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Article Excerpt
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 comparison 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.
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Each year, millions of households find themselves overwhelmed with debt and struggling to maintain their monthly payments. In 2003, over 1.6 million U.S. households resorted to personal bankruptcy as a solution. (1) Upward of nine million people sought advice and assistance from a credit counseling agency, sometimes prior to bankruptcy but mostly as an alternative to bankruptcy (Consumer Federation of America and the National Consumer Law Center 2003). Providing assistance to financially troubled consumers has become a growth industry: as recently as 1990, the annual number of new clients seeking assistance at credit counseling agencies totaled less than 500,000. (2)
We are aware of no studies to date that demonstrate the impact of credit counseling on the subsequent credit usage of counseled borrowers. There are at least two reasons why such evidence would be valuable. First, public policy is increasingly viewing counseling as important for preventing financial problems in the future. Homeownership counseling has long been required by the U.S. Department of Housing and Urban Development in conjunction with a variety of affordable housing programs. More recently, regulatory attempts to reduce predatory lending in mortgage markets have required mandatory financial and homeownership counseling for subprime borrowers who are considering high-cost mortgage loans. Additionally, an important provision of the new federal bankruptcy law (effective in October 2005) requires that all consumers receive credit counseling from a court-approved provider prior to filing for bankruptcy and another round of counseling prior to receiving a discharge of their debts under either Chapter 7 or Chapter 13 of the Bankruptcy Code. Each of these counseling requirements seems to envision either a rehabilitative or preventive role for credit counseling to avoid future financial problems. A small body of empirical work has established that prepurchase homeownership counseling reduces mortgage delinquency (Hirad and Zorn 2002) and raises prepayment rates (Hartarska and Gonzalez-Vega 2005). Regarding the question of the impact of credit counseling on borrowers who are experiencing financial distress, however, the literature is silent.
A second reason for determining the value of credit counseling is that the market's ability to continue providing these services requires it. Most of the credit counseling industry in the United States follows a peculiar business model in which the bulk of the revenue generated by counseling agencies derives from a debt repayment product (called a debt management plan or DMP) delivered to a subset of borrowers who receive counseling. Unsecured creditors typically pay agencies a percentage of the funds recovered under these DMPs but do not compensate the agencies for counseling borrowers who do not enter a DMP. Clients who start DMPs repay some or all of their unsecured debt under the plans, and at least one study found that clients who stay on plans for more than eighteen months reported improved financial management behaviors and fewer stressful events (Kim, Garman, and Sorhaindo 2005).
However, for most agencies, customers on DMPs represent the minority of clients counseled. (3) For the remaining majority of counseled clients, the agency output is less tangible, consisting of education, budget analysis, advice, possible referrals to social service agencies or other institutions to solve specific problems, and general recommendations for specific changes in clients' behavior. Creditors do not compensate agencies for counseling these consumers. In fact, creditors generally do not know when one of their accountholders has been counseled, unless that consumer agrees to a DMP.
A recent report by the Consumer Federation of America concluded that "multi-service agencies are a dying breed.... The multi-service agencies are struggling to keep affordable counseling services for those consumers who are not enrolled in DMPs" (Consumer Federation of America and the National Consumer Law Center 2003, 19). The Consumer Federation of America report sharply criticized the counseling industry for maintaining business models that rely to such a large degree on funding from DMPs. But given the absence of demonstrated value from counseling itself (outside of a plan designed to collect a debt), the market has yet to produce alternative revenue streams to fully compensate for those services for the majority of agencies.
This paper takes a step toward determining whether credit counseling is associated with a measurable positive effect on a consumer's subsequent credit behavior. We examine the impact of one-on-one counseling delivered during a five-month period during 1997 by five nonprofit credit counseling agencies to approximately 8,000 clients. Recognizing that the DMP product offered to qualified consumers conveys benefits separate from the counseling itself, we focus on borrowers who receive financial counseling only but do not enroll in a DMP. Credit bureau data provide objective measures of credit performance for these clients over a three-year period following the initial counseling session, as well as for a large comparison sample of individuals with risk profiles and geographic residences similar to the client group in 1997 but who were not counseled.
METHOD
Any study of the impact of credit counseling on borrowers faces some formidable methodological hurdles, as discussed by Mallach (2001) and Quercia and Wachter (1996). For example, counseling content may vary across providers so that some means of standardization is necessary to properly define the "treatment" of counseled borrowers. The counseling content will also dictate the objectives, which in turn will influence the researcher's choice of behaviors to examine for evidence of counseling's effectiveness. In order to test the impact of counseling on borrowers, a research design must identify and incorporate data on observationally similar borrowers who did not experience the counseling treatment. In addition, the treatment is generally not randomly assigned across borrowers. Instead, borrowers typically choose whether or not to seek counseling and those who do are likely to differ in important ways (e.g., motivation, experience with financial difficulties, severity of financial distress) from those who do not. If these differences are also correlated with measures of counseling success, then the research design must attempt to disentangle the influence of the consumer's initial characteristics from the influence of the counseling itself. This section discusses how the current study addresses each of these methodological issues.
Standardization of Content
Credit counseling entails the tailoring of information and advice to an individual borrower's specific circumstances. All of the counseling analyzed in this paper stems from one-on-one sessions between the borrower (often a couple) and a certified agency counselor. The counseling assessed in this study was administered between April and August 1997 by five nonprofit member agencies of the National Foundation for Credit Counseling (NFCC). The requirements imposed by the NFCC for agency membership standardize the counseling treatment. All clients received one or more sessions with a certified credit counselor. The initial 60- to 90-minute session provided an opportunity to analyze the family's or individual's financial situation in a give-and-take forum that raises and resolves questions related to debt, income, and payment issues. The counseling session normally includes several key components: a discussion of the financial goals of the family, financial strengths and weaknesses, and a comprehensive detailed review of the family's budget and spending patterns. In essence, counseling amounts to "decision assistance" for financially troubled consumers. A written action plan is developed to identify the next steps. As appropriate, referrals to organizations in the community are made--perhaps to a social service agency to address issues that may be contributing to family instability (e.g., addiction). Some clients may participate in additional follow-up sessions.
Identification of Counseled Individuals
The NFCC obtained the cooperation of five member agencies for this study. Participating agencies included the Consumer Credit Counseling Service (CCCS) of Atlanta, CCCS Farmington Hills (suburban Detroit), CCCS of San Francisco, CCCS Southwest (Phoenix), and CCCS of Dallas. Each of these agencies operated multiple offices in their geographic market area (sometimes encompassing several states). Each agency provided data on clients who received an initial counseling session between April and August 1997 but did not establish a DMP; a total of 55,527 clients.
Clients in the sample received counseling evaluation and education but no additional product. The sample consists of consumers in four categories: (1) those who were not recommended for a DMP because the counselor determined they could handle their debts on their own (approximately one-third of all counseled clients); (2) those for whom debts were too high, income too low, or one or more creditors were uncooperative such that it prevented setting up a DMP that would amortize the outstanding debt within 48 months; (3) those who had specific problems that prompted a referral for other legal or social service assistance (e.g., substance abuse programs); and (4) those to whom a DMP was offered but the consumer declined. Consequently, the sample spans the range of economic circumstances of counseled clients but does not include those clients who received counseling as well as the rehabilitative benefit (if any) of the debt payback experience and the regular agency follow-up contact associated with starting a DMP.
Not all the counseling sessions were conducted face to face. Telephone counseling emerged in the mid-1990s and has become an increasingly popular alternative to in-person meetings. Consumers may favor telephone counseling because of the convenience in terms of reduced time and travel...
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