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.”