Nonprofit credit counselors provide one-on-one help for consumers in crisis

For decades, the nonprofit consumer credit counseling industry has provided financial education in the form of personalized, one-on-one counseling that takes a holistic approach to money management. The industry's counselors work in partnership with individual consumers to design and implement action plans for resolving household debt. As conversations with some of the major nonprofit consumer credit counseling providers in the Ninth Federal Reserve District reveal, the industry's aim is to deliver services that are grounded in knowledge, quality, and compassion, whether in good economic times or bad.

A network of agencies

The nonprofit consumer credit counseling industry took root in the middle years of the 20th century, in response to escalating levels of consumer debt that resulted from the increasingly widespread use of credit cards. In the early 1950s, major card issuers established the earliest independent, nonprofit counseling agencies as a means of reducing the number of defaults among their cardholders. Additional agencies began sprouting up over the next two decades, often as spin-offs of existing social-service organizations.

Today, nonprofit consumer credit counseling agencies serve nearly every corner of the country. Some operate independently, but most are connected by membership networks that provide training and advocacy services. By far the largest, best-known, and longest-established of these networks is the National Foundation for Credit Counseling (NFCC), which represents nearly 100 member agencies that deliver counseling at more than 800 locations throughout the U.S. The NFCC's membership roll includes the largest counseling providers in the industry, such as GreenPath Debt Solutions, Money Management International, and agencies that use the Consumer Credit Counseling Service (CCCS) name.

NFCC member agencies come in different shapes and sizes. Some are stand-alone entities with just a few employees. Others are regional or national operations with dozens or hundreds of counselors across multiple branches. No matter what form they take, all NFCC member agencies must meet rigorous quality and accreditation standards. In addition, all financial counselors at NFCC member agencies must become certified by passing an industry-standard, six-module course on credit and personal finance. Many counselors complete additional coursework to gain certification in foreclosure, bankruptcy, or reverse mortgage counseling.

Ten NFCC member agencies are currently operating in the Ninth District. Most of them have provided credit counseling for 30 or 40 years, and some have histories as social-service agencies that date back much further. For instance, The Village Family Service Center, headquartered in Fargo, N.D., began offering credit counseling in 1975, but its full history dates to 1891, when it was established to help children who arrived in the Northern Great Plains on the orphan trains.

A number of NFCC member agencies in the Ninth District supplement their one-on-one counseling services with other offerings, such as financial education seminars and first-time homebuyer workshops. Some also engage in policy advocacy, coursework development, and other activities in support of consumer financial education. CCCS of Montana, the largest provider of financial counseling in that state, is one example. The organization was one of the main proponents of a recent initiative to cap the interest rates that payday lenders in Montana can charge. Another example is CCCS of the Black Hills, located in Rapid City, S.D. It houses the American Center for Credit Education, a publisher of widely used financial education curricula.

Designing an action plan

Nonprofit consumer credit counseling agencies serve anyone, regardless of income, family status, or other life factors. Historically, the bulk of the clientele has been made up of moderate-income, working-class people.

"The average household income of our clients is probably in the upper $30,000s to mid-$40,000s range, which represents a pretty wide swath of the population in the Midwest," says Dan Williams, program director for LSS Financial Counseling Service, an arm of Lutheran Social Service of Minnesota.

Some clients are in decent financial shape overall and just need help designing a budget. More typical, though, is a client who has substantial credit card debt and little or no savings. The person's income is spread so thin to cover mortgage or rent, living expenses, and credit card payments that any job loss, income reduction, or major life event can be financially disastrous.

Once a client has taken the initial step of contacting an NFCC member agency, the counseling process begins with an hour-long session during which the client and a counselor discuss the client's full financial picture, including all income sources, expenses, and debts. The counseling can take place in person, on the phone, or over the Internet, depending on the client's preference and his or her proximity to the counseling office. The counselor and client work together to identify options and design an action plan for reducing debt. In most cases, the counselor will schedule subsequent meetings to continue the counseling and monitor the client's progress in adhering to the plan. Depending on the client's needs, the counseling relationship can last anywhere from one session to several years. The initial counseling session is offered for a low fee or, in cases of true hardship, free of charge. Subsequent services are offered at little cost—typically, $25–$30 a month.

For some clients with heavy debt burdens, one course of action is to establish a debt management plan, or DMP. Under a DMP, the credit counseling agency negotiates directly with the client's creditors to reduce the payments, interest, and fees on each credit card account. The client makes one payment per month to the counseling agency and the agency then disburses the entire payment to the client's creditors, according to the terms of the restructured agreements. In exchange for the counseling agency's intervention in securing at least some payment on the debt, the creditor pays the counseling agency a fee—usually, 5 to 10 percent of the total monthly payment—known as a fair share payment. Fair share payments, counseling fees, and public and private grant money are the primary sources of revenue for nonprofit credit counseling agencies.

A DMP is not an appropriate choice for everyone; some clients don't need any formal intervention, and some lack the income to make any credit payments at all. Across NFCC member agencies, approximately one-third of clients choose a DMP and the remaining clients pursue less formal plans for addressing their financial problems. For those who choose the DMP option, however, the effect can be dramatic. According to Tom Jacobson, director of CCCS of Montana, "If a client goes on a DMP, we can knock down the time they're in debt from 25 or 30 years to an average of 3 1/2 years."

Delivering empathetic services

Many clients have never sought any sort of help from a social-service agency before. They may qualify for public benefits such as energy-assistance grants or state-sponsored health insurance plans and not even know it. One role of the financial counselor is to determine what benefits, if any, a client qualifies for and then connect the individual with the appropriate agencies. Some counseling operations use specialized tools to facilitate the benefit-screening process. For example, CCCS of Montana, working in partnership with the Children's Defense Fund of Minnesota, developed Bridge to Benefits (www.b2bmt.org), a software application that analyzes a client's income, family size, and other variables and determines which federal and state benefits he or she is eligible to receive. The application is in use at CCCS of Montana's seven offices around the state and has been adopted for use in other states, including Minnesota (http://mn.bridgetobenefits.org).

Creating a safe, respectful, collaborative counseling environment is essential. The stigma around financial hardship can be strong; clients may feel embarrassed about their need to seek counseling and may expect to be judged or shamed for their predicaments.

"We're extraordinarily fierce about focusing on a nonjudgmental, nonbelittling delivery of high-quality, empathetic services," says Dan Williams. "When you talk to us, we're not going to judge or ridicule you. We're going to offer an objective, supportive way to figure out your financial situation and come up with a game plan."

Stuart Baker, a counselor with GreenPath Debt Solutions in Marquette, Mich., adds, "We're not some kind of drill sergeant who's going to yell at you for what you've done. It's not about assigning blame. It's about finding the options that will work."

For some clients, the unrelenting stress of financial problems leads to serious health issues.

"We talk to people who say their every thought revolves around their financial problems," says Cherrish Holland, a counselor at LSS Financial Counseling Service's Willmar, Minn., office. "They're depressed, they're not sleeping. They might be having chest pains or can't even get out of bed." Financial counselors are trained to be attuned to signs of depression, anxiety, and stress-induced physical ailments. If clients exhibit symptoms, counselors refer them to health services in their area.

A matter of visibility

According to many counselors at NFCC member agencies in the Ninth District, the biggest challenge their industry faces is a lack of visibility. Nonprofit credit counseling agencies are lean operations with scant funds for marketing and advertising. Their biggest source of publicity is word-of-mouth referrals; most clients hear about the agencies' services from family members or friends who received counseling in the past. The lack of visibility means some consumers don't know that help is available, or—in the case of consumers who only learn about credit counseling once their debts have become seriously delinquent—don't receive help until late in the debt cycle, when their options have dwindled. Counselors stress the importance of early intervention.

"The earlier you come in, the better choices you have for solving your financial problems. The longer you wait, the more difficult it becomes, in terms of the choices available and the decisions you'll have to make," says Bonnie Spain, executive director and CEO of CCCS of the Black Hills.

The lack of visibility and advertising resources also means legitimate nonprofit counseling agencies have a hard time competing with well-funded, unscrupulous companies that present themselves as kindhearted debt-assistance providers but are actually out to fleece consumers. These scammers advertise heavily on the Internet and late-night television. They prey on desperate, debt-ridden consumers who are trying to do the right thing.

In the words of Gail Cunningham, vice president of public relations for the NFCC, "The consumers who are hurt by these scams are well-meaning people. These aren't people who hope they never hear from their creditors again. These are people who are really concerned about not being able to pay their debts. They hear an ad on late-night TV and they think, 'This is an answer to my prayer, this is exactly what I wanted.' And they start dialing, only to be duped."

In the 1990s and early 2000s, a prevalent scam involved for-profit entities establishing nonprofit front organizations that posed as legitimate counseling agencies. The nonprofits' "counselors" used high-pressure sales tactics to convince unsuspecting clients to sign up for DMPs. The nonprofits then pocketed the clients' lump-sum debt payments and funneled them to for-profit background organizations instead of paying off the clients' creditors. A 2004 Congressional investigation and subsequent Federal Trade Commission (FTC) ruling led to the dissolution of most of the for-profits-masquerading-as-nonprofits arrangements.

The rise of the debt-settlement companies

Currently, the prevailing debt-assistance scam is one perpetrated by bad apples in the debt-settlement industry. Debt settlement, a negotiation process in which a creditor agrees to settle a debt for a lump-sum payment that is less than the full debt amount, is a valid service that some legitimate companies offer. It can be an appropriate choice for consumers in certain rare circumstances, but it was never meant to be an across-the-board solution for all consumers who have big credit card balances.

"For someone who is in a serious accident, who can't work or pay their debts for a period of time and who then comes into a sum of insurance money from the accident, it might be an appropriate choice to use that money to settle the missed debt payments," says Bonnie Spain, "but those customers would be very, very small in number."

During the run-up to the recent financial meltdown, as record levels of consumer debt helped swell the pool of potential debt-assistance customers, sham debt-settlement companies began popping up in large numbers. By one estimate, as many as 2,000 of these companies are operating in the U.S. They use pervasive and often misleading advertising to present their services as a fix-all for consumer credit problems. Common sales tactics include blurring the lines between themselves and legitimate financial counseling agencies, claiming to have special negotiating relationships with credit card companies, or implying a government affiliation. "We even saw one ad that was set in front of the White House," recalls Gail Cunningham.

For many of the consumers who respond to the ads, the sham debt-settlement companies do more harm than good. The companies collect large, up-front, monthly payments from customers, ostensibly to set up a holding account that will be used to pay a yet-to-be-negotiated settlement to the creditor. Typically, the negotiation process drags on for months with little or no resolution. If a customer chooses to cancel the arrangement, the company often refuses to refund the payments the customer has made. In addition, the companies instruct customers to stop making payments to their creditors during the negotiation process but never disclose that, by stopping payments, a customer could destroy his or her credit, incur fees that will substantially increase the debt, and even be subject to garnishments or other legal actions.

In response to consumer complaints and the efforts of consumer advocacy groups, including the NFCC, federal and state regulators and policymakers are taking action to halt abuses in the debt-settlement industry. As of an August 2010 Senate hearing on debt-settlement practices, the FTC had brought nine actions against debt-settlement companies since 2004. State regulators and attorneys general had filed more than 120 actions, and several state legislatures had moved to outlaw the industry's worst practices. For example, Minnesota and Montana enacted laws in 2009 that, among other provisions, require licensing of debt-settlement companies and limit the fees they can charge.

The most sweeping regulatory response so far is an October 27, 2010, FTC ruling that applies to debt-settlement services sold over the phone. The ruling prohibits these services from carrying up-front fees; specifies that any holding accounts set up for the purpose of settling debts be maintained at an independent financial institution; and requires companies to disclose information about the length, costs, and possible negative consequences of the process. Debt-settlement companies that do not comply with the new rules could be fined $16,000 per violation. Regulators and consumer watchdogs are monitoring the industry to assess the recent ruling's effectiveness.

While NFCC-certified financial counselors welcome the FTC ruling and similar actions, they recognize that there may always be some bad apples around to spoil consumers' hopes. As one counselor put it, "When companies like these get their hands slapped, they just change addresses and change their names, and then they move on and do business somewhere else."

A peak and a shift

Not surprisingly, nonprofit consumer credit counseling agencies saw unprecedented demand for their services during the recent economic meltdown. According to Gail Cunningham, NFCC member agencies counseled approximately 2.5 million people in 2007, before the mortgage and financial crises hit full-force. In 2009, the total swelled to approximately 4 million. The number of people counseled for housing issues more than doubled, from 362,527 in 2007 to 827,549 in 2009. The demand for bankruptcy counseling trended upward as well, from 1,099,281 in 2007 to 1,288,065 in 2009. Many NFCC member agencies have seen their client volume double or triple. For example, LSS Financial Counseling Service, which currently has 34 financial counselors at 10 counseling locations across Minnesota, saw demand grow from a steady yearly total of about 5,000 clients in the early to mid-2000s to more than 17,000 in 2009.

"We were in a position where we were booked out; we just didn't have the capacity to serve folks," says Susan Aulie, the agency's senior director of financial services. "People were waiting four to six or even up to eight weeks to get an appointment, and obviously, when people are in a financial crisis, they need the help now, not six or eight weeks from now." A low-interest loan from Thrivent Financial Foundation and the Lutheran Community Foundation enabled LSS Financial Counseling Service to hire additional counselors to meet the demand.

Not only has the clientele at NFCC member agencies grown, there also are signs that its demographic makeup has shifted. Nationwide, the average household income of clients at NFCC member agencies in 2007 was $29,478. In 2009, it was $43,434. Counselors at CCCS of Montana are seeing a greater proportion of clients with white-collar jobs than ever before. Cherrish Holland of LSS Financial Counseling Service reports seeing more clients with high education levels than in years past. At The Village Family Service Center in Fargo, Financial Resource Center Director Sheri Ekdom notes that counselors have seen an uptick in clients in the 35–45 age range—a time of life when people usually become more financially secure, not less so.

According to an annual NFCC survey, in 2009, for the first time ever, job loss was the number one reason consumers sought counseling. The accompanying income losses have been severe. According to Dan Williams, LSS Financial Counseling Service sees many clients whose household income has been cut from a range of $70,000–$90,000 down to $28,000–$40,000.

A gradual drop-off

The peak client numbers that nonprofit consumer credit counselors saw in 2009 appear to be slowly falling. NFCC member agencies in the Ninth District began to see a gradual decrease in client volume in 2010. For example, The Village Family Service Center saw a slight drop-off beginning in June and July. As of September, Sheri Ekdom projected calendar year 2010 would show a 7 to 8 percent decrease in client volume compared to 2009 numbers.

While the decline could be read as a sign that the economy is improving, counselors attribute it to other factors. According to Tom Jacobson of CCCS of Montana, the decline is due in part to competition from dubious debt-settlement companies and in part to recent efforts by credit card companies to circumvent nonprofit counseling agencies. Some credit card issuers have launched in-house credit counseling operations that negotiate directly with selected debtors. The practice has raised concern among some consumer advocates, because credit card companies may have an interest in seeing their own claims paid first, even though that might not be what's best for their customers' overall financial situations.

Another factor in the declining client numbers, according to multiple counselors in the Ninth District, is consumer fatigue.

"I don't have scientific proof of this, but I think there are people who are getting tired and maybe making a choice of not doing anything," says Sheri Ekdom. "We've worked with some people on their housing situations for five, six, seven months, and they're not getting anywhere with the lender. There's a sense of 'Why should I continue?' "

The silver lining

Even if client numbers drop substantially from their recent high, financial counselors anticipate that demand for their services will remain strong. In the relative short term of the next several years, counselors expect many consumers will need assistance with the delayed consequences of the economic downturn.

Dan Williams predicts, "We'll need to put efforts toward helping the people who've been collateral damage in this economy. There's going to be a huge number of families around the country who'll need to rebuild their finances over the next five years, because they've had their credit toasted by a foreclosure or wage garnishment or an interruption in income. They've had unpaid bills in 2009 or 2010 that could come back to haunt them years later, and things like insurance and rental deposits will end up costing them more because their credit is poor."

Counselors concur that in the long term, no matter what economic trends prevail, there will always be a need for the services they provide. Even in good economic times, people will experience job losses, medical emergencies, divorces, legal troubles, or other events that can trigger personal financial crises. And there will always be people who, due to a complex mix of emotional and psychological motives, simply don't manage their finances wisely.

"The dynamics of managing money are more than mechanical," observes Susan Aulie. "It's not just about adding and subtracting and knowing if you have enough money in your checkbook. There are so many external forces around the emotional part of why we buy things. People spend money to fill a void or to keep up with the Joneses. I don't think that's ever going to go away."

One silver lining of the recent financial crisis, from a counselor's perspective, is that it has generated a new awareness and openness about personal financial matters.

"People seem a little more open to talking about things like putting money in savings and making different choices about expenses," says Sheri Ekdom. "I think we might be at a teachable moment, where even people who haven't been directly affected by the housing crisis and job losses are looking around and thinking, 'That could be me,' and 'Am I prepared?' We're finding that they really want to talk about preparing for emergencies. That's a good thing."

Thanks to nonprofit consumer credit counseling agencies, whether someone needs guidance in preparing for a financial emergency or in navigating through one, help will continue to be just a phone call away.