Is your collection department in compliance? Are your representatives up-to-date on state, and federal applicable regulations? Is your collection automation technology up to date, and capable of enforcing adherence to your institutions legal obligations? Are agents representing your community bank or credit union in an honest and ethical way?
Debt gathering is a billion-dollar industry with ballooning and complex legal concerns for financial institutions across departments but especially when gathering fees owed. This first in a series of articles provides an overview of the problem, a road map to the solution, and a look at emerging technologies that automate regulatory and other legal obedience.
State and Federal regulators, investors, insurers, guarantors; all entities with regulations or financial responsibilities related to loans have tightened required collection steps or actions, and your institutions collection compliance obligations. Comprehending and defining an institution’s requirements plays a major role of doing business today, especially with compressed net-interest margins, market and slow loan-growth conditions. Collections, once a lower-level, backroom operation is now a highly-visible net income-impacting operation. Effective collections avoids fines and penalties, reduces outstandings, therefore reducing ALLL and improving net income.
The added focus on regulations and guidelines does cause operational strain. Typical community financial institutions lack staff depth to comply completely with these expanded steps; and may lack the technical capacity to ensure following rule guidelines. The noncompliant result breeds fines and penalties levied on those financial institutions.
U.S. banking regulations — which addresses privacy, disclosure, fraud prevention, anti-money laundering, anti-terrorism, anti-usury lending, and the promotion of lending to lower-income populations —is very fragmented and mounting.
Since the signing of the Dodd-Frank Wall Street Reform and Consumer Protection Act into federal law in 2010 there have been 13,789 pages of rules, more than 15 million words written by more than 10 agencies.
Not all of those pertain to debt gathering rules and practices but helps exemplify the snowballing federal and state regulations that bury financial institutions.
More specifically, 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).
In a sign of perhaps more rules and guidelines to come from states, a New York state regulation, which took effect March 1, 2017, requires financial institutions to provide minimum cybersecurity standards and report breaches to regulators in an effort to limit consumer losses. New York’s Department of Financial Services regulates numerous financial entities including credit unions, banks, trusts, budget planners, check cashers, money transmitters, licensed lenders, and mortgage brokers.
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 to the DFS regarding cybersecurity events, and annual certifications.
Besides the new rules 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. A bank recovering its own debt in its own name is not a debt collector. However, banks and other lenders must still avoid abusive practices and comply with the spirit of the FDCPA.
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.
There are some vital steps financial institutions can take to improve debt recovery:
- Proper authentication – Ensure your policies, provide for proper verification of debtor approval steps, verify physical and email addresses and phone numbers; and determine if each phone communicates either through to a land line, cell phone or Voice over Internet Protocol (VoIP) device.
- Tracking – Seek and document debtor “approval to communicate important account status information” with them on these phone numbers. Tracking this debtor approval is an extremely important “newer” compliance step, especially with VoIP and cell automated communications.
- Documentation – Every action involving sending a letter, a notice, a form, any documentation to the debtor, needs a recording in your system, based on your institution’s selection criteria for each such form. Ideally, the system should create and send this form automatically – with no human intervention required, whenever possible.
- Electronic copies – Ensure your system clearly documents the date, the time, who sent which document to which borrower, and concurrently creates an electronic copy for storage in your institution wide document-imaging environment.
- Emails – All actions allowing email communications should be configured in your system based on the institutions selection criteria for each such message. Guarantee it clearly documents, the date, the time, and who sent what message to which borrower.
- Text messaging – An extremely effective communication technique, produces tremendously successful contact rates. However, it is one of the most scrutinized debt gathering steps, to which very clear regulation adherence is an absolute requirement. It is great; however, do it right. Like other communication methods, text messages need configuration in your system based on your institutions selection criteria for each such message. The system creates and sends this text automatically – with no human intervention required. Prior debtor approval is a must!.
- Calling – Historically, calling debtors was the main stay action for collectors. Today, 7% of U.S. homes only have a landline. Nearly half of U.S. homes do not use their landline. Manual versus automated dialing, to a landline, a cell phone or a voice over IP (VoIP) line are huge factors in debt gathering guidelines.
- Modern voice message delivery has become so powerful, that “traditional” views that still are present are simply not correct. It is a false understanding that debtors cannot use automated calling to cell phones. It is critical that automated cell or VoIP calling take place in a compliant manner. For example, delivering an automated voice message to a mortgage holder where the mortgage was sold to Freddie Mac or Fannie Mae; during the delivery of that voice message as long as the debtor can press a button on their phone to connect to a live agent, that automated message deliver is acceptable. “General” message can be used, as can the release of confidential information with proper Right Party Verification processes – to only release that confidential data to the identified borrower. Again, prior debtor approval is a must!
- Letters – Rule-based letters complement voice messaging and ensure the accurate, documented and timely completion of all written correspondence by placing electronic copies in your institution’s imaging system. Once more, powerful technology establishes compliant processes while strengthening net income.
- Third party relationships – It’s also no longer enough for banks and other financial institutions to simply have good working relationships with the third parties that provide IT and other services. Stricter standards and increased scrutiny by the Office of the Comptroller of the Currency (OCC) and the Consumer Financial Protection Bureau (CFPB), as well as the Federal Deposit Insurance Corporation (FDIC) and the Federal Financial Institutions Examination Council (FFIEC), mean financial institutions now have the same responsibilities for in-house and out-of-house services.
- Leverage your system vendor, to develop an outbound message plan that executes your policy, delivery complaint messages per your institutions call schedule.
Leveraging Debt Collection Compliance Technology
Whether regulators represent your state, the FDIC, the Federal Reserve Board, the OCC, the Office of Thrift Supervision or NCUA, regulation adherence is a growing challenge, ripe for automation to solve.
Technology utilization not only strengthens guideline and regulatory faithfulness, it frees staff resources – from mundane, dreaded tasks like dialing-busy, dialing-no answer, dialing-answering machine, and misdialing – to focus on debt repayment negotiations and charged-off debt recoveries, reducing outstanding amounts, preventing some charged-off’s and growing net income.
Employing your system provider’s software to work with your compliance staff, ensures your institution both enjoys the huge advantages of technological automation while staying on “the right side” of the regulation line. Your system vendor can guide you through the debtor approval process, as well as maintaining records of that approval. The key for financial institutions is taking advantage of technology by putting automatic checks and balances in place to enforce adherence to regulations and guidelines.