Collection Agencies and Debt Buyer Tethered

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1 Collection Agencies and Debt Buyer Tethered BY CHRIS SCHAUER WELLS FARGO AND JPMORGAN CHASE have temporarily suspended sales of defaulted credit card accounts. This comes at a time when regulators are increasing their scrutiny of banks collections operations, and recent guidance is delivered by the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC). Should you take notice? Of course. Should you run for the hills? Absolutely not. Background On Monday, April 7, CFPB General Counsel Meredith Fuchs stated in a talk to the House Committee on Financial Services, that We are also considering regulations on debt collection, payday lending, prepaid cards, and overdraft programs. This suggests we will see more information in the coming months. Although this release may have been somewhat unnoticed, it should be viewed by the industry as an indication that it is no longer business as usual. In its Spring 2014 Supervisory Highlights report, the CFPB highlighted deficiencies and violations it found during examinations of debt collectors. The findings target specific issues that relate to the purchase of debt by collection agencies from debt buyers. Some specific issues noted were: The failure of a creditor that relied on a network of debt buyers to collect its debts to adequately assess the debt buyers compliance with federal consumer financial law. According to the CFPB, although the creditor ostensibly [regularly] reviewed debt buyers for compliance, it did not have specific policies and procedures to guide the assessment process and the creditor documented its review in a cursory manner, and often failed to retain the review results. The creditor sold accounts, after issuing an IRS form to the consumer indicating that the debt had been cancelled and the consumer was no longer liable. (The creditor agreed to modify its procedures going forward and was required to identify any consumers harmed by the sale of cancelled debts and remediate such harm.) In several examinations, the CFPB found that supervised entities, were not obtaining the written authorization required by Regulation E when setting up payment plans for consumers providing for electronic payments. In 70% of the cases where the consumer filed an answer to initial debt collection legal action, the lawsuit was vacated by the collector because it could not locate supporting documentation. The CFPB found that this practice violated the Fair Debt Collection Practices Act (FDCPA) because, having made an express or implied representation to a consumer that it intended to establish the consumer owed a debt in the amount claimed in the lawsuit, the entity misled the consumer because it had no intention of proving its claim. A debt collector that furnished information to credit reporting agencies failed to investigate disputes regarding that information and instead only directed the credit reporting agencies to delete the information. 8 ABA BANK COMPLIANCE SEPTEMBER-OCTOBER 2014 PHOTO-ILLUSTRATION BY KEN CECCUCCI. COMPONENTS: THINKSTOCK AND SHUTTERSTOCK

2 Reviewing New Industry-wide Changes SEPTEMBER-OCTOBER 2014 ABA BANK COMPLIANCE 9

3 REVIEWING COLLECTIONS AGENCIES AND DEBT BUYERS In the past, violations made by debt collectors were the problem of the debt collector. The new CFPB guidance now includes all involved parties when sharing legal responsibility. In the past, debt buyers, collection attorneys, third-party collectors and outsourcing partners were all part of a bank s collections business, but compliance did not live beyond the point when the debt was sold. When debts were sold, the accounts became solely the responsibility of the new owner, and compliance was involved only when an internal violation was discovered. And, violations made by debt collectors were solely a problem for the debt collector to resolve. The new CFPB guidance now makes it clear that all involved parties share in the legal responsibility. The guidance clearly includes multiple parties by stating that a variety of entities, including originating creditors, third-party collectors, debt buyers, and collection attorneys engage in debt collection. The OCC reinforces the CFPB s guidance for national banks by making it clear that all national banks and federal savings associations can expect increased scrutiny of their debt sales practices, as well as supervisory guidance addressing such practices. Consequently, compliance managers should begin examining their debt sales practices and consider the need for changes. The Future Is Now The CFPB and OCC have provided a glimpse into the future of debt selling. Banks must have effective policies and procedures now that help ensure compliance going forward, including the need to maintain clean audit trails without sacrificing the efficiency of operations or future compliance needs. Initially, a financial analysis is essential to determine if it is more profitable for the original creditor to sell the debt or collect it internally. In doing this analysis, banks would do well to consider existing laws which may only protect the original creditor and not the debt buyer, such as calling during certain times of day, continuing collection activities even if a consumer requests otherwise, etc. Consumers are becoming more savvy in this economic climate, and so exogenous factors deserve consideration in the financial analysis. The bank s procedures should include these three things: 1. Detailed documentation requirements that ensure the debt buyer receives accurate and reliable information; 2. Procedures addressing third-party due diligence requirements and ongoing due diligence requirements; and 3. An outline of accounts that cannot be sold, including accounts that are approaching the statute of limitations. For initial and ongoing due diligence regarding the choice of a debt buyer for your accounts, banks should consider the following questions: Does the debt buyer have all appropriate licenses and are they in good standing in the state(s) where they operate? How long has the debt buyer been in business? Does the debt buyer have audited financial statements? Is the debt buyer financially sound? Are there any regulatory or legal actions pending against the debt buyer? How often and in what circumstances does the debt buyer pursue legal action on accounts? Should you consider placing litigation limits on purchased accounts? Should you prohibit debt buyers from reselling your accounts? Understanding the impact of these new requirements, and finding reliable, effective, and trustworthy partners in debt collections is essential in reducing potential risk. Regulators Will Audit Your Debt Sales Practices Rest assured that at some point in time regulators will review your debt sale practices. An examination conducted by the CFPB will likely cover one or more of the following modules: Module One: Module Two: Module Three: Module Four: Module Five: Module Six: Module Seven: Entity Business Model Communications in Connection with Debt Collection Information Sharing, Privacy, and Interactions with Consumer Reporting Agencies Consumer Complaints, Dispute Resolution, and Debt Validation Payment Processing and Account Maintenance Equal Credit Opportunity Act Litigation Practices, Repossession, and Time-Barred Debt CFPB Module One. Banks must have effective policies and procedures for debt sales, which would include a financial analysis of why selling a debt is better than collecting it internally. This means the entire collections process is under review. Current delinquency and charge-off procedures will require a second look. What is sold and what is kept in-house must be clearly defined. But first, understanding your internal operations is essential. What are your strengths? What are the internal costs of working an account? A clearly defined decision map must be created, making fully explicit the various decision elements and their relationships, in a systematic, disciplined manner including the questions, options, pros and cons, arguments and evidence. 10 ABA BANK COMPLIANCE SEPTEMBER-OCTOBER 2014

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6 REVIEWING COLLECTIONS AGENCIES AND DEBT BUYERS CFPB Modules Two and Three. Detail document requirements to ensure the debt buyer receives accurate and reliable information. You will need to ensure all outside vendors have as close to real-time access as possible to the required documents necessary to complete their job. The best of the best would supply debt collectors an update every thirty days, but in today s environment that will not be good enough. Real-time updating from and to the debt collector is essential in satisfying this requirement. Review the best option for sharing data, whether its all-flash storage arrays, snapshot-based backups, server-based flash cache, storage systems for virtual environments, or cloud-based file-sharing and sync services. There are many excellent options, and more and more new technologies are being introduced. CFPB Modules Four, Five, and Six. Procedures addressing third-party due diligence requirements and ongoing due diligence requirements. Be sure to subject the outside debt collector to the same due diligence requirements conducted on your internal departments. If you don t, no one else will, until it is potentially too late. Items to include in your due diligence review: Financial reporting Training programs Debt Sales Compliance Program Since collections compliance, including debt sales, is under intense scrutiny, it might be time to review and potentially revamp your program. Start by looking at all past debt sales. Why were those accounts sold? Why did you sell to XYZ company? Did you violate the newly created decision map in the past? If so, did you face increased risk because of it? Did certain debt collectors cause most of your headaches? What were most of your problems? Learn from your mistakes. The Association of Credit and Collection Professionals has over 5,000 members worldwide, so there are plenty options for your ideal partner. Does your ideal partner need a national presence or is it best to look for regional giants? A few large buyers or many smaller players? And what about litigation? Did you keep it in-house or do you need a partner that can fulfill this piece? It seems overwhelming, but once a clear, comprehensive decision map is vetted, a search for the most efficient and effective agency is underway. Here are five simple criteria for finding an ideal partner that will reduce your compliance risk and maximize your returns. Remember, maintaining records of how you addressed each of these is important, too. 123RF Hiring procedures List of top customers for the past two fiscal years and current year-to-date Brief description of any significant relationships severed within the last two years Description of the competitive landscape within each market segment Organizational chart Historical and projected headcount by function and location Biographies of senior management, including employment history, age, service with the company, and years in current position Significant employee relations problems (past or present) Personnel turnover Pending lawsuits against the company Summary of insurance coverage/any material exposures History of SEC or other regulatory agency problem CFPB Module Seven. Outline accounts that cannot be sold, including accounts that are close to the statute of limitations. A comprehensive decision map will resolve this concern, but not identifying all key situations could leave you dealing with more audit violations, reporting concerns, and upset debt buyers. Eliminate the obvious out-of-statute or close to out-of-statute and deceased accounts, and bankruptcies. Now broaden the base to include military, cardholders with multiple accounts (not just credit card but the whole relationship), threatened bankruptcies, balances under a certain amount, and accounts with previous disputes, among others. Since collections compliance, including debt sales, is under intense scrutiny, it might be time to review and potentially revamp your program.

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8 REVIEWING COLLECTIONS AGENCIES AND DEBT BUYERS Debt buyers will have to demonstrate that their culture, capabilities and systems are not only compatible, but transparent. Criteria 1 Capabilities Can the agency meet your needs? Remember, you are looking for a partner that matches your desire for compliance but can recover the debt your internal operations are unable to collect under the current circumstances. Do they have the experience and resources necessary to collect your outstanding accounts receivable? You should ask about the technology utilized in pursuing accounts as well as the technology used to interface with your system. Your partner should also leverage technology in establishing efficient interfaces with your system, so that the turnover and reporting process is efficient and seamless. Criteria 2 Market Knowledge and Approach Does the debt collection agency understand your market/industry? Without a strong knowledge of your business terminology, an unprepared debt collector will not be able to achieve maximum results. How does the agency communicate with the debtor? Review the letter and sample talk-off scripts that are used. Do they call cell phones? Do they send text messages? How often, when, and under what circumstances do they communicate with the customer? Does the agency pursue litigation? If so, under what circumstances? If not, what happens to those accounts? Do all these processes and procedures match your internal compliance requirements? Do they match your decision map? Criteria 3 Results What is the debt collector s historical results with similar clients in the same geographic region and industry? Benchmarks are important, but remember all the factors that go into the recovery of an account. Similar accounts mean that they should have comparable demographic data, aging, and average balances. Very often, a collection agency will tout a super high result with XYZ client, but, upon detailed analysis, it s determined that the accounts are turned over to collections early and had very little work done ahead of time. Ask the tough questions and be skeptical of results. Criteria 4 Compliance Record Investigate a debt collection agency s background thoroughly before hiring them. Are they a member of the industry trade associations? Do they actively participate and keep up-to-date with the latest rules and regulations? Ask for details on their policies and procedures. Look at sample letters, flowcharts, and notes on sample accounts. Ask if they ve had any suits filed against them or any instances of regulatory non-compliance or penalties. Compliance with the Fair Debt Collection Practices Act (FDCPA) is critical to ensuring you are being represented in the most professional and ethical manner. Criteria 5 References A great way to validate your options in hiring a debt collector is to obtain references. Try to contact at least two creditors similar to your business and get their honest feedback. You can also check a collection agency s reputation by contacting the Better Business Bureau, or Chamber of Commerce. Summary The CFPB and other federal regulatory agencies will bring continued emphasis and complexity to the debt selling and collections industries, as regulations are finalized. Some banks have already decided that the cost of government intervention is greater than the profits from selling debt, and they have exited the market, but this is not necessarily the best option for all. The value added from a debt collector has previously focused on monetary results. However, in this ever-changing environment, the debt buyer can provide the capital and expertise for strategic infrastructure and controls needed to reduce the risk of outsourcing/selling. Being able to demonstrate compliance is key for continued successful partnerships. Debt buyers will have to demonstrate that their culture, capabilities and systems are not only compatible, but transparent. Banks will have to demonstrate that the approach they take makes sense for their operations and is based upon a documented decision process. There is much to do so let s get to work. ABOUT THE AUTHOR CHRIS SCHAUER is the President of The Redd Group, and his risk consulting services include data collection and reporting, valuation advice, market research, risk modeling, and strategic analysis. Until 2007, Schauer held the position of Executive Vice President of Great Seneca Financial Corporation, a company of Wolpoff & Abramson s, in Rockville, Maryland. In this capacity, Schauer forecasted economic conditions and portfolio performance to buy and sell credit card debt portfolios valued in hundreds of millions of dollars. He also provided strategic consulting to the four business units of Wolpoff & Abramson regarding legal collections, agency collections, and strategic business practices. He was responsible for forecasting and scoring Great Seneca s portfolios. Prior to joining Great Seneca in 2003, Schauer launched and managed call centers, typically with budgets over $120M annually, and with over a thousand staff members. Schauer has developed, directed and implemented credit card, retail, auto, and medical collections strategies for first- and third-party companies in both a precharge-off and recovery environment. Schauer served as Director of Client and Compliance Services for the National Attorney Network, the legal collection division of TSYS, directing loss recoveries, portfolio liquidation, capacity needs, and product development and auditing for 40 financial organizations and 215 member firms. Schauer also spent six years with agency collections developing work standards, compliance manuals, call center strategies, and scoring models at Equifax Risk Management Services, and Schauer spent five years with Citibank in compliance and collections. SEPTEMBER-OCTOBER 2014 ABA BANK COMPLIANCE 15