any licensee under this act who violates any provision of this act is guilty of a misdemeanor and upon conviction, in addition to other penalties, shall forfeit his license and shall be fined not more than $1,000 for each offense, or imprisonment not to exceed one year, or both. Section XXII. Unlawful Practice of Law by Licensees; Acts of Officers or Employees of Licensee. Nothing in this chapter shall be deemed to authorize the performance, directly or indirectly, of an act or acts constituting the practice of law by a licensee, check seller or casher, or by any person, firm, corporation, or organization. Without limiting the generality of the foregoing and other applicable laws, the following act or acts, when done by the owner; manager or employee of a licensee, in connection with a credit counselling transaction, shall be deemed to constitute the unlawful practice of law: A. Preparation, advising or signing of a release of attachment or gar- nishinent, stipulation, affadavit for exemption, compromise agreement or other legal or court document; B. The furnishing of legal advice or performance of legal services of any kind. No licensee (including an owner, manager or employee of a licensee) shall (1) represent that he is authorized or competent to furnish legal advice or per- form legal services; (2) assume authority on behalf of creditors or a debtor or accept a power of attorney authorizing it to employ or terminate the services of an attorney or to arrange the terms of or compensate for such services; (3) PAGENO="0091" DEBT ADJ~JSTING BUSINESS 87 communicate with the debtor or creditor or any other person in the name of an attorney or upon the stationery of an attorney or prepare any form or instrument which only attorneys are authorized to prepare. Section XXIII. Qualifications of' Principal Managing Officer. No license shall be granted to a prorater or continued in effect as such unless the principal managing officer thereof is at least 21 years of age, a citizen of the United States, a bona fide resident of this State for at least two years immediately preceding his application for a license, and shall have had at least two years' experience in consumer credit extension or credit collection activity. The commissioner shall have power and authority to refuse the granting of a license for good cause shown. Section XXIV. Effective Date. This act shall become effective Mr. SIsK. I have not had an opportunity, I might say, to study that particular document to the extent I should. However, what are the one, tu o, tin ee, or foui `ircas winch you think are m the greatest need of regulation ~ What are the most vit'il points to elimin'itc the type of abuses which have occurred in the District of Columbia and in other areas? And what portions of the California law do you think are the most important in maintaining an equitable operation of this sort? Mr. RABIN0wITCH. Our experi.ence indicates, first, not allowing the debt adjuster to take a fee unless he can perform, And the way we can determine if he can perform is by an analysis of a man's incom.e and the amount available toward liquidation of his debts and then obtain.- ing t.he cooperation of the creditors and allowing only a portion of that ~ee to be taken. Say my fee is $300. 1 wouldn't get it the first. year. I might take it over a period of three years, $10 or $15 a month This is a w'iy of making cure thcxe is pci formarn e hec'uis I c'tn't profit unless I perform. The second is advertising. We feel any advertising that is deceptive and that creates a motivating factor in appealing to the desperate per- son should be eliminated. Another is that no fee he charged until the plan is worked out. I may spend two hours interviewing a man and find he either does not need my service or I cannot perform. But just because I walk in Hechts and look at suits, I don't have to buy a suit. And merely discussing it with him should not require his paying a fee. 75 percent of the people walk- ing in our office do not need our service or we cannot perform, and, frankly, there is a selfish motive because the best advertising we have is when a man stands up and says, "How much do I owe you" and if 1 cannot serve him I say, "Nothing." Eliminating those factors and the bond can eliminate the abuses. Mr. WHITENER. You don't mean eliniinating the bond, you mean in- ~isting on a bond? Mr. RAmNowlvcia.. Insist on a bond and have sufficient protection for the individual. We are handling lots of money. If I get taken for $50 or one of you gentlemen get taken for $50 we will eat, but many of the people we deal with, $50 is the food budget foi a ~ eck md th( y h'tve to be protected. Mr. SISK. Strict auditing you say is an absolute necessity in any reg- ulation? Mr. RABIN0wITcn. Absolutely. In a State audit at the end o:f a year they said he had overcharged one client and that our license was in jeopardy. A review of the file showed we had overcharged six-tenths of one cent. We were forced to issue a check, change our records, and finally after three yeai~s find the individual and get him to cash it, I don't like it, but I am handling lots of money and I don't think you can enforce it too strictly. PAGENO="0092" 88 DEBT ADJUSTING BUSINESS Mr. SIsK. We have a quorum call. The House is in session. Let me express my appreciation for your testimony here this morning. I know it will be of help to the Committee. The statement of Mr. Genosky,. which he left here as requested will be made a part of the record. We thank you very much. Mr. RABINOWITCH. Thank you. (The statement referred to follows:) `STATEM1~NT OF C. T. GENOSXY, [PRIIISIDENT, FINANCIAL ADJU'SPMENT `00. PRolnmsIoNAL CREDIT COUNSELING-PRO RATING Pro~rating or Profesisional Credit `Counseling is a consumer aerice and ha's been' in use since the inception of consumer credit. Availa'ble records indicate that it was `started as a full time industry in Mm- neapolis, Minnesota, by Mr. Sidney ~Jhase, now deceased, in the year 1922. Mr. Chase was a former loan man. He saw the economic need at that time and went into it a's a full time profession. It did not get official national recognition until the early 30's when Justice William 0. Douglas then a professor at Yale, and Justice Abe Fortas was Editor- in-Chief of Yale Law Review. A study was `made of the bankruptcy system `by Justice Douglas on behalf of the Hoover Administration and `by Justice Fortas on a study financed by Yale Institute of Human Relation's'. The study was made in Chicago, Illinois, where Justice Fortas encountered "acerOdited adjustment firm's." In a statement made at the 34th Annual Legal Aid Conference in Denver, October 1955, Justice Fortas said: "My dbiservation was, in short, that such institutions bad a useful function in our society, and not an exclusive function, certainly not a monopolistic function, but a function, so to speak, that is comparable to a psychiatrist. It was a function Which is uheful When people or families are ~iek." He continued: "I believe that when an American family gets in debt so that it needs some help it should have available to it a variety of avenues; their problems should be resolved, if possible, free of charge by a social welfare agency, by the advice of legal aid societies, by friends, by anybody who can help them out of the morass, the terrible morass of a hopeless debt situation. I also believe that they should have available to them, trained, honest commercial enterprises like the credit counselors, debt adjusters, as they are called, to whom they could pay a reasonable fee." In 1935 the Minnesota State Legislature after due investigation decided that professional credit counseling was a just enterprise, necessary to our economy and adopted a regulating bill regulating the industry in Minnesota. Here in the State of Minnesota we have been operating under regulation since. There have been few it any abuses. After World War II consumer credit rose from six (6) billion dollars out- standing in 1946 to an amount which today is in excess in ninety-five (95) mil- lion dollars. It has become such an important part of our economy that over eleven (11) billion dollars are being paid annually by the consumer in interest charges alone. As the consumer credit rose so also rose the casualties, so also rose the number of professional credit counselors. The industry developed from the one to two man operation or the sideline operation to a full fledged profession. It has changed from the original pro-rating of 20 years ago that of merely "han- dung bills," to one wherein the counselor analyses, educates, budgets, counsels and advises the family or individual in proper buying and spending in addition to arranging to pay the bills. There are a number of alternatives for the debtor consumer. It is possible for him: 1. Convert assets to cash to pay all bills in full; or reduce them to a point where the balance of monthly payments can be maintained. 2. Borrow sufficient money to pay the bills provided the re-payment schedule is not in excess of the individual's ability to pay. There are abuses in this aspect both by the over borrower and the over zealous lender. PAGENO="0093" DEBT ADJUSTING BUSINESS 89 ~ The debtor himself can attempt to reduce his monthly payments to creditors sufficiently to enable him to meet the new terms. 4. Secure the services of a reputable, licensed, bonded and regulated service that has a trained staff that can: a. Analyze the individual's income. b. Analyze and review the individual's living expenses and make con- structive suggestions. c. Secure a complete list of all creditors. d. Determine with the debtor what he can really afford to pay and maintain his current living costs. e. Upon completion of information contact all creditors and estab- lish a plan of re-payment based on the above information, and secure the consent and cooperation of creditors to said plan. f. Work with the debtor throughout the entire program to take care of revising budgets and revising payment schedules because of chang- ing conditions or emergencies. g. Keep creditors advised of any new problem that may arise that may interrupt the payment program and maintain their cooperation. h. Make sure the debtor maintains his commitments within his ability to pay. i. Disburse funds received on a pre-arranged schedule in order to meet commitment and avoid interest and late charges where possible. j. Educate and re-habilitate the individual or family so they may be successful in handling their own financial affairs. There are also other alternatives and they are Chapter XIII of the bank- ruptcy act or straight bankruptcy which involves losses to most credit grantors. Pro rating, unlike Chapter XIII does not show preferential treatment to certain creditors by giving them priorities and forcing other creditorsi to sit by empty handed. Chapter XIII attempts to accomplish the same goal for which the pro-rater strives. However, the methods achieving the common end differ. The pro~rater coi~cerns himself with educating the debtor as to how he got into his financial plight, bow he can solve the problem by cooperating with his creditors, how he can avoid the same problems in the future. All the while maintaining his dignity and avoiding the stigma that bankruptcy sometimes carries. Pro rating, unlike Chapter XIII does not force creditors to accept the plan without alternatives. Instead it enables the debtor and creditor to work coopera- tively. It is a fallacy to state that such cooperation is unlikely. In Minneapolis creditors much sooner prefer our plan to Chapter XIII. In fact Financial Ad- justment was started at the request of numerous creditors and has and still operates strictly on a referral basis. Newspaper articels and periodicals have bailed Chapter XIII as inexpensive to the debtor. The following report indicates differently: A report by a trustee in Iowa from December 1958 to December 1964 indi- cates the average cost to the debtor for Chapter XIII proceeding was 26.3 of the monies paid to creditors. In comparison our firm over the same period charges the debtor 15 per cent of the monies paid to creditors. There is no question as to which program is most beneficial to the debtor and the creditors. We do not condone any abuses and neither do we claim there aren't any. Not any more so than any other profession. That is why we strive for regulation. If only these sources that come up with the abuses in our profession would turn their "cruel white light" on the good we have done, the natioual picture would surely change. A survey taken in 1965 disclosed :- "Professional credit counselors nationally helped 189,150 families. 58,800 families counseled without charge. 130,350 family financial programs initiated. $391,050,000.00 of consumer credit involved. $111100000.00 repaid through their assistance. Can anyone honestly come close to that figure in citing abuses? Apparently the "searchlight" of certain vested interests got stuck when it came to actual help being given the debtor consumer by the industry. These same powers who are not satisfied in their own field but have pene- trated the mail order field, the retail hardware market etc. are now trying to wrest the industry from professional men who have dedicated themselves PAGENO="0094" 90 DEBT ADJUSTING BUSINESS to the solution of `the debtor consumers' problems since 1922. If they are so concerned about the plight of the families who become casualties of our system of credit, why don't they use their skills and monies to regulate the industry rather than destroy it. Should the debtor be forced to accept the help from creditor oriented services? They are the very people, in most cases who placed him into the plight he is in. We in the industry are in favor of community oriented credit counseling and our American Association of Credit Counselors is willing to help; however, creditor oriented services are no more help to the debtor insofar as getting him out of debt than a "dope pusher" attempting to cure a "dope addict" of the habit. It is my contention that the problems of the ever growing number of families who are becoming casualties of our great system of credit must be solved. However, this solution must come from "free enterprise" without resort to the courts or charities, otherwise iii the eyes' of the rest of the world our economy will have failed. We take great pride in the factual evidence of our credit counseling and money management program, just as any other profeasion, business or industry does. What we are doing we are doing for people and upholding the "dignity of man." It is people we work with `and it is their particular problems we do all in ou'r power to solve. This then means that the worth of our services must be judged, not by biased opinion, not by book value, not by market' value but by human value. The effectiveness' of our program and the impact it has on the family during and after the conclusion of our program is the base upon which the values should be `set. Our `services `are geared to meet the immediate problems of th'e `debtor consumer. We have no other interests. Our full time is devoted to that end. My final remarks are that if it is the constitutional right of Mr. American Citizen to choose who should represent him in the highest offices of the nation, who should represent him in his legal matters, who should take care of his ills and his health `etc., he therefore should have the right to choose who should represent him insofar as his financial problems are concerned. Only proper regulatory legislation will assure him of `this right. THE STORY BEHIND-FINANCIAL ADJUSTMENT Co., MINNEAPOLIS, MINN. This folder is for the purpose of explaining our operation to the people who are having Financial problems and others in various professional fields, who are interested in people who do have this problem. In addition to people in Financial difficulties we find that creditors, employers, doctors, personnel managers, attorneys, etc. are interested, due to the close tie in with the wage earner and his problem. Financial Adjustment Co. is founded on the principal of helping people manage their money correctly. It is not based on the idea of aiding or abetting a person to dodge any of his or her obligations. Our main aim is to centralize their `ac- counts under one head on a payment schedule they can afford to meet, thereby be- ing able to present their problem to their various creditors in an honest business- like manner. At the same time enabling the individual to have only one place to pay instead of several. Financial Adjustment Co. should be thought of as a financial doctor rather the undertaker. Our method of handling a person's financial affairs consists of an interview with both husband and wife (if married). A full statement of outstanding obli- gations is taken and a budget of current living costs is set up. After this is determined, all other remaining funds are turned over to our office for the purpose of liquidating the accounts outstanding. It must be realized that if the family does not have sufficient funds to maintain their current living costs we are defeating the purpose of our plan. Having determined the amount of income available for distribution, each creditor is then contacted, advised of the amount o'f money that can be applied against the balance due him, a'nd i:5 asked for his cooperation. We realize that each creditor is eager to eliminate his account as rapidly as possible. However, we must `bear in mind, in allocating our client's funds, that some creditors have secured claims, which prevents an actual equitable distribu-- tion. Similar accounts are handled as equitably as possiblb. PAGENO="0095" DEBT ADJUSTING BUSINESS 91 We accept no fee from creditors, neither do we ask for settlements other than time envolved. An open invitation is made to all creditors to check our records any time they choose. A progress report is available to any creditor or employer at any time on any of our clients. We carry a perpetual teporting system to creditors, keeping them informed as to any change in our client':s status or paying habits. Our full charge is based at $15.00 per each $100.00 of indebtedness listed, plus a $5.00 set-up fee at the time the contract is set up. This charge is not a yearly charge but a lump fee for the duration of the contract. Our average case is running approximately 26 months. TheSe charges include all investigations, services, interviews, check costs, etc. These items are stipulated in our contract and each client receives a full complete copy. Contracts are available to anyone interested. The above charge is amortized over the duration of the contract, and this item is set out in bold type in our contract. We are sincere when we say that we do not want creditors to receive their money in any other manner than we ourselves receive our charge for services. Financial Adjustment Co. is operated on strictly referral basis, and we wish to thank the many Credit Managers, Personnel Men, Members of the Clergy, Social Workers and others who have referred families with financial problems to us. The sudden rise in Bankruptcies and Chapter XIII of the Bankruptcy Act is indicative of the need to solve the famly debt problem. It is also worth noting, that the cost of our services is about one-half the total cost including legal and filing fees of the Chapter XIII Plans. Our payout on cases completed is 40% higher, but above all, monies collected are immediately disbursed to creditors. Our client is not just a number. He is a human being seeking help to solve his Debt Problem. We contend that the rapidly growing problem of Families who become casual- ties of our system of credit must be solved, and this must be done within the framework of free enterprise, without resort to the courts or charities, other- wise in the eyes of the world, our economy will have failed. Financial Adjustment Co. is owned and operated by C. T. Genosky, who has been in Credit Counseling in Minneapolis, Minn. since 1936. We are members of the Credit Bureau of Minneapolis. We are in no way connected with any other Debt Liquidation Co., Loan Co., Wage Earner Plan, Credit or Finance Co. Neither do we wish to have our operation or manner of disbursement identified with any other type of opera- tion, other than our own. We are member of the American Association of Credit Counselors and adhere strictly to their Code of Ethics, Constitution and By- Laws. A copy of this Code of Ethics is on the reverse side of this folder. We feel that our services are most helpful to an individual who has a Financial problem, because- 1. We set up his accounts and his current living costs on a business-like manner. 2. Start disbursing to his creditors immediately out of the first monies we receive from him. 3. Due to the amortization of our charges, we are able to release more money to his creditors. The elimination of other check charges and carrying charges enables us to do a better job at less cost to the individual. 4. Through our constant reporting system, creditors are kept advised at all times of the status of our client. Our years of experience in this field eliminates the thought of inferring that every creditor sees eye to eye with us on every proposition, but we know that all things can be worked out by compromise, and the value of our plan is not questioned. We are most anxious to explain our services and welcome and encourage any inquiries regarding the help we are able to give an individual who is having a Financial Problem. FINANCIAL ADJUSTMENT Co. Mr. SIsK. The Committee will stand in adjournment until 10 o'clock in the morning, when we will proceed with this hearing. (Thereupon, at 12:15 p~m. on Thursday, September 14, 1967, the Subcommittee adjourned until Friday, September 15, 1967, at 10 o'clock a.m.) PAGENO="0096" PAGENO="0097" DEBT ADJUSTING BUSINESS FRIDAY, SEPTEMBER 15, 1967 HOUSE OF REPRESENTATIVES, COMMITTEE ON THE DISTRICT OF COLUMBIA, SUBCOMMITTEE No. 5, Washington, D C The Subcommittee met, pursuant to adjournment, at 10 10 a m, in Room 1310,..Longworth House Office Building, Hon. B. F. Sisk, Chair- m'tn of the Subcommittee, presiding Present Representatives Sisk (Chairman of the Subcommittee), J'tcobs and W'dker Also present: James T. Clark, Clerk; Hayden S. Garber, Counsel; Donald Tubridy, Minority Clerk and Leonard 0. Hilder, Investi- gator. Mr. SIsK. Subcommittee No. 5 will come to order. We will continue our hearings this morning on the matter of the debt adjustment business. I i~ ant the record to show that our colleague from Michigan, Mr Diggs, has permission to insert a statement on the matter under dis- cussion. It may be impossible for him to appear in person, but without obiection his statement will be incorporated in the record Mr Sisic The first witness this morning will be the Barden Invest ment Management Corporation. Mr. Holland. STATEMENT OP ELLIOTT HOLLAND, GENERAL MANAGER, BARDEN INVESTMENT MANAGEMENT CORPORATION Mr. HOLLAND. Mr. Scalise had to return to Iowa on a criminal matter. Mr. SI5K. Without objection, the statement by Mr. Scalise will be made a part of the record. (The statement referred to follows:) STATEMENT OF LAWRENCE F. SCALISE, ATTORNEY, BARDEN INVESTMENT MANAGEMENT CORPORATION Mv name is I a~ rence F Scalise I am an attorney practicing in Des Moines Iowa. I am here at the request of Barden Investment Management Corporation of Detroit. I was Attorney General of Iowa in 1965 and 1906. I was very much interested in consumer protection and sought-successfully-the enactment of a bill in 1965 to provide it. Included in the bill as originally introduced were provisions for the regulation of debt management companies Creditor interests opposed these provisions, and they were struck from thebifi. The consumer protection law, however, vested in the Attorney General broad powers of investigation and inquiry into practices suspected of violating that 93 84-181-67-7 PAGENO="0098" 94 DEBT ADJUSTING BUSINESS law. The law prescribes misrepresentations by omission as Well as commission in the sale of merchandise, and merchandise is defined as including services. The misrepresentations are made unlawful even though not relied on by the con- sumer who purchases the good or services. We received a number of complaints and inquiries about debt management companies and their practices. The advertising done by some of them was shrill, misleading, and Irresponsible. Fees were questioned. The social utility of the service itself was in doubt. In conformance with what the new consumer protection law permitted, *my office conducted public hearings Into the practices of debt management companies. We subpoenaed company representatives and their records. Abuses were exposed. These Included unjustifiable fees, misrepresentations in adver- tising, and charges for the service itself that ultimately added up to more than twice the ~iercentage quoted to prospective clients. The hearings focused on the practices of several companies. Since the hearings focused on abuses, not much attention was paid to com- panies In Iowa which charged reasonable fees and rendered services praised by people In the consumer credit field. One such company, in Iowa, had been in operation for a number of ybars and bad won the confidence and cooperation of small loan companies, retail stores, banks and employee credit unions, and had an unblemished record for integrity. The credit manager of a large public utility wrote legislators to this effect: "This company has salvagud a great many potential candidates for bankruptcy from the courts, and guided them on a path of sound financial management. The need for debt managembnt companies is as great as for any of the state, county, or local relief or welfare organzations; the one great distinction is that the money doesn't come out of the taxpayers' pocket." Earlier this year the Iowa legislature enacted a bill to license and regulate debt management companies. Implb~it in the decision to regulate was recognition of the social utility of the service provided. Had the legislature not been con- vinced that debt management fuifilred, or could fulfill if properly policed, a legitimate need, Its action of course would have been to forbid it entirely. I supported arid worked for pa~s'age of this bill. The root question, of course, is whether the service offered by debt management companies is in Itself evil. This Subcommittee is aware of the distinction in law between acts deemed malunr in se and those that are malum prohibitum. Debt management, I submit, is not Intrinsically evil. I don't suppose there is any pre- tense that It is: there are only strong reactions to abuses. Properly regulated, debt management companies must represent and serve the interests of the debtor. Almost without exception every other segment of private enterprise is creditor-oriented. That includes not only retaile~a~nd. other com- mercial enterprises which extend credit, but banks and loan eorn~anies. All of them prosper as more people contract to buy what they can't pay cash for. They want what all creditors want: they want to get paid-now, If possible; soon, if not now; later, if not sooner; and, in the last resort, sometime or anytime rather than never. Yet, as you gentlemen are fully aware, our Bankruptcy Act perp~lts a debtor never to pay his debts. It is an unusually ignorant debtor today who doesn't know that when up against it he can go Into court and beg out of hifi obligations. In our court news publication I noted the other day one filing in bankruptcy by an Individual whose debts exceeded his assets by only $400. The contempt that attaches to this kind of behavior has lessened considerably since our grand- father's day. Ulysses S. Grant wrote his memoirs on his death bed to pay his debts. I submit, however, that In this never-never land there are still thousands of debtors who consider themselves morally committed to pay their debts even if they are bankrupt in a bankruptcy act sense. Where Is the evil In permitting private enterprise to assist them In doing so? It Is other types of private enterprise which have televised them Into believing they have an inalienable right to spend money they don't have. Unquestionably private-enterprise debt management companies can offer an alternative to bankruptcy or chapter 13 proceedings under the Bankruptcy Act. Under reasonable regulation, It Is very probably that the cost of the debtor will be considerably less, for example, than submitting to Ohapter 13 proceedings. And I believe statistics will prove that debtors who seek extraction from difficul- ties in bankruptcy court seek discharge from their debts rather than an extension PAGENO="0099" DEBT ADJUSTING BUSINESS 95 of them: the social odium which attaches to a filing, if such there is, attaches to both proceedings. Outlawing commercial debt management is not the answer. It is, in the cliche, throwing out the baby with the bath. It is this simple: creditors want their money, and properly regulated debt management companies can help them get it. At the same time, and first and foremost, they can help debtors get out of debt without recourse to the courts and without repudiating their creditors. I see nothing mc&lum in ~e in this: on the contrary, I see private enterprise offering drowning debtors a viable alternative to bankruptcy. H.R. 9806 would exempt lawyers who incidental to the practice of law act to adjust the debts of clients. I suppose this is an admission that debt-adjustment is not malum in se and an admission, even, that it is an inevitable and ethical practice. As far as exempting non-profit or charitable corporations from the prohibi- tions Is concerned, I submit to you that there is no less need for regulation of such corporations than there Is for regulation of profit-making concerns. The money comes from somewhere, and it is spent by people. What ever happened to the Sister Kennedy Foundation? In closing, let me say this: I have had cause to familiarize myself thoroughly with the debt management concept and its implementation by private enterprise. I am convinced of its social utility. The consumer is cajoled, enticed, solicited and pressured into debt from every point on the social compass. No law prohibits him from buying what he can't pay for. No odium attaches to the retailer who sells it to him. If private enterprise can offer him an alternative to bank- ruptcy, why shouldn't It be legitimized instead of forbidden? Congress has it within its power to protect the consumer-debtor by regula- tion, such as HR. 9829, Introduced by Congressman Diggs, and to provide him with a service that permits him to meet his obligations instead of denying them. I submit that prohibition of commercial debt-management companies is nothing more than an additional recommendation for bankruptcy. Mr. SISK. Mr. Holland, without objection, your statement will be made a part of the record. You may pi~oceed to read your statement or make an oral statement~, whichever you prefer. Mr. HOLLAND. I appreciate this opportunity to appear before this Subcommittee on H.R. 8929 and H.R. 9806. My name is Elliott Hol- land, and I am the General Manager of the Barden group of com- panies. We operate 56 debt counselling offices in the District of Columbia and elsewhere throughout the country under the Credit Advisors and other trade names. I hope my testimony can show this Subcommittee how professional debt counsellors help so many people bogged down in debt. I testify from daily experience in this industry. We know from working with thousands of debtors that they need our services and that they obtain a practical course in financial planning as we help them out of debt. Our actual experience disproves the many unfounded charges made against the debt management industry. I had planned on going through my prepared statement, Mr. Chair- man, but I would like first to cover a few of its main points and to cover a few of the unfounded statements that were made yesterday during the hearings, especially those that deal with a description. There were certain errors and inaccuracies in describing our clients and ourselves. I look at our debt management client as my boss. I work for him. I am taking his attitude toward his debt and if I can successfully help him out of debt, then I have done my job. If I cannot, then I feel that I have failed him and we try not to fail any of our clients. Our client yesterday was described as being poor and uneducated. I would just like to disabuse the committee of this feeling. Our average client is a wage earner and he has had an average of almost4 PAGENO="0100" 96 DEBT ADJUSTING BUSINESS four years on his present job. This is not four years of total em- ployment, but four years at his present jc~b. He is just usually under 30 years old. He averages 29 and a fraction years. The average income is a bit above $5,000 and this is only the income of the main wage earner in the family. It doesn't include where the wife is working. A good example, to make it clearer to the committee, is that we have offices right now in Seattle, Washington, and very close to the * plant of one of our major aircraft manufacturers. We find that there our client has a greater income on the average, and also greater indebtedness than a client, for instance, here in Washington, D.C. To describe the men `who are the engineers and other technical personnel who have `cooperated in putting some of our jet aircraft into the air and other technological advancements as uneducated and poor, I think was an abuse to them and certainly an abuse to the industry. If the people who testified yesterday to that effect really believe `it, then I caution them not to fly home today or even to drive too close `to the airport. These people were not undereducated. The problem `is that they have been encouraged to purchase and to purchase beyond `their means to repay. Secondly, it was mentioned yesterday that our consultants have an uverage of two years of college and that that wouldn't qualify our consultants to give financial advice. I wanted to say that in that con- ~iection our consultants have gained experience in our industry by working for us. We have our own training program `and we train these people on the job in debt management. We don't have the ability to go out into the general population and find people experienced in debt management. It just isn't that well known. It is now available in all communities. The mere fact that a man might not have a degree I don't believe is any indication of his ability or inability to give advice in debt management. There are no courses offered, by the way, in any of the major educa- tional institutions in personal finance management. There is quite a bit of conversation about starting these courses. Our organization is starting a series of clinics that will travel around the country to edu- cate consumers in the various matters that can help them to prevent going into a situation where they cannot extinguish their own debt. Many of our men, in the earlier years of our history, were recruited from finance companies. We call them converts because they were the men who at one time were collectors for finance companies. In dealing with us in some localities, finally one of our managers might just say, "Well, why don't you come and work for us?" In our early history we had perhaps as much as 60 to 70 per cent of our men who came directly from the field of finance. Also in some occasions our men have helped referees in bankruptcy under Chapter 13 in setting up this type of activity for these hard cases where there is an extreme problem and where we feel we cannot fairly serve our clients. In Chicago our manager there, Mr. Ed Kennedy, was at on& time working for the trustee in bankruptcy in Chapter 13. One of the prob- lems with Chapter 13 `is' that it is not avaiiable~ in `many communities. Another statement made yesterday, Mr. Chairman, was `that our fees run up to 25 per cent. I can state here that in all of my experience in PAGENO="0101" DEBT ADJUSTING BUSINESS 97 debt management I know of no debt management concerned whose fees are 25 per cent. I know of no concern whose fees exceed 15 per cent. Our own fees are 12.5 per cent on the gross debt. Another charge was made that our fees average as much as $400 an hour. I might say as far as the cost per hour is concerned, we have an average of 55 to 60 accounts per employee. In servicing these accounts, we find we spend an average-and this is an average-of 45 to 50 minutes per week on each of our accounts. You not only have to talk to the creditor-and you do this on a continuing basis to advise them of the status of the client; if he has short hours, if he is sick or anything you would like to advise the creditor so he realizes there may be a delay in the payment but he will receive it. You receive money that is sent to you by your clients. You write checks on their behalf. We have a traveling internal audit staff that travels among our of- fices on an unannounced basis to audit, to make certain that financial affairs are properly maintained. Also, writing correspondence on his behalf. In addition, we counsel our men in our offices that each counsellor, when his client comes into the office to make a payment, should cer- tainly get up out of his office and walk into the reception area and speak to this client to find out what is going on, whether there is any way we can help him even more. Our men are told to spend as much time as possible with the client, because he still our client; he is our boss. We have chosen sides. We chose to represent the debtor. To go further, there was a statement made yesterday that we take the entire paycheck. Our own organization and all of the debt man- agement concerns that I have been acquainted with do not do this. This is one thing we do not do. Our client is encouraged to make a pay- ment to us each payday. If he is paid every other week, he makes a payment to us every other week and in no case do we attempt to have his paycheck sent to us because we want the personal contact with the client and we also don't want to be in the position of having too much control over him. Yesterday also there was a statement made that we do not pay cred- itors. I can say that in five years of our operation here in the District of Columbia-and, by the way, in that time we have signed over 17,000 accounts. We have actually assisted over 17,000 debtors. We have let- ters from our customers; we have letters from creditors, and also, Mr. Chairman, we have quite a few cancelled cheeks that prove that cer- tainly without a doubt we are paying the creditors. To make it more emphatic, I would like to submit as an exhibit (Ex- hihit 1) a compilation of one thousand checks which were written in February of this year in our Washington, D.C. office. These are one thousand consecutively numbered checks. To set the record straight, not one of these checks was returned by a creditor. First, it shows that we are paying because every important creditor in the District of Co- lumbia, with very minor exceptions, will be listed in this compilation. More importantly, there have been charges made that the creditors will not go along with us. I have heard this in Iowa; I have heard it in Illinois; I have heard it in Michigan. I would just like you, sir, to go through here and find the name of a creditor who has told you perhaps PAGENO="0102" 98 DEBT ADJUSTING BUSINESS or one of the staff members that he will not cooperate, because we have the cancelled checks to prove it is not the case. Mr. SISK. Do you have additional copies of that material which could be made a part of our file? Mr. HOLLAND. Yes. Mr. SI5K. Without objection, a copy of this material will be made available for the file and subject to inspection by the committee. If possible, it will become a part of the record. (The material referred to follows:) EXHIBIT 1, SUBMITTED AS PART OF THE STATEMENT OF ELLIOTT HOLLAND, GENERAL MANAGER. BARDEN INVESTMENT MANAGEMENT CORPORATION, ON H.R. 8929 AND HR. 9806 EXHIBIT 1 ANALYSIS OF 1,000 CONSECUTIVELY-ISSUED CHECKS Checks used for analysis were issued by the Credit Advisors' office in Washing- ton, D.C. to creditors of their clients during the period February 13-23, 1967. They are numbered E 155001 thru E 156000. All checks were cashed by the payee with the exception of those noted in the remarks column of the tabulation. Check Payee Remarks number 155001 Arrow Loan Company 155002 Central Charge 155003 Huchingers 155004 S. Kann Sons Company 155005 Spiegels 155006 Residents Financial Corporation 155007 Cohan Zick Credit 155008 Dorr Furnture 155009 G.A.C. Finance 155010 American Finance Corporation 155011 Sears Roebuck Company 155012 Household Finance Corporation 155013 Sterns 155014 Grants 155015 Investors Loan 155016 Michael Rokus 155017 Sears Roebuck Company 155018 Central Charge 155019 Kings Jewelry 155020 Old Cofony Acceptance Corp 155021 Kanns 155022 Loans, Incorporated 155023 Seabord Finance 155024 Van's Gulf Service 155025 Houston Furniture Store 155026 A. C. Penny's E 155027 G.A.C. Finance 155028 Sears Roebuck Company E 155029 American Finance Corp E 155030 Kay Jewelers E155031 Singer Company 155032 Richards Company 155033 H. C. Bourne 155034 De Vocht 155035 Liberty Loan Voided-Paid in full. 155036 Montgomery Ward 155037 Aldens 155038 Northeastern Institute 155039 Education Book Club Voided-Error. 155040 Speigel, Inc 155041 First National Bank 155042 Speigels 155043 Sears Roebuck Company 155044 Budget Finance Company 155045 Lenders, Inc 155046 C. C. Welds 155047 American Finance Corporation 155048 Maryland Cash Loans, Inc E 155049 Curtis Brothers E 155050 A. C. Penny Company, Inc E 155051 City Finance Voided-Paid in full. E 155052 Washington Hospital Center PAGENO="0103" m mmr'l m mm m mm m mm m mmmm mm mm mm mm mm mm mm mm mm mrflm mm mrnm mm mm m mm mm mm mm mm mmm mm m mmmm mm m mm mm mm m mmm m :c~: ci) ci) z ci) ci) PAGENO="0104" mmmmmm mm m mmmmmmmmmmmmmmm m mm mmmmmmmmmmmmmmmmmmmmmmmmmmm I. C12 CD ~ :~ -4 3 PAGENO="0105" ~c-) 3 I ii m mm m mm m mm mm mm mm m rn mm m mm m rim rn mm mm mm mm mm mm mrnm m mm m rn mm mm mm mm mm mm m rn mm m mm rn iii mm mm rim rn mm m mm rim 00 -4 0) ~ 000 -40) U' .~ C-.) C-) - COW 00 -10) U) .~ C..) N.) - 0)1000 -.CC) CC -).)~CCCN) 1-- ~ ~~C-)C~~ CD 00-C 0) CC) .~ 1.1) NI I-0)W Co-JO) U) .~ C.) N~) 1-1-C) (0001-..) 0) U) -N U) NI-CD CD --i C..'~ ~ B C) PAGENO="0106" L~J Cr1 CIA `ir~i rnrnm mmmmr'immmmmrnmm m mrnmm m mmm mrnr~,mrnmmmrnr,,~, mrnm mm mm mmmm m mmm mmm mm m mm mm m mrnm mm m mm mm mm mm mmmmm -v ti. PAGENO="0107" DEBT ADJUSTING BUSINESS 103 Check Payee Remarks number E 155385 S. Klein E 155386 Suburban Finance E 155387 Public Finance E 155388 Redisco, Inc E 155389 Speigel's, Inc E 155390 Voided-Error. E 155391 Interstate Bank Company E 155392 Hub Furniture Company E 155393 Beneficial Finance Company E 155394 Public Finance E 155395 G. E. Credit Corporation E 155396 City Finance Company E 155397 Aetna Finance E 155398 Capital Finance E 155399 5. Kann & Sons Company F 155400 Lansburgh #E155401 Fairmont Finance #E155402 Hecht Company #E155403 Bonds #E155404 Chrysler Corporation #E155405 Sears & Roebuck Co #E155406 Potomac Valley Bank #E155407 Commercial Investment Co #E155408 Central Charge #E155409 Eastern Credit #E155410 Lafayette Radio #E155411 Mt. Vernon National Bank #E155412 Voided-error. #E155413 Central Charge #E155414 S. Kann Sons Co #E155415 Hecht Company #E155416 Lansburgh #E155417 Woodward & Lathrop #E155418 City Post Office Credit Union #E155419 C. Lacey Compton #E155420 Investors Loan #E155421 John W. Miller #E155422 Lazarus #E155423 Lazarus #E155424 Kahns Jewelers #E155425 Woodward & Lothrop #E155426 Kahns Jewelers #E155427 Cols Administrative Bureau #E155428 Atlantic Finance #E155429 Signal Finance Loans #E155430 State Loan #E155431 City Finance #E155432 Trade Commission Tm. Credit Union #E155433 Hecht Company #E155434 Decker Guaranty #E155435 American Security Bank #E155436 American Finance Corporation #E155437 Alex Hospital Business Office #E155438 Interstate Bankers Corpsration #E155439 Loans, Inc #E155440 Citizens Bank of Maryland #E155441 Sears, Roebuck & Company #E155442 Manufacturers National Bank (A/C pd. in full, check returned to client-Lost in mail.) 4E155443 Dr. Peters Hamna #E155444 Ben Franklin Reading Club #E155445 A. A. Herr Jr., M.D #E155446 Dr. Herbert A. Maskowite #E155447 Dr. E. R. Grether #E155448 Sears, Roebuck & Company #E155449 Sears, Roebuck & Company #E155450 Seaboard Finance #E155451 Seaboard Acceptance #E155452 G.A.C. Finance Corporation #E155453 Trans American Credit Corp #E155454 Kay Jewelers #E155455 Household Finance Corperation #E155456 Korvettes #E155457 Goodrich Milk #E155458 Dr. Kolkin, M.D #E155459 Dr. Mealier, M.D #E155460 J. Doyle, M.D #E155461 T. J. Byre #E155462 New York Telepnone #E155463 Abbotts Florists #E155464 McNiels Jewelers #E155465 Automobile Brokers #E155466 Budget Finance PAGENO="0108" mm mm mm mm mm m mm mm mm mm mmm mm mm rn mm mm mm mm mm mm mm mm mm m mm mm mm m mm mm mm mm m rn mm mm mm m rn m mm mm m mm mm m I' ~ ~ -~ c_) > F C, 2 PAGENO="0109" DEBT ADJUSTING BUSINESS 105 Check Payee Remarks number #E155549 Creditor Claims of America #E155550 Diners Club #E155551 Wagners Citgo #E155552 Leesburg Company #E155553 First National Bank #E155554 Atlantic Charge #E155555 Major Acceptance #E155556 Fans Finance #E155557 Beneficial Finance #E155558 Fairfax Family Fund #E155559 Belhenge Aircraft Credit Union #E155560 Spiegels #E155561 General Motors Acceptance Corp #E155562 G.A.C. Finance #E155563 Fairway Loan #E155564 Associates Discount #E155565 Crown Company #E155566 Kay Jewelers #E155567 Credit Advisors, Inc #E155568 Seaboard Finance #E155569 G.AC. Finance #E155570 GAG. Finance #E155571 Household Finance Corporation #E155572 First Merchant Bank of Leesburg #E155573 General Motors Acceptance Corp #E155574 Hub Furniture Company #E155575 Aldeno #E155576 Richard Barner #E155577 Ken Albreht #E155578 Union Looms Credit Insufficient address-Voided. #E155579 General Electric Credit Corp #E155580 Liberty Loan #E155581 First Industrial Bank #E155582 Hecht Company #E155583 Columbia Hospital #E155584 Government Employees Market #E155585 Sears, Roebuck & Company #E155586 G.A.C. Finance #E155587 American Security #E155588 Geiza BK. lath #E155589 Major Acceptance Corporation #E155590 Del-Ray Furniture Company #E155591 Household Finance Corporation #E155592 Bank of Virginia #E155593 Sears, Roebuck & Company #E155594 Hub Furniture Company #E155595 American Finance Corporation #E155596 B. & W. Acceptance Corporation #E155597 Atena Finance #E155598 GAG. Finance #E155599 Calvert Credit Corporation #E155600 Peoples National Bank #E155601 Central Charge #E155602 Old Colony Finance Company #E155603 Warrington Furniture.. #E155604 Washington Hospital Center #E155605 Dr. G. M. Augustin #E155606 Hub Furniture Company #E155607 Central Charge #E155608 Spiegels #E155609 Kanns #E155610 Hub Furniture Company #E155611 Capitol Furniture #E155612 Household Finance Company #E155613 Sears, Roebuck & Company #E155614 1st Belle Fonte Bank & Trust #E155615 Center Thrift #E155616 Oxford Finance Company #E155617 Budget Finance #E155618 Liberty Finance #E155619 StarCreditCloth #E155620 American Security & Trust #E155621 Walker Thomas Furniture #E155622 Gea. Refrigeration Supply #E155623 Suburban Trust Company #E155624 Aldens #E155625 Encyclopaedia Americana #E155626 Central Charge #E155627 Getz & Getz #E155628 University Cit #E155629 Parry, Batryn, Collins #E155630 Paul A. Leuy #E155631 Jelleffs PAGENO="0110" I. LTJ c-I C12 CI) CI) CI) (/) (I) 23 33 PAGENO="0111" 107 DEBT ADJUSTING BUSINESS Check Payee Remarks number 155715 Paul Dykes Furniture 155716 Haynans 155717 Allied Radio 155718 Woodward & Lothrop 155719 Hecht Company 155720 American Finance Corporation 155721 East Coast Stainless Steel 155722 BoIling A.F.B. Credit Union 155723 Dr. Fenton 155724 Capital Credit Corporation 155725 Capital Furniture Company 155726 Atlantic Charge Service 155727 Douglas Decorators, Inc 155728 Liberty Loan Company * 155729 Security Bank * 155730 Parents' Magazine, Inc 155731 Midland Finance 155732 Maryland Cash Loan 155733 Seaboard Finance 155734 Sears Roebuck & Company 155735 Industrial Bank of Washington 155736 Seaboard Acceptance 155737 M. Goodpasture, Attorney 155738 Medical Credit Association, Inc 155739 Western Auto 155740 Appliance Buyers Credit Corp 155741 Investors Loans 155742 Firestone 155743 Farmers Merchants National Bank 155744 Wards 155745 Wards 155746 logersall Rand Credit Union 155747 American Finance Corporation 155748 Hub Furniture Company 155749 AAMCO 155750 Investors Discount Corporation 155751 Curtis Brothers Furniture Co 155752 UnionTrustCompany 155753 Capital Furniture & Appliance Co 155754 Voided-Error. 155755 B. C. Fitzpatrick 155756 Columbia Records 155757 Seaboard Acceptance E 155758 Investors Credit Corporation E 155759 E. i. Korvette, Inc E 155760 State of Maryland, Income Tax E 155761 Freeds E 155762 Citizens Bank of Maryland E 155763 Sears Roebuck & Company E 155764 C & P Telephone Company E 155765 Hecht Company E 155766 Hahn Company E 155767 Airways Rent A Car E 155768 Sun Oil Company (Payee still has check paye~cannot locate client s account) ~ E 155769 Suburban Finance E 15~770 Speigel s Inc E 155771 General Tire E 155772 Columbia Hospital E 155773 Kay's Jewelers E 155774 Lincoen Clinic E 155775 American Finance Corporation E 155776 Washington Hospital Center E 155777 Woodward & Lothrop 155778 FaIls Church Bank 155779 Household Finance Corporation 155780 Investors 155781 Suburban Finance 155782 Seaboard Finance Company E 155783 Liberty Loan 155784 Hub Furniture Company E 155785 Central Charge E 155786 Seaboard Finance Company E 155787 Central Charge E 155788 District Credit 155789 Maryland National Bank E 155790 Government Employee Market E 155791 Hub Furniture Company E 155792 Household Finance Corporation E 155793 Sanders, Maryland £ 155794 Sihowatters, Md E 155795 Stoneburner, Md £ 155796 B. L. Gee Grocery PAGENO="0112" w rJI:2 Co E E C/) .~ __J __j __J _J ~EEEE ~- ~ C') C/) (I) U~C).EC EE c_) C.) C.) C') C') C.) PAGENO="0113" DEBT ADJUSTING BUSINESS 109 Check Payee Remarks number #E155880 Christian Science Public Service #E155881 Dunn & Landorf #E155882 Hecht Company ~E155883 High Voltage Insurance Company #E155884 Liberty Loan #E155885 1st National Bank of Strasbury #E155886 Arlington Trust Company #E155887 Fredericks Flowers, Inc #E155888 G. Gregg Eveingan #E155889 Creditor Claims of America #Ei55890 Sears, Roebuck & Company #E155891 Phillas Petroleum Company #E155892 State Loan of Mt. Ranier #E155893 Central Charge #E155894 Suburban Finance #E155895 Humble Oil #E155896 Sears, Roebuck & Company #E155897 ValleySmallLoan #E155898 Spotswood Bank #E155899 Voided-Error. #E155900 Chrysler Credit #E155901 Heclit Company #E155902 J. C. Pennys Department Store #E155903 Interstate Bankers #E155904 Hopkins Furniture #E155905 Montgomery-Wards #E155906 American Finance Company #E155907 Suburban Finance #E155908 I. A. C #E155909 L Frank #E155910 Family Finance #E155911 Old Dominion Bank #E155912 Sears, Roebuck & Company #E155913 Dr. Ayres #E155914 Hechingers #E155915 Capitol Credit Company #E155916 J. C. Penneys Department Store #E155917 Federated Credit Corporation #E155918 Singer Cempany #E155919 Beneficial Finance #E155920 Montgomery-Wards #E155921 Montgomery-Wards #E155922 G.M.A.C #E155923 Millers Stock Yard Freezer #E155924 Redesco, Inc #E155925 Major Finance #E155926 United Cnnsumers Credit Bureau #E155927 Credit Research Company #E155928 Lenders Loan Company #E155929 American Oil Company #E155930 Good Year Service Stop #E155931 Dr. Gruver #E155932 District Credit Clothing #E155933 Suburban Finance #E155934 Investors #E155935 Capitol Finance #E155936 Household Finance Corporation #E155937 Hollywood Credit Clothing #E155938 Calvert Credit #E155939 Julius Lanshurghis #E155940 Hecht Company #E155941 Hub Furniture Company #E155942 Hub Furniture Company #E155943 Capitol Credit Corporation #E155944 Central Charge #E155945 Capitol Credit Corporation #E15594~ G. A. Finance #E155947 Aetna Finance #E155948 Hastings Finance #El55949 Freedman's Hospital #E155950 Montgomery-Wards #E155951 Leonard Gross, D.O.S #E155952 Sears, Reebuck & Company #E155953 Dominic Investment #E155954 Atlantic Finance #E155955 G.M.A.C #E155956 Alex Hospital #E155957 Sears, Roebuck & Company #E155958 Bankers Guaranty #E155959 Maryland Cash #E155960 Hub Furniture Company #E155961 William Thomas #U15962 American Finance 84-181-67------8 PAGENO="0114" 110 DEBT ADJUSTING BUSINESS Check Payee Remarks number #E155963 State Loan #E155964 SUburban CreditBureau #E155965 Tidewater Motocycle #E155966 G.M.A.C #E155967 Aetna Finance #E155968 Credit Union #E155969 Electratrix Corporation #E155970 Calvert Credit #E155971 Western Auto #E155972 Navy Credit Union #E155973 Woodward & Lothrop #E155974 Spiegels #E155975 Hecht Company 155976 Beneficial Finance Company 155977. State Loan 155978 Lafayette~Federal Credit Union_ 155979 Liberty Loan 155980 American's Catalog Store 155981 Hesco Gas Station 155982 B & T Tire Supply 155983 F.C.C. Employment Credit Union 155984 Central Charge 155985 Woodward & Lothrop 155986 GEM Internation, Inc 155987 Eastern Credit 155988 Citizens Building & Loan 155989 Colony Finance E155990 G.E.C.C E 155991 American Sales Company E 155992 Household Finance Corporation E 155993 Franklin National Bank E 155994 S. Klein E 155995 Equity Federal Credit Union E 155996 Walter Reed Credit Union Voided-Paid in full. E 155997 Mr. Meals Garage E 155998 Colonial Jewelers E 155999 Farmers Merchants National Bank E 156000 S. Kann & Sons Company Mr. HOLLAND. One further charge that was made yesterday-and I might say this is the oniy charge that I have heard here in the District that specifically mentioned Credit Advisors, which, as I said, is the name under which we operate here. - Yesterday it was stated in testimony by one of your witnesses that one of our clients, a Credit Advisors client, stopped making payments to us and we sued him. I want to emphatically state that in our ten years of corporate history we have never sued any client I make that emphatically. We have never sued any of our clients. I would re4uest that Mr Kneipp present to this coimmttee the evidence he has that we have filed suit against any of our clients. I have said before that we choose to represent the debtor. I don't believe on one hand we can sit here and say that we represent him and that we are trying to help him and as soon as he stops making pay- ments to us we turn around and sue him. I think it would be uncon- scionable. That is our firm corporate policy. I would like to erase from the minds of anyone here that we would sue one of our clients. In that connection he used the name Credit Advisors. That name has been used by other people in the industry. Quite a bit of conver- sation was held here yesterday on the case of Ferguson vs. Skrupa. Mr. Skrupa has, upon occasion, used the name "Credit Advisor" but not in the District to my knowledge. I emphasize there is no such client. Mr. Kniepp has no such information. If he does, I would like for him to present it here. PAGENO="0115" DEBT ADJUSTING BUSINESS 111 Another thing I would like to say is that it has been said that we favor certain creditors. I don't know where that idea arose in the minds of anyone connected with the industry. We cannot favor any creditor. It would be foreign to our nature to favor any creditor. We must favor our debtor. We must do what we must do to help the debtor out of debt. The only time I have seen any favoring of debtors done in the debt management industry is where debt management is operated on a non- profit basis. I think one of the statements that has been submitted to this committee is by Mr. Price A. Patton. Mr. Patton was the Director of the largest non-profit counselling service in the country, namely, in the City of Chicago. Mr. Patton, in testimony before the Tydings Committee of the Senate, said the originally this non-profit corpora- tion was set up with the help of such individuals as Marshall Field in Chicago and that the creditors were to take a minority interest in this operation. But, as they began to open up and operate and seek clients, the creditors became very much a pressure group; they took control of it to a large degree, and what would occur is that the creditors would send certain of their debtors over and by sending them over to the non-profit organization for counselling service, they are merely saying, ~`We would like to be favored on your disbursements." But, as far as a commercial debt counsellor is concerned, he would never favor a creditor. To go further, sir, as far as the charges are concerned that have been made against the industry, I would like to state that Congress- man Diggs introduced his bill-and I believe it is because in the State of Michigan, which is the state he represents, there is licensing for the debt management industry. The same charges that are made here today were made in 1958 and the congress took a look at the debt management industry in 1958 and they didn't take any action. In 1963, when Mr. Diggs introduced a similiar bill, congress again didn't take action. At that point Michigan had had one full year of experience under the Debt Managment Act and I can say that that is probably one of the contributing factors to Mr. Diggs taking the approach of licensing as opposed to prohibition. 1-lere agin we sit in 1967 and yet in the District there has never been a true investigation of how reputable counsellors operate and of the great need for their services. I would like to ask the debtor, our client, the consumer, the person who we help, what his opinion is. I would like to submit as an exhibit (Exhibit 2) to this committee copies of over 125 letters we received at the time of unfavorable pub- licity last spring, some of them solicited, some unsoliciated, from our clients. I think these letters are testimony from people who live right here of how they feel about our organization and about the help we have been able to extend to them and how they feel about their own debt picture. I would like to submit this to your committee, sir. Mr. SIsK. Without objection, a copy of your Exhibit No. 2 will be made available for the file and subject to inspection by the committee. If possible, it will become a part of the record. (The material referred to will be found in the flies of the committee.) PAGENO="0116" 112 DEBT ADJUSTING BUSINESS Mr. HOLLAND. The debtor is the one for whom these hearings are convened and I think he should be the one to finally determrne whether this industry is of need and service to the economy I thank you, sir Mr SISK Thank you, Mr Holland, for keeping your statement so brief. As I said, your full statement will be made a part~ of the record. (The prepared statement follows ) STATEMENT OF ELLIOTT HOLLAND, GENERAL MANAGER, BAssEN INVESTMENT MANAGEMENT CORPORATION Introduction I appreciate this opportunity to appear before this Subcommittee on H R 8929 and H H 9806 My name is Elliott Holland and I am the General Manager of the Barden group of companies We operate 56 debt counselling offices in the District of Columbia and elsewhere throughout the country under the Credit Advisors and other trade names I hope my testimony can show this Subcommittee hou professional debt counsellors help so many people bogged down in debt. I testify from daily experience in this industry. We know from working with thousands of debtors that they need our services and that they obtain a practical course in financial planning as we help them out of debt. Our actual experience disproves the many unfounded charges made against the debt management industry. Essential Questions to be Answered This Subcommittee should obtain answers to the following essential questions. as it investigates this industry: What role do professional debt management companies play in our economy? Are their services useful, and do they satisfy a need `~ What are the alternatives to debt counsellors presently and what are the altern'itives if commercial debt management were to be outlawed ~ Do non profit organizations fairly represent the debtors and can they alone serve the needs of those in debt? How do responsible commercial counsellors operate in this field? How can the public best be protected from the abuses which have occurred in the past? Do the facts support the charges leveled against the industry? Which abuses are real, and which charges are unfounded? Debt Counselling-A Definition Debt counselling has resulted from the phenomenal growth in consumer credit-a credit expansion which has contributed dynamically to the growth of our free enterprise system but unfortunately has left in its wake large numbers of victims to such easy credit policies. This body of overburdened debtors can be accounted foi in a number of ways Most debtors are buyers with little or no sales resistance They buy far beyond their means and their abilities to pay They are victims of easy credit policies Still others make purchases in good faith but because of illness death loss of employment or some other unforeseen personal catastrophe are unable to meet their contracted payments. Regardless of the reason for default, each class of debtor faces a variety of pressures, such as demanding telephone calls, written and persistent duns,~ garnishment, the threat of unemployment. As these pressures mount, debtors often find that the principal solutions are : bankruptcy * * * or professional debt counselling and management. Debt management companies are not loan companies. Fully qualified and~ capably trained debt management counsellors have only one objective To guide persons in debt out of the maze of money troubles in which they have trapped themselves We think that the facts when known clearly establish the usefulness of professional debt counsellors and the need for their ser~ ices The United States Department of Labor stated in several 1966 reports: "If honestly operated, these agencies can perform a real service for persons deeply enmeshed in debt." That,. of course, is not the entire quote-for the reports go on to warn of the serious abuses that have occurred in the debt management industry. The concern for- these abuses is a concern the industry shares, and has prompted these hearings today. I will address myself to such problems, and the solution to them, later. For now? let us consider the "real service" which my company and other rep- utable ones in the debt counselling field performs. PAGENO="0117" DEBT ADJUSTING BUSINESS 113 Useful S'ervices Performed A professional debt counsellor helps debtors to budget and schedule their debt repayments, while providing relief from unfair or harassing creditor collection tactics. In so helping the debtor and his wife to budget and to practice financial discipline, the counsellor chooses sides. He fights for his client, since his basic responsibility is to their interests-though the end purpose of repaying all debts benefits the creditors. The usual results of a professional relationship--bills are paid off, money is returned to the creditor, and the debtor enjoys a learning experience that he carries with him in the future. He is no longer a financial refugee, he regains his self-respect by learning what too many other people, too many of us, take for granted-an ability to control his own finances. Counselling as an Alternative to Bankruptcy or Additional Debt Without debt counselling, many are forced into bankruptcy. In the past thirteen years, while the U.S. economy has enjoyed its most prosperous decade in history, the annual personal bankruptcy rate has increased 503 percent. Debt counselling is an alternative to bankruptcy, and its disruptive effects on employment, family life, and loss of pride. Like the lesser known and more costly Chapter 13 wage earner procedures, it is a method of paying your way out of debt. Much is made of the fact that debt counsellors do not advance their own money to debtors so as to pay off existing and past due obligations. That is absolutely correct! We believe that individuals already overburdened with bills and debts cannot borrow their way out of debt. It is too costly a solution when the highest interest charges of consolidation loans are considered. We know, because so many of the debts included in the schedule of debts we deal in, are consolidation loans. Furthermore, many debtors are by their very overextended condition poor credit risks and therefore ineligible for such loans. The many credit interests in this country prosper by keeping ind~viduals indebt. We can only survive by resisting these interests and helping the debtor out of debt. Why Can't the Debtor Help Himself? You may wonder, as I did before learning answers through experience with our clients and creditors, why a debt counsellor can succeed where the individual debtor fails. Surprisingly, perhaps, our average clients are not uneducated, unemployed and poverty-stricken. Nor are the non-white minorities overly represented. Our "typical" client, fully employed, under 30, average income of $5,000, and with three or four dependents, is not much different from the cele- brated profile study made of the average bankrupt. This typical debtor, and the many far more affluent clients we help, need the services of a counsellor to help them budget, deal with their creditors, and avoid repeating these problems in the future. This individual cannot always, or even often, help himself. Where the debtor himself attempts to rearrange his repayment plan with his many creditors, he frequently finds that despite the willingness of certain creditors to go along with him, each one still wants the assurance that no other creditor will receive preference. Quite frequently, therefore, the creditors ~vill not allow such an adjustment. Yet, Our experience has enabled us to bring about a workable repay- ment plan. Debt counselling services in a sense are similar to those performed by em- ployment agencies. In that field, certain persons will not suffer the embarrass- ment of applying for n job and being turned down, or of having to accept $1.75 an hour instead of $2.00 because of the relative bargaining positions. The creditors can exert similar leverage on the debtor, in the absence of experienced debt counsellors, that an employer can put on a prospective employee. The professional debt counsellor, like the experienced employment counsellor, can assist in the search for equality in dealing. Today, you no longer hear talk, so common only short years ago, of outlawing employment agencies. Yet, the cry to abolish commercial debt management continues. In the years to come these voices will also disappear in the wake of satisfactory experience under regu- latory statutes. Inadequacy of Non-Profit Counselling In addition to reasons I've given, it is clear from the very provisions of HR. 980~ that even proponents of such prohibitory legislation recognize the need for debt management services. If this bill were passed, commercial debt coun- sellors would be outlawed-but the services could be performed by attorneys or by non-profit or charitable organizations. I would like to emphasize that these PAGENO="0118" 1 14 DEBT ADJUSTING BUSINESS ~dternatives are as inadequate and unsatisfactory a solution to the overall prob- 1cm as the alternative of bankruptcy. (Parenthetically, I oppose those who counsel bankruptcy as cure-alls or as means of solving social problems. The stigma and economic consequences are too severe.) Consider attorneys' services. Apart from the few lawyers specializing in Chapter 13 proceedings, attorneys do not want to, and cannot afford to, perform debt management services. I doubt that you will find a lawyer who after handling one such case is willing to take on another. As for the non-profit organizations, the industry welcomes them for the assist- ance they potentially can give to debtors. However, experience shows that for a number of reasons, they cannot and do not begin to service the needs or numbers of debtors, as we commercial counsellors can and do. Usually, they are either creditor-oriented or paternalistic. They are part ~f the credit establish- ment, financed and supported by creditors, frequently staffed by former credit managers, and subjected to creditor pressures. Therefore, they cannot and do not exist to represent the debtor's point of view. They choose the creditor's side. Furthermore, most debtors are unaware of their existence. Frequently, the non- profit services are offered on a 9:00 to 5:00 basis with appointments often required days or weeks In advance. The occasional debtor who is actually aware of their existence, usually needs immediate assistance-and, even more sig- nificantly, he and his wife can ill afford time off from work to obtain assistance during such office hours. Cost comparisons which have been made further demonstrate that most non-profit agency costs are about the same to the debtor as those furniished by commercial debt counsellors. Perhaps that explains why commercial counsellors assist thousands, and non-profit agencies assist only hundreds or less in the many cities where they exist side-by-side and where direct comparisons can be made. The charge is made that commercial companies are driven out when non-profit services are established. The facts are other- wise-in Fort Wayne, Indianapolis, Des Moines, Bridgeport, Spokane, and the many cities of California, to mention only a few. The statement submitted to this Subcommittee by Price A. Patton, who runs the Chicago non-profit agency, offers the best evidence, and actual experience, of the inadequacy of reliance on non-profit counselling alone. Professional debt counsellors ask only that the market place judge which service is preferred by the debtor-and which service better restores his pride Our average client does not want welfare-type assistance. The therapy of a reasonable fee applies to chronic debtors as well as to others needing assistance~ Se'veral Unfoi~nded Charges Let me briefly discuss other charges that are unfounded. The charge-creditors do not go along with us. The facts-in my introduction to this business years ago as an auditor, I made bank reconciliation analyses of thousands of checks written each week. These indicated that all major creditors accepted payments. Cancelled checks from ten years of our history indicate less than i/~0% of our checks are refused. An analysis of 1,000 consecutively numbered checks recently issued from our Detroit office indicated that only one check out of the thousand was returned. We have submitted as an exhibit the detailed tabulation of 1,000 checks issued in February from our Washington office. This convincingly shows that none of the major creditors in this area re- fuse our checks. No matter how extensive the opposition to our industry from creditors-and creditor opposition and pressures can be understood since we stand betweenthem and the debtor-refusing payment is foreign to creditors and not in their own interest. In fact, antitrust consequences might attach to any such refusals. More- over, if a creditor has been notified that a debtor needs counselling in order to properly support his family, it would be unconscionable for that creditor to de- stroy the very plan that is established to repay all debts. I might add that how- ever silent creditors may be in the District on the question of support for com- mercial debt counselling, o:r vocal in their opposition, their many letters of endorsement in support of proposed regulation in states like Indiana indh~ate concrete approval of the usefuliwss of the role we play. After effer~tive r~gulafrry bills have been enacted in numerous states, they have even more readily recog- nized the benefits they receive from our services. Another charge-we advertise that we prevent garnishments and wage assign- ments, when in fact we cannot. The facts-~whi1e it is obvious that we do not have the legal power to compel a creditor not to attach the wages of one of our PAGENO="0119" DEBT ADJUSTING BUSINESS 115 clients, the fact is that debt counsellors have the ability to negotiate with cred- itors in such a way as to prevent them from taking that final step. It is quite unusual for a creditor to use a wage assignment or a garnishment when be has assurance that he will be receiving regular payments on behalf of the debtor In over ten years of operation I know of not a single case where garnishments and wage assignments were not avoided after opening an `account, assuming regular payments were received. In setting up a repayment plan, we give priority first to judgmen:ts, then to wage assign:ments and garnishments. In the few cases where we are unable to make arrangements of this type of debt, we do not retain the account or any fee, and so advise the client. But once such an account is accepted and the debtor begins making and keeps up his payments, wage assign~ ments and garnishments do not occur. Real Abuses Deserve Condemnation I have been discussing some of the charges that are unfounded. Other charges have been made about real abuses-here in the District and elsewhere. We are as concerned as this Subcommittee is with the existence of such abuses-since our integrity is challenged and our very livelihood threatened through. "guilt by association". That explains why we, and so many other professional counsellors in the field, have eam:paigne'd for meaningful regulation. The debt adjuster who takes his entire fee from initial payments should be outlawed! The company that embezzles or even co'mmingles funds m~ust be stopped! The company that purchases debts, or doubles as a debt manager and a collection agency, or alters the contract, or delays distribution of funds for an unreasonably long time deserves condemnation! Yet each of these abuses i's controllable, and has been controlled or banned in the effective regulatory bills enacted over the last ten years. In Michigan, California, Colorado, Illinois-to mention only a few-dc- tailed provisions, comparable to those in the Diggs Bill introduced both this session and in the 1963 and 1965, prohibit these abuses. The Creative Legislative $olution is Regulation In my opinion, abuses which have occurred in the District, and throughout the country, were the result of debt management `activities not being subject to regulation. The many state legislatures that passed prohibitory bills back in 1955 and 1956, and afterwards, chose the easy method of dealing with abuse's- they outlawed `the business. However, this legislative response is obviously not an effective `solution because of the unfortunate imp~act on needy `debtors. What is needed is a creative legislative solution. It is incredible to suggest, as so many have, that meaningful legislation cannot be drafted to reach problems in this industry; every session, Congress regulates industries and practices of far greater complexity in the fields of banking, savings and loan, automobile safety, and the like. Moreover, it seems contrary to our free enterprise system to pro- hibit commercial businesses at all, let alone prohibiting them before attempting to regulate the so-called abuses. Has any detailed factual investigation ever been made in the District to show the extent of such abuses, or to demonstrate that regulation would be ineffectual? The `trend in this country has been to regulate the debt management industry,. ra'ther than to outlaw it. Many prohibitory bills passed were not based on factual investigations and did not fully comprehend the usefulness of the services pro- vided by reputable professional counsellors. Many were not even opposed. The' thorough legislative investigations in California and Michigan, which had the support of professional counsellors, `demonstrated that regulatory, `rather than prohibitory, legislation, was desirable. The experience `since enactment in these states and o:thers bears out such findings and further demonstrates that the un- desirable companies disappear after effective regulation is established. T'his past year, Arkansas, where the debt management story was not told, and Hawaii,, where the're are no dobt `counsellors, j'oined the group of state's outlawing the business. However, during 1967, the states `of Iowa, `Connecticut and Was'hingto'n all chose the regulatory solution after careful an'd extensive deliberations `of the sort that Mr. Scalise has previously explain'ed. From the record of hearings held by `other House District Subcommittees `in 1958 and `1963, it appears that those Congressmen in attendance recognize `that regulation was preferable to prohibition. We urge this Subcommittee to co'nsi'der and recommend effective regulatory legislation for the District of Columbia, and thereby also recognize the usefulness of, and need for, `professional debt management services. PAGENO="0120" 116 DEBT ADJUSTING BUSINESS Our Gust oiners are Satisfied Our group of companies is the largest debt counselling enterprise in the coun try Oretht Advisors of Washington ID C is the largest local lebt counselling concern. Our survival and growth locally'and nationally can only be attributable to satisfied clients. A few statistics about our local operations support this eon- elusion. We have helped thousands of burdened debtors since we began opera- tions here in 1962. Credit Advisors last year returned on behalf Of District debtors over $800,000 to credit organizations. Without question, we have been the subject of complaints. In correspondence with the local Better Business Bureau in May, we were informed that since June, 1962, the Bureau had received 59 written complaints from our customers-complaints, incidentally, about which we co- operated with the Bureau. During `that period of time, Credit Advisors of Wash- ington, D.C. opened over 17,000 accounts! I might also note that after a series of articles were published here about practices in th s industi v w e recei'~ ed more than 125 letters of endorsement from our customers. We have submitted a sample of those letters, without signature, as an exhibit, and would be pleased to make the originals of these samples and of other letters received available on request. Along with the many other professional debt counsellors in this industry, we are proud to stand on our records of accomplishment and service. iJonclv~siOn Finally, in the course of these deliberations on debt management, I refer this Subcommittee to the findings of Professor Edward W. Reed of the Banking and Financing Department of the University of Oregon, and Professor Robert Dolphin of Michigan State University. Reed, in commenting on the too easy solution of bankruptcy, stated: "Adult education courses along with debt counselling services and debt proration arrangements should be encouraged, but such programs do not reach sufficient numbers of people. Something is needed in addition to these very commendable attempts to solve an important economic and social problem. The need is now." Dolphin, in a comprehensive study entitled "An Analysis of Economic and Personal F'actors Leading to Consumer Bankruptcy" stated: "The combination of denial of bankruptcy when not financially needed and financial counselling should be an effective way to curb the rapid growth of personal bank- ruptcy." Just as there are no easy legislative solutions to the urban problems, such as I recently observed near our main office in Detroit, and which I know so well, there are no easy solutions in arriving at an equation of debtor needs and debtor protection, as related to the debt management industry. The oppressed debtor, suffering from too-ready credit, subject to current creditor campaigns for more restrictive bankruptcy legislation, vulnerable to garnishments, wage assignments, and confession of judgment notes, should not be denied the fair services of the professional debt counsellor. This debtor should not be denied his own choice of who will help him The availability of the professional debt counsellor who serves the debtor's interest exclusively,, offers the debtor a meaningful alterna- tive to the so-called helping hand of the credit establishment. Thank you very much for this opportunity to testify. RESUME OF ELLIOTT HOLLAND 1953-1954: Military Service. 1955-1958: Northwestern University, B.A. Business Administration. 1958-1960: Auditor, Herbert Schoenbrod & Co., C.P.A. 1960-1961: Controller, Dormeyer-Webcor. `1961-1965: Auditor, then Treasurer, Barden Investment Management Corpora- tion January to November 1966 Chief of Business Loans Midwest Area Office Eco nomic Development Administration `November, 1966 to date: General Manager, Barden Investment Management Corporation. Mr. SISK. The Chair reeognizes the gentleman from Indiana, Mr. Jacobs. Mr JACoBs I might preface my questions, Mr Holland, by saying my knowledge about your business is limited to ground zero and, see- on~Iy, I think your extempoi aneous statement was most eloquent PAGENO="0121" DEBT ADJUSTING BUSINESS 117 There are a couple of charges that I have heard-descriptions of your business may be better. My first question is, in the collection of the 12.5 per cent fee to which you referred, is it your policy, as i:t has been represented, to first collect that fee and then begin paying the debt, or do you take a part of that 12.5 per cent from each payment your client makes through your office to the creditor? Mr. HOLLAND. I would like to say emphatically no, we do not attempt to take our fee off the top as has been charged in many cases. We write our contracts to extract an individual from debt and we amor- tize our fee equally over the life of that contract. There is no attempt to take our fees. at the beginning or off the top as it is said. Mr. JACOBS. By amortization, you mean the practice is to deduct the 12.5 per cent from each payment that is made to you so the complement of the money paid to you is directed, I assume, proportionately to the creditors of your client? Mr. HOLLAND. Yes, sir. For instance, if we were to write a contract that would extend for 23 months we would amortize our fee equally in. 23 equal amounts, or payments. Mr. JACOBS~ I know you have stated this for the record and sooner 01 later I can see it in the record, but for my own edification at the moment, would you repeat the number of accounts that are handled by an employee of yours during a week's time? Mr. HOLLAND. In different areas it will be a different figure, but I would say the average is close to 60 in our organization. Mr. JACoBs. Does that mean your average employee puts in up to 60 hours a week working? Mr. HOLLAND. Our average employee puts in, depending on his stature-our managei s certainly do put in a week that is even in excess of that, but our average employee puts in a week that would be 48 hours on the werage I his would be an average of our consultants, our man `igers and also our clerical help Mr. JACOBS. Do you have figures to show what your per-employee hourly income is? Mr. HOLLAND. I could submit those figures.. I would be happy to submit them to the committee. Mr. JACOBS. I think that would be very helpful. In other words,. what I am talking about is t.he gross income of your operation per hour,. per employee I think that might be very helpful and enlightening Mr JACOBS As I understand it, if you hid a client with a $2,000 total debt, your fee, of course, would be $250 for facilitating payment of th'tt debt Mr. HOLLAND. Yes, sir. Mr. JACOBS. Over what period of time would you expect that con- tract to run, or your contract with that client? Mr. HOLLAND. It would be difficult to. say because it depends on the structure of the individual debt. One debtor might come to us for as- sistance who has debts that are due in a. relatively short period of time.. You might be able to work him out. of debt in a period of one year.. Another debtor with the exact total amount of debt, but a different composition of that debt would take much longer. If he comes to you and he has an automobile and the note on that automobile is due in 36 installments and, let's say when he comes to us he still has 27 install- PAGENO="0122" 118 DEBT ADJUSTING BUSINESS ments remaining, it would depend on the structure of his debt to deter- mine the amount of time it would take. Certainly it depends upon his earnings. You first must set up a budget to allow him to meet his household expenses. Then, after subtracting the cash that he needs to run his household, then you come to a figure that is the available cash for retirement of debt. When you relate that to his debt composition, then you can determine how many months it would take. Mr. JACOBS. Does your fee to the client vary with the amount of security that client has against his debt? Mr. HOLLAND. No, there is no variance in our fee. It is, as I told you, 12.5 per cent of the gross debt. Mr. JACOBS. Another question with regard to the intelligence of your clients. There were some comments made about that. I am just wonder- ing if a fellow really is a~ bright as you say, why isn't he bright enough to write his own creditors ~ If he owes eight people a total of $2,000, why doesn't he take a slide rule out and determine, their proportionate shares and pay it himself? Mr. HOLLAND. There is a two part answer to your question. To begin with, I think you will recall when Sears Roebuck had `a catalog that shows good, better, best. When I was a young man we weren't exactly wealthy and we knew we couldn't afford the best and the better was a little bit above our ability, so we would normally try to get what was called good. Sometimes we didn't have such great luck, but that fact I am trying to `point out that advertising nowadays-Sears Roebuck doesn't advertise good, better, best any more They advertise their best Advertising is on a basis of "best foot forward" We sit in our hvmg rooms and we are televised into believing that the average housewife should really be a movie star instead of a housewife and that all of the appliances that she has are the best, that they drive the best automo- bile-I don't want to use an unfortunate word like "brainwashing" but it does `after a while sink in. That is one of the reasons. You do find they are advertised into be- lieving they can afford it Secondly, once they are in this posture, why can't they help them selves out of debt? I think if I could relate it to the employment agency a generation ago, where people would say, "Why should I pay you to get a job for me when I can go directly to the plant and get a job myse1f~" It was a matter of learning. The employer and the employee. And in dealing with the employee you might have a person go directly to the employer and request a job and he might end up earning $1.50 an hour, where actually he should have earned $2.25. The fact of having' someone to deal for him, someone who can bring more leverage to bear to equalize the position, he would be able to get a fairer shake Let's relate this to debt management I might say a generation ago there was quite a bit of legislation that was going to outlaw employ- ment agencies. We don't hear that any longer. We accept them and we see that they do perform a needed function. There is the same leverage between a creditor and a debtor. In `tiTle collection department, creditors feel that they have a right to do almost what~v~r must b~ done to collect and when a debtor comes to one par- ticular creditor, if his composition is let's say a dozen creditors, and he PAGENO="0123" DEBT ADJUSTING BUSINESS 119 goes to one and says, "I am having difficulty, and instead of paying you $12.50 a month I would like to pay you $10 a month so at least I am paying you every month and I can support my household." Of those twelve creditors that creditor is interested in but one: him- self. He doesn't want to agree to take $10 from this debtor unless he has full assurance that other creditors have cut their payments in a corresponding manner. So we have seen many times-I have a close personal friend-like myself, a graduate of Northwestern-here again, an educated man-who attempted to do this with his creditors but the first creditor wouldn't agree to it. Very few will unless they know all creditors are going to take the same cut. I think in those two cases-first, the fact that these people, while educated, they don't maintain a control of their finances. I doubt if there is anybody in this room except myself and perhaps Mr. Rabino- witch, who actually keeps a family budget at home. They don't do this. They are televised into extending themselves. Secondly, they can't deal with their creditors on an equal basis; they need some leverage between themselves and credit. Mr. JACOBS. I would like you to comment on my suggestion that your analogy may not be on all fours. The question about whether a man receives $1.50 or $2.50 is usually not resolved by an employment agency, but by a union of workers in his job situation. It seems to me the leverage in that case is not so much that somebody else speaks for him but because somebody else speaks for him and a thousand other employees similarly situated. The leverage is that they are collec- tively bargaining. In the debt management industry you are not collectively bargain- ing. Each time you bargain, I presume, you bargain for one person or one entity. So the ultimate power, the ultimate counterbalancing interest to the creditor is no greater than it was before the client came to you, except in terms of knowledge of the law and the rights of that individual. Power in the area of bargaining is no greater, regardless of who represents the individual debtor. So I don't think that pre- cisely answers my question. It seems to me that when the debt management company approaches the creditor for extension of credit, he could say no to the debt man- agement company just as quickly as he could to the individual debtor without fear of any greater pressure than the individual debtor could bring to bear. It seems to me the individual debtor who is well in- formed, and even further informs himself, could contact the 12 credi- tors and try to make the same arrangement with all of them at once, just as easily as the debt management company. Do you think my criticism of your analysis is valid? Mr. HOLLAND. Our experience doesn't bear that out. I can say in my first exposure to the industry in 1959 that they had just opened an of- fice in Ohica~o and some of the creditors at that point were not acquainted with the debt management industry, but it was only a matter of a few weeks where the creditors realized that we, in dealing with them, were handling the entire debt structure of an individual and had as our sole purpose to work them out of debt and to deal fairly, first with our client, but certainly fairly with the creditors. And we found that they will cooperate with us where they will not cooperate with the debtor. PAGENO="0124" 120 DEBT ADJUSTING BUS~ESS I can give you a further example that where you have a dozen creditors some of theni may be what I would term reasonable creditors who will attempt to go along with an individual, but we find that so many of the creditors believe that the old conflict between the salesman and the credit department has been won by the salesman. He will sell them and will collect. They are heavy-handed in their collection pm- cedures and will not allow the debtor in many ca.ses to cut his payment one bit.. They will tell him if he cuts the payment and there is a garnish- ment proceeding, they will institute it. When they see we have set up an account to deal with all the credi- tors fairly and not favor any creditor and to make regular payments on this account, they will (lea] with us. Mi'. eJACOBS. Thank you very mu oh for your testimony. Mr. Sis~i. You mentioned that. you have 56 offices. Do you mean nation-wide? Mr. HOLLAND. Yes, sir. Mr. SIsK. In how many states do you operate? Mr. HOLLAND. At the present time we are in eight states and the District of Columbia. Mr. SISK. How many offices do you have in Washington, D.C.? Mr. HOLLAND. One office in the District. Mr. SISK. All of your activities for the District are carried on through one office? Mr. HOLLAND. Yes, sir. We have four offices in Maryland, but one oflice in the District itself. Mr. SISK. Where are those offices located in Maryland? Mr. HOLLAND. We have one in Hagerstown, one in lElkton, one in Mt. Rainier and the other is in the Marlow Heights Subdivision. Mr. Sisic. You operate under what. name of in the District? Mr. HOLLAND. In the District, Credit. Advisors. Mr. STSIC. Approximately how many clients do you have in the Dis- trict. of Columbia ut the present. time? Mr. J-TOLL.~ND. At the pie.seuit. tiI1R~ ~iist over 900 clients. Mr. Sisic Is this a fair avera~'e? I realize when you complete one client you pick up new clients. What is your annual average? Mr. hoLLAND. In the. District it would have 1)een closer to 1200 cli- ents. That would be a fair average, over the last two years. When we started lip, of course- Mr. Sisic. I was going to ask, how long have. yort been operating in the District.? Mr. HOLLAND. Siiwe June of 1962. Mr. Sisic. 1-low many other credit adjustment. companies, or con- solidation companles are, operating in time. District? Mr. HOLLAND. Mr. Chairman. I looked in the yellow pages last. niht. because at last. check there were. five others, but I believe two of tlmem have closed their offices (Tue .to the. recent publicity, or at least dnrmg the last three or four months. Mr. Sisic. You are familiar with the many erificisms and have com- mented this morning on sonic of the statements that have been made before this committee.. I presume you were. here for the opening state- ment yesterday morning on this subject. and I am sure you are gen- erally familiar with other statements and publicity, particularly given to such agencies existing in the. Disirict. PAGENO="0125" DEBT ADJUSTING BUSINESS 121 I understand in answer to Mr ~Ikcobs your defense primarily goes to your company, I assume, and its practices; is that right? Mr. HOLLAND. Yes, sir. Mr. SISK. Do you have any comment to make on the fact that there are and have been abuses here in the District? Mr br LAND I certainly do Mr Chairman, my feeling is and my experience has been that in the states where debt management is regulated, states like Michigan, your own home State of California, Illinois, Iowa, Connecticut, Washington State, that the abuses have disappeared because the licensing acts have required certain financial information to be submitted on all officers, that a certain financial responsibility be shown, a certain experience in the industry, certain bonding requirements, licensing requirements, audit by the agency at the cost of the licensee, and other items that have caused the in dustry to become one that is respected in these states. It operates without the abuses. Michigan prior to the licensing act had abuses At the same time, as I stated earlier, that the Federal Congress was having hearings in 1958, there were abuses in Michigan They began to work on a bill There was an outlawing bill proposed and there was a licensing bill proposed. In Michigan they took the standpoint it would be harsh to outlaw business before giving it a chance to function under licensing They licensed the business in Michigan and quite a few of the operators who are in the business prior to licensing did not apply for licensing. Now there are not) any abuses in Michigan. The same is true in California, as Mr. Rabinowitch te~tified yesterday. My feeling is that any abuse in any industry should be eliminated, not just debt man- agement but any industry. I feel that the Congress here every day legislates businesses and controls businesses far more complex than debt management I feel that once a licensmq bill is passed here that those abuses will completely and totally disappear. Mr. SIsK. YOu operate in California?* Mr. HOLLAND. No, we do not. Mr. SIsK. You do not have any offices in California? Mr. HOLLAND. No, we do not. Mr. SISK. Do you operated any so-called mail operations? Mr. HOLLAND. No, we do not. Mr 515K Do you have any direct mail operations of any kind ~ Mr. HOLLAND. We do on occasion send mail solicitation out. The local office here might send out a mail item to a client but we will never do it. For instance, it was mentioned yesterday there are outfits that had nothing but a mail-drop operation. This is not the case with us. We have had certain people that might have called in to our office and requested help at one time and in discussing their affairs with them we find that we really can't help them. We can give them * some advice and they can handle their affairs themselves. This does happen in quite a substantial number of cases. We fol- low that up in a month with i letter which I term a solicitation bec'tuse it is a solicitation "If you are having difficulty and we can help you, come and see us" A mail operation such as was described, no. Mr. SIsK. Since you mentioned that and due to some comments yes- terday, do you make any charge initially for a prospective client who comes in and you spend an hour or two with him PAGENO="0126" 122 DEBT ADJUSTING BUSINESS Mr. HOLLAND. TJnlcss we are able to in our interview determine that the client can be helped by our services, and unless we are able to sign the client and have him become instead of a prospective client an actual client, there is no charge. There is no interview fee. Mr SIsK When the client comes in and you discuss the situation with him, after determining that you can help him and he agrees on the basis of the terms you stipulate, is a contract signed? Do you have some usual form? Mr. HOLLAND. Yes, sir. Mr. SIsK. Would you furnish to the committee a copy of your con- tract form? Mr. HOLLAND. Yes, sir, I will. Mr. Sisii. It will be made a part of the record, without objection. We would a~ppreciate your forwarding that. (Comnuttee insert) (The contract form referred to, subsequently submitted, follows ) ExHIBIT 5 CREDIT ADVISERS, INC., Washington, D.C. Contract No. AGREEMENT The undersigned Customer hereby employs the undersigned Company to act as Customer s agent in arranging and making payments to Customer s creditors and the undersigned Company hereby agrees to act as such agent faithfully and to the best of its ability. Itis understood and agreed. 1. Application. Customer represents that the application made to Company to employ Company to aid in liquidation of Customer's debts contains a complete and accurate list of creditor's names, addresses, terms and status of indebte~ ness, payment books and statements of accounts available. 2. Balance of debts. Customer represents that Customer's aggregate present indebtedness is $ -. The following shall be additions to or reductions of Customer's aggregate present indebtedness as stated above: (a) Interest charges, carrying charges, or such other charges as may be made by creditors, made known to Company after the date thereof. (b) Creditors' balance from time to time added on or added to by Customer to those listed in Customer's application. (c) Creditors' balances desired to be eliminated by Customer from those listed in Customer's application, provided Company has not contacted cred- itor to be eliminated. 3. Term. The term of this agreement shall be ---( ) months from the date hereof. 4 Filing fee Customer agrees to pay Company as a filing fee to cover the cost of consultation preparation processing and reviewing Customer s application contract and account cards, letters to creditors, telephone calls, and incidental benefits inuring to Customer as a result of Company's services, the suni of twenty- five ($25.00) Dollars. Upon completion of this agreement over its full ) months' term and payment of all compensation to Company, Company agrees to refund said filing fee. 5. Charges. Customer shall pay to Company the sum of $- as compen- sation for services as Customer's agent for the term of this agreement. Company shall be entitled to receive one-~--~----( ) of its total compensation for each month, or fraction thereof, from the date of this agreement to terudnation or cancellation thereof In the event of liquidation of Customer s aggregate present indebtedness by regular payments prior to termination or cancellation this agree ment shall be considered terminated and Company shall be entitled to no further compensation If Customer makes additions to or reductions of indebtedness as provided in Paragraph 2, compensation payable to Company shall be adjusted therefor on a pro rata basis. 6. Payment. Customer agrees to make payments to Company as follows: $- ; on- --;$--- -on------ PAGENO="0127" DEBT ADJUSTING BUSINESS 123 on -; $- - on -; on- and the sum of $ - per promptly each thereafter until termination of this agreement. Payments shall first be applied to the filing fee as set forth in Paragraph 4, and then to the liquidation of Customer's indebt- edness and charges as specified in Paragraph 5. Company shall distribute funds received to Customer's creditors promptly and for the best interest of Customer. 7. Cancel~ation. This agreement shall be cancellable by either party only upon thirty (30) days' written notice to the other party. 8. Reaewai. At termination of this agreement if Customer desires the continued services of Company, Customer shall be entitled to renewal of this agreement upon execution of renewal agreement, upon the same terms and conditions as herein contained. 9. Genera~. Customer agrees to give such cooperation and aid to Company as Company deems reasonably necessary to successfully accomplish the liquidation and/or payment of Customer's debts. Customer understands that Company under- takes only to perform services to accomplish the liquidation, and/or payment of Customer's debts and undertakes in no way to perform legal or other service. Executed at - , - - day of -- -, 19 -, at which time a copy of this agreement was furnished to Customer. Customer Customer Company Authorized agent Mr. SIsK. Upon signing that contract, and here again if I can just outline `a hyp~thetical case, let us say that a man owes' $3,000 to a vari- ety of companies. You sign a contract to be of such assisance as you can. What if anything is the initial charge made by your company ~ Mr. HOLLAND. We have an initial filing fee in the District. That is a charge that is made of $25. This is a refundable charge. It is part of our fee. In many cases we find that we can not fairly deal with `his creditors by charging this fee in the beginning and the acceptance of our contract. Our contract does provide as part of our total fee a $25 filing fee `that is either refunded to the client upon completion of his agreement with us or becomes the final charge on his contract at its termination. Mr. SI5K. That $25, as I understand you to say, is actually only a portion of the 12½ percent charge based on the total contract? Mr. HOLLAND. Yes, sir. Mr. SIsK. In other words,' this actually amounts to an advance? Mr. HOLLAND. That is exactly what it is for. Mr.'SISK. An advance of the fee? Mr. HOLLAND. Yes, `sir.. Mr. SI5K. At the time `the contract is signed? Mr. HOLLAND. Yes, sir. Mr. Sisi~. As I understand it, you :are representing the Barden In- vestment Management Corporation. You do have credit adjustment companies or debt adjustment companies operating under a variety of names; is that correct? Mr. HOLLAND. Yes, we do. Mr. SIsK. Would you furnish to the committee for the record the complete list of the names of the various companies? Mr. HOLLAND. I will. (The list referred to, subsequently submitted, follows:) PAGENO="0128" 124 DEBT ADJUSTING BUSINESS EXHIBIT 8 BARDEN INVESTMENT MANAGEMENT CORP., LIST OF AFFILIATES IN THE DISTRICT OF COLUMBIA Credit Advisors of Washington, D.C., Inc., Second Floor, 1413 "K" Street, NW., Washington, D.C. 20005. Suite #215, 4165 Branch Avenue, Marlow Heights Shopping Center, Washington, S.E. 20023 (not actually in The District of Columbia). IN MARYLAND Credit Advisors of Baltimore, Inc.-~Mt. Rainier, Laurel, Ilagerstown, Elkton. IN COLORADO Credit Advisors of Denver, Inc.-Denver, Pueblo, Colorado Springs, Ft. Collins, Thornton, Lakewood. IN CONNECTICUT Credit Advisors of Bridgeport, Inc.-Bridgeport. Credit Advisors of Hartford, Inc-Hartford, Waterbury, East Hartford. Credit Advisors of New Haven, Inc.-New Haven, New London; IN ILLINOIS Credit Advisors, Inc.-Peoria, Rockford, Springfield. Credit Advisors, Inc.-Ohampaign, Decatur, Moline, Chicago Heights, Dan- yule, Chicago (Soutliside), Chicago (Westside), Chicago (Loop). IN INDIANA Credit Advisors, Inc. of Fort Wayne-Fort Wayne, Gary, South Bend, Elkhart, Hammond, East Chicago. Credit Advisors, Inc. of Evansville-Evansville, Terre Haute, New Albany, Richmond. Oredit Advisors, Inc.-Indianapolis, Kokomo. IN IOWA Credit Advisors ~f Des Moines, Inc.-Des Moines, Sioux City. Credit Advisors of Davenport, Inc.-Davenp~rt, Cedar Rapids, Waterloo. IN MICHIGAN Union Credit Service, Inc.-Detroit, Inkster, Mt. Clemens, Ann Arbor. Financial Adjustment Co. of Lansing, Inc.-Jackson. Financial Adjustment Co. of Grand Rapids, Ine.-Grand Rapids, Saginaw, Bay CIty, Flint, Kalamazoo. IN OREGON Financial Adjustment Co. of Portland, Inc.-Portland. IN WASHINGTON STATE Union Credit Service of Washington, Ine.-Seatt[e, Bremerton, Tacoma, Everett. Financial Adjustment co. of Spokane, Inc.-Spokane. Mr. SIsK. How many are there? Mr. HOLLAND. There are several corporations but we use only three names: Credit Advisers, which we use here in the District; Financial Adjustment Company, which we use mainly in our home State of Michigan; and the name Union Credit Service which we use on the West Coast and Washington State and in Oregon. PAGENO="0129" DEBT ADJUSTING BUSINESS 125 Mr. S1SK. At any time have you had any problems iii the regulated states? In other words, in those states where you operate and where they do have regulatory laws. Have there been any indictments of any of your companies? Mr. HOLLAND. No, we have never been indicted in any state in which we have operated. Mr. SIsK. Have you ever been penalized or paid penal!ties~? Mr. HOLLAND. No, we have never paid any penalties for this. Mr. SI5K. With reference to the California law as to which you heard testimony on yesterday, would you class it as being induly restrictive or as being a fair regulatory law? Have you made a study of, or are you familiar with, the California law? Mr. HOLLAND. I am not as familiar as Mr. Rabinowitch who operates in California. In the industry we normally refer to the California statute and then the Illinois statute as the best. The best in the indus- try from the standpoint of being most restrictive and clearer on what should be done and what should not be done. Also, they do audit. I feel that the audit at the expense of the examinee is a very important part of any debt management act. In both of those states they do on a regular but unannounced basis audit their licensees. Mr. SI5K. In view of what you have said, do you favor a regulatory law? Do you feel that Congress should take any action with reference to the regulation of this particular type of industry in the District of Columbia? Mr. HOLLAND. I feel that the Congress should pass a regulatory bill. To go further, I feel that had that bill been passed in 1963, when ~ bill quite similar to the one pending before this committee had been passed, that the alleged abuses-and I can not say there were probably real abuses-would not even be in existence today. We would not be sitting here now had the Congress passed that law back in 1963. Mr. SIsK. That leads me to ask why 22 states have passed bills pro- hibiting or outlawing the debt adjustment business? Why do you feel that these states felt is necessary to take that stringent action? Mr. HOLLAND. In many of the states, and this is not from personal experience as much as from having researched it. In many of the states this was done in the mid-fifties where admittedly there were abuses. Instead of having a fair look taken at the industry at that ~point, the advocates of abolition were able to in effect hold the day. We have found since that where any legislative body will take a fair look at the industry and will examine it from the standpoint of the creditor, debtor, and the members of the industry itself, that the only conclusion will be licensing. I think it has been proven out this year in Iowa, in Connecticut, and in Washington State where regulatory bills were passed. The trend now is toward a fair look at the industry and licensing `as a result. Mr. SIsK. What is your attitude, Mr. Holland, toward the non- profit type of counseling? Yesterday, it was mentioned that a number of cities and communities across the country are getting into what in 84-181-67-------9 PAGENO="0130" 126 DEBT ADJuSTING BUSINESS some cases is a completely free counseling service, operated, I suppose, in connection with welfare departments or legal aid societies. In some cases these nonprofit groups are organized where they do charge a so-called nominal fee. What is your feeling with reference to the fact they would be adequate for a community, and therefore there would be no necessity of commercial-type operation in that area? Mr. HOLLAND. To begin with, we in the industry certainly welcome the nonprofit operations, nonprofit debt counseling for the help they could potentially give to their clients. However, in areas like~ Fort Wayne, Indiana, which might be a good example, our office is on the third floor of the Getty Building in Fort Wayne. On that same floor be- tween our office and the elevator is the nonprofit debt counseling service. We have been in Fort Wayne since 1960. They have been in Fort Wayne since late 1961. We average 25 perhaps new accounts per week in Fort Wayne. We have five employees. They have one person who is there part of the day and he handles less than 100 clients The fact is that potentially they could help the debtor and we certainly applaud them for their potentiality. However, we find that when our clients contact us, they contact us because of an immediate problem. We have to be available to them. The nonprofit services in Fort Wayne and in Chicago and many other places where we have come in contact with them, normally are open on a nine-to-five basis, no Saturdays. They want the wageearner and his wife to come into the office. They also have to set appointments for sometimes days but more often weeks in advance. By the time the potential client might appear his problem has perhaps predicated him to go to other soui ces Some go to Chapter 13, if available Some go into bankruptcy when actually they did not need to Earlier I testified to the control that the creditors will normally exercise over the nonprofit debt counseling ser~ ice This is actually the case in Illinois as Mr. Price Patten's statement will show. Mr. Patten was one of the founders of the American Association of Credit Counselors. When they decided to set up the nonprofit service in Chicago, they prevailed upon him to operate it They guaranteed him that the creditors would take a minor interest in it This has not been the experience As a matter of fact, right now there was a headline in the Chicago Tribune that said, "Debt helper needs help," because they are now out of funds, actually. I do not believe they are going to be able to meet their subscription from the creditor. They supported it two years ago, but not now. Mr. SISK. Your statement here reminds me of a question. To what extent do creditors cooperate? Mr. HOLLAND. Our experience has been that I would say in the District closer to 95 percent of all creditors will cooperate and those are the creditors repi esented on the exhibit I submitted to the corn mittee by compilation of one thousand consecutive cancelled checks that have been cashed by these creditors. We find that creditors would like the ability to deal directly with their debtor because, as I stated before, they feel that first they can sell them and then their collection PAGENO="0131" DEBT ADJUSTING BUSINESS 127 department can effect collection. Very few of the creditors, many of them do, but we have letters we could submit showing they will accept maj or creditors, creditors who are even greater in this nationwide operation than we are. Some of them have a policy that they will not in writing admit that they will accept the payment plan submitted by a debt adjustor. The basis `of it is it is not the creditor's own self- interest to refuse payment. First he has made a sale. Secondly, he would like to effect collection. Where we are offering him, this collection on a regular basis, it would not be in his self-interest to turn it down and they do not turn it down. Mr. SI5K. That leads me to the next question. This has to do with some specific charges brought to my attention on which we desire some other information for the committee; namely, dealing with the fact that when, say I as an, individual in trouble, go to you and you make a contract with me and I have say, twenty outstanding accounts here: what assurance can you give me that `my creditors are' going to co- operate and they are not going to zero in on me despite the fact that you have made an agreement? What kind of a bond or what kind of insurance do I have w'he~i I turn my money over to you that that is going to protect nie from direct action, lawsuits, repossession, et cetera? What protection `does this client have; does he have any protection? This comes righ't down to some of the things that `have happened here in the District. I am not charging your company wi'th that di- rectly in the field involved, but I am sure you are aware of the charges of this type. What can you as a company give me as assurance for turning over to you the handling and payment of my debts ~ Mr. HOLLAND. Mr. Sisk, may I read just one paragraph from my written statement that answers that question adequately? Mr. SIsK. Yes. Mr. HOLLAND. I say here: While it is obvious we do not have the legal power to compel a c'redi to'r no't to attach the wages of one of our clients, the fact is that debt counselors have the ability to negotiate with creditors in such a way as to prevent them from taking that final step. It is quite unusual for a creditor to use a wage assignment or garnishment when he has assurance that he will be receiving regular payments on behalf of the doctor. In over ten year's of operation, I know of not a single case where garnishments and wage assignments were not avoided after opening an account, assuming regular payments were received. What I am saying there is that our experience in over ten years, while we certainly do not have the legal power to prevent a `creditor from, as you say, attacking the debtor, that in operation this has not been done. We do not know of a single case where it has been done. Mr. SIsK. T'here have been specific cases cited. I am not pointing to your company, but we do have som.e citations of specific cases where actually a person had committed himself or obligated himself with the debt adjustment company and the creditor refused to cooperate. Of course, this seemingly places the client in a very untenable position. PAGENO="0132" 128 DEBT ADJUSTING BUSINESS When this situation developes, what action do you take in protecting your client? Do you make a refund or what do you do? Let us say that in this hypothetical case we have decided to pay monthly pay- ments of $20 to X company. The X company wants $35 because that should be the amount of the monthly payment according to a prior agreement. The company decides to take action even though I've made a contract with you. What action do you take? Mr. HOLLAND. To begin with, I must state again this has not been our experience. It has not happened to us. As to the question of whether or not if it did occur, if t.he next account we signed this after- noon this would occur, what I might do, I could only suggest as far as the company is concerned, certainly there would be no fee involved in such an arrangement. If we signed a client and at some time in the future one of his credi- tors decided not to go along with our program, then we have not really helped that client. It would be unconscionable for us to retain the fee if we have not helped him. Mr. SI5K. You are saying that the policy of your company would be to immediately refund any fees collected from the client? Mr. HOLLAND. If this were to happen, yes, sir. Mr. SIsK. I have one final question. You know some copies of ad- vertising were placed in the record yesterday. I noted that there was a rather substantial change in the language of the ad of Credit Ad- visors, Incorporated, in today's Washington Post. What was the rea- son for the change in the language of this ad? Mr. HOLLAND. I have not been made aware of any change in our advertising. However, on a rotating basis our advertising agency in Detroit does make certain changes. I am not aware of any changes that were made today. Mr. SI5K. I understand that the language in today's ad is somewhat different from what you had normally been running. You are not aware of the reasons for this change? Mr. HOLLAND. No, Mr. Sisk. I can say this: Our ads will be changed on almost a regular basis every two or three weeks. We certainly would not have the same ad running again and again and again. This is a national policy in all of our offices. As a matter of fact, if there were a change from yesterday to today, the ad here would be the same as for our office in Seattle, Washington, Detroit, or Michigan. In other words, it would be a change for the entire chain. Mr. SIsK. I can understand that there would be certain changes as this is a normal procedure in business to change or update their ad- vertising. It seems though that the basic change involved goes to rather fundamental statements as to what you promise the client might gain. I am making no charges here. This was just called to my attention in line with what has been rather close perusal of all advertising on credit adjustors over a period of time. There have been some rather substantial changes as to commitments or promises made to potential clients in the most recent advertising format. Without objection, I am going to ask permission that today's ad in the Washington Post be made also a part of the record of the Credit Advisors, Inc. (The advertisement referred to follows:) PAGENO="0133" J)EBT ADJUSTING BTJSINESS 129 [From the Washington Post, Sept. 15, 1967] BILLs PRESSING? WE WON'T LOAD YOU UP A PENNY, BUT WE WILL HELP YOU PAY YOUR BILLS. YOU CAN'T GET OUT OF DEBT BY BORROWING, BUT YOU OAN BY BUDGETING. WE CONTACT YOUR CREDITORS, ADJUST YOUR FAMILY BUDGET, AND SUPERVISE IT FOR YOU. WE HELP YOU TO PROMPTLY PAY YOUR BILLS WITHOUT A LOAN. NO CO-SIGNERS. NO SECURITY. OVER 200 THOUSAND FAMILIES HELPED BY CREDIT ADVISORS. LET OUR HELPFUL HAND HELP YOU. FREE PVT. HOME OR OFFICE APPT. CREDIT ADVISORS, INC. 1413 K St. NW., 2nd Fir. 393-7865 4165 Branch Ave. SE. Marlow Hts. Shopping Ctr. 423-4850 3510 Rhode Island Ave. In Mt. Rainier, Md. 277-8181 Evening Office or Home Appt. SLASH BilL PAYMENTS WE BUDGET YOUR IN~OME! MANAGE YOUR DEBT PYMTS. AND CREDIT FIGHTS. You can change from: 1. Many check payments-TO 1 payment each pay day. 2. Creditor calls at night-To peaceful sleep. 3. Worry over unpaid :bills~TO security in paid up bills. * Fear of job and health-TO a carfree happy life. NO LOANS NO CO-SIGNERS NO SECURITIES FREE-Private home or office appointments. CREDIT ADVISORS, INC. 1413 K St. NW., 2d Flr. 393-7805 4105 Branch Ave. SE. Marlow Hts. Shopping Otr. 423-4850 3510 Rhode Island Ave. In Mt. Rainier, Md. 277-8181 608 Washington Blvd. Laurel, Md. Mr. 815K. Does the gentleman from New Mexico have any questions? Mr. WALKER. Mr. Chairman, I do not have any questions but I would like to make this comment or observation. PAGENO="0134" 130 DEBT ADJUSTING BUSINESS This has been very interesting to me in the last few days. The thing that interests me and I think the people that have testified so far, even those in the industry, should be coimnended for the attitude they have, regardless of the actions of this committee. I think something should be done, but the thing that I want to emphasize is the prudent operator seems to be willing to have some and insists `and favors some regulatory action. I think they should be commended for it. Mr. SISK. I thank my colleague from New Mexico for that statement. I too, Mr. Holland, want to say I enjoyed your testimony this morn- ing. I think it has been enlightening and informative to the committee. I particularly want to commend you for your recognition that there have been abuses by some people and some companies and regulatory legislation is worthy of consideration. I want to assure you that the committee has before it bills having to do with regulation as well as `bills to outlaw the procedure. All that is in front of us and I appreciate the comments that you have made. Mr. HOLLAND. Thank you very much. Mr. SIsK. Thank you. We have for the record a statement by Mr. Price Patton, Execu- tive Director of the Family Financial Counseling Service of Greater Chicago, Illinois, which, along with enclosures, will be made a part of the record at this point. (The statement and enclosures referred to follow:) STATEMENT OF PRICE PATTON, FAMrLY FINANCIAL COUNSELING SERVICE OF GREATER CHICAGO, ILLINOIS My name is Price Patton, and I am Executive Director of the Family Financial Counseling Service of Greater Chicago in Illinois. This is a non-profit service organized in December, 1965, to provide assistance and consumer education in conformity with standards set by the American Association of C~redit Counsellors, to families who find themselves in crippling installment debt situations. We administered ongoing of budget control and debt payment for over 2,000 families' in the first 12 months. My background in `this w'ork goes back to 1930 when I became aware of the widespreading involvement of wage earner families in such problems through a study made in Chicago by the present Mr. Justice Fortas, then Editor-in-Chief of the Yale Law Journal. My interest in the need for consumer assistance, as eMtablished by that study, led me to leave some graduate work I was engaged in and establish a private agency to assist overburdened consumers in coping with debt and money manage- ment problems. I believe this was the first, or at least one of the first, attempts to tackle such problems on an organized basis. I have been engaged in this work steadily since 1930, with the exception of five years in Naval Aviation during World War II. I have written two books, published by Citadel Press and David McKay, on the subjects of consumer education, family money and debt management, and have addressed many consumer and credit-oriented groups across the country over the past 25 years. In 1950, I worked in the organization of the American Association of Credit Counsellors which has set professional standards in this field and has steadily fostered regulatory legislation in the States to implement these standards and to eradicate abuse. It should be mentioned here that organized `counseling for debt burdened consumers had Its beginning in the Midwest and its main development there and on the West Coast. There are about 50 licensed agencies in Illinois at present. I do not know why, in view of the evident need, the East Coast has developed so few agencies' for this work. This has never been a lucrative field for the pro- fessional counselor and it is surely one of the most trying jobs in the country today. PAGENO="0135" DEBT ADJTJSTING BTJSINESS 131 To give this Subcommittee an authentication of the development of this service under regulation in my State, for instance, there have been submitted a number of copies of a survey conducted in Illinois by the Governors' Advisory Board for Financial Planning and Management among 1,500 employers, business and professional interests, lawyers, labor organizations, credit unions, church and welfare groups. Briefly, the rep(rt of the survey, with 40% of the questionnaires completed and returned, establishes that the services provided by licensed counselors in Illinois are considered beneficial by an overwhelming 95% of those surveyed. This result was reached in spite of the fact that we have had abuses in Illinois by unqualified people and is evidence that such abuses have been all but elimi- nated by regulation and by the determined efforts of professional counselors. The agency of which I am Director is so far the only nonprofit consumer The agency of which I am Director is so far the only non-profit consumer counseling agency in Illinois. It was organized with *the idea of involving the broadest community control and participation. As you may know, a number of not-for-profit services have been set up in the various states within the last few years. `In this regard, the troubled consumer is faced with an increasing dilemma be~ cause most of these non-profit agencies are supported and controlled mainly by installment-creditor interes;ts. Now, I have respect for the economic contribution of installment credit I have due regard for its power. But as an analogy to con- sumer counseling, it is no lack of regard to say that alcoholic clinics should not come under the control of the liquor dealers. Creditor control of consumer assistance cannot work and cannot be permitted in the American society. It is a very great concern to me. As a matter of fact, I must admit that, in our own agency in Chicago, we face the problem. We organized with the understanding that credit interests would remain strictly in the minority of control. However, because the small loan in- terests took the lead in raising the quarter million dollars needed to launch the service, control of our Board has gravitated toward those interests and our an- nounced policy of full service to the low-income debtor is now threatened. Unless the trend is reversed and this imbalance corrected, we confront the danger of degenerating to a sort of approved collection agency, serving those clients most profitable to installment creditor interests, with considerable restrictions on our freedom to speak out on consumer credit abuses, of whic'h our `counseling agen- cies across the country see possibly the highest concentration of all the orga- nizations concerned `with fa:mily financial problems. That is the concern which brings me to Washington to appear before `this Subcommittee. If and when qualified and unrestricted consumer counselling services can be established widely and maintained on a non-profit basis, I `am all for such a development. I believe Federal Reserve figures indicate 40% of our families are committed for installment payments beyond a safe margin. T'he consumer needs all `the help he can get. But it must be recognized tha't the main body of `the effective work in this field is being carried o'n `today by the private, or w'hat the loan companies call the "commercial," co'unselo'r-~w'here both the counselor and the client family are supported and protec'ted `by a'dequate regulation. The qualified priva'te counselor must be encourage'd in his effo'rts, of for no other reason than to have him and his experiences available `to us for the estab- lishment `of effective, non-profit community `services later on whe'n enough people become aware of the magnitude of `the problem. The whole matter of `the economic `health of our families `stands in close rela- tion today to matters of physical and mental heal'th. Guida'nce toward economic health is a mat'ter `of utmost necessity for rebuilding and preserving family stability in `this society. When I addressed the national conven'tion of the Legal Aid Societies in Denver in i9~i7, in the interests of regkla'tory and qualifying legislation on consumer counseling (and was opposed on the platform `by a public relations officer of a giant, small-loan chain), I assured the delegates that the American Association of Credit Counselors `stood ready to as:s,ist any community and any state legisla- tive body in th'e establishment of controlled and qualified services where such services `did not exist. Again I take the liberty `of referring `to Mr. Justice Fortas, `then in private law practice, who was in the convention and whose remarks concerning consumer assistance were recorded i'n part as follows: "I deplore the efforts to eliminate this service from the roster of services that are `available to American families". PAGENO="0136" 132 DEBT ADJUSTING BUSINESS It is clear in the context that he spoke of proposals to eliminate the private con- sumer counselor. The passage of legislation for the District in this struggling field has great importance for the rest of the country. By eliminating private initiative here, the Congress might indeed eliminate some abuse. But by the same legislative process, in setting up ad&iua'te controls, the Congress can not only eliminate any abuses but provide an importan.t gain in consumer assistance for the entire area. It is the essence of my experience over the past 36 years that to deny any assistance to the overburdened consumer, as long as that assistance is beneficial and profitable to him, would be just as harsh as it would be to deny him any medi- cal or legal services, except those provided charitably or non-profitably. I respectfully petition you to take no action that would tend to discredit and strike down the sources of assistance which are ~iow giving so much help and hope to a quarter of a million of the distressed families of our land. REPORT ~F SURVEY BY THE ILLINOIS ADvIsoRY Bo~urn ON FINANCIAL PLANNING AND MANAGEMENT SERVICES, JUNE 1, 1967 A CONSPEOTUS A Total of 1500 Survey Questionaires mailed to Illinois people representing business, labor, government, religion~ civic groupis, law, and education. High Interest Indicated by 40% completed questionaires returned 50.6% requested copies of the results In Communities Where No Financial Planning Service Is Available 88.2% of those expressing opinions favored establishing such a service Benefit of Financial Planning and Management Services 95.3% of those answering felt the services are beneficial to the general com- munity Who Should Provide This Service? 46.6% said professional credit counselors Consumer Economics Instruction in Our Educational Institutions 78.8% indicated it was inadequate Need for Further Development of Family Financial Counseling Services 71% encouraged expansion For details see tabulations below. RESULTS OF SURVEY QUESTIONAIRE Percentage analysis based on opinions expressed in 583 replies Yes No 1. Are family financial counseling services available in your area? 58. 4 41. 6 2. Have you had occassion to deal with, or observe the work of such a counseling organiza- tion? 50.9 49.1 If so, was the service 171 adequate 84 mediocre 52 poor 3. Are those individuals with financial management problems-and the community in general-aware of the financial counselor as a source of help? 35.7 64.3 4. If there is no service in your community, would you like to see one established there?_ - 88. 2 11. 8 5. Would the services of a family financial counselor be beneficial to- ap individual with financial management problems? 96. 8 3. 2' thefamilyofthatindividual? 97.1 2.9 thèemployerofthatindividual? 93.7 6.3 the creditor of that individual? 93.9 6.1 6. Which one of the following groupo do you feel can, and should, be the major provider of family financial counseling services? 151 Social/welfare agencies 100 credit managers 35 lawyers 326 professional credit counselors 50 employers 37 other 7. Are your educational institutions providing adequate instruction in consumer economics, and money management? 21. 2 78. 8 8. Are you a 4 labor union 144 employer 186 creditor 11 educator 127 civic/welfare organiza- tton 87 Governmental agency/official 7 communications media 10 church organization 31 other 9. Which development in family financial counseling would you like to see? 321 expanded 55 left as is 76 other 10. As an employer, or business man, has family financial counseling been helpful to your 58. 5 41. 5 firm? was there a long term effect resulting from this help? 54. 5 45. 5 PAGENO="0137" DEBT ADJUSTING BUSINESS 133 Distribution of QncstioibY?airc by Catceorics Chambers of Commerce 426 Consumer Finance Companies___ 91 Department of Public Aid 100 Retail & Department Stores 96 Township Supervisors 101 Labor Councils 26 Credit Bureaus 92 Universities and colleges 18 Newspapers 77 Collection Agencies 25 Banks 76 Credit Unions 23 Manufacturers 68 Savings & Loan Associations____ 15 Physicians 81 Better Business Bureaus 2 Family Service Agencies 32 Local Government Officials 2 Ministers 47 Certified Public Accountants____ 2 Attorneys at law 34 Internal Revenue Office 1 Hospitals 65 For additional copies of this report write to: Illinois Advisory Board Financial Planning and Management Service 1733 Washington Street Waukegan, Illinois 60085 STATE OF ILLINOIs, DEPARTMENT OF FINANCIAL INSTITUTIONS, Jannary 18, 196~. To Licensees Operating in Accordance With the Requirements of the Financial Planning and Management Service Act: The enclosed standards have been sanctioned jointly by the Chicago Better Business Bureau and the Illinois Association of Credit Counselors and has been delivered to Chicago Newspapers as a guide to them in accepting material sub- mitted by advertisers. We request that you apply the principles of advertising contained in this docu- ment. Very truly yours, JOSEPH B. KNIGHT, Director, Financial Institutions. JAMES J. WALSH, Supervisor, Financial Plan fling Division. STANDARDS VOR ADVERTISING THE SERVICES OF CONSUMER CREDIT COUNSELING Issued jointly by the Better Business Bureau of Metropolitan Chicago, Inc., and the Illinois Association of Credit Counselors Purpose: The intent of these Standards is to encourage and preserve depend- ability in the advertising and business practices of credit Counselors. It is the spirit of these Standards that advertising shall be accurate and clear; that representations to clients and creditors shall not have the tendency or capac- ity to confuse, mislead or deceive them in any way. It shall be understood these recommendations relate and are applicable to firms engaged in providing financial counseling and debt payment service to con- sumers in which the counselors manages the financial affairs of a consumer, re- ceiving and disbursing funds or evidence thereof to his creditors. Such firms may also be known as debt counselors, pro-raters, debt consolidators or debt poolers. However, for the convenience of phrasing these Standards, all firnis or persons so engaged will hereinafter be referred to as credit counselors. 1. Representation: No representation, however made, shall be employed by a credit counselor which tends to mislead the public in any manner with respect to the service offered. 2. Predicted Payment: Since the amount of money a debtor can devote to a debt management program involves factors which may be determined only after a detailed study of his family requirements, income and ability to pay, no predicted amount or period of payment, exact or approximated, can or shall be made prior to an interview. Therefore, the use of a payment chart or any statement of the following nature shall be avoided. Example: "Do you owe $1000? Pay as low as $25" "Up to 36 months to pay" "Cut your payments in half" "Lower your payments by as much as $50 per month" PAGENO="0138" 134 DEBT ADJUSTING BUSINESS 3. (a) Exaggerations: No expression, however made, shall be used which states or implies no financial problem or debt is too great for the credit counselor to solve. Example: "No more financial worries" "We'll solve all your debt problems" "Forget your debts" "Good-by to garnishments" "Owe only one debt" "Get out of debt today" "Bills paid for you" "Debts disappear like magic" These and all other similar expressions which represent that funds other than the consumers will be used to pay creditors are prohibited. (b) Misleading Expressions: Statements, phrases or words which may be literally accurate but which might confuse readers, or which may have a mis- leading implication shall not be used. Typical of such objectionable statement is: "Consolidate your debts" Recommended expressions: "Debt grouping" "Consolidate your payments" "Combine your payments" 4. Cash Advance: Since it is generally recognized by industry members as an unsound business practice, no representation, however made, shall be used which states or creates the impression any amount of cash or an advance in money is offered or can be provided by a credit counselor. No word or phrase may be used which could be interpreted as offering a loan unless completely clarified by explanatory language. Example: "No co-signers" "No collateral" "No security needed" Recommended expression: "No co-signers-No collateral-Because we do not lend you money" 5. Identity: All advertising shall contain the firm's true name and true address. If a trade style is used, other than a registered corporate name and which is not the name of the owner or owners, it shall be registered as required by local statute. 6. Subterfuge: It shall be an unfair practice for a credit counselor to use a dummy or fictitious firm to secure clients, nor may referrals be received from a bona fide fii-m created for this purpose. Advertising which appears to offer loans, or a subterfuge to steer applicants to the advertiser is condemned. 7. Charges: Where service fees are regulated by statute, reference to such fees in advertising, if made, shall conform to the statute. Where not regulated by statute, no deceptive wording shall be used which would tend to confuse or mis- lead the debtor as to the cost of the service. 8. Scare Approach: No veiled of scare techniques or representation of any nature shall be used which seeks to alarm the unknowing individual. Example: "Urgent, call me immediately, Gloria" "Are you in trouble? Call me. Jean" It should be understood that these standards may be supplemented, or revised, to encompass practices not presently anticipated or to conform with any juris- dictional regulation, statutory or otherwise. Mr. SI5K. I have just been informed that Linn Twinem, the Ameri- can Bar representative, who was supposed to be the next witness this morning was called out of town. Without objection, his statement will be made a part of the record. The committee is sorry that Mr. Twinem was not able to make an appearance in person. Mr. SISK. Without objection, the National Better Business Bureau of the City of New York will be permitted to file a statement. (Subsequently, the following letter and exhibits were received for the record:) PAGENO="0139" DEBT ADJUSTING BUSINESS 135 NATIONAL BETTER BUSINESS BUREAU, INC., OFFICE OF TIlE PRESIDENT, New York, N.Y., kSep'tember 18, 1967, Mr. DONALD J. TURRIDY, House District Uornrnfttee, Longworth house Office Buildiing, Washiugton, D.C. DEAR MR. TUBRIDY: The National Better Buisines,s Bureau wishes to go on record as supporting the legislation now pending in the House of Representa- tives which would `prohibit the business of d~bt adjusting in the District of Columbia except as an incident to the lawful practice of law or a's an activity engaged in by a non~p!rofit corporation or a(sso'ciation. The alternative, regulation of the debt adjusting business, would appear to lend dignity to the de'ht adjusters as "licensed" organizations while affording little real protection to the public. The activities of `debt adjusters have been known to the National Better Busi- ness Bureau for many years. Attached i's a bulletin entitled "Debt Adjusters_~ Boon or Burden?" whic'h was issued by the National Better Business Bureau in July, 1955. All of the information reaching the Bureau since the publication of that bulletin `has tended to confirm the statements' made and `the conclu~sion,s reached in the bulletin. A subsequent `release, is,sueld in April, 1965, is `also attached. In many cases, having collected fees in advance, debt adjusters have gone out of business, leaving the debtor `more impoverished than ever. The `debt adju!ster i's' not in a position to rende'r effective relief without the `consent of the creditors. The files o'f `local Better Business' Bureau's are replete with example's where such `consent ha's not been given and where t'he debtor's property has been `seized or his salary attached. The commercial debt adju'ster must charge a fee for hi,s 5erv~ce,s an'd this has the effect of `simply adding another de'bt to the many already owed by the over- burdened debtor, In contrast are the non~profit family credit counseling `services whic~h are operating in more than 50 communities in the United States today with `many more `communities in the planning `stages. These `credit coun'seling servi,ces oper- ate at a `p'rofessional level an'd with a high degree of efficiency. They make no charge to the de'btor for their services or a very nominal charge in some cases. At its February, 1961 meeting, the Executive Council of the! AFL-CIO went on recor'd a~s stating that "The debt adjusting `business, regulated or unregulated, l's not economically or `socially desirable as a commercial activity and should be eliminated." Statutes outlawing the commercial `debt pooling business have already been pa'ssed in 22 ,stateh as noted in the attached bulletin `dated July, 1967. A's you `will note `from thi's bulletin, some states have sought to regulate this business. However, the National Better Bu,sine's,s Bureau !believe,s t'hat regulation is not sufficient. The bdst `courise would seem~ to he the outright prohIbition of a practice that seldom gives the `promised relief and o'ften victimizes the suffering debtor. Sincerely yours, K. B. WILLSON. NATIONAL BETTER BUSINESS BUREAU, DIvIsIoN OF PUBLIC INFORMATION, New York, N.Y. SPOTLIGHT ON SCHEMES; A SPECIAL NEWS REPORT Debt Adjusting-How To Add to Your FinanCial Woes (By Kenneth B. Wilison, President, National Better Business Bureau) One of the cruelest deceptions played on the debt-ridden ciPzen has many aliases: "Debt adjusting," "debt pooling," "debt liquidation," "budget planning," "pro- rating," "debt lumping." They're all misnomers. More accurately, the name of the racket is "debt accumulation," and its chief victims are wage earners in the lower income brackets. PAGENO="0140" 136 DEBT ADJUSTING BUSINESS Whatever it's called, the scheme has the effect of sinking the person already heavily burdened with debt into a financial quagmire. It prompted one official to comment: "We have never run across as many pitiful cases of preying on public misery and difficulties as in this scheme." The business of debt pooling has existed for 25 years and reports received by the National Better Business Bureau indicate that it continues to flourish despite legislative action by some states. There are licensed, reputable firms in the business of "credit counseling" and they are not to be confused with the many unregulated debt adjusters who sup- posedly pro-rate the income of a debtor to his creditors for an outlandish fee or service charge. It works this way: The financially-strapped wage earner agrees to turn over part of his income to the debt adjuster, who then doles out the money to creditors who have allegedly consented to the distribution plan. For this service the adjuster charges a fee which ranges from 10% to 35% of the total amount of the debt. One debt pooling company reported that its fees are 10% of the total indebted- ness. An analysis Qf complaints from dissatisfied clients who withdrew from the plan showed that, to these people at least, charges actually ranged from 16% to 58%. The major difficulty is that almost never is the plan carried to a successful conclusion. Either the creditors fail to go along with the arrangement or the debtor finds it impossible to live with. The end result is that the debtor winds up with another debt-the adjuster's fee. This charge becomes due and payable regardless of the success of the plan. Debt adjusters do not lend money nor do they assume legal responsibility for any money owed by clients. That obligation remains the responsibility of the customer. The adjuster lures his victim with such seductive advertising as this: "If installment payments or past-due bills are troubling you, let us consolidate and arrange to pay all your bills, past due or not, with one low payment you can afford. "If you owe $1,000, you may pay as little as $15 per week; $2,000, $25 per week, and $3,000, $35 per week." The adjuster may add these soothing words: "Keep your creditors satisfied," "avoid garnishments," "obtain peace of mind." In one typical case, a now defunct debt pooling company collected $214 from one client, but made only a single payment of $38 to a lone creditor. The premises of one Chicago firm was found suddenly closed and the office abandoned, stranding 97 clients who had paid in sizable amounts. The owner had skipped town and customers were unable to get an accounting of money paid in or out. The National Bureau has actively campaigned against debt pooling for many years. In a 1955 bulletin it warned that "these operations are well on their way to becoming a national scandal." Since that time, 14 states have outlawed commercial debt adjusting outright. Three others prohibit `the activity on the basis that is constitutes the practice of law. Six states attempt to regulate it by statute. These are a few guidelines for hard-pressed consumers: For a debt consolidation plan to work, creditors must agree to accept smaller payments than they are now getting. They often refuse. If you do business with a "credit counselor," etc., be sure he is responsible. Check with the local Better Business Bureau for a factual report. If your debts have been turned over to a collection agency, discuss your financial problems with them. Tell them the truth and ask for their help. Usually a solution can be reached. Avoid taking any steps which would pile debt on top of debt and bear in mind that there is much the debtor can do for himself. In many cities, family welfare agencies, legal aid societies, retail credit bu- reaus, etc., are willing to assume the burden of debt adjustment for `the deserv- ing debtor at little or no expense to him. PAGENO="0141" DEBT ADJUSTING BUSINESS 137 National Better Business Bureau, Inc., New York, N.Y. DEBT ADJUSTERS-BOON OR BURDEN?? Unregulated Pro-Rating Compan~ies Are ~nbjeet of Many Complaints Debt adjusters are individuals or companies engaged in the business of pro- rating the income of a debtor to his creditors for a fee or service charge. Ideally, the service they render to debt-laden members of society would include setting up a `budget on a workable basis. It would allocate a definite amount of income to debt retirement purposes, including payment of the adjuster's fee as defined by contract. The adjuster would then prepare a plan for distributing the available income periodically to the various creditors on a pro-rata basis. This would usually require obtaining substantial concessions from some creditors. However, if satisfactory arrangements could be effected, the debtor would make regular payment of the total amount budgeted for debt retirement to the adjuster who would then disburse it to hiniseif and the creditors iii ~iccordance with the agreed formula. The ultimate objective would be final einiincipation of the family from its debts and the re-establishment of its credit. COMPLAINTS ACCOMPANY GROWTH The business is not a new one. Known variously as pro-raters, debt poolers, debt managers, credit counsellors, budget systems funding agencies, etc., this type of conipany has functioned in some cities for more than two decades. Within the past year or two, however, their number has multiplied and the geographic scope of their operations has increased at a prodigious rate. Some operators extend or transfer their acLivities from one city to another. In February, a Federal grand jury in Chicago indicted several companies and indi- viduals charging fraud by radio advertisement, mail fraud and conspiracy in the operation of a debt adjustment scheme. Two of these individuals were formerly identified with a pro-rata business in `Columbus, Ohio, which had been the subject of numerous complaints to the Columbus Better Business Bureau. I)uring the past year, criminal warrants have likewise been issued in Detroit, Michigan against one "budget system" operator who had previously promoted similar busi- nesses in a number of Eastern cities. The charges resulted from numerous com- plaints to the Detroit Better Business Bureau and the authorities alleging "bait" advertising and failure of this promoter to perform promised debt adjustment services after collecting his fees in advance. There are debt adjusters who have operated in some communities for many years, free of justified criticism or complaint to the Better Business Bureau. Cer- tainly, it would be unfair to condemn a newcomer solely on the grounds of new- ness. It is nevertheless true that those who have swarmed into the debt adjust- ment field recently have included a large proportion of unscrupulous or incom- petent opportunists whose activities have spread misery throughout the land. They have used extravagant and deceptive advertising to claim far more than they were in position to deliver. They have made false promises to persons whom they knew, or should have known, were beyond redemption, credit-wise. They have withheld their own fees from the debtors' payments but have failed promptly to make agreed payments to creditors or to obtain creditors' accession to the pro-rata plan devised. The net result of their activities, in many cases, has been to leave already desperate people more hopelessly mired in debt and litigation than `before. SITUATION SERIOUS IN MANY CITIES That these practices do not exist in isolated cases only is indicated by a survey which the National Better Business Bureau recently made of Better Business Bureau experience with pro-raters iii forty cities in all sections of the United States. In seven of these cities, pro-raters have been operating, mostly on a limited scale, without serious complaint to the Bureaus. In five others. sufficient time had riot elapsed to permit a significant accumulation of customer exueriepee in Bureau files. In the rerniaining twenty-eight cities, Better Business Bureau experience with pro-raters has been, on the whole, unfavorable. Most of the larger cities are included in this category and, in more than half, complaints have increased so rapidly within the past year as to create serious problems. PAGENO="0142" 138 DEBT ADJUSTING BUSINESS It should not be inferred that every pro-rater in each of these cities has been the subject of justified criticism. But the tactics employed by a majority of the pro-raters have made the complaint picture so black that some Bureaus have been forced to the conclusion that continued uncontrolled operation of these services in their communities would not be in the public interest. MISLEADING ADVERTISEMENTS Many complaints have their inception in prii~ted or broadcast advertising claims such as "Forget Your Debts," "Rid yourself of the worries and troubles of all your creditors," "Pay Us What You Can Afford," and similar representations calcu- lated falsely to imply that, once the debt adjustment company is employed, the debtor has no further responsibility or obligation to his creditors. Other advertising statements-"Bills Paid For You," "We Pay Them For You," "Do you need financial assistance and have no collateral?", "Pay your bills with- out borrowing with single payment," etc.-have had the capacity to deceive as to the true and limited service which the debt adjuster can offer. Some adver- tising has misled debtors to believe that they can get a loan or credit which the pro-rater will use to pay off all their debts. The Cleveland Better Business Bureau reports the case of one company using the word "Finance" as part of its title. Some debt adjustnient services have even advertised in classified columns under the heading of "Loans." Of course, the pro-rater performs no such function, a truth which some complainants have not discovered until after they have signed agreements which they did not understand, and paid fees for non-existent loans. LIMITATIONS OF SERVICE At best, the pro-rater offers a means whereby an individual may retire his total indebtedness, although automatically increased to the extent of the pro-rater's fees, in regular amounts over a period of time which will be consistent with his capacity to pay. The complete success of such an expedient would depend upon the honesty of the pro-rater and his qualifications to analyze his client's financial and budgetary problems, the character of the client and his ability to carry through on the agreement reached, and the willingness of creditors to accept proffered plans for reduced or extended payments, among other factors. The experience of Better Business Bureaus suggests that the proportion of cases in which these circumstances ideally co-exist may be very smalL TAKING ALL OOMER5 Advertisements of some debt adjustment companies have implied an ability to solve the problems of any or all debt ridden persons regardless of their cir- cumstances, character or reputation. On the contrary, it is generally recognized by informed sources that the pro- portion of over-indebted persons who can be helped by a debt adjustment service is limited. A mid-west firm which has operated without complaint to the local Better Business Bureau for many years, has advised NBBB that it finds it nec- essary to turn down six out of every ten applications, "mainly because of (1) a desire to keep some item that is entirely out of proportion, such as an expensive automobile or other luxury item that could be turned back or, (2) reduced income to the point where it barely does more than cover the living budget or, (3) lack of the feeling that they are in serious trouble and determination to live on a meager budget to pull themselves out." A west coast organization, whose record is equally free of complaint, has stated that it will accept as clients only those overindebted persons w-hose income allows monies to be applied toward the liquidation of their obligations over an extended period of time. This organization takes the position `that no pro-rate office has the moral right to accept persons w-ho can pay off their obligations by liquidating assets or by securing a loan, or those whose earnings are currently insufficient to do more than meet barest living expenses regardless of the nature of their debts. It has beeb the experience of many Better Business Bureaus that there are other pro-raters who do not concern themselves with the fitness of applicants for service. In many cases, the only test applied appears to have been the applicant's ability to pay the debt adjuster's fee. PAGENO="0143" DEBT ADJUSTING BUSINESS 139 AGREEMENTS FAVOR PRO-RATERS "No interest. No co-signers. No security needed. No reference check," is an advertising theme employed by many pro-raters. What is not disclosed is that while interest is not charged, there are substantial service charges, often as high as 35% of total indebtedness, added to the debtor's already overwhelming financial burden. Nor is it disclosed that references, co-signers and security are not required because the debt pooling company assumes no financial risk. Customarily, the debtor is induced to sign a contract legally binding on him. If, because of non-fulfillment of promises or other cause of dissatisfaction, the dis- illusioned client seeks to withdraw from a pro-rating plan, he frequently finds that he can do so only at the sacrifice of most, if not all, of the money that he has paid in. He may even face supplementary collection proceedings by the pro-rater. Many such complainants do not have a copy of the agreement that they signed, but investigation by a Better Business Bureau has generally developed that the document is weighted in favor of the pro-rater's receiving the full amount of his fees at the expense of the client and creditors. There is no uniformity in the amount of fees charged by debt adjustment companies or in the method of their exaction. The same company may charge different rates to different clients. In many cases, however, the pro-rater demands the full amount of fees contemplated for the entire life of the agreement, regardless of how long it may be in effect. Generally, the fee is based on a percentage of the client's total indebtedness which may be augmented by "bookkeeping charges" based on the number of accounts involved. Total charges may aniounf to from 10% to 35%, or more, of the total indebtedness. Tfhey may be considerably more than what prospective clients may anticipate. A New York company, for example, has represented that its fees are 10% of the total indebtedness. An analysis by the Better Business Bureau of New York City of complaints from dissatisfied clients who withdraw from the plan showed that, to these people, charges actually ranged from 16% to 58%. PILING DEBT ON DEBT The agreement has sometimes permitted the pro-rater to deduct all or most of his fee from the client's initial payments. In other cases, a percentage is to be deducted from each payment during the life of the agreement, but, under these `ircumstances, some pro-raters have set up "reserve funds" by the expedient of postponing payments to creditors. If a client cancels the agreement before it has run its course, the pro-rater applies the "reserve" toward the satisfaction of the total fees he would have collected bad the agreement been completed. If sufficient funds are not on hand for this purpose, the client is presented with a bill for the balance. If be fails to pay, the debt adjuster may institute legal proceedings to collect. There is an example of an Ohio company which induced its clients to sign cognoi't~t notes for the full amount of its fees. Such notes are, in effect, a confession of judgment and the Better Business Bureau of Akron recently re- ported that 21 judgments, totalling $1,896.83, had been taken against one debt adjuster's clients who had signed such notes. Similar judgments totalling $497.13 were reported as to five customers of another debt pooling firm. In many cases, where judgments are taken, the holder of the note may garnishee the debtor's wages. There is a strong suspicion that some pro-raters so conduct their operations as deliberately to encourage clients to withdraw from agreements during the early life thereof. In such cases, the unfortunate client discovers that, at considerable expense to himself, he has not only failed to improve his position vis a vis his creditors, but has acquired a new creditor, i.e., the pro-rater. RELATION TO CREDITORS MISREPRESENTED Many complaints have arisen from sales representations in advertising and at interviews calculated to lead the debtor to believe that all of the sales credit organizations, banks, loan companies and others to whom he is indebted will automatically agree to whatever plan for payment the pro-rater may devise. The Boston Better Business Bureau, which has pioneered in educating the public on this subject, has pointed out that creditors are under no requirement so to soften PAGENO="0144" 140 DEBT ADJUSTING BUSINESS the contractual obligations of heir debtors and asany creditors decline to accept agreements offered by debt adjustment companies. These facts are not disclosed to prospective customers by the unscrupulous debt adjuster. It is not explained that some creditors, whether accepting the pro- rata arrangement or not, may add additional finance or interest charges, If their accounts are not paid according to the original terms. If legal action has been or is instituted by a creditor against a debtor, only an attorney can provide legal service if required A debt adjustment plan does not preclude nor prevent a creditor from taking his usual action to collect ncluding legal action THE ST. LOUIS SURVEY In February, 1955, the St. Louis Better Business Bureau published the results of a questionnaire to several hundreds of its members in those fields of business most likely to be involved in any attempt by debt adjusters to represent creditors of business firms. Replies, of which 60% were from retail merchants selling on charge or installment plan, and 40% from banks, loan companies and sales finance and discount companies, are tabulated as follows: [In percentj Yes No Do Debt Adjusters Serve a Useful Purpose? Do You Accept Agreements From Debt Adjusters? Do Debt Adjusters Pay Promptly? Do Debt Adjusters Usually Pay Off the Entire Amount? Are Clients Excessively Debt Ridden? 10 30 123-f 0 67 90 70 873~ 100 33 Returns from another questionnaire distributed by the Memphis Better Busi- ness Bureau indicated that approximately the same situation existed in that city.. Recently, the Better Business Bureau of Baton Rouge, La., surveyed the prin- cipal firms doing an installment business in its area and discovered that less than 10% had any working arrangement with the debt adjustment company operating in that city. In its bulletin the St Louis Bureau pointed out that respondents to its ques tionnaire did not rate all proraters in that city uniformly as to reliability; based. on past experience, the creditors might negotiate more readily with a few of the existing debt adjustment companies than they would with others. However, the overall picture presented by the above tabulation is not such as to justify con- fidence in the employment of pro-raters generally as a means of extricating ex- cessively debt-ridden persons from their financial difficulties. MISERY COMPOUNJOED Having been led to believe that through employment of a pro-rater, they had solved all problems relating to their excessive accumulation of debts, some clients are encouraged to ignore direct demands for payment by creditors. Complainants to Better Business Bureaus include many whose sojourn in such a fool's paradise h'ts been interrupted by the intrusion of lawsuits garnishee proceedings repos sessions, or other legal steps taken by creditors who have lost patience~ Similar denouements have sometimes followed failure of the pro-rater to make prompt payments to creditors as agreed, even though the client has faithfully met his obligations to the debt adjustment company. Some short-lived debt adjustment companies have closed their doors after paying only a fraction of .the amount collected to creditors, leaving their clients in worse financial straits than before. The Rochester Better Business Bureau re- ports a typical case where a now defunct prorating company collected $214.00 frOm one client, but made a lone payment of only $38.00 to a single creditor. If the operators are not bonded and leave no assets behind them, there is little that can be done for thevictims in these cases. ALTERNATIVES AVAILABLE. There are many, including some Better Business Bureaus, who believe that there is no need or economic justification for the existence of the pro-rater; that he does not offer a service of genuine value to debtor and creditor, or that his functions are, or could be, performed more satisfactorily by some other kind of PAGENO="0145" DEBT ADJUSTING BUSINESS 141 agency. These critics point out that there is much that the debtor can do for him- self and that, in many cities, family welfare agencies, Legal Aid Societies and retail credit bureaus are willing to assume the burden of debt adjustment for the deserving debtor at little or no expense to him. Under an Ohio law, a debtor can set up a trusteeship through a municipal court which will pro-rate a portion of his income to his debtors at nominal cost. A recent Wisconsin statute enables wage earners to amortize their debts through the state courts Chapter XIII of the Federal Bankruptcy Act permits wage earners less than $5,000 a year to establish trusteeships for the liquidation of their debts, without resort to bankruptcy, over a period of three years, if neces- sary. Nearly 10,000 such proceedings were filed during 1954. LACK OF REGULATION In Wisconsin, there is a licensing law supplemented by rules' and regulations governing debt adjustment companies, only one of which operates in that state. Minnesota also has a licensing law. A recent Maine statute prohibits anyone other than an attorney from engaging in this business, In Pennsylvania, the courts have construed the collection agency law so as to prohibit debt adjusters from taking fees from debtors; hence, there are no pro-rate companies in Pennsylvania. So far as NBBB is aware, in other jurisdictions, any individual, hower ill-qualified may set himself up in business as a pro-rater without any restriction or regulation of his operations whatever. Legislation has been proposed in other states which would prohibit the opera- tion of a debt adjustment business for profit or which would seek to license and regulate the business. The net effect of some of the proposed laws which NBBB has seen would appear to be to lend dignity to debt adjusters as state- licensed organizations while affording little real protection to the public. That would seem to be true of any legislation which: a) would permit unqualified or unscrupulous individuals' to accept money from desperately involved debtors without obtaining the agreemen~t of creditors to plarticipate' in a workable pro-rate plan; b) would permit the adjuster to exact exhorbitant fees, openly or by subterfuge; c) would permit the `adjuster to deduct all or a substantial portion of his fee's in advance rather `than on a pro'-rata basis as service is~ performed; or which d) did not provide for competent supervision by a `state agency adequately financed and staffed. A NATIONAL SCANDAL In this bulletin, the sole purpose of the' National Better Business Bureau has been to draw attention to a situation that is fast approaching a national scandal. We do not s'ugge'st `that all `debt adjusters are charlatans. Better Bus'iness Bureaus in those cities where debt adjusters' have fulfilled their promises to the public to the satisfaction o'f debtors and the creditor community alike have not questioned the value of the service which this' type of business' offers'. It is for the lawmakers to decide whether the activities of pro-rate companies should `be prohibited, whether the'y should be regulated and whether the states should provid'e `other facilities for performing debt adjustment services, as in Ohio and Wisconsin. Without presuming to decide these q'uestions~ the National Better Busthess B'ure'au offer's `the following observations: In a vocation which offers any individual the opportunity to' handle other peoples' money without regard to his reputation, financial responsibility, experi- ence and other qualifications, and without regulation by or accountability `to any public agency, th'e p'otentiality for evil is great. The evidence is more than ample to support the view' that this potential has been realized by an alarm- ingly high proportion `of debt adjusters under existing circumstances. Service Bulletin-Prepared for Chamber of Commerce Members of the National Better Business Bureau, Inc., New York, N.Y., July 1967 HAWAII BECOMES 22ND STATE To PRoHIBIT COMMERCIAL DEBT ADJUSTING On March 30, 1967, Hawaii became the twenty-second state to prohibit the commercial practice of debt adjusting when Governor Burns approved House Bill No. 33. `The bill was introducd by State Representative George W. T. Loo of Honolulu. 84-181-67-10 PAGENO="0146" 142 DEBT ADJuSTING BUSINESS "Debt Adjuster" is defined to mean a person who for a profit engages in the business of acting as an intermediary between a debtor and his creditors for the purpose of settling, compromising or in any way altering the terms of payment of any debts of the debtor, and who: 1. Receives money, or property or other thing of value from the debtor, or on behalf of the debtor, for distribution among the creditors of the debtor, or 2. Otherwise arranges for payment to, or distribution among, the creditors of the debtor. House Bill No. 33 exempts "a nonprofit or charitable corporation or association who acts as an adjuster of a debtor's debts, even though the nonprofit corpora- tion or association may charge and collect nominal sums as reimbursement for expenses in connection with such services." According to Mr. Loo, House Bill No. 3~ is patterned after the Kansas Act and is essentially the Kansas Act except for Sections 4 and 5. In Section 4, Legal Aid Society was included in the definition o~ attoriiey; the exemption for a creditor of the debtor or an agent of one or more creditors was deleted ; the ex- oinption for a person who makes a loan to the debtor and acts as an adjuster for debtors loan in the disburseme~it of the proceeds of the loan, was deleted. Section 5 was added to make clear that money lenders are not effected by this Act. STATES WHICH BAN DEBT POOLING The twenty-two states which have outlawed debt pooling are: Arkansas 1967 New York 1956 Delaware 1966 North Carolina 1963 Florida 1959 Ohio - 1957 georgia 1956 Oklahoma 1957 hawaii 1967 Peint~ylvania 1955 Kansas 1961 Rhode Island 1964 Maine 1955 South Carolina 1963 Massachusetts 1955 Texi s 1965 MissOuri 1963 Virginia 1956 New Jersey 1961 Wesi: Virginia 1957 New Mexico 1965 Wyoming 1957 STATE WHICH REGULATE DEBT POOLING BY STATUTE Six states, while not prohibiting conimercial debt pooling, attempt to regulate it by statute. They are: california. Illinois, Michigan, Minnesota, Oregon and WisCOnsin. Mr. S~sic. We aho have letters from Finance Management Corn- paiiy of ilocic Isli ad, ill iiiols anti Consiuners Credit Counselors, Decatur, Iiliiiois, which, without objection, will be made a part of the record. (Tue lctt.ers rc1cned to follow :) FINANCE MANAGEMENT Co~frANv, Rock Islam!, Ill., d'uyn.ct Th, 1967. lIon. B. F. SISK, House of 1?cprcscntatires, TYG.~li Ol[JtO'fl, t).C. DE~n Mu. Sis~rc : It is my understanding that Subcommittee number five, of the Flouse, will be holding hearings on credit counselling and debt adjusting in the near future. I am presently engaged in this business and feel that myself and other per- sons in our mdustry should be giveil an opportunity to speak l)efore your coin- niittee, and answer any questions that may arise. I know tlntt there is qUitO fl controversy about our business, and will, also, acknowledge the fact that there are People in this business, as iii any other business, who create bad situations. PAGENO="0147" DEBT ADJUSTING BUSINESS 143 A's a member of the illinois' Association of Credit Counselors, and the Ameri- can Association, for several years we have been very instrumental in trying `to rid the industry of the bad operator. I am sure th'at if your committee would take time to interview and question the `authorities *in the states that hold regulation, you will find that the viola- :tions created are very, very few, and that in the areas where our members op- erate `they are held in very high regard. I would appreciate any consideration your committee could show to our in- dustry. Respectfully, H. A. BOWERS, General Manager. Cou su MER CREDIT `CounSELORS, A Divisiou or THE CREDIT BuRE:Au, Decatur, Ill., August 14, 1967. Hon. B. F, SI5K, House of Representatives, Washington, D.C. DEAR MR. SI5K: All members of our industry are most concerned at plans to regulate or prohibit professional credit counseling `in the District of Columbia. Our firm ha's `been in the `business of consumer `credit counseling and financial `budgeting for almost thirty years. We enjoy an excellent reputation with Decatur credit grantors, including retailers, medical professions and financial institutions and the Association of `Commerce. However, many years ago there was a great deal of a'buse in our area by firms going into some type of prorating service and being interested only in retiring their fee, `which was projected in advance `for their service. `This type of thing is now completely stopped. All our industry is licensed and bonded to the State of Illinois; `the Director of Financial Institutions enforces the regulations con- `corning their licensees. We are completely audited, much the same as the con- sumer finance industry in Illinois, at least once a year, and the cost is assessed to us `by `the `State of Illinois. Our receipts, payment checks, and counseling fees are thoroughly checked. This has `driven the unethical operator from the field. `Previous to the time that such services were licensed and bonded in the State of Illinois we `had performed this service for families `for the past twenty-five years on about the same `fee basis. It is not, nor is it intended to `be, a lucrative type of business, but is set up for the good of the families and their `creditors. "We are enclosing a copy of our Annual Report for 1966. If you will check our pages you will find that `we assisted 404 families last year. Our debt liquidation through counseling was `$196,532. We `believe that you will be doing a disservice to commerce, which is carried on through the channels of credit and whose life `blood is credit, if you prohibit `credit `counseling `by ethical, responsible firms in Washington, DC. We are certain that machinery for `hona fide firms can be established just as it was in the `State of Illinois. `T'hank you for your attention to this letter, and we hope that you will consider our statements in favor of credit counseling through a licensing and `bonding law. `Sincerely, Mrs. JOSEPHINE F. SHAFER, Assistant General Manager. Mr. `SIsK. `The next witness will be Mr. Ronald L. Snellings, Navy Federal Credit Union, Washington, D.C. Mr. Snellings, will you `take the witness stand. Is `he here? (No response.) Without `objection, Mr. `Snellings' statement, which I believe we already have, will `be made a part of the record. (The statement follows:) PAGENO="0148" 144 DEBT ADJUSTING BUSINESS STATEMENT OF RONALD L. SNELLINGS, DIRECTOR, MEMBER SERVICES DIVISION, NAvY FEDERAL CREDIT UNION BIOGRAPHY For the record, my name is Ronald L. Snellings. I am the Director of the Member Services Division of the Navy Feder ti Credit Union and have ser~ ed in this capacity since July 1961. Prior to that time, I served as Assistant Branch Manager of the American Security and Trust Company. I am a menTber of the Board of Directors of the Metropolitan Area Credit Union Management As- sociation, a member of the board of directors of the Consumer Credit Associa- tion of Greater Washington, and an associate member of the International Con- sumer Credit Association. I am also Certified Consumer Credit Executive and a Certified Public Accountant. I have worked in the field of consumer finance in Washington, D.C. for more than 15 years and have had considerable exposure to the local consumers' debt problems. I am a native Washingtonian. I. INTRODUCTION As an experienced credit grantor and coun elor in consumer finance in the District of Columbia, I wish to give favorable testimony On behalf of House Bill H.R. 9806. II. REASONS FOR ELIM:NATION There are ten reasons for prohibiting the business of debt adjusting in the District of Columbia as proposed by House Bill II.R. 9806. 1. The fee charged for such services-often ILOor 12 percent of each payment in addition to an initial conference fee of $25-adds to the burden the debtor already bears and actually postpones the date when he will be debt-free. 2. The benefits received by the consumer from this arrangOment are extremely questionable Debt adjustors lend no money make no attempt to counsel do not assure that the debt plan devised will leave their victims enough money to live on 3. By promising quick results which can't be delivered, the debt adjustor dc- ters the debtor from seeking the financial counsel which he so badly needs. 4. Educational efforts are nonexistent by the professional pro-rater in Wash- ington. 5. Deceptive and misleading advertising are used to obtain clients. 6. Credit grantors will not cooperate with professional debt adjustors due to the lack of adequate counseling and the reputation maintained in the com- munity. It will be stated by opposers to your bill that credit grantors cooperate because they accept the professional debt adjustors remittances It is true that my organization accepts these checks However we do this because our attorney has instructed us to accept remittances from all third parties for partial payments as it is a normal business practice of the credit union such as-wives remittances for husbands mothers for sons insurance companies banks, attorneys and many others. 7. 25% of the consumers need counseling only, as opposed to pro-rating. The paid professional is interested in pro-rating only since his fees are based' on the amount of `debt funds he handles. 8. `Licensing of professional debt adjustors brings to mind some concern. Almost every skilled or professional person requires some experience and/or' education before he can be licensed. Qualifications of "trained counselors" in use by the professionl debt adjustor is questionable. 9. Reformulation of family financial money management is not possible through the professional debt adjustor without detailed budgetary counseling educational efforts and a direct contributory Effort by the consumer The con sumer without improving his spending habits will redevelop the same problem since he has learned little from his professional debt adjustor. 10. The District of columbia represents a safO refuge for two professional debt' adjuster due to the many surrounding states which have outlawed the profes-~ PAGENO="0149" DEBT ADJUSTING BUSINESS 145 sional pro-rater. (See U.S. Map, Enclosure 1-dark area represents states out- lawing pro~fessiona1 pro-raters ; the light area is D.C. and Maryland.) What I have observed while counseling credit union members and other con- sumer borrowers has led me to conclude that legislation which would merely regulate the professional debt adjustor would not realiy protect the consumer. III. DIFFICULTY OF REASONABLE REGULATIONS OF PROFESSIONAL DEBT COUNSELING `Let's consider the matter of false or misleading advertising. (Bnc'l'osure 2). On 18 August, classified ads appearing in a local newspaper encouraged debtors to "pay all your overdue bills in one easy weekly payment". "Let us help you out of debt fast !" one ad promised. Another ad told debtors that they could avoid garnishment if they would only allow the advertiser to "consolidate your bills, past due or not, into one low payment you can afford". Intended or not, the implication between the lines was that the debt consoli- dator would pay off the debtor's bills immediately and collect from the debtor later in. e-a-s-y installments. Significantly, the ad did not specify the' number of installments to be paid, the amount of each installment that would `be applied to the debt, or the amOunt o~ the service charge that would be imposed for "credit management". Moreover, the ad contained sample weekly payments which, to the unsophisti- cated debtor, would appear to be approximately four times lower than the monthly payments of a licensed loan company, a bank or a credit union lending an identical sum of money. Since the Senate hearings on August 25, 1967, note' how' the complexion o'f the ad for credit advisers `has changed. There are no more statements of consolida- tion, no payment examples and still no statement of `fees which are charged at a rate `of 121%; There is a law in effect in the District of `Columbia which governs fraudulent advertising (Enclosure 3). The first `series `of ads previously `cited bordered on violating this statute. When laws which purport to control misleading advertising cannot eliminate such practices, one `dou'bts that legislation could regulate debt adjustors effec- tively. IV. EXPERIENCES From what I have observed, I would say, categorically, that commercial debt adjustors make little, if any, attempt `to counsel their clients, teach them the fundamentals of sound money management, or show them, really, how to solve their `financial problems. On the contrary, the `debt adjustor aggravates financial distress; he doesn't alleviate it. One credit union `member who patronized a de'bt adjustor told me th'a't her bills were totaled to' determine how much each `credit'o'r was to receive .per month. `The debt adjustor advised the member that the amount of monthly salary remaining would be used for monthly living expenses. There `was no attempt to' set up a budget; no attempt to advise the member how s;be could cut down on expenses; no' `attempt to suggest means of increasing her $5800 per year incom.e. A debt adjustor `could perhaps ar'gue that he spends his time on his clients', and that for this, he deserves 12% o'f the client's weekly payme'nt, `but the time expended is short and the servi'ëe, superficial. Once having determined how much `the debtor owes, the debt adjustor fills out a few simple forms, sends them off periodically to the debtor's creditors and ignores the circumstances which contributed to the debtor's financial distress. For the record, I would like to submit Exhibits 4, `5, and 6 to illustrate the dearth of effort the debt adjustor expends on his clients. These are samples of the forms used by one DC. pro-rater. Sadly, the people who fall for the debt adjustor's spiel are usually those who can least afford it. A random sample of NFCU members who were patronizing debt adjustors include: one GS-7, two GS-6's, one GS-5, one GS-4. Their combined salaries `total $28,967. Their combined debt $28,850. While some people who resort to the debt adjustor are led to do so because of legiti- mate, but burdensome, expenses, it is evident, from reading their records, that most have lost the ability to manage their funds. They have no idea how to ~la~ PAGENO="0150" 146 DEBT ADJUSTING BUSINESS their expenses, nor do they know the proper percentage of their incomes which they can reasonably allot to such needs as food shelter clothing and tranbporta tion much less how much they can afford to spnd on non essentials such as color television sets or trips to Hawaii What these people need is counseling to reestablish good financial habits, and I would like to present an example of what counseling can accomplish. In May of this year, a 26 year old, single government girl earning $6,451 a year fell behind on her payments to the Navy Federal Credit Union. Subsequent conversation with the girl revealed that she owed a total of $4,346.34,-$2,269.22 of which was owed on a 1966 model sports car and $2,077.12 on miscellaneous bills to local department stores,-the credit captive of a major manufacturer, a bank and a credit union. The girl had already contacted a debt adjustor and had forwarded him $158,- or nearly half a month's pay,-for disbursement to her creditors. Only $49 of the $158 was ever disbursed and no attempt whatsoever was made to assist the girl in handling her finances realistically One of our counselors talked with the girl in the case history just cited. He helped her to set up a realistic budget,. advised her to seek part time employment and locate a roommate to share ex penses personally contacted her creditors and made arrangements partial payments where necessary. Currently, this individual has located a roommate to begin sharing expenses, is making regular payments on her debts, and expects to be debt-free by June 1968. It is difficult to say what might have happened to the girl in the case history had she continued to patronize the debt adjustor and had she not been counseled. But I would doubt very much that she would Ever have found herself in a posi- tion to meet her financial obligations Counseling is a must in assisting the overburdened debtor and debt adjustors do not counsel Similar experiences ~ ere cited in the recent series in the Evening Star newspaper of Washington titled Debtor Beware (Exhibit 7) Thirty one other hardship cases laandled lU my office iefieet the following result's: Oiiigirual debts-prior to counseling $263, 505. 5(~ Debt balances as `of 8/1/67-after counseling through pro-rating_~ 133, 357.48 Amount of debt paid $130, 148. 08 49% Percentage of original debt Cost to consumer for counseling service 0 V. SOLUTION The problems of professional debt adjustors have been citel. It must be recog- nized t:here is an apparent need for counseling `service, therefore, a replacement for the professional debt adjustor is necessary if the proposed legislation is passed. If the consumers of this coniniunity are to be taught how to handle their finances, then a non-profit, consumer credit counseling service center should be established. And I might interject that other major metropolitan areas have already established such centers. In other cities, centers now in operation are helping debtors in developing common sense plans for the or(lerly liquidation of debts and they are finding that )`nc-foertli of the people `rC(/Uektifl(/ (1SX'i.St(lnee need only comtn.seling-and 9?ot 8u1)Pr'~~i.xed pro-vcitin fj-to re~to,e flfl(i'IUifl I' Ii (`Gi~1i. Thi.s fact is of major significance and I feel it should be most carefully con- sidered by this committee. I have trie(l to give you reasons why mere regulations of professional debt adjustors is not feasible. I have also tried to present the facts which have led inc to conclude that debt adjustors must is~ elini'iiiated iii the District of Cidunibia. I believe `that financial counseling is the only way that overburdened debtors can be helped effectively and I would urge the local business community to give serious `thought to the establishment of a community supported consumer credit Co1i1lSf~liiig center. Thank you. PAGENO="0151" DEBT ADJUSTING BUSINESS 147 ExHIBIT 4 e~eda~ ~ T~ bFINANCIAL MANAGEMENT 30~ EVANS BLDG. 1420 NEW YORK AVE., NW. WA$HLNGTO?4 O.C. LX 3~7~5 BONDED PROTECTION We the undersigned do hereby request that you accept the terms set forth herein by CREDIT ADVISORS. INC.. so that we can resolve our financial affairs. A review of our indebtedness indicates that we may make a dis~ tribution to all our creditors by ~ your part being Your cooperation in participating in this arrangement will be appreciated. This will enable all of our creditors to receive their share of our income monthly until such time as our indebtedness may be re~ financed or liquidated. If this arrangement is unsatisfactory. please contact CREDIT ADVISORS. 1NC. ~ -~k~- ~ ADDRESS Our Account # Clip here and return lower section ~ ~i_~_~___ Our present balance Our records have been posted Initialed by #203 PAGENO="0152" ExHIBIT 6 ~ FINANCIAL MANAGEMENT 301 EVANS BLOC;. 1420 NEW YORK ~ WASHINGTON o.E.U ~?c~ ~i EX 3-7565 BONDED PROTECTION We the undersigned do hereby request that you accept the terms set forth herein by CREDIT ADVISORS. (NC.. so that we can resolve eur financial affairs. Your cooperation in participating in this arrangement will be appreciated. This will enable all of our creditors to receive their share~ of our income monthly until such time as our indebtedness may be re- `financed or liquidated. Fo~ r-~ ~ j `»=- ~ ~Jt Our Account ~Y~.L.ZL«=~4I Clip here and return lower section 148 DEBT ADJUSTING BUSINESS 1223 A review of our indebtedness i~dicates that we may make a dis- thbution to all our creditors by your part being S.L2~. If this arrangement is unsatisfactory. please contact CREDIT ADVISORS, INC. Our present balance Our records have been posted Initialed by PAGENO="0153" DEBT ADJUSTING BUSINESS 149 EXHIBIT 5 e~edt~ ~ ~ FINANCIAL MANAGEMENT 30~ EVANS BLDG. 1420 NEW YORK AVE. N.W. WASHINGTON D.C. EX 3-7165 BONDED PROTECTION We the undersigned do hereby request that you accept the terms set forth herein by CREDIT ADVISORS. INC.. so that we can resolve our financial affairs. A review of our indebtedness indicates that we may make a ~is- ~ibution to all our creditors by ~ your part being Your cooperation in participating in this arrangement will be appreciated. This will enable all of our creditors to receive their share of our income monthly until such time as our indebtedness may be re- finance4 or liquidated. If this arrangement is unsatisfactory. please contact CREDIT ADVISORS. INC. r~ ~ ~U~' Our Account ~ Clip here and return lower section. Our present balance Our records have been posted Initialed by PAGENO="0154" Uniform Cornrnerci~f Code Stthus (J~ M (D C' 0 `1 0 CD p. pa ci (1 9 .~ 0 o B C) ~ B ,~` - C) ra o ra p B (7,' 0 0 ci, ~;` gq 0 `l* *~,. 0 I `3 `-4 ía 0a PAGENO="0155" PLAN Cr,.il L A'IvJ sole; BILLS RESSINC? 000...S18per week N Pu OARS 000 $25 per week 00 .535 per week ~~R° ~Rt lTn*~k Credit Rsuusos C'eai ~--s Ce. CREDIT ADVISORS 393-7865 393.7265 RlRIORU'LS~~IY 1413 K SR. NW. 2nd Fl. 1 423-4850 - 423.4850 05'. `lEss-a. 41C55'u';NA,n.SE. 277-8181 MoOue NW ~ Cn,,ter 277-8181 3ORHODEISLA';DAVE,NE ~ ~$~ONAL5 7 PERSONALS 7 . Bili Problems? Ippilcatior s up to~$1 5,000 accepted YOU OWE S500 $1000 $2000 PAY as low as S7 wk. 512 wk. $21 wk. FAMILY BUDGET SERVICE Dept. WP - ME Amount owe YDRESS Otlior A 1iLt. N,'rat 1 6 is Lt.i.,eL E~sai DEco 11' 5 ;s;,1 10 ollIsse -ii ;,:`;IiR;ti LI-c Hoarin~oo 25AupustL$67 BILL ~ PAYMENTS - Credit NO CO-SU.sEOs 00 SECURITY Advisors, Inc. wROtE 0t~t5. 393 7865 CREDI ADVISORS MARLOwe';. U;ce-ewe. Cnn. 393-7065 1413 K St. NV!. 2nd Fl. Mu~1toShupp,,,Cwien 277-SRI 3510 RHODE ISLAND AVE NE N-U-;sjo;l>I'D ARIV('. L.i N I IN EICCUOL'O 110 SL/'OII A DEBT BILL PAYMENTS NiLE lOIS lI.isLi;~L Eon; IL- El' `5 11,1 I'! on 11 September 1067 I w CI) z CI) CI) Ci) Enclosure 2 1' I, PAGENO="0156" 152 tEBT AIXrTJSTTNG BUSINESS ENOLOSIJRE 3 FRAUDULENT ADVERTISING It shall be unlawful in the District of Ooiunibia for any person, firm, associa- tion, corporation, or advertising agency, either directly or indirectly, to display or exhibit to the public in any manner whatever, w'hether by handbill, placard, poster, picture, film, or otherwise; or to insert or cause to be inserted in any newspaper, magazine, or other publication printed in the District of Columbia; or `to issue, exhibit, or in any way distribute or di~seminate to the public; or to deliver, exhibit, mail, or send to any person, firm, aSsociation, or corporation an~y false, untrue, or mtinisa'ding statement, representation, or advertisement with intent to sell, barter, or exchange any goods, wares, or merchandise or any- thing of value or to deceive, mislead, or induce any person, firm, association or corporation to purchase, discount, or in any way invest in or accept as collateral security any bonds, bill, share of stock, note, warehouse receipt, or any security; or with the purpose to deceive, mislead, or induce any person, firm, association, or corporation to purchase, make any loan upon or invest in any property of any kind; or use any of the aforesaid methods with the intent or purpose to deceive, mislead, or induce any other person, firm or corporation for a valuable con- sideration to employ the services of any person, firm, association or corporation so advertising such services'. (May 20, 19116, 39 Stat. 165, eh. 130 #1.) Mr. 815K. Do we have a representative from the Metropolitan Wash- ington Board o'f Trade? The witness will state his name for the bera~fit of the reporter. STATEMENT OP RALPH E. BECKER, ff~NER.AL COUNSEL, METRO- POLITAN WASHINGTON BOARD OF TRADE, PRESENTED BY CHARLES C. COON, ASSISTANT EXECUTIVE VICE PRESIDENT Mr. CooN. Thank you, Mr. Chairman. My name `is Charles Coon, Mr. Chairman, and I am the Assistant Executive Vice President of the Metropolitan Washington Board of Trade. Mr. SIsK. If there is `anyone you would like to bring to the witness table with you, you may do so. Mr. CooN. We have a problem here this morning Mr. Chairman. The gentleman ~ho was to present the testimony for the Board of Trade was the general `counsel of our organization, Mr. Ralph E. Becker. Mr. Becker at the last moment found himself unable to be here this morning. If I have the Cha~rman's permission, I would like to read the statement that he would make. Mr. SI5K. All right. Mr. COON. Thank you. My brief statement supporting passage of IELR. 9806, a bill to pro- hibit the business of d~bt adjusting in the District of ColunThia ex- cept as an incident to the lawful practice of law or as an activity engaged ~ by a nonprofit corporation or association, is in accordance with the policy of the Board of Directors of the Board of Trade. Cortunittees of the Board of Trade have studied and reviewed the matter of "budget planners" and "debt adjusting services" on severki occasions during the last ten or twelve years. Policy to prohibit the operation of these services was first adopted in 1958 despite, as might be expected, the general basic attitude o'f business people in opposition to outlawing `businesses of any kind. Inasmuch as Miriam Ottenberg of the Washington Star earlier this year wrote a series of comprehensive articles on the operations of debt PAGENO="0157" DEBT ADJUSTING BUSINESS 153 consolidating firms in the Washington area which have been reviewed by the committee, I will not take the time to discuss the modus operandi of such firms. Let me just say that in our judgnient their services are unnecessarily costly and often fail to solve the problem since reputable business firms do not usually care to deal with them. According to Miss Ottenberg, 21 states, including neighboring Vir- ginia and the City of Baltimore, prohibit the operation of debt con- solidating firms. This is an increase of six states in the last nine years. We are also informed that debt consolidating firms are prohibited in the Dominion of Canada. Since we understand there are twelve states which regulate such operations in some way, it is perfectly clear that the operation of debt consolidating firms has been a matter of national concern. In our judgment there are other and far more dependable services avaih~ble to those who `are in debt. Banks, credit unions and small loan companies operating under state or Federal control can be helpful either in making cash loans to relieve pressures or counseling concern- ing debt settlement without charge. The Legal Aid Society is also available at no cost. We recognize, however, that most of these agencies are not generally used by our low-income people. Therefore it seems perfectly clear that a free credit counseling service operated as a community agency should be established here as it has been in many other large cities of America. In cooperation with District Government, we have joined with the D.C. Chamber of Comnierce in a study of alleged exploitive practices by retailers. We are reviewing the possibility of the organizing of a free consumer education service, similar to services established in other cities. We have asked the Federal Trade Commission, District Gov- ernment agencies, Better Business Bureau, Legal Aid Society and the Neighborhood Legal Services to give us evidence of overpricing, misrepresentation and bad credit practices in disadvantaged neigh- borhoods to determine what recommendations can be developed for lessening or eliminating such practices. The District Commissioners have already announced that they will initiate free consumer coun- seling service in the near future and this should include credit counseling. It is therefore apparent that steps are under way to provide the kind of counseling services that are needed by people of modest means who are in debt and there would therefore seem to be no possible need for these commercial debt-adjusting operations. That is the conclusion of his statement, Mr. Chairman. Mr. Sisic. Thank you, Mr. Coon, for the statement this morning. As I understand your statement, there is a proposal to establish some type of counseling or consumer service here in the District; is that correct? Mr. CooN. Yes, sir. Mr. Sisic. 1-Tow far along is that effort at this time? Mr. CooN. rfhe District Commissioners have expressed their intent to do this. We are cooperating with them and the District of Columbia Chamber of Commerce by examining the evidences that we can get of these kinds of practices and trying to determine what the problems would be in the establishment of a service of this kind. We only just PAGENO="0158" 154 DEBT ADJUSTING BUSINESS within the last month or so came to this agreement with the District Commissioners to try to be helpful in this. There have been some meetings on this but we have got some distance to go before we have any recommendations to make on this matter. Mr. SISK. Has the Board of Trade ma de any study or any specific report on the activities of the Credit Adjustors in this area? Are you or the Board knowledgeable of the experiences in this area in the past few years? I notice your statement does not include any particular information along that line. Knowing generally and having high re- gard for the Board of Trade and your activities, I was wondering if you had a study committee looking into this matter. Mr. CooN. I do not think so for some time, Mr. Chairman. This state- ment, I am sure, reflects a policy of the Board that has been established for some years and has been periodically reviewed and in the judg- ment of the members of our Board there has not been reason to change it. On that basis I would be glad to let the committee know further on that, but I am not aware of any recent study of the kind that you mentioned. Mr. SI5K. The overwhelming majority of the business houses, par- ticularly in downtown Washington are members of the Board of Trade, are they not? Mr. COON. Yes, sir. Mr. SISK. Are you aware as an individual or in conversations with businessmen as to their general attitude toward helpfulness or lack~ of helpfulness, if that be true, of credit-adjusting firms? Mr. CooN. No, sir, Mr. Chairman. I am not competent to answer that question. I would be delighted to try to get an answer for you but I do not feel competent to try to comment, if I may. Mr. SIsK. In other words, to the extent to which local firms may be cooperating in the credit consolidation programs a matter in which you are not informed? Are you yo~irse1f connected with any local business? Mr. CooN. I am the Assistant Executive Vice President of the~ Board, Mr. Chairman. I am Mr. Press' assistant in a staff position in the Board. I am sure that if Mr. Becker were here with you this morning he could answer your questions for you. I am just not corn- petent to do it on this subject. Mr. SI5K. Any questions of the gentleman? Mr. WALKER. No. Mr. SISK. Thank you, Mr. Coon, for your appearance. Mr. CooN. Let me express Mr. Becker's regret at not being here~ this morning. Mr. SI5K. We regret he was unable to appear. Mr. COON. Thank you. Mr. SI5K. Is Mr. Zimmer in the room? (No response.) Mr. 515K. Without objection, Mr. Zimmer's statement will be made~ a part of the record. (The statement follows:) STATEMENT OF ANDREW P. ZIM:~EE, ATTORNEY My name is Andrew P. Zimmer, and I am a member of the Bar of the District of Columbia and have been in general practice here some six years, presently with an office at 1342 "H" Street, N.W. PAGENO="0159" DEBT ADJUSTING BUSINESS 155 During the course of that time I have been consulted by a number of persons whose personal debts exceeded their ability to pay them, or who faced an un- certain employment future because of the threat of garnishment or creditor pressure upon their employer. Some had gone to local debt-consolidators whose advertising had caught their attention, others sought to deal directly with sev- eral creditors to compose or extend their indebtedness, still others had made up their mind to declare themselves as bankrupts. In a half dozen or so cases I felt that an effective and equitable solution to their problem could be achieved through filing a "Wage Earner's Plan" under Chapter XIII, of the Federal Bankruptcy Act, and I counselled these clients to do this. My purpose in appearing before this subcommittee, thus, is simply to detail and explain a little, the kinds of debtor relief presently available under Chapter XIII and how it operated in certain examples drawn from my own experience. Basically, Chapter XIII was added to the existing bankruptcy laws in 1938 to provide for satisfaction of creditors' claims out of future earnings of a debtor under a Court approved plan of composition or extension of the debts. The debtor must merely show that his principal income is derived from wages, salary or commissions, and the size of his income does not affect eligibility. Upon filing his petition and paying Court costs of $31.00, the Court will issue an order restrain- ing the creditors from interfering with his property or earnings, and directing them to submit proofs of their claims and acceptances of the debtor's proposed plan. The "plan" is simply that part of the petition which states how much the debtor proposes to allocate from his earnings to pay his creditors, the frequency of such payment, and other pertinent Information. A first meeting of creditors is called, where the plan will be confirmed if approved by a majority in number and amount of all unsecured creditors whose claims have been proven and allowed. Now this coercion of the minority of disapproving unsecured creditors, as well as the exclusion of secured creditors who reject the plan, is one of the chief advantages of Chapter XIII over an individual attempt on part of the debtor to seek a modification of his indebtedness. The Court will confirm the plan when it appears that it is in the best interests of creditors and is feasible to carry out. It will appoint a trustee to receive payments from the debtor directly or wage deductions from the debtor's employer, and thereafter make disbursements quarterly to each creditor pro-rata, until the plan is completed or ended for other reasons. The trustee is allowed a fee of 5% of monies actually disbursed, plus actual expenses, usually totalling another 21/2%. However, the debtor invariably saves a good deal more than this, since the accumulation of interest on his unsecured debt stops upon the filing of the plan. This often can be a substantial saving, especially if any of the creditors are lenders operating under small acts permitting interest in excess of 6% per annum. The following are persons I have represented in Chapter XIII proceedings in Washington, D.C.: 1. Government employee, male, age 50, single, many years with his agency, very anxious over debts totalling $2,900. His personnel officer had received numerous creditor notices, and the employee had unsuccessfully sought help from a debt adjuster. A plan proposing monthly payments of $135 was confirmed, all creditors accepting, and fully carried out over four years, final disbursements being made this spring, with all creditors paid off in full. 2. Government employee, female, age 45, single, a number of years in her agency, but had lost her position at a substantial grade because of heavy in- debtedness and some reckless financial dealings. She was in serious trouble over this, completely demoralized, had lost all her records, but was determined to pay back some forty creditors a total indebtedness of $8,000. Her plan, proposing monthly payments of $100 was deemed feasible in part because of her evident good intentions and perseverence. Four years later, this plan is still active, pay- ments were increased to $150 monthly, and as result of relief from her creditors' pressures, the debtor has regained and even advanced above her former position in her agency. 3. Medical technician, now a hotel employee, 24 years old, single, who bad written dishonored checks totalling $700 and faced serious consequences. His plan proposed to pay $60 monthly, was accepted by all creditors, and has per- mitted him to advance in his new employment without fear of garnishment or other penalties. This plan is current. 4. Construction company estimator, age 30, divorced, who had written dis- honored checks and owed debts totalling $1850, was subject to penal action and / creditor pressure that would disaffect any employer. His plan to pay $100 monthly PAGENO="0160" 156 DEBT ADJUSTING BUSINESS was confirmed, is current, and he has reestablished credit and been given greatly increased responsibility in his job. 5. Electrical estimator, age 32, married with child, who owed $1500 falling due at about $150 monthly, which he could not meet. His plan proposed initial payments of $40 a month, which the Referee of the Maryland District ultimately would not approve. However the delay between the plan's filing and denial per- mitted debtor to improve his situation to a point where he can now himself satis- fy his creditors. 6. Government employee, messenger, age 30, married, with three children; debts about $1500. His plan proposed payments of $31 monthly, but failed after several months and was dismissed by the Court, with a small distribution made to creditors, At this point I wish to give credit to the enlightened approach of the Honor- able John A. Bresn'ahan, the Referee in Washington, D.C., and to Roger M. Whelan, the standing trustee, in interpreting the legislative intent of Chapter XIII as being one of getting moneys from the debtor to the creditor as quickly and efficiently as possible, and then encouraging the debtor to bring problems arising during the period of the plan promptly and candidly to the attention of the Court. The committee may wonder what might happen if there should be a sudden growth or rapid increase in the number of filings of such petitions. One juris- diction confronted with this problem, the Southern District of Ohio (which in- cludes Cincinnati), had over 2000 active plans, receiving between 20 to 2~5 new filings a week and was disbursing to creditors about $70,000 per month in 1964. It was realized that manual `bookkeeping was no longer satisfactory, and some mechanization appeared to be called for. A changeover to data processing was made and felt by the trustee to be the answer to his problems in trying to keep efficient and accurate records of his operation. and incidentally, permitted a 20% reduction in the total figure for trustee's fee and handling costs in that district.1 Kansas City, Kansas, is another jurisdiction that has successfully dealt with the challenge of a great rise in filings due to community and local bar acceptance of the Chapter XIII remedy, by turning to automatic data processing. In 1905, 1,362 cases were closed in Kansas District Court, according to its standing trustee, with almost $2,000,000 paid to creditors.2 Although discussions appear from time to time,3 I feel that not enough mem- hers of the bar or the community are aware of the remedies available for deb- tors' relief under the provisions of Chapter Xiii. Particularly where the debtor's separation is aggravated by dishonored checks outstanding, or high interest small loans in default, does Chapter XIII afford remedies not available to the debtor acting on his own or through a representative. Based on the average cost to an average debtor of about 1/6 of his indebtedness, it must be borne in mind that also in the average case, this would be largely offset by the lapse of inter- est falling due after the filing date. Therefore from both the point of view of effecting cooperation by creditors and economy to the debtor, Chapter XIII proceedings have much to recommend them. Mr. SISK. Do we have Mr. B. H. Feldman in the room representing the Budget Counselors, Inc.? Without objection, the statement of Mr. Feldman on behalf of Budget Counselors, Inc., will be made a part of the record. (The statement follows:) 1 Article, "A Wage Earner's Plan That Works," by William R. Schumacher (trustee in Southern District of Ohio), p. 64, Vol. 19, No. 2, SprIng 1965, Quarterly Report, Personal Finance Law. 2 by Claude L. Rice, ibid., page 69, Vol. 20, No. 2, SprIng 1966. This article, by the standing trustee In the Kansas City District, contains a statistical breakdown of how plans closed durIng 1965 progressed after filing, shawlng 610 completed, average period 47 months, creditors 99-100% paid; 564 dismissed before completion average period 31 months, `with creditors 20-52% paid off (depending on their class) ; 188 converted Into bankruptcy adjudications, an average of 25 months after filing, with creditors receiving 47-73% of claimed amount. A total of almost $2,000,000 was disbursed to creditors, or about $1,500 average per case, with about $275 paid additionally by the average debtor for his attorney's fee, Court costs, trustee's fees and coats, constituting an average of one-sixth of his total payment. See Quarterly Report, Personal Finance Law, 115 Broadway, New York, N.Y., which keeps abreast of developments In this field, Including recent legislative proposals, and court opinions. See also: "Relief for the Wage Earning Debtor: Chapter XIII or Private Debt Adjustment ?", Northwestern University Law Review, Vol. 55, July-August, 1960, No. 8.; U.S. Supreme Court opinion in Perry v. Commerce Loan Co., 15 L. Ed. 827 (1965). PAGENO="0161" DEBT ADJUSTING BUSINESS 157 STATEMENT OF B. H. FELDMAN, PRESIDENT, BUDGET COUNSELORS, INC. My name is B. H. Feldman, and I am President of Budget Counselors, Inc. in Washington, D.C. I requested this opportunity to submit a statement to this Subcommittee in order to express my views on the bill relating to the debt miman- agement business which you introduced, just as I had requested the opportunity to testify on a siniilar bill introduced in the House in 1958. 1 said then and I say now that there is a definite need for our type of service. This industry performs a definite service to the debtor and the conimunity. Unfortunately, there are many that do not know how to control their finances, I know that I am qualified to counsel these individuals because for many years I was in the consumer finance and small loan business. Therefore, I am fully ac- quainted with the facts. I believe that as long as the business community overloads these poor people there must and should be someone to help them stand on their two feet and try to help theni meet their obligations within their income instead of having them go from one loan company to another. In a number of cases, some of these people have gone to as many as six loan companies and four banking histitutions and are forever "robbing Peter to pay Paul". As you know, interest, service charges and other hidden charges are added to these accounts. Therefore, the debtor gets further in debt. This finally leads to harassment, litigation and/or repossession. In icy opinion, the debtor can not borrow his way out of debt. I fight for the debtor. I analyze all of his debts (and in many cases, he is not even aware of the total), and analyze his income and expenses to determine how much he needs to meet his current expenses and bow much he can use to liquidate his past indebtedness. I also counsel him as to how to manage his fi- nances in the future. The debtor is apprised of the various interest and service charges included in his total debt. We then try to liquidate this type of debt as quickly as possible by a payment that the debtor can afford. I have operated this business since 1955 and take pride in my many accomli- plishments on behalf of the debtor. I have letters from both cush)mers and their creditors to substantiate this. The majority of the creditors not only don't object to my services, but are happy to cooperate because they now feel that the debtor realizes his obligations and has taken his first step to aecomphish this. In con- tacting the creditor, we verify the balance, include a payment, and submit a pro- posed schedule of future payments. The creditors know of my reputation for fast and courteous service. The debtor also is advised as to his status periodically. We specialize in helping Government and Military personnel stationed in the local area and all over the world. The many individuals who are transferred from place to place are in particular need of a service such as ours. The local debtors we help also need this service. No doubt there have been abuses in our industry just as there have been abuses in other unregulated businesses. This should not justify outlawing my business. In the small loan industry and the savings and loan industry, there were many abuses and adverse publicity before they were regulated. But these industries were regulated and not prohibited. The most recent area trouble was in the Mary- land savings and loan industry. If the Maryland companies had been regulated earlier, the many losses to the public would not hav~ occurred. The same neces- sity for public trust and regulation applies to our business as well. I think that much of the adverse publicity and opposition to debt counseling conies from the public not knowing the facts, and is created by creditor interests which are themselves adverse to the public interest. I don't oppose the so-called non-profit organizations, but these associations don't reach enough of the public. If they are formed, they should not be ex- clusive. They lack the necessary funds to advertise to the public that they exist and to pay competent people to advise the debtor and take an interest in hi~ problems. If these associations are creditor oriented, as they always seem to be, the possible abuses are even greater than the problems we now have. Beside the costs necessary to administer this type of association, which will be added to the businessmen's sale prices to the public, specific cases can be mishandled by passing on pertinent information to some of the creditors backing the or- ganization. I have an article, which appeared in the Washington Evening Star on May 7, 1958, stating that the hearing on that date before a House subcommittee, sched- uled for 30 minutes broke up two hours later, and my integrity was unques- tioned by the subcommittee. Rather than outlawing our business, the lawmakers were questioning the constitutionality of the legislation proposed to bar businesses 84-181---67-11 PAGENO="0162" 158 DEBT ADJUSTING BUSINESS such as mine. I can recall at that hearing in 1958 that a representative of the Washington Board of Trade described us as "interlopers", only one of the many names we have been called before and since then. When this person was asked by the Subcommittee to identify himsel, he stated he was a manager of a loan company. In reply to his criticism of our business, Congressman Multer asked him whether it was right that he keep these people in debt and wrong for me to try to help them get out of debt. The gentleman did not reply and took his seat. In fact, there have been attempts to legislate "truth about lending." I submit to you that the same people who would support the elimination of my business also have been against "truth about lending" legislation. I ask you to review the alternatives to my service. Bankruptcy, high interest rates, higher prices charged by the community to cover the losses incurred and :repossession of the debtors' assets. None of these are beneficial. In 1957, we were visited by the License Bureau of Washington. After going ~over our operations throughly, they left completely satisfied and firmly con- vinced that we were performing a most worthwhile service. I again ask you, as I have asked many times in the past, to regulate the in- dustry, but don't outlaw us. You will find that the community will benefit, and my twelve years of hard work will not have been in vain. Thank you.. Mr. SI5K. Is Mr. John Immer, of the Federation of Citizens Asso- t~iations of the District of Columbia, in the room? (No response.) Its report will be included in the record at this point. (The report referred to follows:) FEDERATION or OrrizicNs ASSOCIATIONS OF THE DISTRICT OF COLUMBIA-REPORT OF THE LAW AND LEGISLATION COMMITTEE This Bill, introduced by Mr. Diggs, would regulate the `business of debt adjust- ing In the District `of Columbia other than as an incident to the practice of law. Debt adjusting, also known as budget counseling, budget planning, budget service, credit advising, etc., involves the collection of regular periodic payments from a debtor, usually faced with obligations which he cannot meet, with the express purpose of arranging with the contracting party's creditors to take less money or accept smaller or less frequent payments. For such services the debt adjustor cha'rgOs some percentage of the payments received by him, such fee being deducted before creditors share in the payment. While there are several of these debt adjusting companies which apparently operate a legitimate business, many have quickly sprung up and as quickly dis- appeared, usually with some of their clients' money. This type of outfit preys upon people who can least afford to take the loss. It has been proposed to outlaw these debt adjustors, but although this may be an expensive way to get one's debts paid, there are many people, mostly those with limited intelligence or very little education or both, who need help in order to extricate themselves from financial ruin, loss of jobs, and the misery this en- tails. Therefore, your Law and Legislation Committee believes that a Bill fairly regulating such business would be better than an attempt to abolish it, and that H.R. 829 is such a Bill. The following resoluion is therefore recommended: Be it resolved by the Federation of Citizens Associations of the District of Coiwnibia in meeting assembled tMs 8th day ~t Jnne 1967, That it endorses H.R. 8929 and urges prompt passage thereof, and that copies of this resolution be sent to the D. 0. Board of Commissioners and the House and Senate Committees on the District `of Columbia. Approved unanimously by the Federal on Juiie 8,1967. JAMES A. WILLEY, Cha4rman, Law and Legislation Committee. JOHN R. IMMEE, President. Mrs. EDWARD B. Monais, Secretary. PAGENO="0163" DEBT ADJuSTING BUSINESS 159 Mr. SIsK. That concludes the list of witnesses. Are there others in the room who desire to be heard on this subject at this time 9 ( No response) Mr SIsK If not, without objection , ~ e have for the recOrd a series of letters and comments, first one from the American Federation of Labor and Congress of Industrial Organizations Without objection, their statement will be made a part of the record. (The statement follows:) STATEMENT OF F. H. MCGIJIGAN, LEGISLATIVE REPRESENTATIVE, AMERICAN FEDERA- TI01\ or LABOR AND CONGRESS OF INDUSTRIAl ORGANIZATIONS I am a Legislatn e Representative of the AFL-CIO This statement is submit ted on behalf of the AFL-CIO and the Greater Washington Central Labor Council. Both organizations whole beartedly support an. 9.806 introduced by Con- gressman Broyhull which if enacted will prohibit the business of debt adjusting in the District ot Columbia except as an incident to the lawful practice of law or as an activity engaged in by a non-profit corporation or association. The debt adjustment or debt pooling commercial enterprises have proved in many cases to be an abusive scheme whereby the debtor has been deceived and overcharged. The debt adjuster has frequently imposed a heavy economic burden on the al- ready overloaded debtor. Frequently the debtor receives no effective relief because his property is seized or his salary attached notwithstanding the ad- juster's announced plan to pro-rate his income among his creditors. We are opposed to H.R. 8929 because even the best intentioned and most ex- tensively regulated pro rater is not in a position to render effective ielief with out the consent of the creditors. We are told that consent of the creditors to ac- cept payments from commercial debt pooling firms in the District of Columbia is rarely obtained. Moreover, budget planning, advice and guidance is available through the con- sumer counselling programs of the AFL-CIO Community Services Activities and other non profit agencies and in addition overburdened debtors may obtain loans to consolidate debts thru credit unions and other credit agencies together with free budget counselling and advice. Because the debt adjustment racket has hit especially hard at the working people of the country it has been a matter of particular concern to the AFL-CIO. At it's meeting in February 1961 the federation's Executive Council declared flatly "the debt adjusting business regulated or unregulated, is not economically or socially desirable as a commercial activity and should he eliminated. As a result of the alarms sounded by labor and other organizations statutes outlawing the debt pooling business have passed in 21 states. They include, Arkansas, Delaware, Florida, George, Kansas, Maine, Massachusetts, Missouri, New Jersey, New Mexico, North Carolina, Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina, Virginia, West Virginia, Texas and Wyoming. Baltimore city has also prohibited it. Some states have regulated this business. However, most observers agree regulation is not sufficient and that the best course is to prohibit outright a practice that seldom gives the promised relief and often victimizes the suffer- ing debtor. We suggest that every member of this committee read "Debtor Beware" (copy attached) the 1967 reprint of a series of articles that appeared in the Washington Star which expose the "debt-consolidating" firms in the Washington area. We further pledge our support to see that commercial debt pooling firms are outlawed in. the District of Columbia. Mr. SIsK. Without objection, a letter from Credit Management Company of Des Moines, Iowa, signed by Mr. John Robb, Executive Manager, will be made a part of the record. (The letter fOllows:) PAGENO="0164" 160 DEBT ADJUSTING JBUSINESS CREDIT MANAGEMENT COMPANY, Des Moines, Iowa, August 9, 1967. Hon. B. F. SISK, House of Representatives, Washington, D.C. Less than a year ago the writer, as Chairman of the Finance Subcommittee for the Governor's Commission on Consumer Problems, held hearings in Des Moines in regard to the practices of some debt management or pro rating organi- zations. Frankly, I was shocked at some of the testimony given during this hear- ing, copies of which I am attaching to this letter. As Executive Manager of a non profit debt organization, I was extremely con- cerned that the testimony that was given would besmirch the whole industry, because we who are working in the credit industry day after day know that these people have to have some place where they can go, and (1) secure advice about their problems; (2) If necessary, actually take over the management of the money of the people involved. Debt management, when run legitimately and under close regulation, can be extremely beneficial to those who are having money management problems. Our own organization Is owned and controlled by the Consumer Credit As- sociation of Des Moines, which too is a non profit organization, chartered for the betterment of credit conditions for both the debtor and the creditor. Handling some of these problem children is not as easy as it would seem on the surface, arid the cost of administering the program runs fairly close to 11% per case, based on the theory that the subject will need a three year program to get out of difficulty. Probably one of the most knowledgeable persons, at the present time, about some facets of debt management would be Perry B. Hall, Assistant Director, The National Study Service, San Anselmo, California. Mr. Hall delivered a lecture, just a short time ago in regard to debt management organizations, in which he stated that he found the so called free debt management organizations spent more time trying to raise funds to carry OIL their activity than they did th counselling individuals. One of the most knowledgeable individuals in the `field of debt management is an individual by the name of Price Patton of Chicago, Illinois. Mr. Patton has had about 20 years experience in the field of debt management and has handled both what could be referred to as a profit making organization, and a no charge organization. I am enclosing a copy of the law which was passed here in the State of Iowa, and if you were to get such a law passed in tiLe District of Columbia, I am sure you would find that the "fast buck boys" would Leave for other climates. One provision, which I felt, should have been included in this law, and which wasn't, was the one covering advertising. If the law had stated, that instead of the Banking Department checking out advertising, that "it is illegal to advertise" this would have put an end entirely to the type of operations, which apparently' you are going to investigate very shortly. It is regrettable, in this day and age, that a few unscrupulous individuals can cause so much difficulty for an industry (the Credit Industry as a whole), as to put our whole industry in a bad light. Sincerely, JOHN II. ROBB, Ecoecutive Manager. Mr. SIsK. Also, we have a letter from Mac.omb Credit Adjustors of Mount Clemens, Michigan, signed by Mr. Irwin King. It will be made a part of the record. (The letter follows:) MAcOMB CREDIT ADJUSTORS, Mount Clemens, Mich., August 21, 1967. Hon. B. F. SinK, House of Representatives, Washington, D.C. DEAR CONGRESSMAN: I have just learned that you, as Chairman of Subcom- mittee #5 of the House District Committee, are preparing a call for hearings on Credit Counselling and Debt Adjusting to determine whether the Congress will be asked to regulate or prohibit professional credit counselling in the District of Columbia. It is the "regulate or prohibit" phrase that motivates this intrusion upon an already busy schedule. However, I am hopeful I will furnish some infor- PAGENO="0165" DEBT ADJUSTING BIJSINESS 161 mation that will assist you and your Committee to filter through the numerous facts, both the well warranted and the iii conceived, that are so prevalent on this subject. While I have no business interest in the function of credit counselling in the District, I do have a dedicated and personal interest and concern in the profes- sion as a whole. I see daily the good it is doing and has done in the solution of the problems of the debt ridden. Its establishment was not brought about through the selfish planning of individuals with an eye out for a profit. The profession came into being by the demand and need of families and individuals floundering in debt and gravely in need of experienced and qualified direction. It has grown over the years due to the increased demand for its services. To prohibit any such function is to ignore and deny this entreaty by those in need of this service. There are many promoting the opinion that professional credit counselling is unnecessary. They make every attempt to ridicule and embarrass those that seek its help. Upon examination, these advocates reveal their true purpose when their altruistic cloaks are removed to reveal the credit grantor, the lender or the col- lector. By their enthusiastic efforts to destroy or eliminate the profession, they prove the need of professional and qualified assistance for the over-indebted. The effectiveness of its service is shown in some measure by the virulence of the attacks of its foes. Only the very naive could support or take up their "cry" for the elimination of this service. Their intent and purpose is much too obvious. The cause of debt adjustment is furthered by the formation of so-called "free" consumer credit counselling services throughout the Country. These firms are sponsored agencies, supported largely by credit firms, especially small loan com- panies. The establishment of these programs appear hypocritical in view of the fact its sponsors are promoting the opinion professional credit counselling is unnecessary. The fact these programs are creditor orientated leaves a doubt "if these plans will be of long-range benefit to the public, since creditors are naturally concerned with maintaining a high volume of credit activity." Regardless, their information adds to the evidence supporting the need of credit counselling. The true requisitness of credit counselling is best proven by those that seek its service. These are not debtors that seek to "cheat" their creditors or evade their just debts. They are families that have found themselves foolishly and unwisely overburdened with debt. They have every desire to meet their respon- sibility, but little knowledge or, in some cases, will power to find the solution to their problems. Most have lost communication with their creditors. They need direction and supervision. The ethical and professional counsellor provides this link. The numbers seeking this service have grown greatly and rapidly during the last five years. Many of these have been floundering for years with little or no appreciable result. For many, their total debts have snowballed. This is due to their "borrowing from Peter to pay Paul" approach to solve their debt problems. Professional counselling, through constant supervision and planning, provides the solution they are seeking, and the majority are successful. The question arises as to why they seek this service. Are they lured to profe~- sional counsellors by promises of an easy life and small payments to creditors. For the uninformed to read the cheap advertising and come-on ads of a few firms, operating under the guise of professional counsellors, it is easy to assume that such is the case. But, the number of this type of firm are few in proportion to the total in operation. Whenever a need arises, there are always the few who try to use the situation purely for personal gain. This type should not cast a reflection on the majority. This majority provide a needed service and this fact must be heeded. The average creditor will agree that most debt counsellors are performing in an ethical and constructive fashion. Regardless the opponents of debt counselling continue to feed their fires with stories on the operations of the mentioned few. I had the displeasure of reading the series of articles in the "Washington Star" that made an attempt to establish the opinion that the operation of the culprit firms, featured in the article, was that of all counselling firms. If this were true, this letter would not be necessary because there would he no credit counselling firms in operation. The opponents of debt counselling may assume that debtors are stupid, but we, who work with them, have a much higher opinion. The subject of "luring" debtors is most interesting to me. The ethical counsel- lor finds the mentioned advertising more distasteful than the average. Most debt counsellors operate on reputation and referral. My office, the oldest in Macomb Ccunty, third largest County in Michigan, has operated without advertising for the last seven years. We are proud to continue to maintain a volume of new business as large or larger as any of I be so called advertising firms. We pay no PAGENO="0166" 162 DEBT ADJUSTING BUSINESS premium to the party making the referral. Our Law in Michigan prohibits any such payment, but, this office made no such payment before the Law went into affect. We rely entirely upon reputation and service for referral. To do so demands we perform a needed service with a successful result. We are doing just that, and so are the majority. As one final point on the subject of the necessity of this profession, let me quote from the Federal Reserve Bulletin, March 1967, *page 347: "(during 1966)-~personal bankruptcies kept rising at a rapid rate. The number filed in- creased by over 13,000 last year, and the total for the year was more than triple that of a decade ago. Bankruptcy is often thought of as a procedure used primarily by businesses, whereas in fact it is used far more often by individuals. Moreover, the nonbusiness share of total bankruptcies continues to grow. In 1956 it was 85 percent; last year it was 91 percent." It appears the need for professional assistance is growing and prohibition of the only service available to offset the disaster of bankruptcy should be avoided. In "A Study of Debt Adjustment in Michigan" a doctoral thesis submitted January, 1959, to the University of Southern California, Dr. Bud R. Hutchinson, surveying operations of private debt adjustors in Michigan, found that many were doing a good job. Only a few firms were operating in a way to indicate the need for state regulation. He concluded: "Since debt adjustment, if done well, can make a valuable contribution to the rehabifitation of some debt- oppressed individuals and since debt adjustment, if unregulated, can work a hardship upon such individuals as well as others, regulation of this business is urgently recommended." A regulatory, licensing law went into effect in Michigan, on January 1, 1962, and has since been considered by many as a "Model Regulation." My office, operating before the Law, found no difficulty operating under the Law. In fact, the ethical Counsellor prefers to operate under regulation. The majority of the unethical operators left the State when the Law went into effect, and are now operating in unregulated States. Similar regulatory bills have been put in effect in other States, most recent being Connecticut and Nebraska and, it is my understanding, a judiciary com- mittee in Rhode Island has just recommended passage of a bill in that State. The need Is obviOus throtighout the Country, and legislators are rising to the o~c&slon by providing a regulated and controlled process that will provide the answer to the problem. Let me thank ~rou for your time. I believe deeply in credft and debt counselling, because I work daily with those that need its services, and could go on for hours, but I know your time is valuable. Let me volunteer my personal services to supply you with facts or figures or any information you may feel you or your Committee could use to reach logical decision on this subject. I would be pleased and proud to furnish you with whatever information you may desire. I shall look forward to 3'our request. Again, thank you. Sincerely, ERwIN R. KiNo. Mr. SIsK. We have a letter to our colleague and a member of this committee, the Hon. Brock Adams from Washington State. The letter will be made a part of the record. Also, an enclosure which he has presented, which is the law adopted by the State of Washington, re-. lating to debt adjusting. These will be made a part of the record. (The letter and enclosure follow:) Boonu, GATES, DOBaIN, WAKEFIELD & LONG, seattle, september 12, 1967. Hon. BRoOK ADAMS, House of Representa~ti~ves, (Yan,aon Office Bwildin,g, Washington, D.C. DEAR Mu. ADAMS: This letter will confirm our telephone conveisa*tion with you this afternoon. We advised you that we represent the Pacific Northwest Associa- tion of Credit Counselors, a `trade association of firms which engage in the debt adjusting business in the Northwest. Our clien1~s are greatly concerned about certain legislation now pending before the House Committee which deals with the affairs of the District of Columbia. As we understand it, this legislation would prohibit the `debt adjusting busine~s in the District. Because of the importance PAGENO="0167" DEBT ADJUSTING BUSINESS 163 which is naturally attached to legislation adopted by the Congress, even though in this instance only affecting the District of Columbia, our clients are greatly concerned and request your aid in opposing it. We represented the Association in the 1967 session of the Washington Legisla- ture and cooperated with the State Attorney General, organized labor and other groups in urging the Legislature to enact a law which would regulate the debt adjusting industry in this state. Such legislation was enacted. From all reports it is effectively regulating the industry. Enclosed are two copies of Substitute House Bill No. 16 setting forth the legislation as enacted. In essence, this legislation requires each debt adjusting firm to obtain a license from the State and to become bonded. It also limits the amount which can be charged and requires periodic reports to the debtor. The members of the Associa- tion which we represent actually assisted in the drafting of the Bill because they were most anxious to eliminate troin the industry the firrne which were causing all of then) to suffer from a public relations standpoint. The writer firmly believes that there is a place for this type of business. We have seen debt adjusting firms actually save people from bankruptcy. In our own practice we have had miany occasions to refer clients to the reputable debt adjust- ing firms rather than seek the more Urastic and far more painful remedy of bankruptcy. In addition to saving the individual's self respect, the debt adjusting firni enables his creditors to be paid We found that much of the pressure behind legislation which would ban this type of business actually came from the small loan lobby. Apparently, the small loan companies would like to be the only source of relief to the hard-pressed debtor other than bankruptcy. The debt adjusting firms constitute competition for these firms. We sincerely appreciate the time which you gave us on the telephone and we hope that you will be able to work against enactment of prohibitory legislation and instead in favor of a regulatory Bill for the District. Very truly yours, ROT3EIIT A. STEWART. SuBSTITUTE HousE BILL No. 16, BY COMMITTEE ON BUsUNE55 AND PRoFESsIoNS (State of Washington, 40th Regular Session) Read first time February 25, 1967, and passed to second reading. AN ACT Relating to debt adjusting; providing for the supervision, regulation, licensing and bonding of debt adjusters and debt adjusting agencies; and prescribing penalties. Be it enacted by the Legislature of the State of Washington: New section. Section 1. Unless a different meaning is plainly required by the context, the following words and phases as hereinafter used in this act shall have the following meanings: (1) "Debt adjusting" means the managing, counseling, settling, adjusting, prorating, or liquidating of the indebtedness of a debtor, or receiving funds for the purpose of distributing said funds among creditors in payment or partial payment of obligations of a de)~tor. (2) "Debt adjuster", which includes any person known as a debt pooler, debt manager, debt consolidator, debt prorater, or credit counselor, is any individual person engaging in or holding himself out as engaging in the business of dept adjusting for compensation. The term shall not include: (a) Attorneys at law, escrow agents, accountants, broker-dealers in securities, or investment advisers in securities, while performing services solely incidental to the practice of their professions; (b) Any person, partnership, association, or corporation doing busine~ under and as permitted by any law of this state or of the United States relating to banks, small loan companies, industrial loan companies, trust companies, mutual savings banks, savings and loan associations, ~uilding and loan associations, credit unions, crop credit associations, development credit corporations, indus- trial development corporations, title insurance companies, or insurance companies. (c) Persons who, as employees on a regular salary or wage of an employer not engaged in the busines of debt adjusting, perform credit services for their employer; (d) Public officers while acting in their official capacities and persons acting under court order; (e) Any person while performing services incidental to the dissolution, wind- ing up or liquidation of a partnership, corporation, or other business enterprise. PAGENO="0168" 164 DEBT ADJUSTING BUSINESS `(f) Nonprofit organizations dealing exclusively with debts owing from corn- ~mercia1 enterprises to business creditors. (3) "Dqbt adjusting agency" is any partnership, corporation, or association ~engaging in or holding itself out as engaging in the business of debt adjusting. (4) "License" means a debt adjuster license or debt adjusting agency license issued under the provisions of this act. (5) "Licensee" means a debt adjuster or debt adjusting agency to whom a license has been issued under the provisions of this act. (6) "Director" means the director of the department of motor vehicles. New seotioa. Sec. 2. No debt adjuster, debt adjusting agency, or branch office of any debt adjusting agency may engage in the business of debt adjusting within this state except as authorized by this act and without first obtaining a license from the director. New section. Sec. 3. An application for a license shall be in writing, under oath, and in the form prescribed by the director. The application shall contain such relevant information as the director may require, but in all cases shall contain the name `and residential and business addresses of each individual applicant, and of each member when the applicant is a partnership or associa- tion, and of each director a,pd officer when the applicant is a corporation. Except as provided hereinafter in this section the applicant shall pay an inves- tigation fee of fifty dollars and a licensing fee of fifty dollars: PROVIDED, That a branch office of a licensed debt adjusting agency need not pay an investi- gation fee but only the licensing fee. If a license is not issued in response to the application, the director shall return fifty dollars to the applicant. An annual license fee of fifty dollars shall be paid to the director by January 1st of each year. If the annual license fee is not paid by January 1st, the licensee shall be assessed a penalty for late payment in the amount of twenty-five dollars. And if the fee and penalty are not paid by January 31st, reapplication for a new license will be necessary, which may include taking any examination prescribed by the director. The applicant shall file a surety bond with the director or in lieu thereof the applicant may file with the director a cash deposit or other negotiable security acceptable to the director and under conditions set forth in section 4 of this act: PROVIDED, That each branch office of a debt adjusting agency shall be required to be bonded as provided herein, but no bond will be required of an individual applicant while he is employed by a bonded debt adjusting agency or branch thereof. The applicant shall furnish the director with such proof as the director may reasonably require to establish the qualifications set forth in section 6 of this act. If the applicant is an individual person making an original license application he shall pay an examination fee of fifty dollars. If the applicant is app1ying for a debt adjusting agency license it shall furnish the director with complete forms of all contracts and assignments designed for execution by debtors making any assignments to or placing any property with the applicant for the purpose of paying the creditors of such debtors, and complete forms of all contracts and agreements designed for execution by creditors to whom payments are made by the applicant. Only such forms furnished the direc- tor and not disapproved by him shall be used by a debt adjusting agency licensee. New section. Sec. 4. The bond, required in section 3 of this act, shall be a surety bond, annually renewable on January 1st, to be approved by the director as to form and content, in the sum of ten tho'usand dollo~rs, executed by the applicant as principal and by a surety company authorized to do business in this state as a surety, whose liability shall not exceed the said sum in the aggregate. Such bond shall run to the state of Washington as obligee for the benefit of the state and of any person or persons who may have cause of action against the principal of said bond under the provisions of this act. Such bond shall be conditioned that said principal as licensee hereunder will not commit any fraudulent act and will comply with the provisions of this act and the rules lawfully adopted hereunder, and will pay to the state and any such person or persons any and all moneys that may become due and owing from such principal under and by virtue of the provisions of this act. The surety on such bond shall be released and discharged from all liability accruing on such bond after the expiration of thirty days from the date upon which such surety shall have lodged with the director a written request to be released and discharged, but this provi- sion shall not operate to relieve, release or discharge the surety from any liability `already accrued or which shall accrue before the expirati9n ç~ ~ th~i,~y i1~y period. The director shall promptly upon receiving any such~ request notify the PAGENO="0169" DEBT ADJTJSTING BUSINESS 165 principal who furnished the bond, and unless the principal shall, on or before the expiration of the thirty day period, file a new bond, the director shall forth- with cancel the principal's license. An applicant for a license under this act may furnish, file and deposit with the director, in lieu of the surety bond provided for herein, United States currency or bonds, respresenting obligations of the United States, or bonds of the state of Washington or any legal subdivision thereof, for which the faith of the United States, the state of Washington or any legal subdivision thereof is pledged, for the payment of both the principal and interest, equal in amount to the amount of the bond required by this act. The security deposited with the director in lieu of the surety bond shall be returned to the licensee at the expiration of three years after the license issued thereon has expired or been revoked if no legal action has been instituted against the licensee or on the bond at the expiration of said three years. New section. Sec. 5. If the licensee has failed to account to a debtor or distribute to the debtor's creditors such amounts as are required by this act and the contract between the debtor and licensee, the debtor, his legal representative or receiver, or the director, shall have, in addition to all other legal remedies, a right of action in the name of the debtor on the bond or the security given pursuant to the provisions of section 4 of this act, for loss suffered by the debtor, not exceeding the face of the bond or security, and without the necessity of joining the licensee in such suit or action. No action shall be brought upon any bond or security given under section 4 of this act after the expiration of three years from the revocation or expiration o~ the license issued thereon. Upon entering judgment for plaintiff in any action on the bond required under section 4 of this act, for more than the sum tendered in the court by the defendant, if any, the court shall include in the judgment reasonable compensation for services of plaintiff's attorney in the action. New section. Sec. 6. The director shall issue a license to an applicant if the following requirements are met: (1) The application is complete and the applicant has complied with section 3 of this act. (2) Neither an individual applicant, nor any of the applicant's members if the applicant is a partnership or association, nor any of the applicant's officers or directors if the applicant is a corporation: (a) Has ever been convicted of forgery, embezzlement, obtaining money under false pretenses, larcency, extor- tion, conspiracy to defraud or any other like offense, or has been disbarred from the practice of law; (b) has participated in a violation of this act or of any valid rules, orders or decisions of the director promulgated under this act; (c) has had a license to engage in the business of debt adjusting revoked or removed for any reason other than for failure to pay licensing fees in this or any other state; or (d) is an employee or owner of a collection agency, or process serving business. (3) An individual applicant is at least twenty-one years of age, a citizen of the United States, and a resident of this state for at least one year. (4) An applicant which is a partnership, corporation, or association is au- thorized to do business in this state. ~5) An individual applicant for an original license as a debt adjuster has passed an examination administered by the director, which examination may be oral or written, or partly oral and partly written, and shall be practical in nature and sufficiently thorough to ascertain the applicant's fitness. Questions on bookkeeping, credit adjusting, business ethics, agency, contracts, debtor and creditor relationships, trust funds and the provisions of this act may be included in the examination. New section. Sec. 7. Each license shall: (1) Be in the form and size prescribed by the director; (2) Show the name of the licensee and the address at which the business of debt adjusting is to be conducted; (3) Show the date of expiration of the lic'~nse as December 31st, and show such other matter as may be prescribed by the director; (4) While in force, be at all times conspicuously displayed in the outer office of the debt adjusting agency or branch thereof; and (5) Not be transferable or assignable. New section. Sec. 8. By contract a licensee may charge a reasonable fee for debt adjusting services, whieh fee may not exceed fifteen percent of the total debts reported to and listed with the licensee by the debtor and/or the debtor's listed creditors. The licensee may require an initial payment by the debtor of an PAGENO="0170" 166 DEBT ADJUSTING BUSINESS amount not to exceed twenty-five dollars which initial payment shall be part of the total allowable fee contracted for, and may not otherwise take or receive for services performed for any one person more than fifteen percent of the amount re- ceived by it at any one time from or on behalf of that person. In the event of cancellation or default on performance of the contract by the debtor prior to its successful completition, the licensee may collect in addition to fees prevjously received, six percent of that portion of the remaining indebtedness listed on said contract which was due when the contract was entered into, but not to exceed seventy-five dollars. A licensee shall not be entitled to retain any fee until notifying all creditors listed by the debtor that the debtor has engaged the licensee in a program of debt adjusting. New section. Sec. 9. If a licensee contracts for, receives or makes any charge in excess of the maximums permitted by this act, except as the result of an accidental and bona fide error, the licensee's contract with the debtor shall be void and the licensee shall return to the debtor the amount of all payments received from the debtor or on his behalf and not distributed to creditors. New section. Sec. 10. Every contract between a licensee and a debtor shall: (1) List every debt to be handled with the creditor's name and disclose the ap- proximate total of all known debts; (2) Provide In precise terms payments reasonably within the ability of the debtor to pay; (3) Disclose in precise terms the rate and amount of the licensee's charge; (4) Disclose the approximate number and amount of installments required to pay the debts in full; (5) Disclose the name and address of the licensee and of the debtor; and (6) Contain such other and further provisions or disclosures as the director shall determine are necessary for the protection of the debtor and the proper con~ duct of business by the licensee. New section. Sec. 11 Every licensee shall perform the following functions: (1) Make a permanent record of all payments by debtors, or on the debtor's behalf, and of all disbursements to creditors of such debtors, and shall keep and maintain in this state all such records, and all payments not distributed to creditors. No person shall intentionally make any false entry in any such record, or intentionally mutilate, destroy or otherwise dispose of any such record. Such records shall at all times be open for inspection by the director or his authorized agent, and shall be preserved as original records or by microfilm or other methods of duplication acceptable to the director, for at least six years after making the final entry therein. (2) Deliver a completed copy of the contract between the licensee and a debtor to the debtor immediately after the debtor executes the contract, and sign the debtor's copy of such contract. (3) Unless paid by check or money order, deliver a receipt to a debtor for each payment within five days after receipt of such payment. (4) Distribute to the creditors of the debtor at least once each forty days after receipt of payment during the term of the contract at least sixty percent of each payment received from the debtor. No more than twenty-five percent of any payment shall be allocated to the debtor's undistributed reserve account. In the event of cancellation or default on performance of the contract by the debtor, the licensee must distribute to the creditors of the debtor the funds of the debtor held by the licensee, less the amount retained by the licensee in accordance with section 8 of this act. (5) At least once every sic months render on accounting to the debtor ivhic'li sha'l indicate the total amount received fro'i~s or on behalf of the del~tor, the to- tal amount paid to each creditor, the total amount which any creditor has agreed to accept as payment in full on any debt owed him by the debtor, the amount of charges deducted, and any amount held in reserve. The licensee ohall in ad- dition render such an account to a debtor within ten days after written demand. New section. Sec. 12. A licensee shall not: (1) Take any contract, or other instrument which has any blank spaces when signed by the debtor; (2) Receive or charge any fee in the form of a promissory note or other prom- ise to pay or receive or accept any mortgage or other security for any fee, Whether as to real or personal property; (~) Loud money or ered!t: (4) Take any confession of judgment or power of attorney to confess judg- ment against the debtor or appear as the debtor in any judicial proceedings; PAGENO="0171" DEBT ADJUSTING BUSINESS 167 (5) Take, concurrent with the signing of the contract or as a part of the con- tract or a~s part of the application for the contract, a release of any obligation to be performed on the part of the lieensee; (6) Advertise his services, display, distribute, broadcast or televise, or permit his services to be displayed, advertised, distributed, broadcasted or televised in any manner whatsoever wherein any false, misleading or deceptive statement or representation with regard to the services to be performed by the licensee, or the charges to be made therefor, is made; (7) Offe:r, pay, or give any cash, fee. gift, bonus, premiums, reward, or other compensation to any person for referring any prospective customer to the li- censee; (8) Receive any cash, fee, gift, bonus, premium, reward, or other compensation from any person other than the debtor or a person in the debtor's behalf in con- nection with his activities as a licensee; or (9) Disclose to anyone, other than the director or his agent, the debtors who have contracted with the licensee; nor shall the licensee disclose the credi- tors of a debtor to anyone other than: (a) The debtor, or (b) `the director or his agent, or (c) another c'reditor of the debtor and then only to the extent necessary to secure the cooperation of such a creditor in a debt `adjusting plan. New section. Sec. 13. Without limiting the generality of `the foregoing and other applicable laws, the licensee, manager or employee of a licensee shall not: (1) Prepare, advise, or sign a release of `attachment o'r garnishment, `stipula- tion, affidavit for exemption, compromise `agreement or other legal or court docu- ment, nor furnish legal advice or perform legal `services of any kind; (2) Represent that he is authorized `or `competent to furnish legal advice or' perform legal `service's; (3) Assume authority on behalf `of creditors or a debtor or accept a power `of attorney authorizing it `to employ or termina'te the services of any `attorney or to arrange the terms of or compens;ate f'o'r such services; or (4) Communicate with the debtor or creditor or any other person in the name of any attorney or upon the stationery of any attorney or prepare any form or instrument which only attorneys are authorized to' prepare. New section. Sec. 14. Nothing in this act shall be construed as prohibiting the assignment of `wages by a debtor to a licensee, if such assignment is otherwise in, accordance with the' law of this' state. New section. Sec. 15. Any payment received by a licensee from or on behalf of a debtor shall be held in trust by the licensee from the moment it is~ received, The licensee shall not commingle such payment with his own property or funds, but shall maintain a separate trust account and deposit in such account all such payments received. All disbursements whether to the debtor or to `the creditors of the debtor, or to the licensee, shall be made from such account. New section. Sec. 16. The director shall, upon reasonable opportunity to be heard, revoke any license issued pursuant `to this act if be finds that: (1) The licensee has failed to' renew its bond as required by this act; (2) The licensee has violated any provision of this act or any rule, promulgated by the director under the `authority of this act or any order or decision of the director hereunder; or (3) Any fact or condition exists which, if it had existed at the time of the original application for such license, reasonably would have warranted the di- rector in refusing originally to issue such license. New section. Sec. 17. The directo'r may promulgate rules, make specific deci- sions, orders and rulings, including therein demands and findings, and take other necessary action for the implementation and enforcement of this act. The director may include among rules promulgated, those which describe and forbid deceptive advertising. New section. Sec. 18. The administrative procedure act, Chapter 34.04 RCW, shall wherever applicable herein, govern the rights, remedies, and procedures respecting the administration of this act. New section. Sec. 19. Any person who violates any provision of this act or aids or abets such violation, or any rule lawfully promulgated hereunder or any order or decision of the director hereunder, *or any person *who operates as `a debt adjuster without a license, shall be guilty of a misdemeanor. New section. Sec. 20. Notwithstanding any other actions which may be brought under the laws of this state, the attorney general `or the prosecuting attorney of `any county within the state may bring an action in the name of the state against any person to restrain and prevent any violation of this act. PAGENO="0172" 168 DEBT ADJUSTING BUSINESS New section. Sec. 21. The attorney general may accept an assurance of dis- continuance of any act or practice deemed in violation of this act in the enforce- ment thereof from any person engaging in or who has engaged in such act or practice. Any such assurance shall be in writing and be filed with and subject to the approval of the superior court of the county in which the alleged violator resides or has his principal place of business, or in the alternative, in Thurston county. Failure to perform the terms of any such assurance shall constitute prima facie proof of a violation of this act for the purpose of securing any in- junction as provided for in section 20 of this act: Provided, That after commence- ment of any action by a prosecuting attorney, as provided therein, the attorney general may not accept an assurance of discontinuance without the consent of said prosecuting attorney. New section. Sec. 22. Any person who violates any injunction issued pursuant to this act shall forfeit and pay a `civil penalty of not more than one thousand dollars. For the purpose of this section the superior court issuing any injunction shall retain jurisdiction, and the cause shall be continued, and in such cases the attorney general acting in the name of the state may petition for the recovery of civil penalties. New section. `Sec. 23. The provisions of this act shall not invalidate or make unlawful contracts between deibt adjusters and debtor~ executed prior to the effective `date of this act. New section. Sec. 24. If any provision of this act, or its application to any `person or circumstance, i's held invalid, the `remainder of the act, or the applica- tion of `the provision to other persons or circumstances, is not affected. Mr. 515K. The record will be kept open for at least a week or 10 days. There is some material that has been promised to the committee that will be made a part of the record. The record will be kept open for that purpose. Rather than close the hearing at this time, the Chair is going to recess these hearings subject to the `call of the Chair. With that statement, the committee stands adjourned. (Whereupon, at 11 :~6 a.m.. the subcommittee adjourned.) (Subsequently, the following Addendum was received for the record from the Bureau of Labor Standards of the Department of Labor:) ADDENDUM SUMMARY OF STATE LAWS PROHIBITING OR REGULATING THE BusINEss OF Dumr POOLING `Received too late for inclusion in the text is an Iowa law, effective July 1, 1907, regulating the business of debt management, bringing to 13 the number of States with regulatory `laws. Twenty-two States prohibit this business as does the City of Baltimore, Maryland, by ordinance. Administration of the Iowa law is the responsibility of the Superintendent of Banking. The law requires an applicant who wishes to engage in the business to obtain a license for each office, renewable annually, at an initial cost of $50 and $100 for each renewal. An investigation fee of $100 is also required. Each application must be accompanied by a penal bond in the amount of $10,000 for each office. The `Superintendent may require a larger bond, up to a maximum of $25,000. The exemptions are similar to those found in most of the regulatory laws, as are the prohibited practices (see pages 8 and 11). The maximum fee which a licensee may charge for his services is 121/2 percent of any payment made by the debtor and distributed to his creditors. There must be a written contract, containing specified information, and the debtor must be furnished a completed copy. A licensee may not receive any fee unless he has the consent of at least 50 percent of the total number of the creditors listed in the licensee's contract with the debtor, or such a like number of creditors have accepted a distribution of payment. The debtor must be informed of the creditors who have not agreed to the licensee's handling of the debtor's account. The licensee is required to furnish the debtor with a monthly written state- ment of disbursements made and fees deducted from his account. Funds received from the debtor are to be distributed to creditors within 30 days after receipt, except for the initial payment which may be remitted within 45 days. The PAGENO="0173" DEBT ADJUSTING BUSINESS 169 licensee is required to maintain a separate trust account of funds received from the debtor. The Superintendent is authorized to examine the condition and affairs of each licensee, who must pay the cost of such examination, up to $100 a day. O'OTOBER 3, 1967. Re Credit Advisors, Inc., 1413 K Street, NW. 2nd floor, Washington, D.C., (bill to prohibit debt adjustment, No. HR. 9806). Hon. JoEL T. BROYHILL, Hoi~ge of Representatives, Washington, D.C. M~ `DEAR Mn. BROYHILL: As I understand, you have a Bill pending legislation to possibly curtail the activitiesi of such companies, as the above. With respect to the same, I have been a victim of Credit Advisor's method of business dealings in that they advertise to relieve the constituent of their financial responsibilities in t:hat all you have to do is give them your money, and they will make all the arrangements to make payments. But they do not relate, or tell you how they go about the same. They do make you sign a Contract, but the so called `~contract" which they relate as meaning "nothing" and can he broken at any time, does not work just that way. It was necessary for me to take these people to Oourt, and the Judge said that I signed a Contract to let them do whatever they wanted with my money, and that I could not interfere within 90 days hence. So in the 90 days:, what they proceed to do, is ruin ones credit rating. After only two weeks of Credit Advisors handling some $160.00 of my money, I was deluged and plagued by everyone whom I owed money, whereas heretofore I paid my bills on the stated dates and times that they were supposed to be paid. It became so embarrassing, they wer'e phoning me at my Government office, at my home, sending me open `face cards:, so that I quickly took what cash I had avail- able, even tho Credit Advisers had my money, and `sent it `to `the people who wanted money. `I quickly as'ked Credit Advisors to return all of my money to me, including the $25.00 Retainer fee, but they would not release it to me. The way they go about the same, Credit Advisors plan. or tend to ruin ones credit rating by holding off all Creditors until where they come to the payees rescue. This they do not relate or `tell you in the Contract. I did not need that kind of help; just wanted to be relieved of paying all `the small bills, and by lumping it in one sum, would make it easier for me all around. However', that is not the w'ay they go about it. In the ninety days they accumulate their constitu- ents money, ruin their credit rating in the mean time, and then proceed to pay them as little as they possibly can, and em1~rrass the constituent all around. Iii taking them to Court I lost some $60.00 `and could n.ot r'etain the same. The Judge said th.at a Bill was' pending; that is all about he could do. They got the best of me in `the entire si.tuation, by misrepresenting the bill of goods they sell in every which w.ay. The Judge said tha't I gave them. 90 days, in the Contract, le'aveway to do w'h'atever they wished wi.th my money and to spend it the way they pleased. But this is not the way they `sell `their bill of goods. In lieu of the pending Bill, thought you would appreciate this kind of infor- mation, as I have since heard `of a number of other people who `have lost even more money than myself in dealing with these kind of companies. Respectfully, Miss MARY AGNES BLUM.. BAR ASSOCIATION OF THE `DISTRICT OF `COLUMBIA, Washington, D.C., November 14, 1967. Re HR. 9806, to prohibit the business of debt adjusting in the District of `Go- `lu'mbi'a; `H.R. 8929, to regulate the business of `debt adjusting in the District of Columbia. Hon. `JOHN L. MCMILLAN, Chairman, `Connnittee on th.e District of Columbia, U.s. House of Representatives, Washington, D.C. DEAR `CONGRESSMAN MdMILLAN: The B'ar Association of the District of `Co- lumbia has considered t'he above-referenced Bill's `and desires to make known to the `Committee on the Dis'trict of Columbia that it supports enactment of HR. 9806. This Bill, if enacted, `would prohibit the business of debt `adjus:ting in the PAGENO="0174" 170 DEBT ADJUSTING BUSINESS District of Colunibia, except as an incident to the lawful practice of law or as an activity engaged in by a nonprofit corporation or association. It is felt by the Association that the business of "debt adjusting," as defined in both `Bills, is of such a nature as to lend itself to grave abuses and can give rise to relationships of trust and counseling in which the debt adjustor's client may need counsel as to the legality of claims against him, usury and other abuses by `his creditors, legal remedies involved in the debtor-creditor relationships, and the application of the Bankruptcy Act. In view of the above, the Association feels that the activity known as "debt adjusting" should be prohibited rather than regulated. "Debt adjusting" should not `be an `activity engaged in `by persons who have not been admitted to the Bar, except `that, subject to applicable restrictions on the unauthorized practice of law, nonprofit or charitable corporation's or associations which engage in debt adjust- ing as a service to the community should be allowed to do so for nominal sums as reimbursement f~r expenses. We understand that such nonprofit or charitable corporations or associations have performed such services in other communities, and we feel this is appropriate. Respectfully submitted, JOHN ID. Poww~, President.