FDCPA guidelines for collections compliance can benefit debt collectors at banks and credit unions.
This article focuses on debt collection practices in banking in 2021, including an FDCPA Compliance Checklist.
We begin by defining the Fair Debt Collection Practices Act (FDCPA) and discuss FDCPA rules for collection agencies and bank collection compliance.
We then share information gleaned from communications produced by the United States Federal Reserve, the agency that maintains the Consumer Compliance Handbook. This resource contains an FDCPA report in a section titled Credit Related Regulations and Statutes. It outlines rules and requirements that enable collection agencies and bank or credit union debt collectors to practice debt collection compliance.
We also explore the role of (and rising need for) automated debt collection software to improve collections compliance management as related to FDCPA compliance amid the challenges of COVID-19 and CFPB* scrutiny.
*The Consumer Financial Protection Bureau (CFPB) was created in part under the Consumer Protection Act.
What is the Fair Debt Collection Practices Act (FDCPA)?
The FDCPA, or Fair Debt Collection Practices Act, is a law that protects consumers from unfair debt collection practices. It outlines limits on creditors, such as how debt collectors can communicate with debtors, access credit information, and recover payment.
FDCPA rules only govern collection compliance pertaining to family, personal or consumer residence debts. Examples include money a person owes on credit cards, mortgaged property, medical bills, or other household costs. FDCPA guidelines do not encompass debt incurred through business or commercial loans.
Another key federal law that protects consumer credit information is the Fair Credit Reporting Act (FCRA). It provides credit report regulations, such as how agencies report debt collection efforts and who can access a credit report.
In addition, the Federal Trade Commission publishes guidance regarding state laws in FDCPA subchapters.
- Subchapter 816, Relation to State Laws, does not exempt a person from complying with state laws, except for inconsistency with federal regulations. In such a case, a state law is not deemed inconsistent if it provides a greater consumer protection than the FDCPA.
- Subchapter 817, Exemption for State Laws, exempts any class of debt collection practices within a state if the Bureau of Consumer Financial Protection finds that the state law is subject to similar requirements as FDCPA, and can be adequately enforced by the state.
The Benefits of FDCPA Compliance for Community Banks and Credit Unions
FDCPA language defines a debt collector as “any person who regularly collects, or attempts to collect, consumer debts for another person or institution or uses some name other than its own when collecting its own consumer debts.”
The Act does not apply to institutions (such as community banks and credit unions) who collect debts in their own name, or that they originated and then sold but continue to service.
However, bank and credit union debt compliance specialists who follow FDCPA guidelines benefit from:
Opportunity to Expand Best Practices
FDCPA guidelines provide bankers with a robust, safe model of best practice for loan collection compliance. Even though FDCPA parameters do not apply to all of a financial institution’s current loans, it’s wise to follow them because if a loan is sold, then it is subject to FDCPA requirements. Additionally, having more than one common collection policy, altering collections based on a past due accounts designation, increases the risk of collection mistakes and compliance failures.
Risk Avoidance through Consistent Bank Compliance
As industry best practices, FDCPA rules benefit banks and credit unions by helping them avoid risk. Bankers who enforce FDCPA collection compliance rules – and avoid doing what they prevent – categorically also comply with other rules congruent with FDCPA practices. For example, the related collection steps that an insurer requires on a private mortgage insurance loan.
Employment Training for Bank Debt Collectors
Bank employers who train their debt collectors to follow FDCPA rules instead of only unique, internal collection policies ensure the long-term versatility and value of their employees.
How CARM-Pro™ Automates Compliance with FDCPA Guidelines
With most banks and CUs over funding their ALLL during 2020, preparing for past due account increases and projected increases in new consumer debt means that debt collection automation will be vital in 2021.
Automated recovery compliance solutions, such as CARM-Pro™ Collection and Recovery Manager – Professional by IBS, greatly enhance collection compliance management. Bankers gain the ability to automatically streamline and document actions that enforce multiple compliance parameters.
For example, CARM-Pro™ can automatically both send and document key required debtor communication on the proper date with no collector involvement. CARM-Pro™ is the proven debt collection management software trusted by hundreds of financial institutions across the U.S.
Communication Restrictions Enforced by Automated CARM-Pro™ Debt Collection Technology
CARM-Pro™ automated features streamline bank debt collector actions to reliably enforce FDCPA rules.
CARM-Pro™ Enforces Time and Place Restrictions on Debt Collection Actions
- CARM-Pro™ integrated phone technology prevents calls to debtors outside of legal times (typically before 8 a.m. and after 9 p.m. per time zone), as well as frequent repetitive calls to the same number. This prevents any appearance of harassment and supports compliance.
- CARM-Pro™ maintains debtors’ attorney names and addresses, and identifies all communications that must be directed to a debtor’s attorney. It then warns collectors (if emailing manually) and prevents (if fully automated) attempts to contact debtors via calls, letters, emails or texts, unless an attorney does not respond, or authorizes direct debtor communication.
- CARM-Pro™ identifies when a debtor has provided written refusal of debt payment, and warns or prevents further communication with the debtor (via automated calls, emails, letters and SMS messages).
CARM-Pro Automates and Streamlines Third Party Communication
The FDCPA stipulates that the only third parties that a collection agency may contact in attempting to recover debt include:
- The debtor
- The debtor’s attorney
- A consumer reporting agency (as local laws permit)
- The creditor
- The creditor’s attorney
- The debt collector’s attorney
In addition, the consumer or a local court may grant an agency specific permission to contact other third parties. If a consumer cannot be located, financial institutions have the right to reach out to third parties for information such as a phone number, residence address, and place of employment.
- CARM-Pro’s skip-trace feature interfaces with the trusted global resource Lexis Nexis™ to quickly identify this information for creditors to find debtors faster. CARM-Pro then presents this contact information to collectors, which improves contact rates and effectiveness, and streamlines the documentation process.
- CARM-Pro™ also helps to locate collateral and/or people when a lawsuit is warranted. For example, a lawsuit to enforce a security interest in property may be used by a debt collector in the judicial area where the property is located.
FDCPA Compliance Checklist for Debt Collectors
The following FDCPA compliance consideration checklist is customized for bank and credit unions to review:
1) Is your financial institution aware of conditions in which FDCPA applies, and as needed, have you created processes and controls to ensure that your actions comply with FDCPA rules?
Yes | No
2) Has your bank or credit union performed as a ‘‘debt collector’’ as outlined by FDCPA, by either:
2-1) Regularly endeavoring to collect unpaid consumer debts owed to others, or
Yes | No
2-2) Endeavoring to collect its own consumer debts in a name other than the institution’s?
Yes | No
If answers to 2-1 and 2-2 are “No”, then your institution is not considered a debt collector under FDCPA.
Now consider questions 3-1 and 3-2, but do not complete , since it does not apply to your institution.
3) Consider these key questions as they pertain to your bank or credit union’s collection efforts:
3-1) Do you think it would strengthen your institution’s collection efforts and enhance your collection compliance to follow FDCPA guidelines?
Yes | No
3-2) Even though it’s not required of your bank or credit union, do you agree that following FDCPA guidelines will improve your collections efforts and enhance your compliance?
Yes | No
4) In endeavoring to collect consumer debts as a ‘‘debt collector’’ under FDCPA rules, did the institution:
4-1) Communicate with the consumer or any third party in a prohibited manner?
Yes | No | Unsure
4-2) Follow required debt-validation procedures?
Yes | No | Unsure
4-3) Use any means of harassment or abusive, unfair, or deceptive practices?
Yes | No | Unsure
4.4) Collect any more than authorized by the debt instrument or state law?
Yes | No | Unsure
4.5) Appropriately apply payment received in the case of multiple debts owed by the same consumer?
Yes | No | Unsure
4.6) Pursue legal action in an area limited to the court district permitted under FDCPA?
Yes | No | Unsure
FDCPA Guideline Challenges During COVID-19 and How to Maintain Compliance
The COVID-19 pandemic has prompted new and unprecedented types and volume of often conflicting policies and programs that could expose bank debt collectors to compliance, risk or failure.
Wise financial institutions will institute additional precautions and follow a conservative approach to documenting collection steps to maintain compliance with FDCPA guidelines.
Below are examples of potential violation risks that will pose new challenges for bankers in 2021 – as well as key features of CARM-Pro™ by IBS that enable banking debt collectors to enforce FDCPA rules.
RISK: Mounting unemployment and employment furloughs will exponentially increase the volume of loan defaults. Expiring unemployment benefits will only exasperate the problem. Temporary restriction of collection efforts will further complicate the situation by requiring financial institutions to create, apply and document their mortgage forbearance communications, and thoroughly document all steps and to record the “what, when, and for how long” of their actions, as to why a bank or credit union is not collecting on a loan.
SOLUTION: CARM-Pro™ Collection and Recovery Manager – Professional by IBS is powerful technology that allows for many compliance steps to be configured as an automated workflow. This workflow streamlines and documents most collection actions and next-steps, and reliably reduces the risk of noncompliance. CARM-Pro™ can remove past due loans in forbearance from active collector queues, thus avoiding collector action on these accounts until the forbearance expiration dates.
RISK: The anticipated increase in consumer financial cybercrime will further necessitate complete, full documentation of all banking processes. In many cases, bank and credit union collection department specialists have been tasked with helping process hundreds of Paycheck Protection Plan (PPP) loan applications. COVID-19 drove the trend of virtual staff, thus fewer people were in the credit department to process applications, introducing the potential for errors such as missed steps in collection documentation.
SOLUTION: Robust CARM-Pro™ software maintains clear, chronological documentation throughout the loan collections lifecycle. CARM-Pro’s dynamic workflows streamline all collection steps, for consistent compliance with multiple competing rules and regulations. CARM-Pro’s extensive configuration flexibility allows banks and credit unions to create checklists of steps to be followed as processes change due to new State and Federal COVID guidelines.
RISK: New government bailout programs for consumers, such as an extension of the PPP program, are prompting some larger banks to opt out of participation. This will cause a surge in applications to collection departments of community financial institutions. Loan recovery officers will be burdened with handling their existing routine activities as well as the increased PPP workload.
SOLUTION: CARM-Pro™ integrates with all core banking systems. It dynamically supports all types of debtor communications, enabling bankers to define the preferred methods (phone call, voice message, letter, email, text). CARM-Pro’s full automation then performs and documents all communications, maximizing compliance and minimizing the mistakes or delays of human interaction and record keeping.
CARM-Pro Automates Compliance During Anticipated Increase in CFPB Scrutiny
The Consumer Financial Protection Bureau (CFPB) is a federal agency whose Office of Fair Lending is charged with overseeing the fairness and regulation of financial services and products intended for consumers.
Changes in U.S. leadership are likely to increase CFPB oversight beyond its current heightened focus on bank and credit union collection activities and loan recovery processes.
The robust features of CARM-Pro™ Collection and Recovery Manager – Professional produce customizable workflows that automatically maintain compliance with all federal, state and local regulations (as defined by compliance resources at CARM-Pro™ user institutions).
CARM-Pro’s scalable features are built upon current industry best practices, to thoroughly automate, streamline and document enforcement of collector actions. CARM-Pro positions a collection operation to be compliant with CFPB, FDCPA, and other external regulatory or collection supervisory entities. CARM-Pro’s extreme configuration flexibility allows banks and credit unions to quickly implement collections changes deemed needed by their compliance teams. This flexibility is critically important, as traditionally-stable regulations undergo a rapid series of changes.
Modern Debt Collection Software Improves Collections Compliance with Fewer FTEs
The economic impact of the COVID-19 pandemic will last well beyond 2021. Most institutions have over-funded ALLL to position for the inevitable growth of past due loans, delinquencies, bankruptcies, foreclosures and repossessions.
Financial institutions will find that adding FTEs is not a sustainable strategy. The most sustainable and cost-effective long-term solution for maintaining collections compliance is modern debt collection technology.
For example, CARM-Pro™ Collection and Recovery Manager – Professional by IBS is a more efficient, cost effective and reliable solution than adding FTEs to maintain or reduce costs and enhance compliance. Fully automating or greatly simplifying current tasks dramatically expands the bandwidth of current resources, allowing them to handle the surge while preventing the need to add new FTEs.
CARM-Pro Helps Banks and Credit Unions Reduce Costs and Grow Income
Interest rates are expected to remain low for the next 2+ years. This means that bankers will make less money on diminished margins, so they must strategize ways to contain costs without adding more full-time employees (FTEs).
CARM-Pro™ technology is the proven, economical collection compliance solution that enables banks to reduce costs and grow income with existing or fewer staff members.
Key ways that CARM-Pro™ Automation Reduces Costs and Grows Income for Financial Institutions:
- CARM-Pro™ automation reduces the time each collection step takes. Bankers gain proactive workflows and next-actions that provide predictable, reliable support in a fraction of the time it would take to manually complete and document all required collection steps.
- CARM-Pro™ automates previously time-consuming debt collection tasks, which frees banking staff time that can be used to focus on recovering previously charged-off revenue (and directly adding new net income to the bottom line). Institutions with a significant inventory of OREO properties can benefit when CARM-Pro™ automates the steps a collector typically does, thereby reducing their workload and freeing them to pursue prior past due accounts.
- CARM-Pro’s powerful automated workflows and communication tools enable banks and credit unions to expand their offering of loans to people with lower credit scores. Financial institutions can address the increased risk in lending to “a lower credit score pool”, within their current market, with a powerful collections solution. This enables higher loan volume to more loan prospects, and contact with more people, more often. For example, financial institutions in mature market areas can grow income by dropping their credit score threshold by 25 points and instituting a special lending program with a higher interest rate for people who cannot obtain loans elsewhere.
- CARM-Pro’s skip-trace feature and automated workflows enable banks to stop paying fees to outsource recovery of their charged-off loans to a collection agency. By bringing recovery efforts in-house, leveraging the newly-freed time of current FTEs to work them will establish a pure-revenue recovery stream.
CARM-Pro™: Automating FDCPA Collection Compliance Since 1989
In these challenging economic times, community financial institutions are seeking proven solutions from experienced vendors with responsive, dedicated support teams. Unfortunately, opportunists often try to seize “revenue opportunities” by jumping into what they perceive as a growing segment of the economy (collections). Their speed to market, coupled with their lack of industry knowledge and experience, can yield damaging results for banks and credit unions.
CARM-Pro™ Collection and Recovery Manager – Professional by IBS is the leading solution that banks and credit unions engage to automate collection compliance and increase revenue with existing or fewer FTEs.
IBS is partnered with most major core account servicing system providers. CARM-Pro™ is interfaced with virtually every core account servicing system.
CARM-Pro™ is trusted by community financial institutions throughout the U.S. as the most dynamic, well-maintained, well-serviced contemporary debt collection management solution on the market today.