Credit counseling – the bedrock of the financial industry – is built on a rich history of community support. And though it may seem like a time-worn practice, it continues to be an essential form of assistance for people struggling with their finances. In this blog, we will talk about the concept of ‘Fair share’. It refers to a voluntary compensation mechanism that plays a key role in sustaining credit counseling agencies, and enables them in their mission, i.e. helping borrowers regain control over their finances by paying off their debts. While it has gone through its ups and downs, it continues to play an important role in the credit counseling space.
How did the concept of Fair share come to be?
To answer this question, let’s start off with a little flashback to the 1950s and 60s, when department stores such as GFox, Robinson May, and Hecht’s were all the rage in America’s big cities. All these stores had customers in common, which helped establish a network of interconnected relationships. This is when the concept of ‘credit reporting’ emerged. If a customer went delinquent at a particular store, the credit manager alerted his peers at the other stores. They essentially collaborated to share information about such customers across stores, creating a community that looked out for one another.
Some sympathetic managers took this a step further, offering guidance to customers outside of regular business hours – a practice that has come to be more commonly known as ‘counseling.’ These managers came together to form not-for-profit Consumer Credit Counseling Agencies (CCAs) in major cities and negotiated with retailers in order to get fairly compensated for helping their customers get onto repayment programs. This compensation came to be known as ‘Fair share’, and was calculated as a percentage of the funds recovered. This percentage initially ranged from 15-20%.
Fast forward to the mid-1990s, the landscape of credit counseling witnessed a transformation as rising interest rates resulted in a huge demand for credit counseling programs. This increased demand strained bank budgets, resulting in a significant reduction in Fair share payments. Present-day Fair share payments average around 5% and continue to act as a primary source of revenue for non-profit CCAs.
These agencies now offset this reduction in Fair share payments by adding a monthly service fee to their clients’ DMP programs. The amount typically ranges from USD 10 or USD 15 per month for each debt enrolled in a debt management program. This is in addition to the fact that non-profit credit counseling agencies may also receive funding via individual donations, as well as public and private grants.
How are Fair share payments facilitated?
Fair shares are facilitated through several different methods. It can be paid by permitting the CCA to deduct a given percentage from each payment (resulting in a ‘net’ payment), that is posted for the full amount to the consumer’s account. Alternatively, it is also paid by tracking the full (‘gross’) payments from each CCA and remitting the Fair share to the CCA at the end of the month. Bigger lenders often conduct comprehensive due diligence surveys to verify the non-profit status of CCAs, to ensure that they are eligible for Fair share compensation.
Most lenders are aware that even after considering Fair share payments, credit counseling or DMP programs are the most cost-effective methods to recover dues from customers struggling with paying off their. The returns often exceed those of debt sales, settlements, and late collections, so the Fair share acts as a welcome – and much-needed – compensation for the invaluable services provided by non-profit credit counseling agencies who are, after all, working towards a noble cause..
It’s these payments that allow non-profit agencies to continue in their mission of empowering borrowers to regain control of their financial futures. By supporting Fair share, lenders contribute to the sustainability of the non-profit CCA business model, while also playing an essential role in nurturing stability, security, and financial resilience within their communities.
In conclusion, Fair share represents a lot more than a simple financial transaction. It stands as a symbol for the spirit of collaboration, empowerment, and community support that lies at the very core of credit counseling. These payments allow credit counseling agencies to do what they do, without having to heavily charge the very borrowers they are working with.
As we navigate the complex landscape of modern finance and the changing dynamics of the lending industry, we must remember to uphold the principles of Fair share. Let’s do our bit to ensure that non-profit CCAs can continue on in their honorable mission and serve as beacons of hope for those in financial difficulty!