Quarterly Consumer Credit Trends: Recent trends in debt settlement and credit counseling

CONSUMER FINANCIAL PROTECTION BUREAU | JULY 2020

QUARTERLY CONSUMER CREDIT TRENDS

Recent trends in debt

settlement and credit

counseling

1 QUARTERLY CONSUMER CREDIT TRENDS: RECENT TRENDS IN DEBT SETTLEMENT & CREDIT COUNSELING

This is part of a series of quarterly reports on consumer credit trends produced by the Consumer

Financial Protection Bureau using a longitudinal, nationally representative sample of

approximately five million de-identified credit records from one of the three nationwide

consumer reporting agencies.

Report prepared by Christa Gibbs, Grant Guillory, Vanessa Megaw, and Charles Romeo.

2 QUARTERLY CONSUMER CREDIT TRENDS: RECENT TRENDS IN DEBT SETTLEMENT & CREDIT COUNSELING

INTRODUCTION

At one time or another, many Americans struggle with or fall behind on their debts. In 2018,

for example, roughly 28 percent of consumers with a credit file at a nationwide consumer

reporting agency had a debt reported by a third-party debt collector, and nine percent had at

least one 60-day delinquency on a credit card.

With the dramatic rise in unemployment due to

the COVID-19 pandemic, consumers are facing unexpected economic pressures. Understanding

trends in debt relief activity, especially during the Great Recession, can help deepen our

understanding of how creditors, debt relief providers, and consumers may respond to this new

crisis or future economic downturns. This work also helps inform market stakeholders’ and

policy makers’ policies affecting debt relief options for consumers.

In this report we find that debt settlements increased sharply during the Great Recession and

typically occurred faster relative to non-crisis times. Since 2016, as delinquencies on unsecured

debt have risen and credit card access has tightened, debt settlement activity has risen as well,

though there has not been a corresponding increase in reported credit counseling activities.

Creditors of unsecured debt, especially credit card debt, have several strategies to grant long-

term concessions to consumers to make repayment more manageable and mitigate lender

losses. These strategies are largely structured around account maintenance guidance issued by

the Federal Financial Institutions Examination Council and financial regulatory agencies.

For

instance, creditors can offer long-term hardship repayment programs for delinquent debts that

have not yet been “charged-off,” an accounting determination that classifies a debt as unlikely

to be collected. These programs can involve the creditor closing the account and setting a

repayment plan for the full account balance over a fixed term, often with concessions like

waivers of certain fees and interest rate reductions. Within this structure, third-party credit

counseling agencies can work with consumers to assess their hardship situation and enroll

them in workout programs across multiple creditors through debt management plans (referred

to as “credit counseling” in this report).

In contrast, a debt settlement is an agreement that the consumer will resolve the debt by paying

less than the full balance owed and can occur before or after the creditor charges-off the debt.

See Bureau of Consumer Financial Protection, The Consumer Credit Card Market, (Aug. 2019) at 138 and 41,

available at https://www.consumerfinance.gov/data-research/research-reports/the-consumer-credit-market-2019/

(hereinafter The Consumer Credit Card Market (2019)).

For example, national banks are subject to oversight by the Office of the Comptroller of the Currency. See Off. of the

Comptroller of the Currency, Comptroller’s Handbook: Credit Card Lending, Version 1.2, (Jan. 2017), available at

https://www.occ.treas.gov/publications/publications-by-type/comptrollers-handbook/credit-card-lending/pub-ch-

credit-card.pdf.

3 QUARTERLY CONSUMER CREDIT TRENDS: RECENT TRENDS IN DEBT SETTLEMENT & CREDIT COUNSELING

To align with financial regulatory guidelines, pre-charge-off settlements typically occur if the

consumer can make a single lump-sum payment or pay the settlement within three months.

Post-charge-off settlements can be structured over any length of time. As detailed in this

report, most settlements occur after the lender classifies the account balance as charged-off.

Additionally, most settlements reflect agreements directly between the consumer and the debt

holder,

which can occur as a result of a consumer asking the holder for a settlement, the debt

holder’s proactive settlement offers, or sometimes as an agreement between the consumer and

creditor as an alternative resolution to litigation proceedings.

Settlements may also occur via debt settlement companies (DSCs), which offer to manage the

settlement process on the consumer’s behalf for a fee. The Bureau’s 2019 publication The

Consumer Credit Card Market found that the relative volume of credit card balances settled

through DSCs more than doubled between 2017 and 2018 while the reported share of settled

outstanding debt remained steady.

Higher overall debt levels, increased market presence of

DSC programs, and evolving creditor DSC policies likely drove this growth.

At the Bureau’s

2020 Evolutions in Debt Relief Convening, creditors, consumer advocates, and debt relief

service providers discussed these trends and the imperative to develop new debt relief options

that would improve transparency and better meet a variety of consumers’ financial situations.

This Quarterly Consumer Credit Trends report analyzes data from the Bureau’s Consumer

Credit Panel (CCP) to provide insight into consumers’ use of debt settlement and credit

counseling debt management plans from 2007 through 2019.

This period includes debt relief

activity observed both during the 2008 financial crisis and the succeeding period of credit

loosening, a period which also includes amendments to the Telemarketing Sales Rule (TSR) in

2010 that address the telemarketing of debt relief services. The amendments to the TSR

instituted various disclosure requirements and other consumer protections including the

prohibition of upfront fees in the third-party debt settlement industry. Subsequently,

“Debt holders” include original creditors, who may hire third-party debt collectors, and debt buyers.

Large credit issuers’ policies toward DSCs vary and may include potential litigation, not negotiating with the DSCs,

or treating settlements requested through DSCs the same as they would a consumer requesting a settlement directly

or through a Power of Attorney. The Consumer Credit Card Market (2019) at 151 and 167.

Potential developments include “tech-based” solutions for self-help, early hardship identification, and debt

restructuring options, as well as expanding CCA programs to include more flexibility, longer repayment terms, and

some principal forgiveness for certain hardship cases; see Consumer Financial Protection Bureau, Evolutions in Debt

Relief Convening, March 10, 2020,

https://www.consumerfinance.gov/about-us/events/archive-past-

events/evolutions-in-consumer-debt-relief-event/ (hereinafter Evolutions in Debt Relief).

The CCP is a 1-in-48 sample of de-identified credit records from one of the three nationwide consumer reporting

agencies.

4 QUARTERLY CONSUMER CREDIT TRENDS: RECENT TRENDS IN DEBT SETTLEMENT & CREDIT COUNSELING

approximately 80 percent of DSCs exited the market,

though industry data suggest recent

increases in the number of companies and enrollments.

By exploring debt relief trends across time, this report provides insights into potential

relationships between economic conditions, regulatory changes, creditor policies, and debt

relief services, and, more generally, into the experiences of borrowers in financial distress.

Specifically, this report shows the evolution of overall debt settlement use, including changes in

the number of consumers using this option and in the amount of debt settled, and the time

accounts spend between non-payment and charge-off before eventually reaching settlement.

This analysis focuses on the largest forms of unsecured debt other than student loans: credit

cards, retail revolving and installment accounts, and personal revolving and installment

accounts. The data represent nearly 34 million credit accounts that were settled through a

creditor or had account payments managed by a CCA at some point between 2007 and 2019.

Of these accounts, 69.5 percent were credit cards, 26.6 percent were retail cards,

and 3.9

percent were personal revolving accounts or personal or retail installment loans. In all, these

accounts represent more than 18 million consumers, or nearly one in thirteen consumers with a

credit record at a nationwide consumer reporting agency between 2007 and 2019.

CHANGES IN DEBT SETTLEMENT AND CREDIT COUNSELING

The CCP data identify accounts where the creditor reports the account settled for less than the

full balance and some accounts with payments managed by a CCA. The data do not indicate

whether settlements occurred directly with the consumer or through a DSC. Conversely, the

data show third party CCA activity, but not creditor workout plans made directly with the

consumer. Relative to for-profit DSCs, most CCAs are non-profit, operate under different rules,

and have different relationships with creditors. Nonetheless, comparing trends in overall debt

Regan, Greg. “Options for Consumers in Crisis: An Economic Analysis of The Debt Settlement Industry (Data as of

December 31, 2012)” at 5, February 28, 2013

https://americanfaircreditcouncil.org/wp-content/uploads/Regan-

Report-Options-for-Consumers-in-Crisis-as-of-Dec-121-1-1.pdf (hereinafter “Regan Report, 2012”).

Regan, Greg. “Options for Consumers in Crisis: An Economic Analysis of The Debt Settlement Industry” (Data as of

March 31, 2017) at 7, February 5, 2018

https://americanfaircreditcouncil.org/wp-content/uploads/2018.02.05-

AFCC-Report-Consumers-in-Crisis.pdf (hereinafter “Regan Report, 2018”).

This analysis only includes settlements furnished by the creditor and not accounts furnished by a debt buyer. Debt

buyer reporting practices varied over this period. For more information on debt buyer tradelines see CFPB. “Market

Snapshot: Third-Party Debt Collections Tradeline Reporting.” July 2019.

https://www.consumerfinance.gov/data-

research/research-reports/market-snapshot-third-party-debt-collections-tradeline-reporting/. Also, not all accounts

managed by a CCA are necessarily reported as such by the furnisher, so the number of accounts is under-reported in

these data. Analysis suggests relatively consistent furnishing practices by individual companies over this period.

General purpose credit cards can be used for transactions at a variety of merchants, while retail (or private label)

cards cannot be used as broadly (typically only at one merchant or a small group of merchants).

5 QUARTERLY CONSUMER CREDIT TRENDS: RECENT TRENDS IN DEBT SETTLEMENT & CREDIT COUNSELING

settlement and credit counseling through CCAs can provide a more complete picture of recent

changes in the market for debt relief services.

Figure 1 shows that the number of settled accounts increased from 2007 to 2010 in response to

the financial crisis and its immediate aftermath. From 2011 through 2015, debt settlement

activity dropped dramatically as the economy expanded and the supply of potential settlement

candidates decreased.

Accounts managed by financial credit counseling programs followed a

similar trend during this post-recession period, except the decline began a year earlier in 2010.

Given the relative lags in reporting for settlements versus credit counseling, we would

anticipate seeing changes in credit counseling in the credit reporting data before changes in

settlements, as seen here.

Both just before and after the 2010 TSR amendments went into

effect, the overall trends for settlements and credit counseling activity largely moved together.

While the drop in settlements during this period follows the TSR changes that took effect on

September 27, 2010 (see the vertical line in figure 1),

there was also a drop in credit

counseling, an industry which was not directly affected by these TSR changes. Moreover, these

decreases also align with changes in related macroeconomic factors, such as the tightening of

credit during the financial crisis and improvements in the overall economy after the crisis.

From 2016-2019, increased delinquencies and tightening credit access correspond to increases

in settlements.

This increase in debt settlement appears to be a function of changing

macroeconomic conditions, creditor account management strategies, and apparent increases in

See Bureau of Consumer Financial Protection, The Consumer Credit Card Market, (Dec. 2017) at 307, available at

https://files.consumerfinance.gov/f/documents/cfpb_consumer-credit-card-market-report_2017.pdf

(hereinafter

The Consumer Credit Card Market (2017)).

Settled accounts are not reported as such until the conclusion of the debt settlement process while accounts

managed via a CCA can be reported as settled as soon as the consumer enrolls. As a result, accounts that enter credit

counseling are typically reported in the data months before accounts in debt settlement plans. Industry data indicate

that the average successful settlement occurs 14 months after enrollment in a DSC program, with the first settlement

occurring within four to five months; see Dobbie, Will. “Financial Outcomes for Debt Settlement.” May 2, 2020.

https://americanfaircreditcouncil.org/wp-content/uploads/Dobbie-Report-05022020-final.pdf

(hereinafter

“Financial Outcomes for Debt Settlement”). These patterns may differ for direct settlements between consumers and

creditors.

These TSR changes were proposed in August 2009, and it is unclear what, if any, net effect they had on settlements

for 2009−2010 as DSCs responded to the upcoming changes.

Following improvements after the Great Recession, delinquency rates on credit cards began trending upward in

2016 and, around the same time, credit card access began tightening. For more on changes in delinquencies across

products, see Federal Reserve Bank of New York, Quarterly Report on Household Debt and Credit, (February 2020),

available at https://www.newyorkfed.org/medialibrary/interactives/householdcredit/data/pdf/HHDC_2019Q4.pdf

For more on changes in credit tightness, see Consumer Financial Protection Bureau, Consumer Credit Trends,

available at

https://www.consumerfinance.gov/data-research/consumer-credit-trends/.

6 QUARTERLY CONSUMER CREDIT TRENDS: RECENT TRENDS IN DEBT SETTLEMENT & CREDIT COUNSELING

for-profit DSC activity.

By comparison, there has been little change in credit counseling even

as delinquencies and settlements have increased. This is consistent with reported market shifts

such as DSCs gaining market presence and reductions in the availability of CCA programs.

FIGURE 1: COUNTS OF ACCOUNTS SETTLED OR IN A CREDIT COUNSELING PROGRAM EACH YEAR

Consumers may have multiple accounts they are seeking to settle at any given time, but further

analysis of the data indicates that these consumers generally settle one account at a time and

ultimately settle an average of 1.6 accounts over a three-year period.

Conditional on settling

The Consumer Credit Card Market (2019) at 151 and 167. Creditors also reported reductions in debt selling

activities during this time period; see The Consumer Credit Card Market (2017) at 307.

In 2016, a CCA trade organization reported an environment of shifting client volumes, shrinking funding, and

emerging competition. The sector has continued to face these challenges, resulting in ongoing consolidation of

agencies; see Keating, Susan. “State of the Credit Counseling and Financial Education Sector.” NFCC Connect: 51

Annual Conference, Washington, D.C. September 26, 2016. However, CCA participants have recently reported efforts

to develop new CCA debt management options and improve underlying technology are allowing the sector serve to

more consumers with fewer resources; see Evolutions in Debt Relief Convening (Panel 4).

Industry data show consumers who settle at least one account after entering a DSC program typically settle 3.37

accounts (half of their enrolled accounts) within three years, but the debt profile of a consumer working with a DSC

7 QUARTERLY CONSUMER CREDIT TRENDS: RECENT TRENDS IN DEBT SETTLEMENT & CREDIT COUNSELING

an account, consumers typically settled about 1.2 accounts per year, an average that was

relatively constant over the full 13-year period. From 2007 to 2011, consumers with accounts

reported to be in a credit counseling program had approximately 2.0–2.3 accounts enrolled in

these programs.

In 2012, this began to decrease and stayed around 1.7–2.0 accounts per

person through 2019. This decrease is somewhat smaller than the 20 percent drop in the

average number of credit cards per consumer: in 2008 consumers had an average of five credit

cards, but by 2018 they had four.

CHANGES IN PRE-DEBT SETTLEMENT BALANCES

Furnishers do not typically report the final balance of the settled account or the amount the

consumer pays the creditor (the “settlement amount”), but they do report the balance of the

account in prior periods. As a result, the balance reported the quarter before settlement should

generally provide a lower bound on the balance settled and a likely upper bound for the true

settlement amount.

Figure 2 shows the total and average balance of all settled accounts for

each year from 2007–2019. During the Great Recession, there was a steep increase in both the

total debt settled and the average balance of accounts that settled.

The total amount of debt settled more than doubled from 2007 to 2010, increasing from $5.4

billion to $11.4 billion; this was driven both by an increase in the number of accounts settled

(see figure 1) and an increase in the average settled amount, as seen in the rise in average

balances during this period (see figure 2).

By 2016, the total amount of debt settled dropped

to $3.7 billion. This decrease was mostly driven by the large decrease in the number of accounts

settled during this period, as seen in figure 1, as the supply of charged-off debts accumulated

during the financial crisis resolved or became less likely to resolve over time. The average

balance settled decreased from 2010 to 2014 and has remained relatively unchanged since.

may be different than the overall sample and these data likely also include accounts held by debt buyers; see Financial

Outcomes for Debt Settlement.

Actual number of accounts enrolled in credit counseling per consumer may be higher than observed in the CCP due

to differences in creditors’ furnishing practices for consumers enrolled in credit counseling programs.

The Consumer Credit Card Market at 35.

The full debt owed at the time of settlement may be higher, though the consumer is still likely to settle for less than

the full balance owed in the quarter before settlement. Most lenders will cut off credit access on accounts far enough

into delinquency for settlement to occur, so actual balances owed may be higher to the extent fees and interest

accumulate and are unlikely to be lower as consumers are typically making no payments just prior to settlement.

Since this report excludes accounts purchased by debt buyers, the actual total amount of unsecured debt settled

through both creditors and debt buyers is likely higher than the $11.4 billion reported by creditors in 2010. In more

recent years, creditors were more likely to hold these delinquent debts through settlement and not sell them to third

party debt buyers.

Regan Report, 2018 at 10.

8 QUARTERLY CONSUMER CREDIT TRENDS: RECENT TRENDS IN DEBT SETTLEMENT & CREDIT COUNSELING

FIGURE 2: TOTAL AND AVERAGE BALANCES OF SETTLED ACCOUNTS BY YEAR

WHEN DOES SETTLEMENT OCCUR IN DELINQUENCY?

The period between initial delinquency and settlement often reflects a period of financial

distress for consumers and uncertainty for creditors. Creditors generally seek to work out a

resolution before charging off the debt and may offer various workout plans and eventually

settlements to certain consumers as the delinquency becomes more severe. Throughout the

delinquency, the consumer is subject to creditor or third-party debt collection efforts and

eventually may be subject to litigation.

Settlement timing largely depends on creditors’

policies and consumers’ ability to get the money to fund settlements. While analysis of these

data cannot disentangle these two drivers, these data can provide insight into how these forces

have changed over time on net. Specifically, these data show how the length of time between

the last successful payment on an account and when it settles has changed over time.

For additional information on consumers’ experiences with debt collection, see Consumer Financial Protection

Bureau, “Consumer Experiences with Debt Collection: Findings from the CFPB’s Survey of Consumer Views on Debt”

(January 2017) available at

https://files.consumerfinance.gov/f/documents/201701_cfpb_Debt-Collection-Survey-

Report.pdf.

9 QUARTERLY CONSUMER CREDIT TRENDS: RECENT TRENDS IN DEBT SETTLEMENT & CREDIT COUNSELING

Most accounts are charged-off by the debt holder prior to settlement. Specifically, more than 70

percent of accounts settled since 2013 were first charged-off.

Accounts that are not reported

as charged-off prior to settlement are typically in collections or another severe delinquency

status such as 150 days or more past due.

Accounts can remain in a charge-off status for many months before settlement and did so for

an average of 12 months in this sample. Figure 3 shows percentiles of the number of months

between when an account was last current and when it settled (including time in charge-off).

From 2007 to 2019 the 25

percentile remained relatively stable at around four to seven

months, meaning that about one-quarter of all accounts that settled over the last 13 years were

past due for seven months or less before settling. In contrast, the median account spent 27

percent less time (three fewer months) in delinquency before settling in 2009 than in 2007.

Decreases were even larger for accounts at the 90

percentile, which dropped from 37 months

to 24 months (or 35 percent). That is, during the Great Recession many distressed accounts

settled faster relative to after the crisis, possibly driven by lenders’ greater willingness to settle.

Specifically, to the extent there was increased competition for the collection of consumers’

limited funds and some motivation for lenders to reduce the impact of the crisis on their loan

loss reserves, debt holders may have accelerated their efforts to reduce expected losses during

the Great Recession.

Following 2009, this trend reversed: through 2013 time in delinquency increased by 63 percent

and 75 percent for the 50

and 90

percentiles, respectively. The median number of months

accounts spent in delinquency stayed at 13 months through 2018 and rose to 14 months in

2019. The 75

and 90

percentiles show similar trends: both remained relatively stable

through 2018 before increasing in 2019. In recent years, settlements consistently occur after

consumers spent more time in delinquency than during the Great Recession.

We cannot cleanly identify the account status just prior to charge-off prior to 2013 due to changes in reporting

codes and because the CCP data are quarterly during this period. To the extent debt holders charged off accounts

fewer than three months before settlement, the share of settled accounts first charged-off may be higher than

reported here.

For an overview of loan loss reserve guidelines, see “Allowance for Loan and Lease Losses (ALLL),” Federal Reserve

Board. https://www.federalreserve.gov/supervisionreg/topics/alll.htm

10 QUARTERLY CONSUMER CREDIT TRENDS: RECENT TRENDS IN DEBT SETTLEMENT & CREDIT COUNSELING

FIGURE 3: TIME IN DELINQUENCY (INCLUDING CHARGE-OFF) BEFORE DEBT SETTLEMENT (BY

PERCENTILE OF MONTHS IN DELINQUENCY)

CONCLUSION

The CCP data reveal substantial changes in debt settlement activities over the last 13 years.

During the Great Recession, the volume of debt settlements rose dramatically. Between 2007

and 2009, most settlements occurred within a year of the start of delinquency, perhaps as

creditors sought to ensure recovery of some funds during the recession. However, as the

economy rebounded and the supply of charged-off debts from the financial crisis decreased,

settlements dropped, and the time before a delinquent account settled grew. Since 2017, there

has been an uptick in reported settlement activity and balances settled alongside an increase in

delinquency, but no corresponding increase in credit counseling. These changes may reflect

evolving creditor account management, CCA and DSC policies, as well as apparent increases in

DSCs’ market presence. While recessions differ in their underlying causes and in their effects

on different types of households, to the extent the effects are similar, we may see patterns like

those from the Great Recession repeat themselves in future downturns as consumers and

lenders face increased pressures: increases in debt settlements and less time in severe

delinquency or charge-off before settlement occurs. CCA activities may not see corresponding

increases if current trends hold and the menu of debt relief options for consumers does not

change. Further monitoring of debt relief trends will help deepen our understanding of how

creditors and consumers manage their debts portfolios in response to this crisis.