The Impact of Credit Counseling on Subsequent Borrower Behavior

GREGORY ELLIEHAUSEN, E. CHRISTOPHER LUNDQUIST, AND MICHAEL E. STATEN 
The Journal of Consumer Affairs, Vol. 41, No. 1, 2007
ISSN 0022-0078
Copyright 2007 by The American Council on Consumer Interests 
SUMMER 2007 VOLUME 41, NUMBER 1 27

The study examined the impact of individualized credit counseling delivered to nearly 8,000 consumer clients during 1997. Credit bureau data provided objective measures of credit performance at a variety of margins between 1997 and 2000 for counseled clients, relative to a compar- ison group of uncounseled borrowers. Receipt of counseling was associated with a positive change in borrower credit profiles. Techniques to control for self-selection into counseling reveal that much of the improvement was attributable to characteristics unique to consumers who sought counseling. But counseling itself was associated with substantial reductions in debt and account usage, and appeared to provide the greatest benefit to those borrowers who had the least ability to handle credit prior to counseling. 

For a complete review of this paper please visit:  http://tcainstitute.org/workingPapers.html

IS TECHNOLOGY-ENHANCED CREDIT COUNSELING AS EFFECTIVE AS IN-PERSON DELIVERY?

Michael E. Staten
Norton School of Family and Consumer Sciences The University of Arizona
650 N. Park Ave., Room 427
P.O. Box 210078
Tucson, AZ 85721-0078
(520) 621-9482 statenm@email.arizona.edu

and
John M. Barron

Dept. of Economics
Krannert Graduate School of Management Purdue University
West Lafayette, IN 47907
(765) 494-4451 barron@purdue.edu 

February 2011
This research was jointly sponsored by the Consumer Federation of America and American Express as part of a multiyear program to identify best practices in the credit counseling industry and quantify the impact of those practices on consumers. The views expressed here are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of Philadelphia or the Federal Reserve System. This paper is available free of charge at http://www.philadelphiafed.org/research-and-data/publications/working-papers/. 

ABSTRACT
This paper compares outcomes for borrowers who received face-to-face credit counseling with similarly situated consumers who opted for counseling via the telephone or Internet. Counseling outcomes are measured using consumer credit report attributes one or more years following the original counseling. The primary analysis uses data from a sample of 26,000 consumers who received credit counseling either in-person or via the telephone during 2003. A second sample of 12,000 clients counseled in 2005 and 2006 was provided by one of the agencies to examine Internet delivery. Technology-assisted delivery was found to generate outcomes no worse – and at some margins better – than face-to-face delivery of counseling services.
CONCLUSIONS

Across several large samples of credit counseling clients, the analysis described above
could find no evidence that technology-assisted counseling was associated with subsequent client credit profiles that were worse than those for consumers who received face-to-face counseling.
If we take post-counseling client creditworthiness – as measured by commercially available risk scoring products one or more years after the counseling – as an indicator of whether a credit counseling experience was helpful to a consumer, then the evidence suggests that both telephone and Internet counseling can be just as effective as face-to-face counseling.

Several caveats to these findings should be noted. First and foremost, because the sample of participating agencies was not selected to be representative of industry-wide practices, the results cannot necessarily be considered representative of the typical experience of counseled consumers nationwide. Instead, they reflect what is obtainable from a group of agencies that emphasize client education and identification of the underlying cause of financial problems. The fact that telephone counseling generated outcomes that were no worse – and at some margins better-than face-to-face delivery of counseling services suggests that, when done well, the two delivery channels can be equally effective. 

The impact of delivery channel was determined on three separate indicators of post- counseling outcomes for consumers, measured up to four years after the initial counseling visit. Two of these indicators (a commercially available bankruptcy risk score product; a commercially available new account delinquency risk score product) represent general measures of creditworthiness. In addition, the model examines the actual incidence of bankruptcy among the sampled clients during the four-year period following counseling. While these indicators offer objective evidence on the consumer’s credit experience from a variety of angles, they aren’t the only possible indicators of counseling effectiveness. For example, survey evidence on consumers’ perceived financial stress and confidence in their financial situation, pre- and post- counseling, would augment the objective measures of consumer credit performance and provide a more complete picture of counseling’s impact.

Finally, the results on the role of debt management plans are particularly intriguing, but self-selection may be partly responsible. Clients who start DMPs outperform all other counseling clients on all of our outcome measures. Admittedly, clients who were recommended for DMPs are in better financial shape than clients who do not qualify. But the evidence also indicates that between two borrowers who are recommended for a DMP (i.e., borrowers for whom a DMP is both a workable option and the best option), the borrower who actually starts payments in a DMP fares significantly better on all outcome measures at two-year and four-year milestones after counseling. Perhaps there is some residual self-selection effect driving this result (e.g., borrowers who make a commitment to start a DMP are more motivated to repay than borrowers who do not – although both sets of borrowers were sufficiently motivated to take the step of seeking counseling in the first place). Alternatively, perhaps the DMP experience itself (e.g., budgeting to make regular DMP payments; continued interaction with and reinforcement from the counseling agency) generates the improvement in the outcome indicators. In other words, there may be "education" value in the DMP experience, an issue that has been hotly debated between the counseling industry and the U.S. Internal Revenue Service (which grants tax exemption for educational institutions) and various regulatory agencies in recent years. Given the significantly improved credit profiles for clients who do start DMP's this phenomenon deserves closer study. 

For a complete review of this paper please visit: http://tcainstitute.org/workingPapers.html

16th Annual Vehicle Finance Conference

This conference, co-sponsored by the AFSA Vehicle Finance Division and AFSA Education Foundation, is the first event of the year for the vehicle finance industry and held in conjunction with NADA's Convention & Exposition. The auto industry's premier conference  is developed and driven by members of the American Financial Services Association, the national trade association for the consumer credit industry. Vehicle Finance Division members will not only have the opportunity to exchange valuable information, but will be encouraged to help define and coordinate AFSA's strategy and special projects to benefit their companies and the industry. 

Graduate school teams from The University of Arizona and Wake Forest University were invited to present marketing strategy recommendations for new car financing for young buyers, delivered through auto dealers including differentiated products and processes. The students under my mentorship from the UofA, Tony Stovall, Laee Choi, Tory Ligon and Charles Lawry received a second place prize of $5,000 for their efforts on their presentation.

The Success and Failure of Counseling Agency Debt Repayment Plans

Eastern Economic Journal, 2012, 38, (99–117) r 2012 EEA 0094-5056/12 www.palgrave-journals.com/eej/ 



Daniel T. Brown, Charles R. Link and Michael E. Staten


ABSTRACT
This paper investigates whether success on a counseling agency-administered Debt Management Plan (DMP), as measured by the amount of original debt repaid, can be predicted at the time of counseling based on observable client and debt attributes. The paper utilizes a unique database of over 17,000 consumers who were counseled and recommended for a DMP by a large non-profit credit counseling agency during 2003. Of particular interest to counseling agencies and creditors is the finding that the magnitude of the interest rate reduction offered by creditors to consumers on a DMP has a significant, positive influence on debt repayment.


Keywords: Debt Management Plan; consumer finance; bankruptcy; credit counseling JEL: D11; E21; G21


INTRODUCTION
Millions of American consumers seek advice and assistance from a credit counseling organization each year. Upwards of one-third of these consumers enroll in voluntary repayment plans, called Debt Management Plans (DMPs), as an alternative to bankruptcy. Counseling agencies broker these unique plans by getting creditors to voluntarily exercise mutual forbearance in the form of concessions on finance charges and repayment terms, a halt to late fees and collection calls, and a re-aging of accounts to “current” status while the consumer is on the repayment plan. But, the majority of DMPs terminate prior to completion. Creditors worry that some borrowers opportunistically enroll (with the tacit approval of counseling agencies that act as screeners) just to get a temporarily lower interest rate with no intention of sticking with a plan to its conclusion. The moral hazard risk has contributed to creditor reluctance to make deep concessions on plans. But, a DMP can be a far less costly debt relief option for many consumers than either bankruptcy or debt settlement.1 Creditor reluctance to make concessions leaves many consumers unable to qualify for a beneficial DMP, as will be explained below.
This paper investigates whether success on a DMP, as measured by the amount of original debt repaid, can be predicted at the time of counseling based on observable client and debt attributes. One objective of building such a model is to identify the impact of creditor concessions on DMP participation and completion. In addition, a predictive model accessible to both counselors and creditors could be used to move the industry away from the typical one-size-fits-all DMP and toward a system in which creditors are more willing to make deeper concessions for those consumers with a demonstrated greater need. A predictive model could also help to boost DMP completion rates by giving agencies a tool to make operational adjustments to allocate more resources to clients who are likely to need extra assistance as they work through their repayment plans.

We are not aware of any prior econometric studies of the determinants of DMP payment experience. With more than 1.5 million households projected to file for bankruptcy in 2010, at the same time that credit card chargeoffs for the largest issuers have soared about 10 percent of outstanding balances, there is clear need for creditors and counseling agencies to reduce the barriers to making DMP products available to a wider segment of consumers in order to prevent bankruptcies and lower losses.2 This paper examines the factors that determine the repayment of debt through a DMP using data on over 17,000 consumers who were counseled and recommended for a DMP by a large non-profit credit counseling agency during 2003. The objective is to identify attributes observable at the time of counseling that predict which consumers will be more likely to do well on DMPs, among the pool of clients for whom a counselor recommended a DMP at the end of the initial counseling session.
The paper is organized as follows. We first provide background on the DMP and the resulting partnership between consumers, counselors, and creditors. Then a brief literature review regarding the potential determinants of DMP success is given. The methodology underlying the research is then discussed. Next, the data used in the empirical models are described. Regression model estimates of DMP repayment are subsequently analyzed. We then acknowledge and explore sample selection issues and provide additional insight into the effectiveness of the counseling agency’s screening process. Finally, we offer concluding thoughts. 


For the complete paper please visit:  http://tcainstitute.org/workingPapers.html

MoneySmarts for Teachers A Personal Development Conference for Granite State Teachers

http://www.nhjumpstart.org/MoneySmarts.htm

Take Charge America Institute and Jump$tart

http://www.jumpstart.org/take-charge-america-instituteff.html

Why teens mistrust banks

Among other suspicions, teenagers think the stock market is rigged to benefit Wall Street bankers.

By MSN Money partner on Tue, Jun 28, 2011 12:54 PM

This post comes from Brian O'Connell at partner site MainStreet.

American teens are not only mistrustful of major financial institutions, they're actually growing resentful, and that could impact both the long-term savings habits and bottom line of U.S. banks and investment firms for a long time to come.

The data come from the University of Arizona's "Take Charge America Institute for Consumer Financial Education and Research," which says it's been working on the financial literacy of America's youth since the institute was founded in 2003. But what it's been finding lately has less to do with literacy and more to do with full-blown resentment against America's financial institutions.

In a study released last week, institute researchers conclude that American teenagers were especially shaken by the financial crisis of 2008 and 2009, and to a large extent still are today. After seeing their parents struggle with layoffs, high debt and mortgage payments that are becoming more and more difficult to meet, teenagers clearly lay the blame at the feet of "banks, credit unions, credit card companies, businesses and investment institutions," says the poll.

Active distrust
"This poll is extremely revealing," says Michael Staten, a professor at the University of Arizona and director of the institute. "In addition to students' lack of knowledge about the building blocks of personal finance, which we have seen for years in these types of surveys, it shows the next generation of American consumers now also actively distrusts many of the pillars of the financial services industry." Post continues after video.
Staten says the study data indicate that younger Americans have largely disregarded the need for understanding how money and finance work, and now that lack of knowledge is really sharpening their ire toward banks and financial services companies. Not knowing how banking and investment firms operate seems to add to the hostility young Americans evidently hold toward the money management industry.

The good news, Staten says, is that teenagers are starting to recognize the importance of learning more about money -- and how it works.

"Despite their strong suspicion of financial institutions, these students responded that they believe education is important to their futures and that financial success can be achieved with the right financial decisions," he adds. "This is a hopeful sign and it tells us that more financial education is needed. It may not yet be too late to defuse this sense of cynicism about all things financial, and to prepare these young consumers for the financial choices they will face in adulthood."

Greedy bankers
Still, the University of Arizona data show that younger Americans' attitudes toward financial firms doesn't differ too much from those of the rest of the population:

• The majority of students who responded to the survey (60%) believe that credit card companies often entice people into taking on more debt than they can handle.
• More than 70% of students believe that businesses often try to "trick young people" into spending more than they should.
• Only a bit more than 25% of students disagreed with the following statement: "The stock market is rigged mostly to benefit greedy Wall Street bankers."
• Only 15% of students are aware that credit unions are different from banks with respect to their not-for-profit status.
• Fewer than one in five students who responded to the survey (17%) disagreed with the statement, "Banks are mostly interested in getting my money through hidden fees."

Who is at fault?
Clearly, the younger generation holds a serious grudge toward Wall Street in general, and banks and credit card firms in particular. But financial services firms only have themselves to blame, and will have to reach out to tomorrow's consumers to earn their trust and their business.

"This isn't just about bad PR for the financial services industry," says Dan Iannicola Jr., CEO of the Financial Literacy Group, which conducted the study for the University of Arizona. "Adolescents with this level of distrust of financial institutions become adults who don't open bank accounts, invest for retirement, insure against risks or finance important purchases like college educations or homes.

"This type of financial disengagement could push a generation of consumers away from mainstream institutions and toward risky alternative service providers or toward simple inactivity, which has its own perils."