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

Image courtesy of  patpitchaya / freedigitalphotos.net

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

Image courtesy of adamr / freedigitalphotos.net

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?

Image courtesy of Stuart Miles / freedigitalphotos.net

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.