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Reducing Collection Compliance Risk for Community Banks and Credit Unions

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.

Learning the Collection Compliance Rules

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.

11 Tips to Improve Debt Recovery and Avoid Collection Compliance Risk

There are some vital steps financial institutions can take to improve debt recovery:

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.