Should the ARM Industry Follow Banks’ Lead in Fighting Back Against Increased Regulation?

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Dave Camp, a Republican Michigan lawmaker who was elected to Congress in 2012, received a great deal of support from banks during the 2012 elections.  However, the chair of the House Ways And Means Committee has recently turned his back on his supporters and proposed a bank tax to be collected from U.S. banks. Rep. Dave Camp’s proposal would increase taxes on banks in such a way that would threaten the bottom line of major equity players, causing his high finance donors to balk at the proposal.   

In a 2010 speech before the Tax Council, Camp stated, "I aim to launch and fight the tax reform battle once again.  And I am well aware that this might ruffle those who have used the tax code to benefit particular industries or activities at the expense of economic efficiency, simplicity, and fairness."  With their feathers truly “ruffled,” Bank of America, Citigroup, Goldman Sachs, J.P. Morgan and other banks have joined forces to lobby against the tax burden that would directly affect the banking industry. 

For example, the Wall Street Journal recently reported that Goldman Sachs refused to attend a fundraiser held in March for the National Republican Congressional Committee due to Rep. Camp’s tax proposal.  After being pressured by banks to publicly denounce the tax plan, 54 Republican lawmakers signed a letter to Rep. Camp expressing their concerns about the tax.   

The concerted effort to join forces and fight increasing taxation and regulation that could harm the industry’s bottom line is something ARM insiders should take notice of.  As can be seen in the case of banks, if the ARM industry makes a concerted effort to protest regulation—including pressuring lawmakers and withholding political contributions—would it see the same success?  The question is: how much will the industry suffer before we begin fighting back? 

Mortgage Lenders Must Assess Borrowers’ Ability to Repay in New CFPB Guidelines

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The Consumer Financial Protection Bureau’s (CFPB) new rules that took effect on January 10, 2014 are getting mixed reviews from industry insiders.  This is particularly true of rules related to a consumer’s ability to repay and the steps loan originators must go through to ensure the numbers are correct.  The rules have been created to curtail risky lending practices that led to the housing market problems in 2008, and are part of the steps required by 2010’s Dodd-Frank Wall Street Reform and Consumer Protection Act.

Industry insiders’ concerns lie in the fact that the rules are further restricting an already heavily-restricted lending environment.  Additionally, the loans that are government backed—primarily those purchased or guaranteed by Fannie Mae and Freddie Mac—remain temporarily unaffected, even if the applicant’s debt-to-income ratio is above the 43% limit created by the new rules. 

The Center for Responsible Lending, a consumer watchdog group, has stated that the CFPB’s approach of increased regulation is a good idea.  However, the group believes that the CFPB should have gone one step further with their rule making, particularly related to allowing the borrower to file a lawsuit against any lender who does not effectively evaluate that borrower’s ability to repay the loan. 

These new rules require lenders to eschew “no documentation” and “low documentation” loans.  The hope is that these new rules will help the American economy avoid the crisis that hit in 2008.  Since that time, approximately 4 million American homeowners have lost their homes to foreclosure. 

Richard Cordray, the Director of the Consumer Financial Protection Bureau, said in a statement: "When consumers sit down at the closing table, they shouldn’t be set up to fail with mortgages they can’t afford.  Our ability-to-repay rule protects borrowers from the kinds of risky lending practices that resulted in so many families losing their homes.  This common-sense rule ensures responsible borrowers get responsible loans."

Local Municipalities Are Finding Creative Ways to Collect on Unpaid Accounts

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Due to decreasing federal monies allocated to cities and towns across the nation, a recent trend in the ARM industry is the acquisition of accounts from a municipality, as collection regulations allow municipalities to outsource their collections accounts.  However, the municipality is still responsible for supervising the collection process to ensure that all rules are followed and that citizens’ rights are protected in the process. 

These collections accounts can originate from multiple sources: overdue library books; court fees that are delinquent; parking tickets that have not been paid; and of course, municipal taxes that are delinquent.  In fact, most municipal accounts are based on collections of the latter category.    

There are creative ways that local municipalities can increase the effectiveness of their collections practices.  For example:

• The town of Norfolk, Virginia has recently begun garnishing residents’ state income tax returns to collect on unpaid parking tickets. 

• New Haven, Connecticut has made use of mobile infrared technology to scan license plates and check the owner’s municipal debts.  During the first six months of this creative approach, the city was able to collect $1 million dollars of money that was owed to it. 

• San Francisco, California decided to focus on corporations with a large number or drivers (for example, UPS) who owed money for parking violations.  In their collections attempts, they billed these companies monthly for infringements and booted the vehicles when the money wasn’t paid.  As a result, the city collected $1.5 million dollars in money that was owed.    

• Augusta County, Virginia hires third-part collections agencies to collect on unpaid library dues.  The result was approximately $100,000 collected—a number which represents more than half of the annual library budget for acquiring new materials. 

• Ohio’s Portage and Cuyahoga Counties use third-party collections agencies to collect on their unpaid accounts, but charge the agency fees to the debtor.  This program has also been highly successful in assisting the counties seeking to balance their operating budgets.  

Can cities use debt collectors to collect on municipal debt?

Could This Mean the End for Small Loan Servicers? Don’t Panic Just Yet!

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There’s no doubt about it: Smaller loan servicers are going to be challenged by the Consumer Financial Protection Bureau’s (CRPB) new rules.  This is particularly true concerning the costs associated with ensuring that all regulations are closely followed and monitored in-house.  In such, many small firms are now looking for strategic alliances with third-party vendors whom they can trust to comply with all of the CFPB’s new rules. 

In particular, residential mortgage servicers will be scrambling to implement new rules related to borrower notifications and interaction, as well as those focusing on key procedures and infrastructure improvements.  While many of the larger servicers have already implemented these changes in expectation of 2014’s regulatory changes, the smaller servicers, on average, are not nearly as well prepared.  This is primarily due to the costs associated with implementing these changes. 

Increased attention to detail in record keeping will require higher costs associated with paperwork and compliance issues for the smaller firms.  While many of the larger banks and mortgage servicers have been selling their servicing rights on loans that underperform to keep expenses down, smaller servicers might not have this option. 

Servicing mortgages is a business that is competitive, just like any other.  Now, with the new CFPB regulatory requirements, small servicers will be feeling the heat of balancing their compliance with turning a profit.  The question that is still on everyone’s mind is this:  will this situation lead to further consolidation in the loan servicing industry?  The answer to that question remains to be seen, although many industry analysts are suggesting that the increased cost of regulatory compliance is likely to cause this exact scenario. 

This doesn’t mean that small servicers should throw in the towel just yet.  It is possible to implement all the changes required by the CFPB and still maintain a profitable business if you’re a small firm servicing loans.  New acquisitions can help manage overall profitability.

Fewer Lawsuits Mean Better Days Ahead: FDCPA Lawsuits Filed Against Collectors Down 10% in 2013

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If the mutual goal of both consumers and debt collection industry insiders is better communication, there is light at the end of the tunnel for 2013’s heated exchanges between the two sides.  The numbers prove it: 2013 saw 10% fewer cases filed under the Fair Debt Collection Practices Act (FDCPA) by consumers and their attorneys against a debt collector. 

This data, compiled and released by WebRecon LLC, shows a decline in lawsuits that has been happening for two years straight and is showing every sign of continuing this trajectory.  Specifically, 10,320 FDCPA lawsuits were present on federal district courts dockets in 2013, which is a 10.2% decline from 2012’s numbers.  2012’s numbers showed a 6.8% decline from 2011. 

Lawsuits filed by consumers against debt collectors, collections attorneys, and ARM companies saw a rapid rise in 2005 and peaked in 2011, following the brutal economic aftermath of the 2008 world financial crisis.  Fewer lawsuits claiming FDCPA violations means the industry is stabilizing and finding its footing on a path to higher customer satisfaction. 

There are multiple reasons for this but much credit can be given to the willingness of both sides to negotiate best practices in the industry.  Additionally, the recent outspokenness of key players in ARM during the CFPB’s Advance Notice of Proposed Rulemaking (ANPR) shows a willingness on behalf of the debt collection industry to meet consumers halfway. 

Despite the gains being made and the decline of FDCPA lawsuits on federal court dockets, lawsuits alleging ARM violations of the Telephone Consumer Protection Act (TCPA) have risen rapidly in 2013—up almost 70% from 2012’s numbers.  However, as this statute was originally written for telemarketers, there remains open debate concerning the scope and range of this Act as it relates to debt collection industry best practices.

Three New Year’s Resolutions You Should Make If You’re in the Debt Collection Industry

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The past year has been a whirlwind of speculation and heated discussion in the debt collection industry and among collection attorneys, as federal regulators zeroed in on ways to resolve the backlash of problems created by the financial crisis of 2008.  Much of those solutions involve increased regulations in an already heavily regulated industry, as topics like accurate originating documentation for litigation and communication via digital methods became “hot button” issues across the media. 

With this in mind, here are three New Year’s resolutions you need to make now if you’re in the collections industry in any capacity. 

Resolution #1:  Stay vigilant and informed

By February 16^th, 2014, the Consumer Financial Protection Bureau will stop taking advice from consumer advocates and collection industry insiders.  At that point, they’ll determine the new rules based on the knowledge they received during the Advance Notice of Proposed Rulemaking period.  This means that there will be new rules and you will have to stay updated on them, so vigilance is more important this year than it has been in a long time. 

Resolution #2: Pay close attention to your third-party vendors

Last year, the Consumer Financial Protection Bureau made it very clear that a collection agency could be held responsible for the collection actions taken by any third-party vendor it hires.   

Resolution #3: Remember that communication is working, and will continue to work

The Consumer Financial Protection Bureau stated that out of the 5,329 debt collection complaints it added to its consumer complaints database, 5071 consumers reported a timely response from the company.  What this means is that despite the current agitation between consumer advocacy groups and debt collection insiders, opening lines of communication to improve the consumer experience works and both sides want to see it happen.  Also, almost 20 percent of the total number of complaints added to the database fell under the category of “communication tactics,” with the largest portion complaining about too-frequent calls, or calls that occurred after a cease and desist request was filed.  Honest discussion about digital communication, or methods of contact other than calling, should be (and are being) brought to the forefront of the debate.  

What are the biggest changes anticipated from the Consumer Financial Protection Bureau's proposed new rules?

Summit Seeks to Find Common Ground between Collection Industry and Consumer Groups

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While there is worry that the Consumer Financial Protection Bureau’s new regulations will create problems for the collections industry, some ARM industry insiders are using the current period of Advance Notice of Proposed Rulemaking (ANPR) provided by the CFPB as an opportunity to communicate openly with consumer groups. 

Last month, an ARM publication, insideARM (affiliated with the iA Institute) hosted a Large Market Participant Summit in Washington, DC.  The summit included a panel moderated by an ARM defense attorney and in-depth discussion of what consumers want to see happen regarding the CFPB’s proposed new rules.  While many of the suggestions provided during the summit were not in sync with the ARM industry’s best interests, there were still some common goals found between consumers and collection industry insiders.    

Both sides reiterated the need for better data flow and verification of consumer debt.  Consumer advocates suggested one database that could be populated by the creditor or original lender, and accessed by downstream collectors.  However, according to Barbara Hoerner, counsel and Chief Compliance Officer at collection agency Progressive Financial Services, such a database could have negative consequences, such as data standards requirements added to ARM firm systems already struggling to handle the current ones. 

Both sides did agree, however, that a push toward better communication is important.  In such, any rule that the Consumer Financial Protection Bureau creates that serves to encourage more consistent and accurate communication would be readily accepted by both consumer advocates and ARM industry insiders.  However, the specifics of how better communication efforts would work in an increasingly digital landscape are muddy, at best.  Email communication and voice mail communication are two particularly difficult topics facing the industry, but regulators are beginning to see the value in focusing on them.  In the meantime, many in the collections industry are looking on the bright side and hoping the rulemaking period provides much-needed communication happening between both sides of the debate.  

Are complaints against collections practices being resolved?

The Big Wait for the Consumer Financial Protection Bureau’s Next Move

The Consumer Financial Protection bureau has placed the topic of debt collection at the forefront of their priorities as soon as the period of Advance Notice of Proposed Rulemaking ends.  What this means for the debt collection industry is that 2014 might become one of the most important years for the collection industry since the FDCPA was passed in 1977.

Some of the changes announced by the agency include increased regulations for debt collection practices.  These regulations could include restrictions placed on the originating creditors, as well as better accuracy on forms or documents that are shared between collection parties, debt buyers and settlement companies.  The potential also exists for updated rules on the limit and scope of communication that must transpire between a collection agency or collection attorneys and a debtor, including communication via text messaging. 

The biggest changes, according to senior CFPB officials, will likely occur for creditors that both originate -and collect on debt.  Currently, the Fair Debt Collection Practices Act only places restrictions on third-party collectors.  These changes proposed this year by the CFPB could affect first-party creditors in much the same way that the Fair Debt Collection Practices Act affects current third-party collectors.  It could also give the Consumer Financial Protection Bureau the authority to supervise larger debt collectors that are not affiliated with a bank; although banks are also under fire for their current debt collection practices, as well. 

This past July, American Banker interviewed Paul Joseph, the director of business development for McCarthy, Burgess & Wolff, a debt collection firm.  In that interview, Joseph stated: “You can't ignore this.  It's a freight train.  I have no doubt they're going to eventually come after everything [with regard to consumer debt].” If his conclusions are true, the ARM industry might be in for a rude awakening when the dust settles and the new regulations are in place.  

Balances Rise While Third Party Debt Collection Accounts Decrease: Is This a New Trend?

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According to information released last year by the Federal Reserve Bank of New York, the percentage of American consumers with at least one account serviced by collection agencies or collection attorneys fell sharply in 2013, particularly during the third quarter.  This is despite average account balances increasing—a trend that is just now changing from the previous year and a half. 

This trend has been interpreted to mean that consumers are paying down debts with smaller balances first, leaving their accounts with higher balances to collect further interest charges.  These accounts observed in the survey include a small percentage of credit accounts, but most were accounts held by parties collecting on medical bills and utility bills. 

Also on the FRBNY report was a general outstanding household debt that showed the largest quarter-to-quarter increase since 2008.  Among these debts, balances on mortgage accounts ($56 billion), student loans ($33 billion), auto loans ($31 billion) and credit card debt ($4 billion) were among the top consumer debt balances held by Americans in 2013.

Donghoon Lee, senior research economist at the New York Fed, stated “[In the third quarter of 2013], we observed an increase of household balances across essentially all types of debt. With non-housing debt consistently increasing and the factors pushing down mortgage balances waning, it appears that households have crossed a turning point in the deleveraging cycle.”

The final numbers of Q3 in 2013 showed American household debt at $11.28 trillion, which is only 11% below its peak in 2008 of $12.68 trillion.  Other trends include:  

• Student loan balances appearing on credit reports increased $33 billion to $1.03 trillion.
• Auto loan balances increased for the 10 straight quarter, up $31 billion to $845 billion.
• Credit card balances increased $4 billion to $672 billion.
• Total mortgage debt increased to $7.9 trillion, up $56 billion.

Notice from the Feds: Banks Will Be Held Responsible for Third-Party Collection Service Providers Used

At the end of 2013, the Federal Reserve Board released a reminder for all banks and banking institutions that they are held responsible for the actions of all third-party providers and collections agencies they hire, including ARM companies.  The statement advised all banks to take risk management measures seriously when considering the use of third-party collections, as a failure to collect according to increasing Federal regulatory procedures could hurt the reputation and financial well-being of larger companies. 

Also included in the issued guidelines were definitions of what the Federal Reserve Board considers to be a “service provider.”  In its definition, the FRB lists a service provider as any entity that enters into a contract with the financial institution in order to provide business functions or services for that financial institution.  With this definition, ARM firms would be clear-cut service providers, as would collection attorneys or collection agencies hired by larger banking institutions.  Other service providers might be firms offering accounting, loan review, compliance services, auditing and risk management assessments.

By holding financial institutions accountable for the actions of third-party ARM companies and collection attorneys, the Federal Reserve Board has taken an unprecedented move to encourage ARM businesses, collection agencies and collection attorneys to follow all compliance guidelines related to debt collection and legal action.  The loss of reputation and potential fines incurred by a larger financial institution means that they will be seeking only the most informed, professional ARM companies to provide third-party debt collections services.  It just makes better financial and business sense to play by the rules, particularly in the process of collecting on consumer debt. 

This guidance applies to all member banks of the Federal Reserve System, including savings and loan companies and nonbank subsidiaries.  Encouraging banks to closely monitor their ARM vendors keeps debt collection practices in line with new tighter Federal guidelines for collecting.  

Are Debt Buyers Ever Going to Start Buying Paper Again?

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Ever since the new policies of the Federal Trade Commission (FTC) and Consumer Financial Protection Bureau (CFPB) went into action over the past few months, bringing with them a sustained focus on collection agencies and collection law firms that has yet to abate, there has been a perceived shift in the industry.  Banks and other large players in the debt field have put severe restrictions on who they will sell “paper” to, restrictions which have had the practical effect of freezing out the smaller collection agencies.  At the same time, many small firms have shown a disinterest in buying all but the most sparklingly well-documented paper for fear of running afoul of the newly watchful Federal Government.  The spate of charges and lawsuits brought by the FTC in recent months has underscored the new reality: Shady practices and robo-signed no-doc debts or contested debts will no longer fly for very long.

The market for paper has thus been in a depressed state, as in many ways, the FTC has forced the larger collection agencies who meet the $10,000,000 revenue baseline to collude against smaller agencies as a form of self-defense. They want the scrutiny to go away, and as such feel they can’t afford to be connected to smaller firms who might play fast and loose with disclosure and documentation regulations.

There are signs that smaller firms are ready to start buying paper again.  After all, the debt business in the U.S. alone is worth $12.2 billion annually.  That means, no matter how large the big players are, there is a lot of money left over for small firms to reap.  And the larger firms can’t afford to take on smaller debts that aren’t cost-effective for them to handle, traditionally the impetus to sell paper off down the food chain.

However, while most experts in the field feel certain that the small firms will begin buying paper in bulk again soon, so far there has been no overt sign that this gold rush has begun.

FTC: When It Comes to the TCPA and FDCPA, Everything Counts

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For an industry that relies so heavily on communication devices to reach their targets, debt collectors have been carefully watching how the Federal Trade Commission interprets and enforces laws relating to their business for decades.  Collection agencies and collection attorneys have been paying particular attention to the Federal Debt Collections Practices Act (FDCPA) and the Telephone Consumer Protection Act (TCPA) because the language of both acts – the first written in 1977 and the latter amendment created in 1991 – predate many modern technologies, especially text messaging and ringless voicemail.

The FTC has no rulemaking authority, but frequently uses its enforcement authority to telegraph how it plans to interpret rules and regulations going forward.  Recently, the FTC brought the first case against a collection firm based in Glendale, California that involved the sending of text messages and found that the firm had violated the clear disclosure rule of the FDCPA when it used text messages that made no reference to debt and did not obtain prior permission from the consumer.  The company in question agreed to a $1 million settlement and to accept guidelines for future collection attempts.

The ruling was enlightening because the FTC chose its words very carefully to state that it does not matter where the transmission was targeted (i.e., a land-line phone or device).  In fact, the FTC underlined the issue in a post to its web site, writing ‘Regardless of the means you choose — mail, phone, text, or something else — the law applies across the board.’

Thus, the FTC’s policy going forward is relatively clear: There will be no tolerance for “loopholes” regarding text messages or so-called “ringless voicemail” messages that bypass a mobile phone’s ringer and allow direct recording to voicemail.  The FTC clearly intends to regard any communication without clear and prominent disclosure as a violation of the FDCPA and/or the TCPA.

How many debt collection firms meet or exceed the FTC's $10,000,000 revenue baseline for review?

Is it legal to send debtors a text message in an effort to collect on a debt?

Can Municipalities Benefit From Collection Attorneys And Agencies In Collecting Their Debt?

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Debt collection for municipalities is a lot different than most other non government collection procedures.  The truth is that a municipality, just like a regular business will need to collect on different services or fees associated with the area.  The problem is that a lot of municipalities do not have the funds necessary to hire people full time and that is when a collections law firm can be there to help them. 

Why It Is More Important Now

The federal and state governments have made severe cuts in the past which means that most municipalities have seen their budget cut.  They need to get the cash coming in from parking fees, fines, water bills etc or they may face a dire financial situation.  Defaults also increased as the economy took a turn for the worse making it more important than ever to have a firm that can be successful in collecting debt for them.

Bad Signs

The clue to look at in order to know how bad the payment of those fines and fees are is the amount of time that they have been without a payment.  A payment that is behind over 60 days is thought of as a high risk for non-payment.  If your municipality has a lot of those then you could be in the red for a long time because you still need to pay bills on time.  You may need to consider bonds or other ways to raise revenue.

Best Options

A collections firm is a great option to get money in from unpaid fines and fees because it is cheaper than hiring full time employees and they have more experience to get the job done right.  Another option is to hire the firm to handle not just collections but also billing so that there are fewer delays in the payments altogether.

How Will The Increase In Consumer Confidence Affect The Collections Efforts My Company Will Have To Make?

Are Consumers Buying Again And Will This Lead To Increased Sales And Thus Increased Collections?

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The economy has slowly been getting better and with the better news from Wall Street regarding unemployment and consumer confidence, it makes sense to say that people are buying again.  The good news for businesses is that the increased number of purchases means more capital coming in, but it usually means that collections efforts will have to increase as well.

People Being A Bit More Careful

Though the purchases are starting to increase they are nowhere near the levels they were before the 2008 collapse.  That is not all good news as a lot of them feel that they need to exercise more care because their salaries have gone down.  In other words a lot of them may face the same problems making the payments that they had in the past, but now they will do so because they have less money to spend.  Do not think of the extra care people are taking as proof that collection efforts will not be needed as much.

Sales And Collections

There is a correlation between the increase in sales and the increase of collection efforts.  That is because the math cannot be denied.  The more sales that you have the bigger the chance that some will default in their payments; it is simply a matter of averages.  That does not mean that you do not want more sales, it only means that a percentage of those additional sales will eventually default, not that every additional customer will. 

Business Owners Should Be Ready

If there is a project that is expected to increase the amount of sales or accounts that your company will see then it is a good idea to be ready for some collections to take place.  You will notice that defaults can start taking place after the first payment for the account all the way until the end of the contract or payment plan.  The collections strategies will be different depending on the account and the amount of default so be ready for all of them.