The new compliance risks for creditors that outsource collections litigation

Walker White

January 10, 2022

For creditors trying to recover long charged-off debts, it’s been appealing to use vendors that manage the long and complex process of managing lawyers and filing suit against debtors. Not only did outsourcing save time and hassle, it insulated the creditors from violations of federal and state debt-collection rules made by the vendors.

The Consumer Financial Protection Bureau (CFPB) has long been trying to pierce the compliance shield provided by outsourcing. With its recent modifications to Regulation F governing collections, the CFPB has eliminated much of the protection creditors have against violations by their vendors.

Now creditors need other ways to protect themselves. Here are five of the most important steps any creditor can take to mitigate their risk that vendors could put them in violation of the new regulations:

  • Build a central process for monitoring compliance.  The CFPB has made it clear that lenders are responsible for the “unfair, deceptive or abusive acts or practices” (UDAAP) committed by any vendor they use. As with any other regulations, financial institutions need an independent internal process for ensuring compliance by their own employees and all the service providers they hire.
  • Closely monitor communication with debtors. Regulation F now imposes strict rules on the frequency and content of communications intended to collect debts. It also requires creditors and their vendors to keep track of and comply with requests consumers make about how they want to be communicated with.
  • Bolster the process for communicating details about debts to collection agencies and law firms. The new rules require specific information to be communicated with debtors who ask for evidence the debt being collected is valid. The data for these validation notices needs to be provided directly by the lender and can’t be passed from one vendor to another.
  • Make sure there is an audit trail of all collections activities at the creditor and its vendors.  Be prepared to respond to requests from bank examiners, the CFPB, and plaintiff’s lawyers asking for details about every phone call made, letter sent, and legal paper filed.
  • Consider bringing litigation management in-house. The new regulatory regime mandates a complex and detailed flow of information between creditors, collection agencies and law firms. Adding a master servicer to coordinate litigation increases the risk that something will get lost. Few master servicers have the technology needed to monitor communication by law firms in real time. This makes it very difficult for the master servicers and the creditors they work for to ensure compliance. 

The consequences for lenders of a violation of debt collection rules by a vendor can be significant. The CFPB has shown itself to be very serious about cracking down on regulatory violations, often imposing large fines. And even a small problem could disrupt the operations of a vendor, delaying the recovery of all the accounts it is handling. 

For a comparison of creditor-managed collection litigation to outsourced litigation management, you can download our QuickStudy, “The risk of outsourcing collections litigation: How centralized control can prevent compliance violations and increase recoveries at the same time.”

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How outsourcing collections litigation is hampering your recoveries

Walker White

January 3, 2022

Attention lenders: If you’re still hiring an outside firm to manage your collections litigation, you are spending money on a service that is making your operations less efficient. You’ll be able to increase recoveries while expending less effort if you coordinate your collections law firms in-house.

To be sure, anyone who’s been in this business for a while knows this wasn’t always true. Back when paper documents held sway, creditors hired outsourcers to escape the tedious and costly work of forwarding account files to local law firms and keeping track of their progress.

Today, paper has been replaced by cloud computing (or should have been). And the government now requires creditors to monitor the law firms collecting debt on their behalf, ensuring that they comply with strict regulation.

In this environment, outsourcing collections litigation is no longer the most efficient recovery method. Here are just six of the pain points caused by litigation outsourcing:

  • Disjointed workflows. Many outsourcers use multiple software systems (often emailing documents, too) throughout the collections litigation process, instead of a single streamlined system.
  • Manual document creation. Attorneys hired by outsourcers often create legal filings in Microsoft Word, after gathering supporting information from multiple systems. Data duplication leads to increased risk of errors.
  • Inefficient information exchange. Law firms need facts and documents to support the validity of the creditor’s claims. Eventually, they will need an official of the creditor to sign an affidavit attesting to the claim’s veracity. Typically, outsourcers handle this information exchange through email, delaying collections while creating manual work flows for the creditor.
  • Insufficient audit support. The systems used by most outsourcers are designed to keep track of groups of files that are forwarded as a package to law firms. They typically can’t provide the real-time details of individual accounts the creditor needs to supervise and audit compliance.
  • Costly fees. Aside from the legal fees involved, outsourcers pocket 4%-7% of all recoveries.
  • Heavier workloads for attorneys. Collections lawyers engaged by outsourcers must attend to time-consuming clerical tasks. This busy work leads law firms to ask for higher contingency fees than they would need with a more efficient (and less error-prone)  process.

Today a creditor can solve all these problems by using modern cloud-based technology that enables them to manage their collections litigation in house more efficiently than through master servicers. Specifically:

  • State of the art workflow management systems allow creditors to store collections data in a single repository for smoother workflows.
  • Documents are automatically assembled without draining clerical processes.
  • Compliance is simplified, since the system is centralized and disallows debtor-contact that would violate regulations.
  • The administratives costs involved are typically well below those charged by outsourcers.

Best of all, the enhanced efficiencies mean improved productivity, increased volume, lower legal fees, and ultimately, higher returns.

For a comparison of creditor-managed collection litigation to outsourced litigation management, you can download our QuickStudy, “The risk of outsourcing collections litigation: How centralized control can prevent compliance violations and increase recoveries at the same time.”

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