New Federal Legal Requirements for Credit Counseling Agencies

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The effective date for new federal legal requirements on tax-exempt credit counseling agencies is now at hand for some in the industry and will be here soon for organizations ending their 2007 tax year on December 31st.

The effective date for the Pension Protection Act of 2006 (H.R. 4) is now at hand for some in the credit counseling industry and will be here soon for those organizations ending their 2007 tax year on December 31st.

In response to the implementation of H.R. 4, which contains significant changes to the law governing tax-exempt credit counseling, the American Association of Debt Management Organizations (AADMO) will hold a live audio on-line webinar briefing featuring industry and legal experts to explain the law's content, meaning, implications and important legislative history.

The law imposes new legal requirements on 501(c)(3) credit counseling organizations and also imposes additional mandates on those agencies through the introduction of section 501(q). According to the IRS, some of the most significant changes are:

Services - You must provide credit counseling services tailored to the specific needs and circumstances of each consumer.

Ability to Pay - You many not refuse services based on inability to pay, or on the ineligibility or unwillingness of a consumer to enroll in a debt management plan (DMP).

Fee Policy - You may charge reasonable fees, but must provide waivers if a consumer is unable to pay; also, except to the extent allowed by state law, you may not charge fees based on the percentage of the consumer's debt, the consumer's DMP payments, or the savings to the consumer from the DMP.

Board Composition - The majority of your board of directors must represent the broad interests of the public, such as public officials, community leaders, and persons having special knowledge or expertise in credit or financial education. No more than 49 percent of the board may be employees of the organization, creditors, or those who will benefit financially in any other way.

Referrals - You may not pay for referrals of consumers, or receive amounts for providing referrals of consumers for DMPs.

Contributions - Section 501(q) also prohibits you from soliciting contributions during the initial counseling process or while the consumer is receiving services from you.

Fair Share - Your revenues that are attributable to DMP cannot exceed 50 percent of your total revenue. However, for credit counseling organizations that were in existence on August 17, 2006, the 50 percent limit will phase in over four years.

The new law also declares "Debt Management Plan Services" to be unrelated business income. The term "debt management plan services" means services related to the repayment, consolidation, or restructuring of a consumer's debt, and includes the negotiation with creditors of lower interest rates, the waiver or reduction of fees, and the marketing and processing of debt management plans.

"This is the most significant change in the law to impact the credit counseling industry ever. This change is nationwide, affecting the entire industry. It will alter the way credit counseling agencies operate, whether they stay tax-exempt, become only non-profit or even become for-profit. This law now regulates on a federal level how agencies receive assistance from creditors, how consumers pay for services, how agencies comply with state law and, most importantly the fact that they may now have to pay taxes", said Mark Guimond, Executive Director of the AADMO.

"Given the complexity of the changes to the law of credit counseling, we are pleased to have Jeff Tenenbaum as our legal expert for the live on-line webinar briefing. Mr. Tenenbaum, the American Bar Association's "Outstanding Nonprofit Lawyer for 2006" is a partner at the Venable law firm in Washington, D.C. He was recognized by Who's Who in American Law in 2005 and by the Washington Business Journal as a "Top Washington Lawyer" in 2004. In the nonprofit community, he was awarded the distinguished "Chairman's Award" from GWSAE in 1997 and from the Center for Association Leadership in 2004", added Guimond.

The live audio on-line webinar briefing will be on Tuesday, September 25, 2007 at 2:00 P.M. EST. For information about participation in the audio on-line webinar briefing on changes to the law of tax-exempt credit counseling, please call AADMO at 281-361-2325.

About AADMO:
AADMO is the largest trade association for the credit counseling and debt management industry. Nationwide, the majority of licensed and legally operating credit counseling agencies are members of AADMO.

AADMO is working diligently to ensure the continued operation and viability of credit counseling and debt management organizations. AADMO provides important education and information for the entire industry.

AADMO is an industry education and advocacy organization whose mission is to promote and ensure the continued operation and viability of credit counseling and debt management organizations. AADMO provides its members and the consumer public with information about the credit and debt counseling industry.

AADMO members are consumer credit counseling agencies, debt management organizations, credit counselors, personal finance educators, credit and debt information educators, consumer lawyers and many others.

AADMO is the only trade association to have held state law compliance workshops with the New York State Banking Department and the California Department of Corporations upon enactment of their respective laws governing credit counseling. AADMO is also the only trade association for the industry to publish a formal summary of state laws that has been reviewed by state regulators.


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