ATLANTA — The debt collection industry has undergone major transformations over the past decade, as it has evolved to keep pace with changing compliance requirements. Debt collection agencies, large and small, have adopted new technologies to ensure that they comply with these regulations. But challenges remain in the fast-moving regulatory landscape, in efficiently and effectively collecting unpaid debts from consumers.
In LexisNexis® Risk Solutions’ “Ask the Business Experts” series, Linda Straub Jones, director of collections compliance at LexisNexis Risk Solutions, the data and analytics provider, sat down with Rozanne Andersen, vice president and chief compliance officer, Ontario Systems LLC, to discuss how the collections industry has evolved to tackle new compliance regulations, as well as the trends debt collection agencies will have to face in future.
Linda Straub Jones: Thank you so much for joining us today, Rozanne. What would you say has been the biggest compliance challenge for the accounts receivables management industry in the past decade, with regards to debt collection agencies’ bottom lines?
Rozanne Andersen: Without a doubt, it has been the Consumer Financial Protection Bureau’s (CFPB) requirement for agencies of all sizes to implement a compliance management system.
Compliance management is a discipline within an agency that cannot be taken lightly. It is not achieved by assigning a long-term employee with a new title or telling them to wear a second or third hat. It can only be achieved with planning, training and in some environments, hiring. But with that comes increasing costs to the basic infrastructure of an organization. If you look back 10 years, most debt collection agencies did not have compliance as a line item in their budget. It has only been since the advent of the CFPB that we’ve started to see agencies budget for the expense of driving a compliance management system within their organization.
In many ways, compliance has become a differentiator for collection agencies. Companies that have invested heavily and meaningfully in a compliance management system are using that to win RFPs and stand out among the pack. However, I think this is also the main reason why we have seen carnage among the small to mid-size debt collection agencies, which cannot afford to compete with the additional cost of compliance.
Straub Jones: How have debt collection agencies responded to this change?
Andersen: They have either embraced it, resisted or changed their business model to reduce regulatory risk. For example, many third-party debt collection agencies are moving to a first party collections or the extended business model structure to avoid third party exposure under the Fair Debt Collection Practices Act (FDCPA). For those who are not familiar with the term, the first party collections model is a model which requires the collection agency to present itself to consumers in the image and likeness of the creditor or healthcare provider. Compliance with the FDCPA is not required. For all practical purposes, the collection agency’s staff become the defacto employees of the client.
When you are collecting consumer debts as a first-party debt collector in the image and the likeness of the creditor, the Fair Debt Collection Practices Act (FDCPA) no longer applies to the debt collection agency. Unfortunately, many collection agencies do not know how to properly collect in the name of their creditor clients, and find themselves waffling between the first and third-party model to their detriment. Plaintiff attorneys love to prey upon the collection agency that talks the talk of a first party collector without adhering to the legal formalities required of that model.
Straub Jones: What role does technology play in debt collection agencies’ compliance management systems?
Andersen: In the eyes of the CFPB, the compliance management system is not just software or technology. It’s a culture by which you manage your entire business, so you’re able to detect, investigate and fix any potential issue that might lead to any form of consumer harm. Technology supports this vision of a compliance management system by automating the collection process and generating reports to analyze compliance with all aspects of consumer financial laws. Most debt collection agencies are building this technology from the ground up, often with the assistance of a third party, but it’s important to note that software is just one spoke in the wheel of a compliance management system.
Straub Jones: What solutions might be available to help debt collection agencies build out a compliance management system?
Andersen: Speech analytics software, training software, collection software applications, complaint management systems and collection screen prompts create huge compliance advantages for collection agencies. From my experience driving the compliance consulting division for Ontario Systems, I strongly recommend agencies test out the state of the art software solutions available today. The Ontario Systems software applications are designed to support an agency’s ability to comply with state and federal law every step of the way. For example, the Ontario Systems software applications are installed in a default state with a variety of compliance settings for the agency to select based on their risk tolerance, size and complexity and market segments.
Straub Jones: For a debt collection agency, trying to keep up with the changes – whether it’s a lawsuit or a suggested piece of legislation – this is a real challenge.
Andersen: Well, you have hit the nail on the head. If the change is due to a new law or regulation or a modification to an existing law or regulation, most agencies adapt quickly. But if the change is due to a new interpretation of a law or regulation, operations folks understandably resist making changes to their process based on one court decision. This is because legal decisions at the district or even appellate level do not change the law of the land. Judges from one jurisdiction may interpret the very same law or regulation in a way that directly conflicts with the interpretation of the law or regulation by a judge in a different jurisdiction. The debt collector doesn’t know which way to turn. That ambiguity is probably what frustrates debt collection agencies the most.
Straub Jones: How does cost factor into a compliance management system?
Andersen: Building a compliance management system is an expensive process, especially for a small to mid-sized debt collection agencies. The larger agencies with 100 or more agents typically spend at least $100,000 on one compliance person to build and manage their compliance management system. In contrast, a small to mid-sized agency cannot take on that expense without dramatically affecting their bottom-line. Therefore, small to mid-sized agencies are really at a competitive disadvantage out of the gate. And that’s why we’re seeing so many larger agencies buy up the smaller agencies who are not able to compete in this new environment.
Straub Jones: What three trends do you see on the horizon for the collections industry that others might not be aware of?
Andersen: Number one, the resurgence in debt buying. I think the reason we’re seeing this now is that money is flowing again and the current markets have loosened. Debt selling is also being recognized by credit issuers as a great way to once again meet revenue goals. There’s a perceived relaxation in the regulatory environment, which means the concerns that drove most debt sellers and buyers out of business after the launch of the CFPB are being replaced with new-found appetites for debt funding, selling and buying.
Number two, I think we’re seeing a renaissance of residential home refinancing. Everyone knows that the residential real estate market is booming right now, particularly for the owners of homes suited for first-time buyers, and that’s across the U.S. We’re seeing houses sell for their list price and then some. As a result, this allows banks to appraise them at a higher value, and loan money against that higher value. Whenever that occurs in our marketplace, it’s always a great sign for the collections industry because it means consumers feel cushioned by the increase in their home’s market value. do one or all of three things: buy more, borrow more or pay off debts. I think we’re going to see another Golden Age in debt collection in the next few years, albeit short-lived.
Finally, the third trend I anticipate is that losses from an increase in lawsuits under the Electronic Funds Transfer Act (EFTA) are going to explode. We’ve seen a decrease in lawsuits under the FDCPA, but consumer lawyers are always searching for new ways to defend the “innocent” consumer,” and the EFTA supports this effort because it provides for private right of action. As a result, and because there is so much confusion about how to comply with the EFTA, I predict we will see many more class actions filed under the EFTA against debt collectors and creditors.
Straub Jones: Thank you so much for sharing your insights with us, Rozanne. Here at LexisNexis Risk Solutions, we also look forward to seeing how the debt collection industry addresses collecting unpaid debts, while meeting evolving compliance expectations in 2018.
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