A constant and growing compliance burden for banks and credit unions adds to escalating costs and puts a heavier burden on vigorous collection systems to maintain order and help ensure profitability.
Debt gathering is a billion-dollar industry with swelling and multifaceted legal concerns for financial institutions across departments but especially when gathering fees owed. This last in a series of articles offers an overview of the problem and a look at emerging trends and solutions.
Regulations or financial responsibilities related to loans have tightened collection compliance obligations. Understanding and defining an institution’s obligations plays a prominent role in business especially with compressed net-interest margins market and current loan-growth conditions.
Collections, once a lower-level, backroom operation is now a highly-visible net income-impacting operation.
The immediate consequence for non-complaint financial institutions are fines and penalties but the added focus on regulations and guidelines does causes continual operational strain
Typical community financial institutions lack staff depth to fully obey regulations and rules without help; and may also lack the technical capacity to ensure full guideline acquiescence.
According to the Association of Credit and Collection Professionals, the CFPB handled close to 300,000 complaints about debt gathering in 2016. In addition, Webcom reported litigation for 2016 totaled 10,402 involving the Fair Debt Collection Practices Act (FDCPA); 3,960, Fair Credit Reporting Act (FCRA); and 4,860, Telephone Consumer Protection Act (TCPA).
The new rules require written policies and procedures, risk assessments, monitoring and testing, audit trails, access controls, application security, third-party service provider cybersecurity standards, encryption, data retention, specific hiring and training practices, incident response planning, notification of cybersecurity events, and annual certifications.
There are a basketful of regulatory acronyms covering lending and recovery, some more obvious than others:
- The Equal Credit Opportunity Act (ECOA) requires creditors, which regularly extend credit to customers including banks, retailers, finance companies, and bank]-card companies, to evaluate candidates on creditworthiness alone.
- The FCRA of 1970 regulates the gathering, sharing, and use of customer-credit information.
- The FDCPA prohibits debt collectors from using abusive, unfair, or deceptive practices to gather debts.
- The Home Mortgage Disclosure Act (HMDA) requires the maintenance and yearly disclosure of home purchases, pre-approvals, improvement, and refinance applications data.
- The TCPA restricts telephone solicitations and the use of automated telephone equipment, such as automatic dialing systems, artificial or prerecorded voice messages, SMS text messages, and fax machines.
- The Truth in Lending Act (TILA) promotes the knowledgeable usage of consumer credit by regimenting the disclosure of interest rates and other costs associated with borrowing.
- Loans to Insiders establishes various quantitative and qualitative limits and reporting requirements.
There are also guidelines for the Federal National Mortgage Association, aka Fannie Mae, the government-sponsored enterprise that securitizing mortgages; and the Federal Home Loan Mortgage Corporation better known as Freddie Mac.
The pressure on community financial institutions to increase loan volume is so intense that many financial institutions are making more precarious credit decisions or providing lower-interest borrowing than in the past. Their response to increasing competition for business, real estate and auto loans, and lines of credit – all once primary staples of community institutions only – allows for shakier underwriting standards.
Many financial institutions try to compete against each other and nonbank competitors on price and easy-credit schemes. In the past a bank or credit union would target only those meeting pre-defined measures to offer loans and avoid applicants with a poor credit history. However, in the post 2009 crisis atmosphere, banks and nonbanks became more aggressive in sustaining the consumer’s growing demand for credit.
The escalating online lending market fueled the alternative environment with appealing technology platforms, the capability to use alternate data sources to judge creditworthiness, rapid growth of new companies and product offerings geared to borrowers.
By using technology and unconventional underwriting techniques, many alternative lenders vied for borrowers with quicker processing times, automated apps, minimal demands for financial documentation and same-day funding, services most community banks struggled to match.
With relaxed loan underwriting standards appearing amid fierce competition, particularly for vehicles, some regulatory bodies started taking notice. The practice triggered concerns that financial institutions are taking on too much risk and skirting with FDCPA compliance standards.
Auto loans, as an example, grew rapidly thanks to numerous Americans who went on motor vehicle shopping spree in recent years. Many paid for their vehicles with a loan. Now more than 107 million Americans, about 43% of the entire adult population in the U.S., have auto loan debt.
The concern is that some six million people are 90 days or more behind on their car payments, according to the Fed data.
The Office of the Comptroller of the Currency warned that the $1 trillion car loan industry has gotten more dangerous due to its unprecedented growth in auto loans, rising delinquencies, dwindling used car values, and relaxed underwriting standards. The agency also raised concerns about auto loans, especially the lower-quality agreements known as subprime. The OCC also noted concern about commercial real estate concentration risk at community banks.
The mounting credit risk— along with the increased cost of regulatory obedience, low interest rate environment, general uncertainties and the need to stay compliant — created apprehensive bankers. Especially since state and federal guidelines govern repayment conditions regardless of loan type to protect consumers from unsavory practices.
To remain fruitful and nurture lending proceeds, financial institutions must meet all their current customers’ needs while adding new accounts.
Powerful collection software helps keep outstanding loan repayment delinquencies down, prevents some charged-offs, and provides for improved recoveries on prior charged-offs; while increasing net income.
Another important byproduct of strong compliant collection-documentation is with automated portfolio performance tracking and reporting. Banks and credit unions with solid loan collection data reporting can better measure their risk tolerance while increasing loan effectiveness without compromising credit quality or going beyond their risk appetite.
A flexible and robust collection system should allow engagement with customers in their channel of choice automatically without totally removing old fashioned human contact – even if loan volume increases substantially.
A robust collection system uses fully automated debtor messaging whenever possible such as voice messaging, email, text, voice to voice, and letters to encourage repayment on time. It also provides a complete 360-degree debtor view and account relationship profile.
This provides banks and credit unions with the best techniques to help leverage specific scores (contact-ability, collectability, overall recovery) during the loan servicing life (versus loan origination scores), and best channel appropriate collection work flows that yield the best possible results to the financial institution.
Here are some communication capabilities financial institutions should expect from their collections system:
- Letters, Notices – A letter, notice, form, any documentation to the debtor, configured and completed automatically, based on the institutions selection criteria for each such method.
- Emails — The system creates and sends the emails automatically with no human intervention required.
- Text Messages — A very effective communication method, produces extremely positive contact rates. Nevertheless, it is one of the most scrutinized collection steps, to which precise compliance is an absolute condition.
- Voice Messages — Historically, calling debtors was the primary action for collectors. Today, most homes don’t even have a landline. More than half have wireless only when it came to phone service, according to the U.S. Health Department. Only 6.5% of homes are landline only.
Holding debtors accountable to their payment commitments with swift, often automated, reaction to failed payment promises, and rewarding debtors who honor payment promises with an automated thank you, helps maintain order and ensures greater profitability even in a riskier loan environment.
Recent years have seen a tremendous focus on financial institutions collection operations. State and Federal regulators, investors, insurers, guarantors; all entities with regulation or financial responsibility related to loans have tightened collection obligations, and amplified their review of financial institutions lending environments.
This emphasis produces operational anxiety. Community financial institutions often lack staff depth and experience to comply with amplified collection requirements; and may lack the technical aptitude to guarantee compliance. Reliance on people and manual processes to get the right things done, on time and properly documented is often both the riskiest approach and not the most cost-effective strategy.
Leveraging the collection system provider’s resources to operate with collection compliance staff safeguards the institution while staying on the right side of the compliance line. It also preserves all the benefits of this communication channel.
The collection system vendor should guide the organization through the process of seeking debtor approval as well as maintaining records of that approval.
Best of breed banking collections software also allows the financial institution to offer various and flexible means to communicate with debtors.
Virtually every core system has some native collections module. Often the vanilla version’s capabilities are inadequate for today’s environment. In the mature highly competitive merger-acquisition market of core account processing systems, it is not realistic to expect these vendors to invest research and development money into core collection modules, keeping them up to today’s very dynamic, demanding segment of the market.
Look for a full-blown version rather than a low end/entry level version, serviced by knowledgeable collections system support professionals. Integrated robust collections software improves net income by holding and reducing costs, preventing some charged offs, and increasing increase recoveries improves compliance.
Employing your system provider’s resources to work with your collections staff, ensures your institution both enjoys the huge advantages of automation while staying on “the right side” of the regulation line.