Needs-based Counseling Gathering Steam

  Credit counselors soon may have a new model for counseling debt-laden consumers, a needs-based approach developed by TransUnion, a Chicago-based consumer credit bureau. TransUnion is working with Money Management International, a leading credit counseling firm headquartered in Houston. Several other counseling firms are trying out the system, too.
  The new model could come in handy for dealing with the expected increase in the number of consumers seeking counseling when the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 takes effect in October. That measure requires consumers to attend a counseling session sometime within the six months before filing for bankruptcy.
  With the Consumer Federation of America and MMI estimating that roughly 50% more consumers, or 1.5 million, will seek counseling once the new law goes into effect, a process for ranking debtors according to the severity of their financial situation could help counseling firms deal more effectively with the expected increase.
  Drawing on data in TransUnion's extensive consumer credit database, combined with information a credit counselor gleans during an initial interview with a debtor, TransUnion's analytical model creates a debt-management score that helps lenders and counselors quickly assess how much help, if any, an individual debtor requires. "It's an empirically driven application designed to fit customer needs," says Michael S. Rosenthal, TransUnion's director of debt management solutions development.
  Model Testers
  To build the model, TransUnion gathered information on past credit-counseling sessions and applied credit data indicating what happened to participants' credit profiles. "We developed the score based on that population," Rosenthal explains.
  Nine credit grantors and seven counseling firms have signed up to test the new model. Eight of the credit grantors and three of the counseling firms were up and running as of the first week in May.
  Each credit grantor determines the concessions for the various levels of risk. The test phase started in February. But, says Ann Woods, MMI director of industry relations, MMI is the only agency feeding data into the test. The others, she says, are using TransUnion's scoring to help with assessment of client needs.
  So far MMI has 17,000 to 20,000 debtors participating in the test run, with some acting as a control group. The goal is to have 30,000 debtors enrolled to determine how certain concessions affect debtor behavior.
  Creditors should see enough results within the first 12 months, Woods says. But preliminary data indicative of long-term results would be available by October, when the new bankruptcy law kicks in, says TransUnion's Rosenthal.
  A needs-based approach gives counselors a variety of debt-management strategies more closely tailored to a consumer's financial situation, instead of the current "one-size-fits-all" approach currently offered.
  But creditors have to buy into the plan. They are the ones who grant concessions to debtors.
  Up to now, creditors generally authorized counselors to offer debtors just one interest-rate reduction or one minimum-payment plan, no matter how great or little their need. And in recent years, Woods reports, the concessions creditors offered were not as good as they had been in the past.
  Just as the new model includes a sliding scale for creditor concessions, says Woods, counselors hope there will be a sliding scale for creditor underwriting of counseling so fees are assigned to the source best able to pay. Creditors would offset the cost of the plan for the worst case. Clients whose needs are not as dramatic might pay half the cost, with creditors paying less or nothing for those who are better off.
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