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Debt management - The people element

Carol Baker



Requests by people desperately trying to raise finance to pay unsecured debts by re-mortgaging hit a brick wall when First Direct, owned by the international banking giant HSBC, sparked a panic when it withdrew its entire mortgage product range to new customers.

Commentators would argue that for a bank of HSBC's size to withdraw its products in such a manner, raises questions on just how hard the impact of the 'sub prime' market has actually hit the bank.

As the HSBC shores up its finances, the Co-operative Bank and other high street banks followed suit by withdrawing products, while two 'sub-prime' mortgage lenders pulled out of the UK completely.

According to Moneyfacts, in the space of just one day, more than 300 mortgage deals vanished from the market.

Almost 3,000 were withdrawn in March, taking the number of products available to fewer than 5,000.

To put this into perspective, the figure stood at more than 15,000 before the credit crunch began last summer.

The shutdown of the discount mortgage market is likely to prove the last straw for heavily indebted households.

Number of declined applications soars

A survey by debt management specialists, EuroDebt, revealed that 94% of brokers have seen more clients declined in the last six months than ever before.

"Our survey and on-going workshops have demonstrated that the vast majority of brokers have seen an increase in the last six
months in the number of clients not meeting tougher lending criteria," explained Kevin Still, Director of EuroDebt Financial Services.

"Almost all of the brokers surveyed offer both prime and sub-prime mortgages, and of these, 9% think that there has been an increase of over 50% in the number of clients being refused, while 32% think there has been an increase of between 20-50%.

"This is alarming evidence that overstretched homebuyers are turning to credit cards, personal loans and overdrafts.

"The current economy means that for those looking to consolidate their debts, re-mortgage may not be viable.

"But a smaller secured loan alongside a Debt Management Plan may be an effective transitional strategy until products return to market and the consumer has a period of stability with regard to making agreed reduced repayments to their unsecured creditors.

"This is particularly true if mortgage arrears and/or other priority creditor arrears need to be tackled in the first 12 months of the Debt Management Plan, which we are seeing increasing evidence of."

Creditor attitudes

One of the key issues to be faced in difficult times is unsecured creditor attitudes to defaulting accounts or freezing interest & charges on accounts and holding the CAIS/INSIGHT/SHARE status code with the DMP flag set on, pending resumption of contracted payments.

This requires greater trust between creditors and debt management companies in the on-going liaison process. But many banks are ill-equipped to comply with the new Banking Code on Consumer Debt Management which came into force at the end of April.

Under the new UK voluntary Banking Code, banks and building societies should provide more support to consumers heading into debt problems, including actively identifying and contacting those customers who may be at risk.

Banks already have a great deal of data in place to build an accurate profile of their borrowers but historically this data has only been used to assess their customers' financial circumstances when applying for new credit.

The challenge now facing the banking industry is to proactively identify those existing customers who are falling into debt.

Credit cards, for example, are often the first to show signs of stress.

If a customer increases their cash withdrawals and, at the same time, reduces their monthly repayment to a minimum, these two combined behaviours are a strong indicator that the customer is struggling to meet their financial commitments.

Another example is when cash withdrawals from a customer's credit card account coincide with deposits being made into a current account, to keep it within the overdraft limit to pay bills or other loan repayments.


Creditor Liaison

With over 18,000 people in active debt management plans, representing over £450 million of debt with over 3,700 creditors and
150,000 credit agreements, the schemes have historically depended on the voluntary participation of both the debtor and their

As a result, creditor liaison has become a core part of EuroDebt's model in working more effectively with creditors as Kevin
Still confirmed.

"If the creditor understands what a debt management company (whether they are in the free or fee charging sector) actually
does, then they become confident that the debtor is not about to escape.

"EuroDebt's dedicated Creditor Liaison Officer, Dionne Stocking, routinely visits all the main creditors, collectors and debt
buyers so that they are fully aware of our work and its value to them.

"Dionne identifies whether the creditor has a genuine hardship unit or a policy of assessing hardship cases. For bigger or
more complex groups, it is assessing how they communicate within their own organisation.

"For instance, HSBC Bank, which has HFC and M&S under its portfolio, may have uniformity in some parts of the group, but not
in others.

"This information is then relayed to our front line staff so that they know who the right creditor contact is from the very
outset to accelerate the communication process.

"And this dramatically increases the chances of getting proposals accepted and getting interest and charges frozen."

Licencing approved operators of debt management plans

While under the new Tribunals, Court and Enforcement Act, the Justice Secretary Jack Straw will be able to licence approved operators of debt management plans and debt advisory charities, giving them the power to force creditors to accept the plans that they have drawn up.

EuroDebt believes that getting creditors to agree to debt management plans voluntarily allows them to re-educate the debtor so that they develop a track record of meeting payments on a long-term basis.

As a result, EuroDebt focuses very much on creating sustainable payment plans.

By taking a face-to-face model approach with its home visits, it is able to determine what is truly affordable for the debtor, and identify any inflated expenses or people who are actually trying to hide away from their creditors instead of facing up to the reality of their situation.

"But more importantly," says Richard Bramham, Managing Director, EuroDebt, "we help debtors do something to improve their situation. It can be a slow, but methodical process which certainly pay dividends for the debtor, especially as creditors meetings are far more warming in accepting payment plans.

Sometimes there will be quite a major creditor who has never met a third party debt management company but Dionne has made very successful inroads and opened doors both ways to find a common ground and common aims."

Debtor stress

"The level of debtor stress continues to be a big concern for us" said Richard.

"In July 2007 we introduced a 'cooling off' clause in our contract with the option to waive that right if the client wants us
to act for them immediately.

This allows us to inform creditors on day two of our appointment, irrespective of whether any fees have been paid to us.

The effect of this is to stop further collections activities and to request that interest and charges are frozen at that point.

"Ultimately in 95.6% of those requests, we have been successful in freezing interest and charges.

"For those creditors who have a hardship unit, they are able to move the case immediately to that unit, or advise the collections agency of the hardship case so that the aggressive action normally taken by outsourced collection agencies can cease.

"This gives a fairly immediately stress relief to the debtor, and a high degree of comfort from the debtor's point of view
knowing that the balance is not going to continue to rise."

Alongside this, as many of its clients may not be able to fund the initial instruction fee in a single payment, EuroDebt now operates a scheme that sees token payments made to creditors in months 2 and 3 of the plan, with clients moving on to the full payment plan by month 4.

Also, the company is far more committed to taking on pro-bono cases where there is a genuine hardship and it feels that debt management is in the debtor's best interest.

From a creditor's point of view, they get much more certainty on the payment process if someone funds the instruction fee earlier before going on to a proper full payment plan.

Everyone satisfied

For EuroDebt the goal is to ensure that both creditors and debtors are satisfied with the process and client surveys show exceptional results, not only from the debtors' point of view, but also of ongoing value the plans have for creditors.

"We now survey all new clients six months after they signed their agreement" continued Richard.

"The results echo our survey of our main client base, but as these new clients have only recently come onto their plans, the stress is perhaps most acute.

"Yet some of the testimonials we have received have been quite exceptional - some of them are life saving comments.

"We have also introduced fee capping so that there is a limit to both our instruction fee and to our overall fees to give a finite position with regards to how long our fees will need to continue to be charged.

"To some extent, we have to be guided by what the market dictates and can bear, and clearly the banks and finance houses are looking to provide pressure, particularly to insolvency practitioners with regard to their fees and how speedily they disburse money back to the banks - which used to be around the end of year two, if they are lucky.

"But unlike insolvency practitioners, debt management companies are able to disburse funds to creditors very early in the life cycle of a debt management plan."

New developments

"Right at the very start of our client relationship we request that the client completes the Experian Subject Access Form - paid for by us" said Kevin Still.

"The report is then returned and we use that information to validate the client's financial planner information in terms of the number of creditors, creditor information and the balance information on the report.

"Equally importantly for us, and one of the things that regularly comes out of the Office of Fair Trading communications is what impact a debt management plan will have on that client's credit standing.

"So most of our front line staff have been trained by the former Director of Regulatory Affairs at Experian so that they know how to interpret a credit report.

"Therefore, when we send out our draft statement of affairs we will be able to comment with confidence on what the credit report is actually saying.

"We are also able to quote on what the expectations are for the report's improvement over the course of the debt management plan."

EuroDebt sees the credit report as a key tool in is annual review process with clients, along with regular bulk balance and status updates from creditors when EuroDebt confirms the accounts they are acting upon.

"This electronic and encrypted process allows an efficient exchange of information between the debt manager and the creditors, allowing EuroDebt to focus on accounts where charges are still being applied or where the appropriate status codes haven't been set.

Since the move to its new offices in Priory Park, Bedford last July, EuroDebt has continued to grow at a steady pace, reflecting the company's predictions that there will be a doubling in the requirement for professionally managed debt solutions in 2008.

Through EuroDebt's flexible introducer agreements, brokers can simply refer cases or submit a full 'fact find' and the company already has over 300 Introducers, typically IFAs and mortgage brokers, reaping the benefits of the system.

The success of its workshops goes further to illustrate the growing uptake of debt management by brokers as a means of supporting clients in difficulty and securing the future of their business.

Indeed some brokers have taken advantage of the free co-branded web portal with EuroDebt as part of their Introducer Agreement, which allows them to offer referrals for clients in financial difficulty who require an urgent "no obligation" face-to-face meeting with a trained debt advisor.





Carol Baker has been the Editor and Marketing Director of Credit Control Journal since 1992.


Carol is the author of three books, ‘Computer Applications in Credit’, ‘Export Credit’ and ‘Retention of Title’, and specialises in corporate insolvency, banking law, fraud, trespass in insolvency, corporate credit and asset management, and consumer finance.



Source: Getting Paid (Volume 27, No 7/8, 2006)




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