98.8 Percent Overhead

The North Seattle Community College Foundation is one of the nation's biggest credit-counseling agencies, but hardly any of the millions of dollars in revenue goes to helping students. Most of it goes to for-profit corporations.

Desperate debtors were supposed to be the key to riches for the North Seattle Community College Foundation, created to independently raise money for North Seattle Community College, a public school. Finding money for scholarships can be tough for a two-year school that alumni are prone to forget after they transfer to a four-year college. So seven years ago, the nonprofit foundation, which had relied on dinners and other traditional fund-raising events, settled on an unusual way to fill its coffers: credit counseling.

As the foundation began to morph into a credit-counseling agency in the ensuing years, organization officials predicted great things. Credit counseling would bring in as much as $1 million a year for scholarships, they said.

The foundation's credit-counseling business today is one of the biggest in the nation, generating yearly revenue in the tens of millions of dollars. But federal records show just a small fraction of that money—far less than $1 million in any given year—has gone to college scholarships or programs. Most of the money raised has gone to for-profit concerns contracted to do the foundation's credit-counseling work, not needy students.

In the fiscal year ending June 30, 2004, the North Seattle Community College Foundation took in $65.7 million and gave just $895,725 in scholarships and grants to college departments. Since setting up its credit-counseling business in late 1998, the foundation has taken in $233.6 million and contributed only 1.2 percent of that in scholarships and grants, according to tax returns. That would put overhead costs at 98.8 percent.

In April, the foundation found it was a poster child in a U.S. Senate report titled Profiteering in a Non-Profit Industry. Among many other negative findings, Senate investigators concluded that the foundation provided debtors with scant help to avoid financial trouble. With that notoriety and scrutiny by the Internal Revenue Service and other federal investigators, the foundation has changed its practices and says more changes might come. But former and current foundation officials insist that Senate investigators didn't find anything substantive.

The fact that this obscure nonprofit foundation is involved in a multimillion-dollar business at all is not widely known. The foundation's Web site (www.northseattle.edu/foundation) makes no mention of it, and how this came to be is a complicated story.

It begins with unfortunate folks who are drowning in credit-card debt. By engaging a credit-counseling agency, they get breaks on interest and late fees by consolidating their debt. The agency collects monthly payments and distributes the money to creditors. It's supposed to be charity work, with counselors talking with debtors to help them find their way to solvency. Roughly half the states and most credit-card companies require that credit-counseling agencies be nonprofit enterprises.

But there's big money involved. The nation's biggest credit-counseling agencies handle billions of dollars each year. With consumer debt increasing to record levels in the late 1990s and bankruptcies rising at a corresponding rate, a lot of folks saw a chance to get rich by going into the credit-counseling business. For-profit businesses in recent years have partnered with nonprofits, whose actual involvement in helping those in debt seems to be in name only.

Whether the North Seattle Community College Foundation has followed the law is up to the IRS, which won't comment on investigations or on whether any particular agency is in trouble. A foundation board member, though, confirms that the IRS is auditing the organization. And Joel Greenberg, president of New Jersey– based Garden State Consumer Credit Counseling, is blunt: "I don't think it's very ethical. This is not supposed to be this kind of business." Says David Lander, a St. Louis bankruptcy attorney who has served on the board of a nonprofit credit-counseling corporation for two decades and is considered one of the nation's leading experts on credit counseling: "This is a really screwy story. It smells."

Profitable NonProfits

Then–Gov. Gary Locke weakened state requirements for credit-counseling agencies.

(Getty Images)

The credit-counseling agencies of the 21st century are a far cry from the first agencies that sprang up in the 1950s. At first, agencies didn't charge debtors for their services. Rather, credit companies paid the bills by contributing a portion, typically 15 percent, of money collected. Bona fide charitable organizations, such as the United Way, also helped keep agencies afloat. Besides consolidating debt and making monthly payments to agencies that, in turn, distributed the money to creditors, debtors visited counselors in person to pore over monthly budgets, be instilled with financial discipline, and make plans for solvency.

That's changed. More than 1,200 credit-counseling agencies have sprung up during the past decade, each a tax-exempt charity but many not resembling one. Supposedly nonprofit agencies flooded television with too-good-to-be-true commercials promising an easy way to end calls from bill collectors. Meanwhile, credit-card companies reduced their contributions for agencies' collection services by more than half, so debtors paid these nonprofits at least as much as creditors did.

Federal regulators have rooted out some of the worst agencies. Most notably, Maryland-based Ameridebt, once the country's biggest credit-counseling agency, was forced into bankruptcy as the Federal Trade Commission, the IRS, and attorneys general in Illinois and Missouri filed lawsuits charging violations of consumer-protection laws and unlawful enrichment of insiders, who established for-profit companies that held contracts with nonprofits to process paperwork and market services to consumers.

The North Seattle Community College Foundation entered the credit-counseling business in 1998, when it established a division called American Financial Solutions (AFS). It started out small. According to financial statements it gave the IRS, the foundation spent less than $11,000 on credit counseling during its first six months in the business. Those same financial statements show that Amerix, a for-profit corporation, gave the foundation $73,000 to help launch the credit-counseling division. But Amerix would get far more from the foundation in coming years.

Amerix is a subsidiary of Ascend One, a Maryland holding company owned by Bernaldo Dancel. Dancel, who declined a request for an interview, is viewed unfavorably by consumer advocates. They say he was one of the first in the nation to realize the enormous amounts of money that could be made through credit counseling. He's one of the leading figures in the downward spiral of the credit-counseling industry, says Travis Plunkett, legislative director for the Consumer Federation of America.

Dancel's ties to the credit-counseling industry go back to 1992, when he founded a nonprofit credit counseling agency called Genus Credit Management. Four years later, Dancel established Amerix to process accounts for Genus, keeping track of debtors' payments and making sure creditors got paid.

The IRS takes a dim view of nonprofits that enrich insiders, so in the late 1990s, Ascend One sought to divest itself of Genus but still keep the lucrative account-processing business for Amerix. Any newly created nonprofit credit-counseling agency would have to withstand scrutiny from the IRS, which would want assurances that a new agency was a bona fide charity before granting it tax-exempt status. Amerix made an end-run on the IRS, approaching nearly 30 colleges and universities to strike deals with pre- existing nonprofits that could keep the money flowing. The North Seattle Community College Foundation was one of the few educational nonprofits that bit.

The deal worked like this: The college foundation purchased the Genus accounts in 2001 for $17 million, with no money down. Amerix, which had helped set up the foundation's American Financial Solutions three years earlier and was processing accounts for the foundation's fledgling credit-counseling division, would be paid $11 million by the foundation; Genus, which had been swallowed by a Florida credit-counseling agency called InCharge Institute in 1999, would get $6 million. The money the foundation owed would be repaid with funds collected by the foundation from debtors and creditors. With the acquisition of 200,000 Genus accounts, North Seattle Community College Foundation became one of the biggest credit-counseling agencies in the nation overnight, handling more than a billion dollars in consumer debt. But there was a catch. Under terms of the deal, the foundation had to continue using Amerix to process accounts.

By all appearances, the college foundation became a cash cow for Amerix, which went so far as to answer the foundation's telephones and enroll consumers in debt-management plans. Contracts between the foundation and for-profit companies under the Ascend One umbrella called for at least half of every dollar of revenue collected by the foundation to go to Amerix. For example, if a debtor was referred to AFS by CareOne, a Dancel-owned marketing company that steers consumers to the foundation and four other agencies with Amerix contracts, the foundation had to turn over 85 cents of every dollar of revenue collected to Amerix. That's illegal under Washington law, which forbids accepting or giving any reward or premium for referring debtors to a debt-consolidation company, according to a lawyer assigned to the state attorney general's consumer- protection division.

"It would be my opinion, for any debt adjuster to do that would be a violation of the statute," says Assistant State Attorney General David Huey, who reviewed the law and the provisions of the deal at Seattle Weekly's request. The provision is designed to ensure that unscrupulous agencies don't enroll debtors in debt-consolidation plans they don't need.

However, state law is extraordinarily weak when it comes to regulating the credit-counseling industry. It's a 1960s-era statute that doesn't take into account the cutthroat nature of modern credit counseling. The law got weaker in 1999, when the Legislature, at the request of then-Gov. Gary Locke, eliminated requirements for credit-counseling agencies to obtain licenses from the state Department of Licensing. Besides eliminating licensing provisions, the practical effect, according to Huey, was to remove a requirement that credit-counseling agencies be nonprofit. And that's not good, the state lawyer says. "My own personal feeling is, this presents a problem in that if you get for-profit people in there, you're going to have a lot of abuses," Huey says.

The Legislature's relaxing of regulations strikes Plunkett, of the consumer federation, as odd. He notes that other states have stiffened regulations in recent years, including passing laws requiring counseling agencies to post performance bonds. Washington's elimination of the licensing requirement is "certainly contrary to the trend, which is to beef up at the state level," Plunkett says.

The bill passed within months of the North Seattle Community College Foundation's entry into the credit-counseling industry. So even if state regulators concluded that the college foundation or any other credit-counseling agency was acting as a front for a for-profit enterprise, there was little the state could do about it. Peter Ku, then chancellor of the Seattle Community College District, who foundation officials say facilitated the foundation's entry into credit counseling, had been a big fund-raiser for Locke since the early 1990s.

Locke says he can't recall the legislation. He says he never spoke with Ku about the bill that relaxed licensing requirements and also eliminated several outdated advisory boards. Ku could not be reached for comment.

Enter the Feds

While state regulators haven't gone after the college foundation, federal investigators have. In 2002, the IRS launched an audit. The foundation kept its tax-exempt status, but it is again under the scrutiny of the IRS, which is conducting another audit as part of a campaign to root out businesses disguised as charities in the credit-counseling industry. "It's been going on for a while," says Phyllis Mayo, personnel director for The Seattle Times, who serves on the foundation's board and has signed the foundation's tax returns. She won't say if she thinks the foundation's credit-counseling activities will survive the probe. "Everything's up in the air," she says.

The U.S. Senate added pressure last year with the investigation that exposed bad practices in the industry and forced changes. Senate investigators concluded that the relationship between Amerix and the college foundation was, at best, questionable and, at worst, illegal under provisions of the federal tax code that were designed to ensure that nonprofits are truly charitable enterprises.

Plunkett, who has closely followed the Senate inquiry, puts it this way: "The Amerix people are not dumb. As far as I can tell, they're not corrupt the way Ameridebt was. They're just trying to do as little as they can under the law."

Problems with the college foundation's American Financial Solutions division identified by Senate investigators in the report published in April included:

Amerix employees, who had a vested interest in enrolling debtors in debt- consolidation plans that would generate fees for account processing, sometimes answered the phones for AFS, speaking directly with debtors who were in over their heads. Furthermore, under the foundation's deal with Amerix, the for-profit company collected 68 cents of every dollar of revenue collected if a debtor was sent to the foundation by Amerix. If a debtor contacted AFS directly, Amerix and the foundation would split the proceeds 50-50.

The deal between the college foundation and Amerix required that three out of 10 callers to the foundation would be enrolled in debt-management plans that would generate processing fees for Amerix. Industry experts say such quotas put pressure on counseling agencies to put debtors into plans they don't need.

Under terms of its contract with Amerix, the foundation had to ensure that each debt-management plan would generate at least $30 a month, with the money coming from debtors and creditors. As a nonprofit charity under the federal tax code, the college foundation couldn't legally demand a penny from debtors. Monies paid by consumers to the college foundation are supposed to be voluntary contributions.

The college foundation and four other credit-counseling agencies set up by Amerix from pre-existing nonprofits offered scant, if any, education to help consumers avoid financial trouble. "Amerix stated that the reason why it approached colleges and universities to pitch credit-counseling agency 'startup' opportunities was because those organizations could educate consumers about their finances," investigators wrote. "It does not appear, however, that any Amerix credit-counseling agencies provide classes to consumers on credit practices or budgeting."

As a charity, the foundation was supposed to offer financial education to anyone who asked, regardless of ability to pay. However, the foundation didn't allow anyone who wasn't enrolled in a debt-management plan to access a Web site that provided information on budgeting and spending.

Credit counselors employed by the foundation were required to refer debtors to Dancel-controlled companies that offered prepaid credit cards and mortgage refinancing. Senate investigators concluded that such arrangements invite revocation of tax-exempt status because nonprofits are not supposed to be conduits to for-profit businesses.

Debtors were signing up for debt- management plans via the Internet without ever speaking with a credit counselor to explore options and determine whether they really needed the service.

The foundation was also paying bonuses to credit counselors, some of whom made more than $60,000 a year thanks to the added pay. Bonuses can be dangerous, experts say, because they can act as incentives for counselors to put debtors into debt-management plans they might not need.

About the only praise Senate investigators offered was that the foundation capped its monthly fee charged to debtors at $50.

The foundation ceased most of the practices criticized by Senate investigators after hearings before the Committee on Homeland Security and Governmental Affairs last year. During the past year, the foundation has opened a classroom near its Bremerton call center to provide in-person counseling and education. And the foundation says it's hired three employees to make sure that consumers placed on debt-management plans really need that kind of help.

Despite the changes that coincided with federal probes, former and current North Seattle Community College Foundation officials insist that investigators didn't find anything amiss.

Cuba Craig, the foundation's former CEO, saw the business grow—and her salary soar.

(Kevin P. Casey)

Contrary to the findings in the Senate report, Cuba Craig, the foundation's former CEO, who submitted her resignation in January, says the college foundation was already following business practices recommended by investigators. "We had a lot of programs in the works they didn't know about," she insists. "We were already doing what they wanted us to do."

Craig says the Senate probe "increased awareness." But it's tough to see how the college foundation board, which includes Seattle business executives, could not have known that it was blurring the line between legitimate charity and bona fide business. Besides Mayo, the board of directors includes Stan Diddams, a senior vice president with Bank of America, and Thomas Mesaros, president and CEO of the Alford Group, a consulting firm that advises nonprofits on fund-raising strategies. The board also includes a state employee, Lorena Eng, who is regional administrator with the Department of Transportation.

Joseph Jahn, president and CEO of Vaupell Industrial Plastics, who has served on the foundation's board of directors since its entry into the credit-counseling business, sounds as if he hasn't read the Senate report, although he says he's familiar with it. "American Financial Solutions was treated as a positive influence," he says. "We've always been characterized as a positive influence in the industry. I believe that AFS has very effectively served its mission."

However, Jahn acknowledges that the college foundation is considering severing its ties to Amerix so it can start processing accounts in-house. Asked if there's an escape clause in its contract with Amerix, Jahn says, "I would rather not get into that. This is an agreement where there are a number of different aspects to it. We are in active discussions with Amerix at this time."

1.2 Percent of $233 Million

Credit-counseling agencies that process accounts in-house spend considerably less on account processing than the college foundation, according to federal tax returns and interviews.

The foundation has given Amerix as much as 80 percent of the foundation's revenue in a single year, according to the Senate report and the foundation's tax returns. Greenberg, of Garden State Consumer Credit Counseling, says roughly 40 percent of the revenue his agency collects is spent on account processing. He says the decision to keep processing in-house is an obvious one, given that a primary function of credit counseling is keeping track of money. "I've always had the feeling we would be skating on thin ice [with regulators] if we outsourced our processing," he says.

InCharge, the Orlando-based credit-counseling agency that transferred the Genus accounts to the college foundation, collected $46.3 million in revenue in 2003, according to its most recent tax return, and spent slightly less than $4.4 million on account processing. Robert J. Barrett, president and CEO of InCharge, declined a request for an interview, nor would an InCharge spokesperson discuss processing costs beyond what the agency stated in its tax return. But in a letter responding to Seattle Weekly's interview request, Barrett did say that InCharge unloaded the Genus accounts on the foundation two years after acquiring them and used the money to establish its own account- processing division so that it no longer does business with Amerix.

The college foundation's entry into the credit-counseling field—and the scrutiny it's gotten from the federal government—has been big news in the industry. But it's barely made a blip in Seattle.

State Sen. Ken Jacobsen, D-Seattle, who left the foundation board prior to its entry into credit counseling, says he's only vaguely familiar with the saga. "I heard about it through casual comments," Jacobsen says. "The casual comments were that they were making quite a bit of money. I just assumed they were using it for scholarships or classroom equipment or something. It seemed a rather odd way to raise money for a foundation. It seemed strange." Told the amount of money that the foundation has collected and how much has gone to Amerix, Jacobsen says, "That's incredible."

Foundation officials promised big money for scholarships when it started in the credit-counseling industry. But IRS documents show that the foundation has typically spent less than 1 percent of its annual revenue on scholarships and grants to college departments since allying with Amerix.

Jahn says the foundation has raised "about $4 million" for scholarships since entering the credit-counseling industry, but the foundation's tax returns show slightly more than $2.8 million has gone for scholarships and grants to college departments in that time. That's 1.2 percent of the $233.6 million that the foundation has taken in between 1999 and the fiscal year ending June 30, 2004.

Craig, the foundation's former CEO, told the Puget Sound Business Journal in 2002 that the foundation expected to raise as much as a million dollars for scholarships that year. In fact, the foundation in the fiscal year ending June 30, 2003, took in nearly $75.2 million and gave just $581,766 in scholarships. In the previous fiscal year, the foundation had $84.7 million in revenue and spent just $325,611 for scholarships and grants to college departments.

By contrast, the foundation gave nearly $198,000 in scholarships, almost 40 percent of its gross income, in fiscal 1999, which ended just as the foundation was getting into the credit-counseling business. The year before acquiring the Genus accounts, the foundation gave out $673,000 in scholarships, 16 percent of its gross income.

In written testimony submitted to the Senate subcommittee last year, Craig said the foundation gave $3.6 million in scholarships in 2003. But the foundation's tax return, filed after Senate hearings, tells a different story. Under penalty of perjury, the foundation told the IRS that it gave slightly less than $896,000 for scholarships and grants in fiscal 2004. Craig can't explain the discrepancy, saying she doesn't have the tax returns in front of her. "I wouldn't dare try to tell you off the top of my head," she says.

Exactly how much has gone to Amerix isn't clear. Incredibly, the foundation doesn't list the company in the space where nonprofits are required to list their five highest-paid independent contractors and disclose how much each has received. But the Senate report released in April makes it clear that most of the foundation's money has gone to Amerix.

In fiscal 2001 alone, the foundation took in $84.7 million and paid Amerix more than $70 million for processing services, according to investigators and the foundation's tax returns. Amerix got another $6 million to repay the loan used to acquire the Genus accounts. Investigators concluded that the payments for loans and processing services amounted to paying Amerix twice for the same thing.

Between the college foundation and four other nonprofits that morphed into credit-counseling agencies with Amerix's help, Dancel's company has blossomed. Senate investigators report that Amerix's gross revenue jumped from $43.3 million in 1998 to $95.3 million in 2002. "Even if the amounts . . . had been realized by Amerix through arms-length transactions at fair market value, the absence of any charitable or educational purpose suggests that the Amerix credit-counseling agencies were not operating exclusively for exempt purposes and therefore may be in violation of tax regulations," Senate investigators wrote in the April report.

Craig, who was paid nothing when she worked part time as the foundation's director in 1998, has seen her own financial condition soar. Her beginning salary in 1999 was $100,100. By 2003, her pay had more than doubled to $240,482.

Craig has long been a fixture on the Seattle charity scene, raising money for the Fred Hutchinson Cancer Research Center, the Seattle Seahawks Charitable Foundation, and Big Brothers Big Sisters. She says she didn't know what a credit-counseling agency was when Ku, then chancellor of the Seattle Community College District, asked her to become CEO of the foundation's startup. Ku, who retired two years ago, couldn't be reached for comment. Craig says Ku tapped her because he knew she was smart, flexible, and diligent. "He knew that whatever he asked me to do, I would do it, and I would work hard," she says. Craig says she left the foundation on good terms when she resigned in January, and Jahn confirms that.

New Standards

The foundation and the four other credit-counseling agencies that contract with Amerix for account processing must live up to considerably less stringent standards than agencies certified by the National Foundation for Credit Counseling. Founded in 1951, the NFCC requires that members be accredited by the Council on Accreditation and Family Services, an independent third party that sets standards for more than 1,400 social-service agencies. "If applied throughout the industry, these professional standards could significantly address the abusive standards identified in this report," investigators wrote.

New federal regulations for credit counseling agencies are due to take effect this fall. Under a bankruptcy reform bill signed by the president, credit counseling will be mandatory for any debtor who declares bankruptcy. But debtors won't be allowed to go to just any counseling agency to fulfill the requirement. They will have to work with agencies certified by the Executive Office for United States Trustees (EOUST), a branch of the Department of Justice. EOUST standards and applications for agencies released earlier this month make it clear that credit-counseling agencies will have to spend an average of 90 minutes with each debtor discussing their finances and potential paths to solvency. EOUST is also requiring agencies to post performance bonds and disclose all contractors that process accounts and the terms of those contracts.

While the bankruptcy bill promises a wave of new customers for the foundation and other credit-counseling agencies, the new federal standards will be tough to meet, says Greenberg, who wonders who will pay for counseling sessions if debtors can't afford it. William Binzel, chief counsel for the NFCC, says the NFCC hopes to convince credit-card companies and charities like the United Way to help pay for mandatory counseling.

Greenberg blames outfits like Amerix and the college foundation for heightened scrutiny from regulators and legislation in 10 states aimed at weeding out shady players. "What they've done is caused negative opinions and actions to occur," Greenberg says. "This year has been the busiest year ever for new regulations."

In addition to new state and federal regulations, the IRS has been auditing dozens of credit-counseling agencies to determine whether they should keep their tax-exempt status. Earlier this month, the IRS announced that it revoked charity status in four cases but wouldn't say what agencies had their exemptions yanked. The IRS won't comment on pending audits or investigations. Binzel says no NFCC agency has lost its tax exemption. Jahn says that, to his knowledge, the college foundation isn't in the IRS's crosshairs.

Amerix appears to realize that its days of milking nonprofits may be coming to a close. While state and federal regulators have been tightening up, the company has been lobbying legislatures to allow for-profits into the credit-counseling field. The company's efforts last spring in Maryland were unsuccessful, says Deanne Loonin, an attorney with the National Consumer Law Center in Boston. "It seemed like they didn't want the competition," she says.

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