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Changing Trends in Credit Help Organizations |
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Providing credit help assistance to
financially troubled consumers has become a growth industry. As recent as 1990, credit help agencies' annual number of clients totaled less than 500,000. But now, each year, millions of households find themselves overwhelmed with debt and struggling to maintain their monthly payments, seek the help of credit help organizations. In 2001, nearly 1.5 million households resorted to filing for bankruptcy as a solution. Between 2.0 million and 2.5 million people sought advice and other assistance from a credit help agency, mostly as an alternative to bankruptcy. Debt problems have numerous causes, but the problems can be typically traced to events such as job loss, income interruption, and often just poor financial management. There have been no empirical studies of financially troubled debtors to determine the long-term impact of credit help counseling. But there are at least two reasons why such evidence is valuable. First, public policy increasingly views counseling as important, to prevent financial problems in the future. The U.S. Department of Housing and Urban Development has long required homeownership counseling in conjunction with a variety of affordable housing programs. More recently, regulatory attempts to reduce predatory lending in mortgage markets have required mandatory credit help counseling for sub-prime borrowers considering high-cost mortgage loans. An important provision of the bankruptcy reform legislation, now under consideration by Congress, requires that consumers filing for Chapter 7 bankruptcy first complete credit help counseling from a court-approved provider. Each of this credit help counseling requirement seem to envision either a rehabilitative or preventive role for credit help, to avoid future financial problems. A second reason is that the market's ability to continue providing these services requires some documentation of the value of the credit help services to price it properly. A peculiarity of the credit help industry is that the bulk of credit help agency revenues derive from administering debt repayment plans (debt management plans, or DMPs) for clients. DMPs are attractive credit reduction measures for some consumers because they avoid bankruptcy but still gain creditor concessions, like reduced interest rates, late fees, and minimum payments. The clients qualify for debt repayment plans, based on the outcome of an initial credit help counseling session. But the condition is that, the consumer stays with the plan. Of course, not all consumers who seek credit help agencies qualify for or need to be placed on DMPs. For many agencies, customers on DMPs represent the minority of clients counseled. Under this plan, creditors pay the agency a percentage of the funds recovered. This is called fair share payments. The success or failure of these plans can be used, as an imperfect but readily observable metric, for evaluating the service provided by the credit help agency. For the remaining majority of clients, the credit help agency output is less tangible, consisting of education, advice, referrals to social agencies or other institutions to solve specific problems. They also consist of general recommendations regarding the client's spending patterns. Consumers are usually charged a small fee for such credit help counseling. The fees are in keeping with the social-service orientation of most counseling agencies, and therefore form only a very small part of total credit help agency revenues. Until the mid-1990s, the fair-share payments from creditors effectively subsidized the credit help services provided to clients, who did not enter repayment plans. However, as competition from new entrants to the credit help market eroded the fair-share percentage, agencies that provided credit help to a significant portion of their clients, without setting them up on DMPs, were faced with a financial dilemma. So, creditors have made it clear that they will not continue to subsidize the cost of serving non-DMP clients. Thus, the quality and quantity of credit help counseling provided to hundreds of thousands of borrowers, for whom debt repayment plans are not appropriate, is in jeopardy. |
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