On July 30 and 31, 2009, the Federal Reserve Bank of Philadelphia (the “Bank”) held an invitation-only conference entitled "The Future of Consumer Credit Counseling" (the "Conference"). Overall, the Conference presented views from invited speakers from academia, the credit counseling industry, creditors, and government regulators and policymakers.
The Bank’s Payment Cards Center, through forums and research, provides “insights into developments in consumer credit and payments that are of interest not only to the Federal Reserve but also to the industry, other businesses, academia, policymakers, and the public at large.”
Below is a brief summary of the highlights of the two-day Conference:
Day One
Day One of the Conference featured a presentation from keynote speaker Michael Staten, director of the Take Charge America Institute for Consumer Financial Education and Research at the University of Arizona, as well as presentations from a "Research Panel." The Research Panel was comprised of Steve Bucci of the MMI Financial Education Foundation, Val Klein of CCCS of the Delaware Valley, and Manuel Quigore of Lundquist Consulting.
Professor Staten's message to the Conference audience was that, in his opinion, the industry will not survive unless it evolves from its roots – perceived to be focused on the repayment of unsecured debt to creditors – into a vehicle for education. Staten strongly warned that the old model (as it may be practiced) is not sustainable and that, equally as important, the traditional industry funding structure needs to be changed. Staten offered the following advice for steps that industry can and should take. First, the industry should work with creditors to expand "less-than-full-balance" debt management plan products and other less-than-full-balance options. Second, the industry should capitalize on the core educational nature of its services and engineer new products with that in mind.
The focus of the Research Panel was a recently-released study, the “Credit Counseling Value Study,” conducted jointly by the National Bankruptcy Research Center and the MMI Financial Education Foundation. The study was published in May 2009. Specifically, the audience was abuzz about the study's "15 percent" finding; fifteen percent refers to the study's finding that 15.2 percent of all clients who received pre-filing bankruptcy counseling did not file bankruptcy during the study period. A summary of the study’s findings is available at www.mmifoundation.org/06112009.asp; to request a copy of the study, email the National Bankruptcy Research Center at dpatel@lundquistconsulting.com.
Day Two
Day Two of the Conference featured three panels. Panel One: Credit Counseling and the Current Economic Environment; Panel Two: Coordination and Regulatory Issues; and Panel Three: Determinants of Consumer Choice. Day Two offered a number of highlights to Conference participants and also put a spotlight on the differences between the credit counseling industry and the (for-profit) debt settlement industry.
In particular:
Alice Hrdy, Assistant Director of the Division of Financial Practices at the Federal Trade Commission (“FTC”), discussed the FTC's notice of proposed rulemaking under the Telemarketing Sales Rule relating to debt relief services. See www.ftc.gov/opa/2009/07/tsr.shtm for the FTC's July 30, 2009 press release and link to the 150+ page notice itself. A copy of our July 31 Alert on the subject can be found at www.venable.com/federal-trade-commission-issues-notice-of-proposed-rulemaking-to-amend-telemarketing-sales-rule-to-cover-debt-relief-services-07-31-2009.
Hrdy focused her comments on three aspects of the rulemaking. First, the rulemaking would apply to inbound calls that are triggered by media advertising (e.g., ads prompting a consumer to call a toll-free number), not just outbound telemarketing calls. Second, the rule would not apply to "bona fide" nonprofits. And, third, there would be an "advance fee" ban that would be similar to one under the federal Credit Repair Organizations Act (the FTC is proposing that no fees be permitted to be charged or collected until each debt is actually settled). Hrdy noted that the FTC will be holding a public forum on this rulemaking once the comment period has closed on October 9, 2009.
Another highlight came from another federal regulator, Ned Pollock, Deputy Comptroller/Credit Market Risk at the Office of the Comptroller of the Currency of the Department of Treasury (“OCC”), who discussed a highly-charged accounting issue relating to the timing of banks' recognition of forgiven debt (that occurs when banks settle debt at less than the full principal balance owed). While Pollock emphasized that this issue is largely out of the OCC's hands (because the guidance issued in this area is multi-agency guidance based on regulatory accounting rules), he left the door open for further examination of the issue (although did not offer much optimism for any changes in this regard).
A recurring theme from the credit counseling industry on Day Two was the need to encourage and promote innovations with viable less-than-full-balance product alternatives by creditors and credit counseling agencies alike.
On Day Two, another common theme articulated by representatives of the credit counseling industry was concern about the advertising, marketing and other business practices of the debt settlement industry. The debt settlement industry often found itself on the defensive, as it articulated the rationale underlying the industry's typical fee structure and business practices. In fact, at one point, an audience member – a professor from the Thomas M. Cooley Law School in Michigan – provided the audience with copies of a study from Southern Methodist University (“SMU”) in support of the debt settlement industry. In addition, Wesley Young from The Association of Settlement Companies (“TASC”) touted the good work of TASC members, citing a 55 percent success rate for clients. There was considerable discussion about the definition of "success" in connection with debt settlement, with the FTC's Hrdy noting that the new proposed rulemaking offers a strict definition for these purposes.
Finally, Mark Guimond of the American Association of Debt Management Organizations (“AADMO”) provided audience members with a copy of draft federal legislation, developed by AADMO, which would require that creditors pay mandatory 15 percent "fair share" contributions to credit counseling agencies.
Conclusion
Robert Hunt, Assistant Vice President and Director, Payment Cards Center, Federal Reserve Bank of Philadelphia, wrapped up the Conference with the following thoughts:
- Research. The industry needs to do a better job of collecting data – to figure out what works, and what does not.
- Behavioral Economics. Hunt emphasized looking at behaviors and how they affect possible outcomes. For example, use of ACH as a repayment alternative made a significant difference in customers' paying behaviors.
- Broad Spectrum of Products. This issue is urgent – the industry needs to figure out a way to offer less-than-full-balance products, and needs to figure this out quickly.
- Advocacy. The industry needs to figure out how to be a more effective advocate for consumers; for example, how does the work that credit counselors do impact the national dialogue on health care?
A summary of the Conference will be provided to participants by the Bank in the future.
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For more information, please contact Jonathan Pompan at 202.344.4383 or jlpompan@Venable.com.
For more information about this and related industry topics, see www.venable.com/ccds/publications.
This publication is not intended to provide legal advice or opinion and should not be relied on as such. Legal advice can only be provided in response to a specific fact situation.