Last week the CFPB and the FTC held a workshop to address what happens to unpaid debts at different stages of the debt collection cycle. The workshop brought together state and federal regulators, economists, major banks, debt collection agencies, debt buyers, consumer advocate attorneys, technology companies, members of the judiciary, credit reporting agencies, and more.
The workshop was aptly titled “Life of a Debt”, with a focus on data integrity in debt collection. But there was a great deal more covered during the event than maintaining data integrity when accounts reach the advanced stages of debt collection. I’d like to share some thoughts and perspectives about the future of debt collection, with a focus on what was covered during this workshop, but I want to start with a discussion of Part 4 (the third panel of the day) of the workshop – the critical stage when debt collections reach the court.
This particular panel discussion focused on data integrity and collecting debt in the courts, and was the liveliest discussion of the day. While the other three panel discussions appeared to reach a general consensus on one or more talking points, this one didn’t seem to “get there.”
Some key points about debt collections in the court that were brought out:
- Debt collectors are limited to telephone calls, collection letters, or litigation when trying to communicate with consumers about debts being collected.
This is well established. There really is not much more to collection than this, no matter who owns, or is collecting the debt.
- Approximately 90% of collection lawsuits lack consumer participation. Most end in default judgment.
Numerous studies support this estimate.
- Debt buyers would prefer to have contact with consumers outside of the court.
Depending on the debt buyer, this is true. I can certainly confirm this, from my own professional experience, that it is preferred by the debt purchasing company Encore Capital Group, whose former CEO, Brandon Black, sat on the above linked panel.
- Collection lawsuits should be filed when there is data to back up the claims sufficient to meet local court rules, and that a national set of standards would be great, but may not be feasible.
This last point is a serious flaw, and perhaps why the theme of the workshop included the term “data integrity”. I will have more to share on this in a later post (this one will run long as it is).
With that foundation, and with a focus on what can be done to affect change and improvements regarding collections through the courts in the future, I want to lay out some fresh concepts.
Ready resources to help people deal with debt collectors.
Judge Annette Rizzo, from the first judicial district of Pennsylvania, brought some unique perspective to the panel. As part of the Mortgage Foreclosure Diversion Program in PA, she witnessed the lack of homeowner participation in the foreclosure process drop from 90% (similar to credit card lawsuits today), to just 30% non participation. That is quite the accomplishment! How was that achieved? She provides some background to answer that question during the panel session linked above. If I could use only one word to sum up what must have been a herculean effort that Judge Rizzo only briefly described, it would be… OUTREACH!
Can anything be done to emulate the success of the Foreclosure Diversion Program in PA as it can be applied to lawsuits to collect unsecured debts? Not in my opinion. At least not to the degree possible when there is much more at stake, like ones home.
There are emotional attachments, physical displacement, larger dollar amounts, and a host of additional reasons why someone is going to be much more committed to mitigating a foreclosure, when compared to participating in a process to resolve smaller balance unsecured debts, like credit cards. But outreach, and access to resources that are not the debt collector, like was expressed by judge Rizzo, are very much worth testing and exploring. And there are participants involved in the collection and payment of unsecured debts willing to “step up”, as Rizzo suggested was needed.
Existing resources can be tapped to get people engaged in learning about the different solutions available to them to resolve a debt, both before a collection lawsuit is filed or as an additional touch point afterward. And there are companies willing to step up and test some of these measures. I reached out to a large debt buyer, and to a national non-profit credit counseling agency, and I confirmed that there is openness and willingness to pilot processes designed to improve consumer engagement.
Nonprofit Credit Counseling Agencies provide “Boots on the Ground” to help people deal with accounts in late stage collections.
There are strengths and weaknesses inherent in the debt management plans offered by credit counseling agencies. Weak, in that some consumers’ financial situations can be resolved with creative and flexible approaches (generally lacking in nearly all managed repayment plans). Strong, in that the plans offer predictability and measurable success if monthly income and expenses show both an ability to pay, and when the person’s income remains stable. But the vast majority of debt management plans do not contemplate principal balance concessions from original creditor participants.
What if you were able to add principal concessions from debt buyers? How does this flexibility potentially change the litigation stage of collection? From my experience, balance concession flexibility, measured beside a person’s current financial ability to pay, when fully understood by people faced with late stage collection notices, including litigation, can make a crucial difference.
Tapping into the strengths of existing systems, technology efficiencies, and the scalability of many credit counseling companies to increase consumer engagement prior to collection litigation – even after a collection action commences, makes sense. This is particularly true when considering the stable and longer-term view of collections that are maintained by some of the larger national debt buyers.
During the session, Black suggested his former company can offer consumers, “…more flexibility, more choice… where they’re going to pay less. We’re not going to need the court system as much.” Taken in context, the success of this approach is predicated on being able to communicate in a meaningful way with the person owing a legitimate debt.
My own experiences working with Encore’s subsidiary companies, Midland Funding LLC, and Midland Credit Management, support this assertion. Current trends within the debt settlement industry at large also support Black’s statement. Resolving debts with the Encore brands offers opportunities for the reduction of balances, and/or flexible payment terms that do, indeed, keep people out of the courts. This type of flexibility did not spring up overnight, and balance concessions and payment flexibility are not unique. This is something hard-coded into virtually all later stage collections. And most collection firms (at least those that are in the space for the long term), including the contingency collection agencies, adjusted quickly to the economic downturn by developing protocols for collections that can meet a consumer’s ability to pay.
I reached out to Encore Capital Group and asked, “Is there a willingness to test a cooperative effort with non-profit credit counseling agencies that can create an additional touch point for resolving debts prior to instigating a collection action in the courts?”
Brian Enneking, Vice President of Consumer Marketing at Encore Capital Group, responded. “We recognize the value credit counseling agencies provide to financially distressed consumers, and we work with many such firms today. We are also very interested in exploring ways to help our consumers get back on track, which can certainly include testing additional methods of connecting consumers with such firms. Our company believes strongly in working with consumers to avoid pursuing collection action in the courts, whenever possible.”
I call that a step up, and one that would be smart for other debt buyers to embrace.
Another suggestion from Judge Rizzo during this same panel session was the notion of creating “various touch points for these cases, to maybe fix it before you even have to use the courts.”
The obvious issues here are:
- People avoid collection calls.
- The content of messages left by collectors is limited, and they often go unreturned.
- Collection letters often go unopened or are disregarded.
When debts reach later stage collections, people have already been overwhelmed with demands for payment. They will often become numb to these ongoing collection efforts. They do not know about the different options to resolve a debt, and the flexibilities that may exist for them to get a handle on the situation before it escalates. Most people do not want to speak with a debt collector, and are not sure who to trust or where to turn.
I reached out to a non-profit agency, Cambridge Credit Counseling, a company I hold in high regard for their national transparency project. I asked, “Is Cambridge open to participating in a pilot program with a large national debt buyer designed to build consumer awareness, and provide budgeting and counseling sessions regarding their ability to repay later stage collection accounts prior to, or even after, a collection action is filed?
To which they responded: “Absolutely. There has always been a pretty solid barrier between debt collectors and consumers, and non-profit credit counseling agencies like Cambridge can bridge that gap. The missing component has always been financial education. The ongoing counseling that agencies like ours provide, as shown in our Transparency Reports, clearly indicates the impact that education has on the likelihood that a consumer will successfully complete a debt repayment plan. Clients engaged in the ongoing financial education offered by our agency are 22% more likely to repay their debts in full. Quarter after quarter, our data shows that it’s all about education, reinforcement, and engagement.”
Non-profit credit counseling agencies are already in place as touch points in the earliest and later stages of unmanageable debt.
- The CARD Act requires that a toll-free number be printed on credit card billing statements that will ultimately connect the caller to a credit counselor. And credit card and other loan originators regularly refer their card members and customers to non-profit agencies.
- DOJ approved non-profit agencies are already integrated in the bankruptcy process through the requirement of pre- and post-bankruptcy counseling.
Providing this additional touch point for consumers facing the specter of collection accounts in the courts is certainly not a stretch. Can it lead to more participation, fewer consumers facing default judgments, and the wage garnishments and bank account levies that result? Absolutely. With widely adapted implementation, clear messaging to consumers, and a broad awareness campaign, I believe non-participation could be reduced measurably. Midland Funding LLC, and other debt buyers, already offer payment and balance flexibilities directly to consumers. Connecting consumers with non-profits like Cambridge Credit Counseling and their peers could help lighten the load on our courts, educate consumers, and provide meaningful assistance to people seeking help with debts in late-stage collection.
These two companies show there are additional opportunities for cooperation. Both have indicated a willingness to explore different ways to help consumers understand the options available to resolve debts, both before and after courts are brought into the picture of the life of a debt.
I plan on making some additional outreach efforts to other debt buyers, collection firms, and non-profits. I will update this post when there is more to share.
I invite anyone with a sincere interest in adding to this discussion to post in the comment section below. I would ask that you keep the focus of your comments on the future of debt collection that is sure to come. I will have more to share about all of the panel sessions from the CFPB/FTC workshop in the weeks to come.