The consumer debt counseling industry is at a crisis point. After avoiding the limelight for 30 years, debt counselors are finally receiving the scrutiny and evaluation that their importance to the public requires. Consumer Reports presented a thoughtful, generally positive analysis of the industry, Business Week took a shot at the entire industry and the The Washington Post excoriated Ameridebt, In Charge Institute and Cambridge, three very large and relatively new players. Demand for consumer debt counseling is on the upswing. Consumer debt remains extraordinarily high; the economy took a nosedive. The most recent drafts of proposed but languishing bankruptcy legislation require debtors to visit a debt counseling agency before filing a bankruptcy petition. New entrants whose services, motives and costs are suspect are advertising widely and taking over the market share of older "safer" players.

Recent Trends

For the past several years, creditors have been cutting the dollars they pay to debt counselors, forcing them either to transfer costs to the debtor or to reduce expenses. This has put the squeeze on those that have tried to offer worthwhile services. Payment for the service or "fair share" was once set at 15 percent, and although many creditors paid less (or paid nothing), many of the major creditors once paid close to 15 percent. But Citicorp has reduced its "fair share contribution" to 8 percent, Discover to 7 percent, Providian and Household pay 10 percent on all funds, and Chase pays 10 percent on funds transmitted by EFT. Fleet and Capital One pay 9 percent. Recently, two creditors, First USA and MBNA, developed and implemented proprietary evaluation mechanisms according to which the creditor pays debt counseling agencies on a sliding scale that rewards agencies that bring value to the creditor.

The National Foundation for Consumer Credit (NFCC), the trade association or foundation of members that represents many of the traditional agencies, is in tumult. For a number of reasons, including its failure to make the case for effective counseling with the creditors or public, the market share of NFCC affiliates has fallen precipitously. Not surprisingly, NFCC is transforming itself. Within the past few months the president of the organization has resigned and an interim president is serving while a national search is being conducted for a suitable successor. The term of the last chairman, a Citicorp employee, has expired, and the incoming chairman is John Berglund, the head of the Consumer Credit Counseling Service (CCCS) affiliate in Denver, who appears to be reform-minded and very competent.

The content and effectiveness of the debt-counseling process are under attack. The news articles about In Charge, Ameridebt and Cambridge point out how little they offer debtors during their short telephone interviews, how much the debtor pays and how often the debtor ends up applying for a new loan at an affiliate of the counseling agency.

The industry was created on the notion that if debtors learned a bit about use of credit and budgeting, a portion of them would manage their finances more effectively, benefiting themselves and their creditors. But the quality of counseling and the notion of "education" have remained unexamined. A few of the more client-sensitive agencies have been concentrating on strengthening the educational component of their contacts with clients at the budget counseling sessions and in follow up contacts with participants. Two excellent examples are the St. Louis CCCS, which stresses individual educational counseling sessions, and the Austin CCCS, which stresses group sessions. A vast majority of even the well-intentioned agencies are far behind; they have neither a well-developed curriculum for the counseling session nor adequate mechanisms to insure quality. There is, in fact, a fundamental difference regarding the definition of "education" between the creditors and the best of the agencies. Creditors and many agencies see education as taking place outside the counseling session via visits to various service clubs, whereas the best of the agencies take the position that the counseling session is the primary educational endeavor and the most important of all.

The current question is whether the industry simply requires greater regulation and scrutiny, or whether the whole concept should be thrown out. If it is worth keeping, then a new round of regulation and oversight is required. A bit of history will be helpful.

History of Counseling

In the early 1970s, working under the auspices of the International Credit Association, retailers that made extensive use of unsecured credit cards organized a network of agencies that would meet with their customers who were having difficulty paying their credit card bills and, when necessary, develop and implement a payment plan for those customers. The payment plan called for the customer to pay 100 percent of what was due to all unsecured creditors, and to send funds to the agency to disburse to those creditors. Some creditors reduced their late payment fees and their default interest rate, and most accepted smaller installment payments. To meet the expenses of the debt counseling agency, some creditors voluntarily returned to the agency up to 15 percent of the funds that were disbursed to it and called it their "fair share." Some agencies also received funding from the United Way, while some charged their clients a fee. If the customer needed only a bit of advice, the agency provided that advice. If the customer required a bankruptcy, most agencies were unwilling to provide that advice because they did not want to make a recommendation to the borrower that would lead to a write-off of their constituents' accounts. Few agencies treated customers as their clients; most viewed the creditors as their clients. The consumer movement was suspicious of the industry because it was so closely allied with the creditors, its quality was uneven, it was unwilling to tell the customers about bankruptcy or other consumer rights, and finally because many of the agencies did not explain that the services were funded by the creditors.

From 1970 through the late 80s, this industry was sleepy and attracted little attention. The agencies were non-profit, called themselves CCCS of the areas they served, and affiliated with the National Foundation for Consumer Credit, an organization created by and for the benefit of the creditors.

The explosive growth of consumer credit in the late 80s and early 90s led to an explosive growth in the debt-counseling field as well. There were many new entrants, most of which relied on phone conferences that were more convenient, cheaper and faster than face-to-face interviews. These telephone interviews dispensed with even the pretense that the counseling sessions provided meaningful budget advice or education. One of those new entries, GENUS, now known as In Charge Institute, became the largest service provider in the industry by dispensing service solely by mail and telephone. Genus was reported to be a nonprofit/for-profit hybrid. It contracted for "back-office services" with an affiliated for-profit corporation, appeared to be closely affiliated to certain creditors, was willing to work with fewer than all of a client's creditors, and launched an attack on the NFCC system.

The enormous increase in consumer credit from 1988-96 and the decision by the industry to extend credit to people who were previously denied credit led to a significant increase in the number of customers who could not pay their bills. Some declared bankruptcy, and the number of filings rose. The number of people visiting NFCC affiliates grew even faster than the number of people filing bankruptcy. Although there were more defaults, the consumer finance industry proved very profitable. There was consolidation as well.

The consumer movement had continued to be skeptical of the debt-counseling industry. The best of the industry provided real credit counseling and education, developed a loyalty to their clients and even suggested bankruptcy when it was appropriate. Some agencies had developed excellent educational programming for the public. Those, unfortunately, were the exceptions. Many agencies looked much like collective collection outposts for creditors. The NFCC developed an accreditation process for its members, but those standards did not require sufficiently high-quality standards or quality control in the counseling sessions.

Toward the end of the 90s, consumer retail lending profits leveled off. Consumers began paying their bills in ways that generated fewer late charges and less interest; limits had been reached on the extension of credit and on the benefits of consolidation and technology. As profits leveled off or dropped, creditors began looking more closely at the debt-counseling industry they had created. Creditors realized that fair share was a significant expense item to them that was allowing some agencies to accumulate a surplus, and was encouraging new entries into the industry. The debt-counseling industry had been created in a way that encouraged agencies to put people into debt-management plans since such plans generated maximum revenue to the agency. In 1999 and 2000, a number of major creditors that had been supportive of the debt-counseling industry reduced or eliminated fair share contributions, and some that had provided concessions to participants in the debt-management plans reduced or eliminated those benefits. This has significantly reduced revenue at debt counseling agencies.

Major creditors have also imposed new requirements for eligibility in the debt management system. At the same time, Genus' success in a market dominated by nonprofits that were asleep at the switch induced a plethora of new entrants that provided little service at a high cost and saw the opportunity to get rich quick off of the misery of overextended credit cardholders.

Today's Challenge

The situation is on a very dangerous track. If the agencies providing effective counseling and education are to have any chance of continuing, progressive and sophisticated creditors must create a productive dialogue that must include consumer representatives, the dialogue should focus on quality, and major creditors must provide sufficient funding to those agencies that provide effective services. The dialogue should lead to a method of making certain that those agencies that provide productive services are paid for those services. No such dialogue has ever taken place in this industry, and none is currently scheduled. Perhaps ABI is the institution that can find a way to initiate the dialogue. At the same time, effective regulation of the debt-counseling industry is necessary to keep the wolves from the door of the millions of credit card debtors who are now at risk.

It does appear that there is a real need among consumer debtors for an effective debt-counseling industry. It provides value for people with the following needs:

1. the consumer who needs an hour or two of informed listening and counseling and a bit of credit advice, and who can and wants to pay her creditors directly and in full and outside of the bankruptcy system;
2. the consumer who wants to try to pay her creditors in full outside of the bankruptcy system but cannot do so without the help of a third party, and who can do so without unduly endangering her car payment, house payment and basic family needs;
3. the consumer who needs effective credit and budgeting advice in a one-on-one setting.

Getting to a "Win-Win" Situation

If the debt counseling agencies can provide quality counseling, they may be able to increase the number of people who complete debt-management plans. There is no one else out there that can perform these services better. The effective debt counseling agency is a "partner" with the best of the consumer bankruptcy lawyers; they each have a service to provide. The question is whether the industry as it is currently configured can provide such services, and to what extent the current activities of the creditors will destroy the ability of debt counseling agencies to help the consumer. The counselor must see the debtor, rather than the creditor, as the customer; there must be effective counseling and education; when bankruptcy is indicated, the debtor must be so advised; and the costs imposed directly on the debtor must be small.

From the creditors' point of view, there are several concerns. First, the debt counseling industry must operate efficiently from a cost point of view; second, it must not place people into debt-management plans who need advice only; third, the creditor must conclude that effective counseling and education do, in fact, reduce defaults and "write offs."

Conclusion

The internal struggles within the NFCC, the effort of selected agencies to infuse education and quality control into the counseling sessions, the tools that MBNA and First USA have begun to use to evaluate and compensate the agencies, and the explosion of highly advertised providers that offer minimal services at maximum price to debtors all come at a time when more and more people need the service and when greater public attention is being aimed at the industry. There are cries for both state and federal legislation. If the stories about Ameridebt and some of its cronies are accurate, then such regulation will be welcome. In the meantime, it will be interesting to see whether the best or worst of the industry will thrive, if or mediocrity will endure.

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Footnotes

¹ The author is also vice chairman for education of the Consumer Credit Counseling Services office in St. Louis. Return to article