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.