Banks are putting the pinch on the consumer credit counseling agencies they depend on to combat the rising tide of delinquencies and bankruptcies.

In their zeal to cut costs, a number of banks, including First Union and Marine Midland, have cut back their funding to the nonprofit agencies.

Some of the regional centers have been hurt more than others, causing dissension among the ranks of credit counseling firms and fraying relations between counselors and lenders.

About 20% of the 200 members of the National Foundation for Consumer Credit, the trade group for credit counseling agencies, do not charge consumers who use their services. These "no-fee" agencies would be hurt most if lenders continue to reduce their contributions.

Some in the no-fee sector are banding together in a campaign to preserve their income - and their image as free public-service agencies.

"We want to differentiate ourselves" from those that charge for the service, said C. Philip Johnston, who is leading that effort. He is president of the Consumer Credit Counseling Service of St. Louis, which has offices in five southwestern states.

"If I were a banker, I'd think a long time about giving (other) agencies a contribution when they are getting $50 and up from my customers," said Mr. Johnston, a former senior vice president of credit cards at Mercantile Bank, St. Louis.

Credit card and other consumer lenders have developed symbiotic relationships with the counseling entities. A financial institution will typically refer a severely delinquent or overextended customer to one of the 1,200 locations operated by members of the consumer credit foundation.

These agencies help borrowers work out budgets to prevent default and ensure creditors' of recovering some of the outstanding debt. A typical client owes $19,000, excluding housing costs, to 11 creditors.

This year, foundation members are expected to recover $1.4 billion to creditors, or about 30% more than last year. Also this year, the foundation expects its members to counsel 900,000 people, compared with 65,000 in 1983.

Lenders pay counseling agencies a portion of the recovered debt, known as "fair share contribution." Most of the arrears are on credit cards; about 35% of the fair share contributions to the agencies come from credit card issuers.

As the agencies' increased their collecting success, the total dollars they received from lenders also increased. Now, however, lenders are cutting those payments.

In the early 1990s, lenders reduced fair shares from 15% to 12%, said John Erickson, president of CCCS South West, a no-fee operation in Phoenix. "But now you are seeing a drastic cut by players that didn't cut at all before."

The foundation said the credit agencies generally are paid an average 11%.

First Union Corp.'s card services division notified the foundation in March that it was reducing its maximum contribution to 9% as of April 1.

Durant Abernethy, president and chief executive of the credit counseling foundation, said he is discussing the matter with the bank and hopes to reverse the decision. Charlotte-based First Union would not comment on its decision.

Also in March, Elan Services of Milwaukee, a card-processing affiliate of Firstar Bank that serves 1,000 financial institutions in the Midwest, eliminated its fair share contribution entirely. Elan said it has been "taking hundreds of cost-cutting measures."

Marine Midland Bank of Buffalo dropped its fair share to 10% in January 1995, and this year First Security Bank of Utah, doing business in Idaho, New Mexico, and Utah, cut its top contribution to 8% from 12%.

These cuts may be just the tip of an iceberg, said the presidents of several consumer credit counseling organizations.

Credit counseling executives said the lowering of fair share contributions is short-sighted, and one retail-industry creditor agrees.

Limited Credit Services, part of the Limited of Columbus, Ohio, considered lowering its contribution until it concluded that it actually saved money on customers who went into counseling - a loss of $70 per account versus $102 for nonclients.

The losses result from interest-rate reductions and fee waivers that a lender grants on the counselor's debt-repayment schedule.

"Most credit grantors don't realize that we educate. They view us as a collection agency," said Jack R. Onorad, president of CCCS Western Pennsylvania, Pittsburgh.

This month, for example, Consumer Credit Counseling Service of Los Angeles sponsored two free seminars on the basics of budgeting and buying a house. Mr. Johnston's agency in St. Louis is developing a curriculum on personal finance for schools.

The fear now is that such programs may be pared down or eliminated because of dwindling lender contributions. Moreover, the no-fee agencies may be forced to begin charging. At least one already has.

In January, counseling centers in Kansas City, Mo., and its Kansas suburbs began charging a $5 fee for clients with one to five debts and $10 for six or more.

"Our funding has been slowly reduced," said Nancy J. Nouser, president of the Kansas City, Mo.-based service. "We are very involved in education and needed to make sure that we could meet the needs of our communities."

Similarly, Mr. Johnston said his operation may consider charging consumers and closing some of its lower-volume offices in smaller communities.

"We are already merging our branches and looking at different ways of doing business," said Mr. Erickson in Phoenix.

Mr. Johnston would like to form a trade association for no-fee agencies within the National Foundation for Consumer Credit to differentiate themselves from the fee-charging services. The idea would be to create a separate identity, and presumably marketing benefits, for the subgroup.

But these agencies do not want to give up membership in the foundation, even though it costs anywhere from $500 to $30,000 a year, depending on the size of the operation.

"I'd rather work through the national foundation," said Mr. Onorad. "I am hoping the NFCC will improve its marketing practices to communicate our interests."

Mr. Abernethy said he would consider assigning a separate logo to the no-fee agencies, but "the NFCC simply cannot politically or legally take a position on which service is the best."

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