the contractual obligations of heir debtors and many 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 prorata 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, including 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: Returns from another questionnaire distributed by the Memphis Better Business Bureau indicated that approximately the same situation existed in that city. Recently, the Better Business Bureau of Baton Rouge, La., surveyed the principal 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 questionnaire 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 confidence in the employment of pro-raters generally as a means of extricating excessively debt-ridden persons from their financial difficulties. MISERY COMPOUNDED 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 has been interrupted by the intrusion of lawsuits, garnishee proceedings, repossessions, 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 reports 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 the victims 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 agency. These critics point out that there is much that the debtor can do for himself 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 necessary. 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 operation 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 statelicensed 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 agreement of creditors to participate 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 fees 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 suggest that all debt adjusters are charlatans. Better Business Bureaus in those cities where debt adjusters have fulfilled their promises to the public to the satisfaction of 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 they should be regulated and whether the states should provide other facilities for performing debt adjustment services, as in Ohio and Wisconsin. Without presuming to decide these questions, the National Better Business Bureau offers the following observations: In a vocation which offers any individual the opportunity to handle other peoples' money without regard to his reputation, financial responsibility, experience and other qualifications, and without regulation by or accountability to any public agency, the potentiality for evil is great. The evidence is more than ample to support the view that this potential has been realized by an alarmingly 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 "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 corporation or association may charge and collect nominal sums as reimbursement for expenses in connection with such services." According to Mr. Loo, House Bill No. 33 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 of attorney; the exemption for a creditor of the debtor or an agent of one or more creditors was deleted; the exemption for a person who makes a loan to the debtor and acts as an adjuster for debtor's loan in the disbursement 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: Six states, while not prohibiting commercial debt pooling, attempt to regulate it by statute. They are: California, Illinois, Michigan, Minnesota, Oregon and Wisconsin. Mr. SISK. We also have letters from Finance Management Company of Rock Island, Illinois and Consumers Credit Counselors, Decatur, Illinois, which, without objection, will be made a part of the record. (The letters referred to follow :) Hon. B. F. SISK, House of Representatives, Washington, D.C. FINANCE MANAGEMENT COMPANY. DEAR MR. SISK: It is my understanding that Subcommittee number five, of the House, 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 persons in our industry should be given an opportunity to speak before your committee, and answer any questions that may arise. I know that there is quite a controversy about our business, and will, also, acknowledge the fact that there are people in this business, as in any other business, who create bad situations. As a member of the Illinois Association of Credit Counselors, and the American Association, for several years we have been very instrumental in trying to rid the industry of the bad operator. I am sure that if your committee would take time to interview and question the authorities in the states that hold regulation, you will find that the violations created are very, very few, and that in the areas where our members operate they are held in very high regard. I would appreciate any consideration your committee could show to our industry. Respectfully, R. A. BOWERS, CONSUMER CREDIT COUNSELORS, A DIVISION OF THE CREDIT BUREAU, Hon. B. F. SISK, House of Representatives, Washington, D.C. DEAR MR. SISK: All members of our industry are most concerned at plans to regulate or prohibit professional credit counseling in the District of Columbia. Our firm has 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 abuse 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 concerning their licensees. We are completely audited, much the same as the consumer 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, D.C. We are certain that machinery for bona fide firms can be established just as it was in the State of Illinois. Thank 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, Mr. SISK. The next witness will be Mr. Without objection, Mr. Snellings' statement, which I believe we already have, will be made a part of the record. (The statement follows:) 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 Federal Credit Union and have served 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 member of the Board of Directors of the Metropolitan Area Credit Union Management Association, a member of the board of directors of the Consumer Credit Association of Greater Washington, and an associate member of the International Consumer 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 counselor 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 ELIMINATION There are ten reasons for prohibiting the business of debt adjusting in the District of Columbia as proposed by House Bill H.R. 9806. 1. The fee charged for such services-often 10 or 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 arrangement 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 deters the debtor from seeking the financial counsel which he so badly needs. 4. Educational efforts are nonexistent by the professional pro-rater in Washington. 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 community. 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 consumer 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 safe refuge for two professional debt adjuster due to the many surrounding states which have outlawed the profes |