# Presentation: 484271

## 
Robert D. Manning, PhD
Director 
Center for Consumer Financial Services
Rochester Institute of Technology 

- Robert D. Manning, PhD
- Director
- Center for Consumer Financial Services
- Rochester Institute of Technology

**RESPONSIBLE DEBT RELIEF**
**Algorithmic Assessment of Household Debt Capacity and Repayment Capability: The Risks and Rewards to Financial Institutions**
**2009 NCUA Risk Mitigation Summit**
- Federal Reserve Bank of Atlanta
- February 19, 2009

## INTRODUCTION

**Robert Manning, PhD**
- Research Professor and Director, Center for Consumer Financial 	Services, Rochester Institute of Technology
- Author of Credit Card Nation and Living with Debt
- Editorial advisor to the documentary film “In Debt We Trust”
- Financial Educator (eg. DOD Financial Readiness Campaign)
- Frequent invited expert at US Congress Committee hearings
- Numerous interviews on national , international and local TV, radio, print 	media
- Expertise – consumer finance, retail banking deregulation, education

## AFTER THE “DOUBLE FINANCIAL BUBBLE”: THE SUBPRIME LENDING CRISIS, FALLING HOUSEHOLD CONFIDENCE, AND THE U.S. CONSUMER-LED RECESSION

**AFTER THE “DOUBLE FINANCIAL BUBBLE”: ****THE SUBPRIME LENDING CRISIS, FALLING HOUSEHOLD CONFIDENCE, AND THE U.S. CONSUMER-LED RECESSION**

## ECONOMIC CONTEXT 

**U.S. ECONOMY****(AN ATHLETE ON STEROIDS?)**

- Pre-2005 (on steroids)

- 2006 and later

## CONSUMER SENTIMENT VS. UNEMPLOYMENT: OBJECTIVE VS. SUBJECTIVE MEASURES (1980-2008)

- Source: Federal Reserve Bank of St.Louis, Federal Reserve Economic Data
- Consumer Sentiment data at http://research.stlouisfed.org/fred2/series/UMCSENT
- Unemployment data at http://research.stlouisfed.org/fred2/series/UNRATE

## CONSUMER-LED VS. BUSINESS CYCLE RECESSION(NON-PERCENTAGE DEBT FIGURES ARE IN 2008 DOLLARS)

| Economic Variable | July 1981 - Oct. 1982 | July 1990 - Jan. 1991 | April - Oct. 2001 | Dec. 2007 - Dec 2008 |
| --- | --- | --- | --- | --- |
| Average Quarterly Real GDP % Change (Annualized) | -2.10% | -2.53% | 0.08% | -0.16% |
| Overall S&P500 Change | -8.02% | -3.43% | -16.69% | -35.99%1 |
| Yearly Change in Housing Starts  | -2.03% | -14.99% | 2.17% | -46.99% |
| Real Median household income change (Annual) | -0.96% | -2.87% | -2.18% | -2.59% |
| Foreclosure Rates | n.a. | 0.94% | 1.46% | 2.97% |
| Vacancy Rates | 1.50% | 1.70% | 1.65% | 2.83% |
| Median Existing House Price Change (Annual) | n.a. | 5.55% | 6.31% | -9.00% |
| Avg. Quarterly Increase in Unemployment filings | 623,800 | 655,500 | 500,500 | 851,000 |
| Avg. Quarterly Change in Bankruptcy filings | n.a. | 3.20% | -0.53% | 8.92%2 |
| Avg. Quarterly Change in Consumer Debt 
(non including mortgage debt) | 1.09% | 0.20% | 1.49% | 0.47% |
| Avg. Quarterly Change in Revolving Debt | 2.08% | 1.96% | 0.05% | 0.87% |
| Estimated Avg. Revolving Debt Household Balance      (in 2008 dollars) | $3,500  | $6,700  | $16,100  | $16,300  |
| Estimated Mortgage Debt Per Household 
(in 2008 dollars) | $29,200  | $42,500  | $60,600  | $94,500  |
| Credit Card Charge off rates | n.a. | 3.68% | 5.25% | 5.45% |
| Credit Card delinquency rates (past due 30 days) | n.a. | 5.24% | 4.92% | 4.85% |
| 1 S&P 500 % change is from Jan. 1 2008 – Dec. 31 2008
2 Bankruptcy data is reflective of first 3 quarters of 2008, waiting for 4th quarter data to be released
Note: All consumer debt figures are 3rd quarter 2008 data , waiting for 4th quarter data to be released. 
n.a. = not available
  |  |  |  |  |

## CONSUMER-LED VS. BUSINESS CYCLE RECESSION(NON-PERCENTAGE DEBT FIGURES ARE IN NOMINAL DOLLARS)

| Economic Variable | July 1981 - Oct. 1982 | July 1990 - Jan. 1991 | April - Oct. 2001 | Dec. 2007 - Dec 2008 |
| --- | --- | --- | --- | --- |
| Average Quarterly Real GDP % Change (Annualized) | -2.10% | -2.53% | 0.08% | -0.16% |
| Overall S&P500 Change | -8.02% | -3.43% | -16.69% | -35.99%1 |
| Yearly Change in Housing Starts  | -2.03% | -14.99% | 2.17% | -46.99% |
| Real Median household income change (Annual) | -0.96% | -2.87% | -2.18% | -2.59% |
| Foreclosure Rates | n.a. | 0.94% | 1.46% | 2.97% |
| Vacancy Rates | 1.50% | 1.70% | 1.65% | 2.83% |
| Median Existing House Price Change (Annual) | n.a. | 5.55% | 6.31% | -9.00% |
| Avg. Quarterly Increase in Unemployment filings | 623,800 | 655,500 | 500,500 | 851,000 |
| Avg. Quarterly Change in Bankruptcy filings | n.a. | 3.20% | -0.53% | 8.92%2 |
| Avg. Quarterly Change in Consumer Debt 
(non including mortgage debt) | 1.09% | 0.20% | 1.49% | 0.47% |
| Avg. Quarterly Change in Revolving Debt | 2.08% | 1.96% | 0.05% | 0.87% |
| Estimated Avg. Revolving Debt Household Balance      (in 2008 dollars) | $1,500  | $4,300  | $13,600  | $16,300  |
| Estimated Mortgage Debt Per Household 
(in 2008 dollars) | $12,500  | $27,250  | $50,500  | $94,500  |
| Credit Card Charge off rates | n.a. | 3.68% | 5.25% | 5.45% |
| Credit Card delinquency rates (past due 30 days) | n.a. | 5.24% | 4.92% | 4.85% |
| 1 S&P 500 % change is from Jan. 1 2008 – Dec. 31 2008
2 Bankruptcy data is reflective of first 3 quarters of 2008, waiting for 4th quarter data to be released
Note: All consumer debt figures are 3rd quarter 2008 data , waiting for 4th quarter data to be released. 
n.a. = not available
  |  |  |  |  |

## AVG. HOUSEHOLD DEBT VS. MEDIAN HOUSEHOLD INCOMEIN CURRENT AND PAST RECESSIONS(2008 DOLLARS)

## U.S. 2008 RECESSION

- Phase I – Consumer Debt Driven
- Phase II – Job Loss Driven
- Phase III – Foreign Investment
- ?

## HOUSEHOLD CONSUMER DEBT BY CATEGORY1990-2008 (NOMINAL DOLLARS)

- HOUSEHOLD CONSUMER DEBT BY CATEGORY1990-2008 (NOMINAL DOLLARS)

## AVERAGE REVOLVING DEBT PER HOUSEHOLD 1990-2008  (2008 DOLLARS)

- Note: Total estimated revolving debt refinanced into Mortgage debt is $350 million
- *2008 average reflects July 2008 reported revolving outstandings
- Source: % of Revolving Accounts: Articles from www.cardtrak.com, CardTrak LLC
- Total Revolving Debt: Federal Reserve Statistical Release.  G.19 - Consumer Credit Outstanding
- Number of households data: U.S. Census Bureau , Current Population Survey reports

## U.S. PERSONAL BANKRUPTCIES, 1990-2009

- Source: U.S. bankruptcy Courts, available at available at http://www.uscourts.gov/bnkrpctystats/statistics.htm#quarterly
- Note: 2009 bankruptcies are estimated at 1.6 million

- Est. 1.6 million in 2009

## DEBT AFTER THE BANKRUPTCY REFORM ACT: SOARING CREDIT CARD DISCHARGE LEVELS, 1990-2008(2008 DOLLARS)

- Notes: Calculation derived from 40% of the annual charge off expense of the Credit Card industry divided by annual Ch. 7 Bankruptcies.
- 40% of total annual charge off expense is a proxy for the amount attributed to bankruptcy (statistic source below).
- Due to a significant increase in ch.7 bankruptcy filings  in 2005 prior to the Bankruptcy Reform Act, an estimated 50% of  the total industry charge off expense was attributed to ch.7 bankruptcies. Also, a 35% metric was used for 2006 and 2007 to show the drop in Ch.7 bankruptcies caused by the new laws. But a resurgence in Ch.7 bankruptcies in 2008 has led back to the estimated 40% metric used in years prior to 2005.
- Sources: Card Industry Directory (Thomson Publishers), Editions 1-20
- U.S. Bankruptcy Courts, available at http://www.uscourts.gov/bnkrpctystats/statistics.htm#quarterly
- 40% statistic source: Furletti, Mark. _Measuring Credit Card Industry Chargeoffs: A Review of Sources and Methods_. Federal Reserve Bank of Philadelphia: September 2003.

## LOOK AT MY PIGGY BANK!  LOOKS LIKE MY 401K ACCOUNT 

## RESPONSIBLE DEBT RELIEF:

- Alternatives to Consumer Bankruptcy and Debt Settlement

**RESPONSIBLE DEBT RELIEF:**

**“****When you are $100,000 in debt, it’s your problem.**
**When you’re $1,000,000 in debt... it’s your bank’s [problem].**
- -----From the Movie, *ROSALIE  GOES SHOPPING* (1992).

## THE PARADIGM SHIFT

**Traditional Underwriting Standards (Prior to 2001)**

- Debt/income ratio important
- Cash flow analysis
- Typically, 80-100 % unsecured debt repayment

**Suspension of Economic  Fundamentals (2001-2006)**

- Asset values inflated based on market values
- Debt/income ratio less of a factor
- Mortgage refinanced to include unsecured debt, results in 120% debt/income ratio
- Debt repayment not an issue because of mortgage refinancing

**Return of the Financial Laws of Gravity (2008-?)**

-      Declining real wages
-      Plummeting stock market
-      Increased job insecurity
-      Rapid declines in home market values
-      Debt repayment = ???

## Slide 17

## DEVELOPMENT OF RDR

## HOW IS THE RDR PROGRAM INNOVATIVE?

- Objective algorithmic estimates of consumer debt repayment ability across all states and household structures
- This ‘means-testing’ process produces an easy-to-interpret percentage estimate of the debt that can be repaid by the household.
- Strategic relationships between full- and partial-payment companies improves creditor union collections and reduces member bankruptcies
- The partial payment option included in the RDR system is an innovative ‘Responsible Choice’ plan that creates a balance of financial responsibility between the consumer and the creditor(s) and provides an alternative to Chapter 7 bankruptcy.

## HOW IS THE RDR PROGRAM INNOVATIVE?

- The RDR algorithm and documentation  of the ‘Responsible Choice Plan’ offers objective, transparent, and reliable estimates that satisfy bank regulators’ and examiners’ requirements for consumer debt concessions and charge-offs.
- The RDR debt concession programs may enable Credit Unions to reduce the required full “write-down” of these delinquent accounts as well as to reduce the required loan-loss reserve “offsets.”
- In some cases, members that receive an RDR debt concession may not have a federal tax liability (1099) if loan principal is not forgiven.
- With the use of RDR, credit unions and members can feel 100% confident they are working with service providers that uphold the best practices of the industry without the added expense and complications of consumer bankruptcy.

## RDR “MEANS-TESTED” SYSTEM: OBJECTIVE ASSESSMENT OF CLIENT DEBT CAPACITY (FULL, PARTIAL, BANKRUPTCY)

## ALGORITHM VARIABLES

**Total gross household income**
**Locality-based household budget (as mandated by Federal  ****	****Bankruptcy Court)**
**Average housing and transportation costs of county of residence**
**Court required payments such as child support or delinquent taxes**
**Secured loan obligations**
**Medical/health expenses**
**Allowable federal tax adjustments and deductions**
**Total outstanding unsecured debts**
**Total federal, state, local taxes**
**Estimates net, after-tax  monthly household income**
**Varies by itemized or non-itemized tax filing**
**Varies by homeowner status**

## RDR Algorithmic Software: Client Information

**RDR Algorithmic Software: Client Information**

## RDR Algorithmic Software: Client Repayment Capability

**RDR Algorithmic Software: Client Repayment Capability**

## RESPONSIBLE  DEBT RELIEF:WHY IT IS NOT A DEBT SETTLEMENT PROGRAM

- Patent-pending RDR algorithm provides an arithmetic estimate of consumer debt capacity that identifies the most appropriate debt resolution plan for CU members: full, partial, bankruptcy.
- Responsible Debt Relief (RDR) includes national and local Consumer Credit Counseling Companies (CCCSs) – InCharge is core affiliate– that offers the only full- and partial-payment coordinated system.
- RDR actively promotes rather than restricts communication between CU members and creditors.   Clients are actively counseled _NOT_ to extend their account delinquencies to charge-off status.
- Clients’ payments to creditors are NOT escrowed by partial payment service providers (Responsible Choice Plan).  Instead, electronic payments are sent to creditors directly from clients' checking accounts.
- The RDR debt concession programs may qualify participating, unsecured lenders to reduce the regulatory required write-down of their consumer debt portfolios as well as their loan loss reserves.

## RESPONSIBLE  DEBT RELIEF:WHY IT IS NOT A DEBT SETTLEMENT PROGRAM

- Program disclosures are clearly explained to CU members and  program fees are not charged until creditor acceptance of the debt concession plan is received.
- Initial program documentation fees are modest and, unlike traditional Debt Settlement plans, clients can request program fee reimbursement if they decide not to continue in the Responsible Choice Plan.   The monthly administrative fee is rebated upon completion of the 36 month program.
- In 2008, RDR assessments recommended about 35% to CCCSs, 38% to partial payment, and 27% to bankruptcy. CU members that can repay at least 70% of their unsecured debts are referred to CCCS programs.
- All creditors are treated equally with *pro rata *payments in contrast to  Debt Settlement programs that only offer sequential, partial-payment payoffs to creditors after debts are “charged-off.”

## RDR REPAYMENT RANGE: DETERMINES WHICH DEBT RESOLUTION PLAN IS BEST SUITED FOR FINANCIALLY DISTRESSED CONSUMERS

## STANDARD VERSUS ITEMIZED TAX FILINGS FAMILY OF FOUR (DUAL INCOME HOUSEHOLD)ATLANTA, GEORGIA

- $91,000 household income
- $25,000 credit card debt
- $250,000 mortgage ($230,000 balance) at 6.5% fixed rate, 25 yrs left
- $2,400 monthly cost of home
- Estimated $16,000 annual mortgage interest
- $5,000 annual property taxes (deduction)
- 			      **Debt Repayment=**

- Standard Deductions
- _63%_

- Itemized Deductions
- _88%_

##  Family of Four By State (dual income Households)

-  $35,000, $40,000 and $45,000 Credit Card Debt scenarios
-  $10,000 Home equity Loan at 6.5% interest; $200 monthly payment
-  2 cars - $1100/month for loan payments, insurance, gas/maintenance
-  $300 monthly contribution to 401k
-  $1,000 Annual Contribution to Non-profit organizations
-  $4,000 Annual health care plan and other medical costs
-  $2,000 Cost of home – Mortgage, taxes, insurance, interest (6.5%)

***	***_***City***__***	***__***                  State***__***	***__***	***__***           Net Payback to Creditors   ***_
- 					_$35,000_	         _$40,000_	_$45,000_
- 	Orlando    	Florida		     76%	             64%     	     56%
- 	Dallas  		Texas		     76%	             64%    	     56%
- 	Salt Lake City	Utah		     57%	             48%     	     41%
- 	New York City	New York		     51%	             43%     	     36%
- 	Los Angeles	California		     45%	             38%	     31%

-  *Family of Four *By State *(dual income Households)*

## IMPACT of ARM Resets on Repayment of Unsecured Debts

_*Family of 4 with $136,000 household income*_
-  $65,000 Unsecured Debt (50,000 credit card and 15,000 medical debt)
-  $15,000 Home equity Loan at 6.5% interest
-  2 cars - $1,450/month for loan payments, insurance, gas/maintenance
-  $500 monthly contribution to 401k
-  $12,000 Boat Loan at 15.9% interest
-  $1,500 Yearly Contribution to Non-profit organization
-  $5,500 Yearly cost for health care plan and other additional medical costs
-  Cost of home is per month – Mortgage payment, taxes, insurance, interest (6.5%)

_***City***__***	***__***	***__***State***__***	***__***               Cost of Home***__***	***__***        Net Payback to Creditors ***_
- Atlanta 		Georgia		3,000		          44%
- 				2,500		          60%
- 				2,000		          91%

- _IMPACT of ARM Resets on Repayment of Unsecured Debts_

## RESPONSIBLE DEBT RELIEF:

- Helping MEMBERS by Increasing CREDIT UNION Efficiencies

## FINANCIAL DISTRESS FACED BY MEMBERS: SPOUSE LOSES FULL-TIME JOB

- Bob and Jane Johnson with two children
- Reside near Los Angeles
- Jane loses job, finds part-time job to help make ends meet
- Household income: falls from $120,000 to $84,000 (30% decline)
- Credit card debt = $20,000 total balance, $500 minimum monthly pmt.: 5 total cards including 2 Credit Union accounts ($8,000 balance)
- EXPENSES:
- $2500 monthly cost of home
- $900 monthly cost of automobiles (payments, insurance, gas/maintenance)
- $4,000 annual healthcare costs

- BEFORE JOB LOSS =  NO PROBLEM WITH LOAN PAYMENTS. Bob and Jane had sufficient income for debt payments.

- RDR assessment  AFTER  job loss = 54% ($10,800 net repayment over 3 years)
- The Johnsons can not make their minimum credit card payments and are bankruptcy eligible after the decrease in their income.

## POSITIVE RESULTS OF RDR: CREDIT UNIONS AND MEMBERS WORKING TOGETHER

_**Bob and Jane Johnson**__**	**_

- Avoid personal and financial consequences of BANKRUPTCY
- Make maximum monthly payments based on their objective RDR assessment
- (Combined Household Income)

_**Credit Union**_

- Credit Union recovers 54% of outstanding  unsecured debts.
- Provides member-friendly alternative to bankruptcy

## MEMBER WITH CAR LOAN AND CREDIT CARD DEBT60-MONTH AUTO LOAN, (6% APR)$16,500 BALANCE, 4 YRS LEFT ($390 PAYMENT)$30,000 CREDIT CARD DEBT ($600 MIN. PAYMENT)$10,000 CREDIT CARD DEBT (CREDIT UNION)$20,000 CREDIT CARD DEBT (COMMERCIAL LENDERS) TOTAL MINIMUM PAYMENTS = $990AVAILABLE CASH FLOW = $650DEFICIENCY = $340

- Member experiences income loss and rising loan APR’s:
- RDR Assessment = 40% (bankruptcy eligible)
- Member has only $650 for combined credit card debt and auto loan payments
- Member can File for Bankruptcy or face Auto Repossession
*RDR 36-month payment for unsecured = $260 *
*This RDR plan enables full payment of auto loan *
- _RESULT: __**NO**__ consumer bankruptcy, __**NO **__automobile repossession _

## LOSS MITIGATION RESULTS OF RDR

**‘**_**Responsible Choice’  Plan**_

- FULL Repayment of auto loan
- NO auto repossession
- Unsecured debt concession of $5,000 (credit Union)
- 50% of $10,000
- 50% of $20,000 (Commercial Banks)
**Credit Union Loss = ****$5,000**

_**Other  Options**_

- Does not prevent consumer bankruptcy
- $10,000 of CU credit card debt is discharged
- Repossession of automobile
- Only $9,000 liquidation value on $16,500 balance
- CU loses $7,500 on auto loan
**Credit Union Loss = ****$17,500**

**CREDIT UNION SAVES $12,500 with RDR**

## HYBRID SECURED LOANS: Leveraging the RDR Debt Concession

- Home Mortgage Refinance
- Auto Loan Refinance

## INNOVATIVE PRODUCTS  Hybrid Loan Programs combine unsecured and secured debts

**3/27    Home Mortgage Refinance Plan**
- 3 yr – Payoff of Unsecured debts (based on RDR 			score) WITH lower mortgage payments
- 27 yr – Payoff of Mortgage and three- year partial 			mortgage loan  forbearance
**3/2    Auto Loan Refinance Plan**
- 3 yr – Payoff of Unsecured Debts(based on RDR 			score) WITH lower auto payments
- 2 yr – Payoff of auto loan payments and two-year 	partial auto loan forbearance

## CU MEMBERS IN FINANCIAL DISTRESS

- John and Susan Smith
- Susan’s loses job and works part-time
- Household income declines 30%
- Auto loan: $18,000 balance, $500 monthly pmt., 3.5 years left
- Credit card debt = $25,000 balance, $500 minimum monthly pmt. ($10,000 w/ Credit union and $15,000 w/ other lenders)
- $350 monthly deficiency

- Monthly cash flow: $650 available for combination of auto loan and credit card payments ($500 for car note and ONLY $150 for credit card payment) considering the decreased household income – Credit card recovery unlikely

- This job loss/income decline scenario could result in consumer bankruptcy and/or auto repossession based on their $350 monthly deficiency.

## DEBT FREE IN 5 YEARS!3/2 AUTO LOAN REFINANCE WITH RDR

- RDR assessment estimates $650 monthly cash flow available for credit card payment and car loan
- REFINANCE AUTO LOAN for 5 years.  Partial forbearance of auto loan for 3 years with increased car payments over last 2 years.
- 3 years – decrease monthly auto loan payments from $500 to $300 and increase monthly credit card payments to $350
**55% net repayment of credit card debt**
- Last 2 years – with credit card debt paid off, monthly auto loan payments  rise to $650  to pay off outstanding auto loan

- RESULT: _NO_ consumer bankruptcy, _NO_ automobile repossession.  Credit Union recovers entire auto loan and reasonable amount of unsecured debt.

## MEMBERS IN FINANCIAL DISTRESS

- John and Susan Smith
- Susan loses job and works part-time
- Household income declines 30%
- Mortgage: $150,000 balance, $1,200 monthly payment, 25 years left
- Credit card debt = $30,000 balance, $650 minimum monthly payment, ($10,000 w/ Credit union and $20,000 w/ other lender)
- $550 monthly deficiency

- Monthly cash flow of $1300 available for mortgage and credit card payments

- _RESULT_: This scenario could result in Chapter 13 bankruptcy and/or home foreclosure.  John and Susan cannot pay their $1,200 monthly mortgage AND their $650 minimum monthly credit card payment.

## 3/27 MORTGAGE REFINANCE WITH RDR

- RDR assessment estimates $1300 monthly cash flow available for COMBINED monthly mortgage and credit card payments
- MORTGAGE REFINANCE– 30 yr. – Partial forbearance of mortgage for first 3 years followed by higher monthly payments over remaining 27 years.
- 3 years – reduce monthly mortgage payment from $1,200 to $900 while increasing monthly credit card payment to $400
**Equals 41% net repayment on credit card debt **
-  Remaining 27 years – With credit card debt paid off, monthly mortgage loan payments  rise to $1,300 to pay off outstanding balance including partial three-year forbearance.

- _RESULT_: No consumer bankruptcy and no home foreclosure. Credit Union recovers entire mortgage loan and reasonable amount of unsecured loans.

## RDR PARTIAL PAYMENT PLANS: ADVANTAGES FOR CREDITORS AND CU MEMBERS

- Accounting and Tax Guidelines:

## HOW ARE FINANICAL INSTITUTIONS CURRENTLY REPORTING PARTIAL PAYMENT PLANS? 

- Credit Unions, Commercial Banks, and other lenders are required to charge-off 100% of distressed and delinquent debt even if a portion is repaid through “work-outs,” settlements, or Chapter 13 bankruptcy reorganization plans
- Financial Institutions are required to write-down the entire “charge-off” amount from their loan portfolios.  Also, loan-loss reserves must be increased based on the size of the charge-off.

## 	CURRENT ACCOUNTING GUIDELINES

- $10,000 Credit Card balance with a 50% debt concession
- The entire $10,000 is written-off even if a partial debt concession is granted and the remaining amount is repaid.
- Performing assets of bank portfolios must be reduced by $10,000 and corresponding increase in loan-loss reserves.
- CU members are issued a 1099 form for debt forgiveness over $600.  This amount is submitted to the IRS and taxes are paid based on the members’ marginal tax bracket.
- For instance, a $5,000 debt concession at a personal marginal tax rate of 25%, would result in an increase in federal taxes of $1,250.  _This tax obligation is forgiven if the member files for bankruptcy_.

## “PREFERRED” CHARGE-OFF POLICY

- 1.  Empirical (algorithmic) formula that is scientific, objective and reliable across all financial situations of clients and different geographical areas.
- 2.  Documentation that verifies CU members’ financial distress and inability to repay his/her loans in-full.  Requires sworn affidavit that confirms the truthfulness and accuracy of the members’ financial information.
- 3.  Summary of conditions that merit debt concessions when, in most cases, CU members are eligible for bankruptcy. Hence, it is in the best interest of CU’s to accept a partial payment rather than pursue a costly and uncertain debt recovery following bankruptcy.

## HOW DO FINANCIAL INSTITUTIONS REPORT A RDR CERTIFIED PARTIAL PAYMENT PLAN? 

- Objective, empirical, reliable RDR algorithm
-  + Detailed and verified consumer data
- =  Offers bank examiners empirical data for   justifying debt concessions
**Preferred Option**
- In the RDR three-year repayment program, some options may permit only the debt concession to be charged-off, _NOT_ the entire amount of debt like bankruptcy or debt settlement
- e.g. If a member receives a 50% debt concession on a $5,000 credit card balance...ONLY $2,500 would be written-off and $2,500 would be repaid
- INSTEAD of the full balance of $5,000 written-off

## HOW DO FINANCIAL INSTITUTIONS REPORT A RDR CERTIFIED PARTIAL PAYMENT PLAN? 

**Option 2**– Three-year RDR repayment plan – CU Members that do not qualify for a CCCS debt management plan are eligible for a modest debt concession
- 	Major credit card issuers “strip-off” all accumulated interest and fees to a client’s account in order to reduce the amount of principal to be repaid (70-90%)
-        This plan requires the full repayment of principal, and thus the debt concession is not reported as a charge-off. Thus, for accounting purposes, none of the outstanding balance is written-off and it is not required to increase loan loss reserves.
-        This upper tier, partial payment RDR plan is administered by accredited, nonprofit Consumer Credit Counseling Services (CCCS) organizations

## RDR CERTIFIED: HYBRID PARTIAL PAYMENT OPTION

- If RDR assessment is between 70-90%, CCCS has an opportunity to offer clients a new ‘upper-level’ partial payment option.
- By a ‘strip-down’ of interest and penalty charges, creditor(s) reduce repayment to appropriate level and no write-down is necessary
- Increase the amount of clients that CCCS can help
- Currently 20%-25% of people who contact them....
- 	to potentially 35%-40%

## HOW DO FINANCIAL INSTITUTIONS REPORT A RDR CERTIFIED PARTIAL PAYMENT PLAN? 

- Option 3– Major Credit Card Issuers with small average credit card balances ($500-$1500) participate in 6-9 month RDR repayment plans that are classified as ‘work-outs’ rather than charge offs.
- For example, a $1200 credit card balance  with a RDR assessment of 50% results in a $600 debt concession; $600 is paid off in 6 monthly payments of $100 without an IRS tax liability.

## WIN-WIN-WIN

** ****Implementing Responsible Debt Relief Programs**

** ****Credit Union Member ****WINS**** **
** ****(****lower interest rates, improved loan access, greater financial education support)**

**CU Membership Services ****WINS**** ****(member-friendly alternative to debt settlement and stressful bankruptcy laws)**

**CU Collections Department ****WINS**
**(loan loss mitigation and less litigation expenses)**

## RDROBJECTIVE, RELIABLE, BALANCED

## http://www.creditcardnation.com/budget/index.html

- _[http://www.creditcardnation.com/budget/index.html](http://www.creditcardnation.com/budget/index.html)_
- _[http://www.creditcardnation.com/calculator.html](http://www.creditcardnation.com/calculator.html)_

## Helping CU Members With the Challenges of the Financial Crisis

## Q & A

- For more information, please visit:
- www.responsibledebtrelief.org
- www.creditcardnation.com
- www.hopefinancialusa.com

## RESPONSIBLE  DEBT RELIEF:WHY IT IS NOT A DEBT SETTLEMENT PROGRAM

-   [1]  Patent-pending RDR algorithm provides an arithmetic estimate of consumer debt capacity that identifies the most appropriate debt resolution plan for CU members.  Based on estimated household financial capability, Responsible Debt Relief (RDR) recommends CU members to full-payment Consumer Credit Counseling Services (CCCS) or bankruptcy professionals when appropriate.    Those  CU members whom can  repay at least 25% of their household debt are recommended  to enroll in a verifiable, “means-tested” partial payment program such as the ‘Responsible Choice’ Plan (RCP) administered by Hope Financial USA.
-   [2] Responsible Debt Relief (RDR) has partnered with one of the CCCS industry's leading Consumer Credit Counseling Companies -- InCharge-- to offer the nation's only full- and partial-payment coordinated system.  For example, CU members in a full-payment Debt Management Program that can no longer make their minimum monthly payments (eg, reset on ARMs) are referred to HOPE's RCP rather than bankruptcy.
-   [3] Patent-pending RDR algorithm provides an arithmetic estimate of consumer debt capacity that is the objective basis for calculating the client's debt concession and realistic repayment schedule. It is locality-specific in estimating household cost-of-living (based on local bankruptcy district), taxes, and discretionary household income.
-   [4]  Clients' unsecured creditors are immediately contacted and RDR-based debt concession repayment plans are presented and explained to creditor collection departments.  Clients are enrolled based on creditor acceptance of the RCP and must be able to repay from 25 to 60 percent of outstanding unsecured debts over 36 months.   RDR encourages rather than restricts communication between CU members and creditors.
-   [5]  The RDR debt concession program may quality the participating unsecured lender to reduce the regulatory required write-down of their consumer debt portfolios as well as their loan loss reserves. In some cases, clients that receive a debt concession may not have a federal tax liability of the debt forgiveness.

## RESPONSIBLE DEBT RELIEF

-  [6]  RCP enrollment is only available to CU members after the program is deemed fully compliant with state-specific regulatory statutes.  The program disclosures are clearly explained to CU members and  program fees are not charged until creditor acceptance of the debt concession plan is received.
-  [7]  Clients’ payments to RCP creditors are NOT escrowed by HOPE FINANCIAL USA.  Instead, automatic electronic payments are sent to creditors from clients' checking accounts.  HOPE sends email reminders to clients regarding monthly electronic RCP payments and HOPE counselors monitor clients’ payment status.
-  [8]  Initial program set-up fees are low unlike traditional Debt Settlement plans that charge 1-2 months of program payments.  A portion of the total monthly administrative fee of $42 per month is rebated upon completion of the 36 month program.
-  [9] Client repayment plans are based on household financial capability rather than higher amounts that are proposed to creditors in order to earn settlement fees.   Similarly, CU members that can afford over 70% repayment plans are referred to CCCS programs.
-  [10]  All clients' creditors are included in the RCP’s payment schedule and thus are treated equally in payment priority in contrast to Debt Settlement programs that offer only sequential, partial-payment payoffs to creditors.  All creditors in RCPs receive pro-rata monthly payments and thus these debts are satisfied at the same time.
- [11] CU members are referred to *pro bono *legal networks or nonprofit organizations as well as self-directed instructional programs if they have fewer than three unsecured consumer loans and a total of less than $5,000 in consumer debt.