I recently spoke to a financial management company who had a partnership with a collection agency. The partnership allowed the financial management company’s users to call the collector to negotiate a settlement. Surprisingly, many customers found that many months after they made a payment, their records still showed as unpaid on their credit report. For some, once their debt has been further sold, payments that were already registered suddenly disappeared.
This isn’t a new phenomenon – the debt collection process is broken. It’s been broken for decades, but as other segments of financial services are modernized, the situation has become painfully obvious, and the government has noticed that too.
Regulatory changes are putting enormous pressure on debt collection practices and are expected to significantly change the operating landscape. Banks need to stay ahead of the curve by adopting advanced technology solutions, as they do in other areas of their business.
In August of 2013, the Consumer Financial Protection Bureau (CFPB) published an Advance Notice of Proposed Rulemaking (ANPR). It has collected responses from consumers and industry experts, in an almost unprecedented outreach. While the rule isn’t yet finalized, its direction is clear:
More data and documentation in the debt sale process.
California’s Fair Debt Buying Practices Act paves the way for significantly stricter requirements for information to be provided to a consumer when their debt is sold. This is above and beyond what the Fair Debt Collection Practices Act (FDCPA) requires, and poses a huge challenge to current debt sale processes. Many financial institutions are expected to or have already scaled back their debt sales, leading to lower liquidation rates and heavier reliance on internal operations.
Blurring the line between 1st and 3rd party collections.
The FDCPA only explicitly governs the actions of 3rd party collectors, who are vendors for loan originators. While 1st party collections are not explicitly going to be included in the new rule, enforcement actions have clarified that loan originators are held liable for Unfair, Deceptive or Abusive Acts and Practices and other violations. 1st party collections can cause similar damage to consumers’ financials as 3rd party, and governance is becoming similar. At a time when banks’ internal teams are required to compensate for lack of debt sales, they are also most vulnerable to litigation and enforcement actions.
More disclosures to consumers.
Finally, the rule is expected to require more verbatim disclosures of consumers’ rights. This is an increased liability when collectors are on the phone – stating all disclosures and keeping the flow of conversation. Together with increased litigation under the Telephone Consumer Protection Act, this has led some bankers to state in closed conversations that “the collection call is all but dead”. Call centers are becoming a source of legal liability, together with the increased cost of training and hiring.
With the introduction to these new regulations, what should financial institutions do to adjust? Luckily, despite the constraints, technology can help banks to respond to the changing regulatory environment.
End to end data integration.
Collection communications – an email, call, letter or website – should all be integrated into a single database. Banks and credit unions can’t have a payment made on their collection portal not reflected when the debt is sold or even before the next communication. Every process must leave an audit trail and the customer’s financial situation must be taken into consideration in every step.
Digital communication and delivery.
Debt Collection can’t be a “he said she said” situation. With verbal requests to cease and desist upheld in the FTC’s action against NCO Financial Systems Inc. last year and more required disclosures, it is safer to move to written interaction. With digital natives an increasing proportion of borrowers, moving to digital also let’s banks communicate with their customers, even the defaulted ones, via channels they prefer.
Code enforced compliance.
With an end-to-end integrated, digital-based collection platform, financial institutions have the opportunity to stop relying on collector training and expensive voice analytics to control compliance. An automated system enables control of disclosures, loan modifications and recovery process with unprecedented accuracy. This reduces compliance scope but also allows personalization and targeting of treatments to various consumer segments.
Ohad Samet is a FinTech industry veteran and the co-founder and CEO of TrueAccord, the first-of-its-kind algorithmic recovery platform. TrueAccord is using machine learning, behavioral analytics and a humanist approach to help enterprises and small businesses recover outstanding payments and maintain positive customer relationships. Ohad spent almost a decade implementing machine learning for financial service companies in roles the include: Head of Analytics for FraudSciences (acquired by PayPal), Founder of Analyzed (acquired by Klarna) and the Chief Risk Officer of Klarna, among other notable tech companies. For more information, please visit www.trueaccord.com.