A Panel Discussion on Dynamics In the Consumer Credit

Counseling Service Industry*

Anne Stanley
September 2001

Summary: On July 20, 2001 the Payment Cards Center of the Federal Reserve Bank of Philadelphia sponsored a
workshop on the consumer credit counseling service industry. Leading the moderated discussion were four senior
executives from regional credit counseling firms associated with the National Foundation for Credit Counseling
(NFCC). Jerome Johnson, president and CEO and Ghyll Theurer, program manager represented the Consumer Credit
Counseling Service (CCCS) of South Jersey, a program of Family Service Association. James Godfrey, executive
vice president, Consumer Credit Counseling Service (CCCS) of Maryland and Delaware, Inc. and Patricia Hasson,
president of Consumer Credit Counseling Service (CCCS) of Delaware Valley, Inc. rounded out the panel. The
discussions were enriched by the breadth of experiences represented by the panelists who come from a variety of
industry and nonprofit backgrounds. The panel discussed the role of credit counseling firms mediating between
financially troubled consumers and their unsecured credit card lenders. This paper is a summary of those discussions.

*The views expressed here are not necessarily those of this Reserve Bank or of the Federal Reserve System.

Background & History

Jerome Johnson opened the discussion with some background and history of the
NFCC; he also described the industrys economic structure. The NFCC, which was
founded in 1951, is the nations oldest and largest non-profit organization dedicated to
budget and credit education and counseling. NFCC member agencies, many of which
operate under the name Consumer Credit Counseling Service (CCCS) are non-profit
organizations that provide consumers with confidential money management, homeowner
counseling and educational services. CCCS agencies are independently accredited by the
Council on Accreditation of Services for Familes and Children Inc. (COA).

COA

accreditation identifies organizations in which consumers can have confidence, protects

organizations against lowering standards, enables organizations to meet measurement and
reporting requirements and demonstrates accountability in the management of resources.
In addition, CCCS agencies require that all counselors employed by them undertake the
professional preparation to become certified consumer credit counselors. There are
approximately 175 NFCC affiliated counseling agencies with some 1,418 offices
throughout the United States, Puerto Rico and Canada.
According to the NFCCs web site members provided counseling to 1.6 million
families in 1999, helping many to take control of their finances. Budget counseling
allowed one third of their clients to repay their debts on their own. Only 7 percent were
referred to an attorney for legal assistance to begin the process of filing bankruptcy.
Another 33 percent of consumers receiving counseling entered debt management plans.
Debt management plans are contracts between the consumer and creditor, using a credit
counseling agency as the liaison between them. The agencies negotiate repayment terms

with creditors on behalf of their clients, and clients agree to make monthly payments to
the agency, which in turn, remits a proportional share to all the unsecured creditors. In
working with their clients, the CCCS agencies work toward a goal of having the client
debt-free within five years of beginning a plan.
The success of these programs is evident in the numbers: in 2000, some $5 billion
dollars was repaid to creditors (primarily credit card issuers) under CCCS debt
management plans. This total does not include the one third of their clients who receive
only budget counseling, most of whom presumably remain current with their debt
obligations.

Mr. Johnson emphasized in rendering this service, credit counseling

agencies can often be seen as an alternative to bankruptcy for financially constrained

consumers and clearly a benefit to creditors. In fact, this mutually supportive structure
and the underlying trust between creditor companies and the CCCS agencies was said to
have characterized the relationships for most of the recent past. Some of that is changing,
as described below.
CCCS agencies depend heavily on contributions from creditors in return for the
money recovered. This is typically a percentage of the payment made to the creditor
under a debt management plan and then given back to the agency, commonly referred to
as fair share.

Using 1999 figures, Mr. Johnson pointed out that while fair share

payments are received for only the 35 percent of CCCS clients who enter debt
management plans, this primary revenue source must cover expenses associated with the
agencies broader education and counseling activities. Fair share reimbursements are
negotiated by NFCC at the national level with the major credit card issuers and
historically they were close to 15 percent of amounts collected. More recently, these

negotiated contribution levels have decreased substantially, to the 7 to 10 percent range,

placing significant financial strains on the CCCS agencies.
Changes in the Market
Ghyll Theurer and James Godfrey led the discussion on the next topic: the
changing dynamics which have led to these lower reimbursement rates and other changes
in the relationships between CCCS and the creditors they service. A significant factor
has been the changing structure and explosive growth in the counseling industry. While
the NFCC and its affiliated agencies essentially defined the industry for many years, Ms.
Theurer noted the rapid growth of new agencies outside of the NFCC frame over the past
decade and the fact that many of these new alternative agencies may be operating on a
for-profit basis. Mr. Godfrey noted that in 1990, of the 225 credit counseling agencies in
the U.S., 202 were affiliated with NFCC. In 2000, the total number had grown almost
four- fold to over 800 agencies, only 175 of which were affiliated with NFCC.
The new entrants in the market were described as more profit oriented than the
traditional CCCS agencies, which operate with a broader educational mission. The new
entrants also tend to be more efficient and technologically advanced.

Many focus

exclusively on debt management plans, aggressively advertising their services to

prospective clients, offering only telephone counseling and willing to negotiate reduced
fair share contributions with issuers.

While there are clearly highly professional

operations among the new industry entrants, the publicized debt mills and other less
professional organizations also fall within this category.
According to Mr. Godfrey, since 1993, the number of debt management plans
entered into by consumers has increased tenfold. This, of course, has meant that creditors

pay more money in the form of fair share contributions. The panelists generally agreed
with the industrys contention that a number of those attempting to enter debt
management plans do not qualify and would likely be able to manage their financial
obligations without concessions. The industrys reaction has been not only to lower the
level of payments to the credit counseling agencies but also to heavily scrutinize all
applicants for debt management plans and tighten concession terms. In brief, the historic
level of trust between creditors and counseling services has been eroded, increasing costs
to both parties.
In response to questions, the panelists also touched on the impact of the wave of
consolidation passing through the credit card industry. Greater industry concentration
means fewer creditors with which to negotiate, but there was some sense that these
mega creditors exercise more leverage in the negotiations.

For credit counseling

agencies operating problems abound: keeping track of changing account numbers and
other client information following mergers is often a significant challenge. Ms. Theurer
observed that, in some cases, consumers currently in debt management plans with a
creditor that merges find the new lender wants to change the terms and conditions of the
previous agreements. Both agencies and consumers are then faced with the lengthy
process of renegotiating a plan with the new creditor and all that entails.
One positive development that has arisen from the heightened competition and
industry restructuring is that the original CCCS agencies have had to examine their
business models and focus on improving productivity. The panelists agreed that to a
certain extent the agencies had become complacent and were slow to adopt new
technologies to improve service levels to consumer clients and creditors. Some agencies

are experimenting with creating fee structures that require the consumer clients to share
at least a modest part of the costs and hopefully also introduce compliance incentives.
The Impact of Bankruptcy Reform Legislation
The concluding section of the workshop was led by Patricia Hasson, president of
the CCCS of Delaware Valley, who shared her views on the potential impact of the
proposed new bankruptcy legislation currently being debated in Congress. The current
version of the bill would require petitioners to obtain a certificateof contact with a
nonprofit credit counseling service prior to filing for bankruptcy. Then, the consumer
would have to complete a financial-education course before the bankruptcy would be
discharged.

These provisions would have the most immediate impact on credit

counseling agencies. At this stage no one knows what will be required in these areas,
how such actions would be administered, or how the service providers would be
compensated.
Despite these uncertainties, the legislation may provide consumer credit
counseling services an opportunity to play a more proactive role. Ms. Hasson emphasized
that much would depend on what is meant by financial education and how the
certification process would work. If the certification process provides some incentive to
structure a debt management plan as an alternative to filing for bankruptcy, it could lead
to more opportunities for the agencies and potentially lower the level of filings.
Similarly, given their historic role in providing financial education, the CCCS agencies
would seem well positioned to participate in this aspect of the bills requirements. At the
same time, agencies will most likely need to examine their financial-education models to
make sure they satisfy the higher demand in ways that are effective and cost efficient.