This story appears in the February 2009 issue of Cards&Payments.

Spurred by a sharp rise in credit card charge-off rates, more issuers are offering concessions on interest rates and fees to certain customers on the brink of default in hopes that fewer of those debts become unrecoverable.

The consumer credit card sector's charge-off rate for accounts 180 days past due stood at 6% at the end of September, and analysts say charge-off rates may climb beyond 8%  this year if unemployment rates continue to rise. Charge-offs cut deeply into issuers' profits last year.

The first line of defense in stemming charge-offs is tightening underwriting requirements and reducing credit lines, which most major card issuers began to do last year. Now many issuers are moving into the more-delicate area of negotiating with certain customers on the brink of default by offering them restructured loans, including cutting rates and fees and extending repayment deadlines.

"Many card issuers are trying to work things out with borrowers whose problems can be fixed," says Dennis Moroney, a senior analyst with U.S.-based TowerGroup, a research firm owned by MasterCard Advisors LLC. "Some of the early-stage delinquencies we are seeing are due to a job loss or a sudden change in financial circumstances that can be corrected." Such forbearance during difficult times also can build cardholder loyalty, he suggests.

Issuers are routing more customers in the early stages of delinquency to credit-counseling agencies that may help them negotiate new loan terms. Collection firms say their consumer credit card business is up as more issuers tap them to contact customers in the mid-to-late stages of delinquency to soften loan terms and extend payment deadlines. And card issuers also are picking up the pace of their negotiations with debt-settlement firms (see story).

However, altering troubled cardholders' loan terms is no panacea for issuers' charge-off epidemic, experts warn.

"Workouts can be a difficult and costly process," says Brian Shniderman, director of the banking team at Deloitte Consulting LLP. The vast majority of credit card accounts in the late stages of delinquency likely will become charge-offs, and the percentage of all troubled accounts that can be saved through workouts is "probably fairly small," he notes.

But issuers are highly motivated to prevent further defaults. Even the market for charged-off accounts has tanked.

In late 2007, the average collection rate on charged off consumer credit card accounts was 8% to 10%. By late 2008, that rate had shriveled to 4% to 6%, according to Tim Smith, vice president of collections for India-based FirstSource Solutions Ltd.

"Issuers were getting 13 cents to 15 cents on the dollar for charged-off accounts sold to debt-recovery firms in 2007, but in late 2008 they were lucky to get 6 cents to 8 cents on the dollar," Smith says. "It may go lower."

Strategies Vary
Workout strategies vary at each stage of delinquency, analysts say.

Some issuers send an e-mail, a text message or a telephone call to customers within a day or two of them missing a payment. The initial contact lays the groundwork for possible renegotiation of payment terms, says Edmund Tribue, MasterCard Advisors global practice leader. When a customer with a solid credit card payment history falls behind on a payment, most issuers are willing to work out a deal to restore the account to good standing with no additional penalties if customers immediately make a payment, he says.

JPMorgan Chase & Co. sometimes works directly with some customers in serious financial hardship to "restructure loans to reduce interest rates, suspend future late and over-limit fees and extend repayment terms through a variety of payment programs," according to a Chase spokesperson.

But Chase and most other large card issuers urge early-stage delinquent customers to first contact a qualified credit-counseling agency. Such agencies help qualifying clients organize their debts and negotiate loan-term concessions from creditors.

Agencies Swamped
Clients typically freeze their credit use and agree to make single monthly payments to the credit-counseling agencies, which disburse payments to the their various creditors. The agency typically retains a portion of the payment as its fee; nonprofit agencies' counseling fees average about $25 per month.

The economic crisis has swamped credit-counseling agencies affiliated with the nonprofit U.S.-based National Foundation for Credit Counseling. The crisis also has forced the foundation to ask issuers for deeper concessions, says Susan Keating, its president and CEO.

The foundation, which served 2.5 million consumers last year and works with the nation's largest credit card issuers, experienced a 30% increase in traffic through its 900 U.S. offices last year, says a spokesperson. The heightened demand forced foundation-affiliated agencies to increase their total number of counselors by 10%, to about 2,600 employees, she says.

The foundation's average cash-strapped client has six credit cards with annual percentage rates ranging from 20% to 30% for each card, Keating says. Most clients require dramatic reductions of the late fees and penalties on their accounts and reductions of the rates on their cards to less than 10% to emerge from debt, Keating says. But many issuers balk at cutting rates so sharply.

Issuer Waivers
Last September, the foundation urged issuers to waive late and over-limit penalties for consumers receiving its credit counseling and to agree to set troubled borrowers' monthly payments at 2% of their existing balances (or 1.75% in cases of extreme hardship). To ensure these borrowers can liquidate their debts within five years, as required by federal regulations, the foundation also urges lenders to lower the annual percentage rates of debt-strapped borrowers appropriately.

Keating says four of the nation's largest card issuers have agreed to offer those concessions. Chase and Bank of America Corp. are among those already operating within the foundation's guidelines, according to spokespersons from each of those companies.

"Different card issuers have different concession policies, and many of them say they won't make changes until they know their competitors are doing so," she says.

But Keating says several top issuers have promised to rework their concession policies soon. She is hopeful that most of the nation's largest issuers will fall in line with the foundation's guidelines for deeper concessions by March 31.

"It's in the issuers' best interest to give consumers meaningful concessions that will allow them to pay off their debts and avoid bankruptcy, and we think the tide is turning in that direction," she says.

Moroney says issuers are motivated to work more closely with credit-counseling agencies. "When the economy was booming, there was less of a need for card issuers to make concessions to borrowers, but as things have gotten tougher out there, banks are aligning themselves with credit-counselors again and trying to be more receptive to negotiations. It improves their own long-term interests."

Card issuers also are assigning collection firms to handle more contact with cardholders in mid- to late-stage delinquency, says FirstSource's Smith.

FirstSource, with 17 of its 35 worldwide collection call centers located in the U.S., derives about 25% of its revenues from consumer credit card collections, Smith says. Some 30% of its consumer card business is devoted to counseling customers through the delinquency stages before charging off the account.

"We're handling more delinquency-stage work for card issuers," Smith says, noting some issuers are introducing programs enabling delinquent borrowers to restore their accounts by locking in a lower interest rate and making payments over 24 months. "The goal is to stabilize the account, get the consumer on a repayment plan and prevent their getting a black mark on their credit report. It's a fairly small trend, but it's growing."

As the economy worsens, more consumer credit accounts are likely to go into default. Charge-off rates are likely to continue rising, but issuers are taking every opportunity to stave off further charge-offs.

Issuers that can help some troubled borrowers keep their credit accounts in good status during this downturn may win those customers' loyalty for the long run.  CP

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