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.”

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.”

As we move into the new year, it’s clear already that 2022 will be a turning point for the entire collections industry. And that’s particularly true in the community where we are most active—the creditors, lawyers, and service providers involved in recovery litigation. All of us are still confronting the tragedy, disruption, and uncertainty of the coronavirus pandemic.

And though we’ve spent several years preparing, we are all still figuring out how to adopt the Consumer Financial Protection Bureau’s Regulation F, which finally went into effect at the end of 2021.

As I think about 2022, I do not expect that the CFPB or other regulators will swoop in during the year with major enforcement actions in collections. It’s more likely than not that they will watch carefully how we implement the standards for consumer contact and the other changes that Reg F imposes.

Nonetheless, the specter of being charged with violating the new regulations hangs over every player in the industry. Indeed, this new reality has started to set off a chain of events that is only just beginning. Three of the four predictions, in fact, flow directly from Regulation F. I start with one issue that we all must confront right away.

1. Cyber security will become an urgent priority.

Computer security breaches are becoming more frequent, more serious, and a lot more costly. We’ve seen how ransomware attacks and new software vulnerabilities can set off a chain reaction of disruption throughout the economy that ultimately can cause days of uncertainty for many players throughout the industry. For everyone involved in collection litigation, a hacking incident can expose sensitive personal information, disrupt legal proceedings, and raise the ire of regulators.

Accordingly, everyone from the largest bank to the smallest collection law firm is looking at all the computer systems they depend on and asking for assurance they have every possible defense in place. These concerns and demands will escalate, favoring those operators at the vanguard of cyber security technology and procedures.

2. Creditors will become more involved in the collections and litigation process.

Regulation F has put an end to the days when creditors could assume that by outsourcing their litigation and collection that they were protected from penalties for any violations made by their vendors. The new rules make clear that the institutions that hire law firms or other service providers are responsible for their actions.
Compliance departments in 2022 will rigorously interrogate all their law firms and other vendors to determine if they can track and follow requests consumers make about how they want to communicate.

Prediction 2a is that often enough the big banks won’t like what they see. Too many players are doing business the way they did 20 years ago. They can’t communicate with customers over email or social media. And they can’t take payments electronically. These gaps not only risk running afoul of Regulation F, they also don’t live up to the standard of service that banks expect of their brands.

3. Vendors will start to retool their systems—or exit the business.

What happens at the collections agency or master servicer after they realize they can’t deliver the service level that the creditors and regulators expect? A scenario along these lines: The CEO calls the head of technology and discovers that they’ve been running the same systems since email was delivered via a dial-up line. Translation: If you want to do business in today’s world of instant communication and cloud computing, you will have to invest in a modern computing platform.

Some will step up and build or buy the technology they need. Others, I’m sure, will see 2022 as the right year to sell their company to a buyer that already has modern systems or at least has the capital to acquire them.

4. A generational shift will begin at collections law firms

Ultimately, the demand for new business practices and technology will flow from regulators through creditors and master servicers to hit individual collections law firms hard. Yes, the lawyers on the front lines have ultimate responsibility for following the rules. But they are generally local or regional players with limited resources.

This is a big opportunity for the legal minds coming into the upper ranks at their firms now. They have trained and formed their practice around a shifting landscape and in anticipation of technological upgrades that will quickly become a “ticket to play.” That is expertise their firms will value deeply as they grapple with the industry shifts outlined here and more.

In all, 2022 is going to be a year when the collections litigation world will rethink many practices and relationships that have been stable for years, sometimes decades. At Oliver, we’re in the middle of this, of course, building a technology platform designed to make the entire litigation chain more productive. We look forward to exploring all of this with everyone in the community. Don’t hesitate to give us a call or find us at industry events.

We’ve also written a white paper that explores the new world of creditor-driven collections. You can get your copy here.

Here’s to a successful 2022.

In the wake of the Hunstein case, we examine how these consumer-centric policies, laws and market conditions are causing disruption and uncertainty in the collections industry. There are three take-aways from our interview with Stephanie Eidelman, CEO of The iA Institute.

Regulators are placing the compliance responsibility at the feet of Creditors.

Stephanie Eidelman: As we remember from former CFPB Director Cordray, they were going to write rules for first parties.  They set that aside.  The Trump administration didn’t pick it up. I would expect these will be picked up again with the Biden administration. So, your platform nicely anticipates that.

Walker White:  Absolutely.  It ultimately comes down to the fact that we have better technology today to solve collaborative problems.  It’s important that the collaborative platform is for all parties to work together in a compliant, efficient manner to achieve an outcome we all desire.  This is good for all parties involved, but also for the consumer as well, to make debt collections as palatable as possible.

Our solution, called Oliver CLX, which stands for collections litigation exchange, automates, and orchestrates all repetitive, legal, and regulatory processes, bringing all the required parties together onto a single platform to drive more revenue, help them maintain rigorous compliance, and ultimately simplify the litigation process.  This gives creditors more control over the process and ensures compliancy across the channel.

Hunstein is just the latest example of the need for change in the Collections Industry.

Stephanie Eidelman:  In the last week or two, we have all been consumed by this case that came out of nowhere, Hunstein.  I’d be interested in your perspective on how the market can deal with compliance fire drills in a better way.

Walker White: I think Hunstein is an example of why change is required in this industry.  If we look back over the last 15-18 months, think about all the disruptions in the industry.  COVID—obviously, unexpected macro activity.  And then Regulation F, which was expected and will require a lot of change.  Some of these changes can be awfully expensive and disruptive.  And ultimately, these changes expose all companies in the supply chain to compliance risk, from the creditor to the master servicer, to the law firm, etc.

We think the trend is towards what we call “creditor-managed collections,” rather than the more decentralized approach that we have today.  This is not going to be creditors dictating the steps that the law firm or others must take, but rather think of it as the creditor setting the table.  That’s where the Oliver platform is valuable to manage all the consumer data in a centralized repository, and then farm it out to anyone who is authorized to use it.  This allows those creditors to implement, in a configurable group of servicers or vendors that they want to implement their collections strategy, facilitate the data transmissions, because it’s the creditor’s platform.

This allows us to step right around the Hunstein problem, because it’s not going to a third-party and then from that third-party to someone else. The creditor is authorizing the release of the information directly.  It doesn’t matter whether it’s for agency, legal, or debt sales.  Ultimately, we are centralizing and enforcing the consumer preference data side of that as required by Reg F.

We are no longer playing telephone, where we toss files from person to person.  With a creditor-driven model, the creditor puts the data into a platform where everyone can operate on it seamlessly. And I think that’s the difference that we’re going to see going forward.

Built-in Compliance stabilizes the process.

Stephanie Eidelman:  It’s interesting that you talk about centralization as a way to standardize or maybe stabilize the process.  How does that look different tomorrow from today?

Walker White:  I think a good way to consider this is through the lens of the compliance being built into the solution.  Historically the creditor would send a file out, they would rely upon their servicers, the firms, and so on to manage it.  But think about how TurboTax, which took all the laws, rules, and procedures of the tax code, and basically brought it into a platform where even someone like myself can file my taxes online because they built all that compliance into it.  The Oliver platform has built-in compliance rules, such that anyone who’s operating in the environment gets the benefit.

For example, the creditor wants the demand letter sent in 35 days, not 34 and not 36.  The platform ensures that will happen and documents that it was sent.  Next the suit is going to be filed…automatically released…never a day early, never a day late, always on time.  When it comes to proving attorney meaningful involvement, if you’ve got a platform which can oversee all processes, it’s easy for them to see that the attorney looked at this matter for seven minutes while they evaluated the balance and who it was being mailed to, and so on.  Ultimately, I think the big difference we’re seeing; rather than leaving it to chance and to the individual parties, the creditor can oversee the process.  Not enforce it but oversee it and make sure everything is followed in the way they expect it to.

Listen to the full interview here.