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Responsible Debt Relief
A new algorithmic assessment of members' ability to repay can help CUs avoid charge-offs and collection expenses

By Diane Franklin

Feb. 9, 2009

This is Web-only bonus coverage from "Managing Card Portfolios" from the March 2009 issue of CUES' Credit Union Management.

In an economic climate that finds an increasing number of consumers facing the prospect of bankruptcy, lenders might do well to start minding the adage that a half a loaf—or perhaps even a third of a loaf—is better than none.

It is in this spirit that Bob Manning, Ph.D., consumer finance expert and author of "Credit Card Nation," has put forth the innovative Responsible Debt Relief  program, which provides an algorithmic assessment of household debt capacity and the member's ability to repay outstanding loans. Working with accredited Consumer Credit Counseling Services, the RDR program has two advantages: (1) allowing consumers to avoid bankruptcy and unscrupulous debt settlement companies through partial repayment of their unsecured debt and (2) enabling the lender to recoup a sizeable percentage of the money owed without costly collection and litigation expenses.

"It gives credit unions the opportunity to recalibrate and get their members on an even keel during this extraordinarily difficult recessionary period," Manning says.

Manning, a fellow with Filene Research Institute, is advancing the RDR program via a pilot program with the California and Nevada Credit Union Leagues that was set to get under way in February. The program is currently licensed in 25 states.      

By meeting the NCUA threshold for charge-offs, the program will be able to meet examiners' standards of proof, Manning says. "We see positive consequences regarding lower portfolio write-downs and loan-loss reserves."

There are also opportunities for credit unions to offer mortgage and auto refinance loans in coordination with the RDR program.

As part of the RDR program, Manning is working with Filene to schedule a series of financial health check-up fairs at credit union locations. This will enable consumers to look at their debt relief scores and determine whether a full or partial debt repayment plan is appropriate for them. At these fairs, consumers will be able to meet with debt management counselors, financial planners and insurance agents to help assess their financial well-being.

Manning acknowledges that a substantial number of credit unions are loathe to forgive a debt, but he believes the objective analysis of consumer debt capacity provides them with a reasonable compromise. "The choice is to recoup 40 or 50 percent of the debt under the program or risk getting nothing if the person is forced to file bankruptcy," he observes.

Diane Franklin is a free-lance writer based in Florissant, Mo.

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