You are probably familiar with the Credit Counseling Industry from the debt management plan proposals you receive from Credit Counseling Agencies (CCAs) on some of your customer accounts. For most banks, that is the extent of the relationship with CCAs, but for several banks, a more collaborative relationship has proven to be very beneficial for the banks and their customers.
Credit Counseling Supports Collection Efforts
Credit Counseling exists to help consumers get a better handle on their finances, especially when they are having trouble managing their debt. During a credit counseling session, a counselor completes a thorough review of the consumer's financial situation, prepares a current and projected budget, and provides recommendations and resources specific to their financial situation. If appropriate, the customer will have an opportunity to enroll in a Debt Management Program, which is a structured repayment program for unsecured debt where a consumer repays their creditors over a 3 – 5 year term. This is not debt settlement; consumers will pay 100% of their debt back, but at lower interest rates.
Credit Counseling’s holistic budget counseling and debt management program strives to put clients in a better position to meet all of their expenses, rather than having to decide which bill they can afford to pay each month. Any improvement the client can make to their personal finances will lead to higher recovery rates for their creditors.
Stay Ahead of Debt Settlement by Thinking Holistically
The best way to combat debt settlement is to provide your customers with affordable solutions before they feel the need to search for other options. Most customers will show signs of stress that present your representatives with the chance to offer credit counseling before they start searching the internet for debt relief options. When a customer takes the time to call and ask for lower interest rates, payment holidays or internal repayment plans, they are searching for help and may be struggling to make payments on other credit lines and essential housing and living expenses. In these cases, offering an internal program may provide some relief to the customer, but it will not address their overall situation.
By collaborating with a reputable non-profit credit counseling agency you will have a trusted resource for your representatives to give consumers, showing that your organization cares about the consumer’s overall financial health and not just the accounts they hold with your company. At the same time, financial education will be provided that includes the negative consequences of debt settlement and bankruptcy.
The CFPB and Credit Counseling
As consumer debt rises, regulators increase their attention on first and third party collection efforts. By taking a proactive approach to connect struggling customers with credit counseling, your organization is demonstrating that you care about your customers’ overall financial well-being and not just the recovery on your account. See what the CFPB says about credit counseling here.
Encourage Credit Counseling at Every Stage of Collections
Currently, the policy of many banks is to pull accounts back from a third party collection agency when they receive a debt management plan proposal from a CCA. This policy dis-incentivizes collection agencies from referring consumers to credit counseling for further assistance. Creditors should be encouraging their third party collection agencies to refer customers to credit counseling agencies when appropriate allowing the industries to work more closely together for the benefit of consumers. With this in mind, a great first step for creditors would be to run a 2 year pilot that incorporates a referral to credit counseling at every stage of collections.
Considerations when Choosing a Reputable Credit Counseling Partner
Are they licensed to operate in the states that you do business? Some counseling agencies are licensed to operate nationally, while others may be licensed in just a handful of states. If you are a large collection agency, then it will be important to have national coverage, however, if you are an agency that operates in just a few states then you may want to consider working with a smaller agency doing business in the same area.
Finally, does the agency have the capacity and partnering experience to handle your referral business? You want to work with a counseling agency that recognizes that the quality of their performance as a referral partner is a reflection on the referring organization. Can they do “on the spot” counseling or do they need to schedule appointments? Do they have the reporting capabilities to track the metrics that are important to you?
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