A Whole New World is Opening up for Lenders and Debt Collectors
The regulatory framework for oversight
of the consumer debt collection industry has long been a patchwork of dated
legislation. Beginning in the 1970s, the federal government passed a series of
laws aimed at protecting consumers from abusive and predatory practices in the
financial services industry.
The foundational Federal Debt Collection Practices Act (FDCPA) was passed in 1977 and has
been updated through the years. It was followed in the early 1990s by the Telephone Consumer Protection Act, which focused on limiting the use of
telephone communications in debt collection. In 2010,
the Consumer Finance Protection Bureau (CFPB) was created as an outcome of the
Great Financial Recession.
The patchwork nature of the regulatory
framework, combined with significant ambiguity with respect to interpreting
dated legislation in the modern era, has resulted in a challenging environment
for industry participants. Most legislation pre-dates and did not envision the
Internet and texting, for instance.
This year, though, a transformative
set of new
was published by the CFPB in an attempt to address such challenges. In May, the
CFPB published the first set of substantive proposed rules seeking to modernize and clarify the
industry regulatory framework. In addition to limiting the quantity of outbound
telephone contact attempts (seven calls per seven-day period per outstanding
loan) that debt collectors can make to delinquent consumers, the regulations
also address, for the first time, permissible uses of new technologies like
text messaging and email.
For industry participants, there are
two key takeaways from the new regulations. The very good news is that the
CFPB’s proposed rule-making seeks to create clearer, brighter lines around
permissible activity. Put simply, creditors and debtors may now interact through
modern channels with clearer rules of the road. But also, the CFPB is putting
the industry on notice, backed by its enforcement authority, to dramatically
improve the customer experience for delinquent customers. Expect severe
sanctions and enforcement actions for rogue players once the rules are
Calling Is Outdated
For the last 40 years, many debt
collection agencies have been stuck in a simple business model based on the
guidelines of the initial FDCPA, in part because they feared sanctions. Seen in
the context of today’s mobile and digitized world, those guidelines were clear
only with respect to telephone calls (for example, prohibiting outbound phone
calls at unusual and inconvenient times).
As almost every modern citizen can
attest, outbound calling is inefficient and almost archaic today, both with
regards to customer experience and collection rates. According to an industry report, returns between 18% and 20% were the
norm a decade ago, but that’s been cut in half. The unmistakable and persistent
decline in the success of phone calls to recover debt is the result of myriad
factors, including the rise of illegal spam calls and robo-callers, which has
bred distrust and a reluctance to answer one’s phone across the board.
Consumer behavior has changed
dramatically in the last ten years, too; I do my banking on my smartphone and
can stream movies on an airplane. We all live in the iPhone era, which means
bouncing between text, email, and apps is the norm. The proposed rules from the
CFPB acknowledge and embrace this shift, which means debt collection agencies
can feel confident in employing omnichannel communications to engage with
customers when accounts are delinquent. In one sense, CFPB is demanding
a shift from outbound telephony strategies to a more customer-centric
This is good news for customers.
According McKinsey, delinquent customers actually prefer
to be contacted by email or text. Lenders and collection agencies should
have reassessed the use of outbound telephone outreach as their primary means
of communication anyway.
Omnichannel Is Not Difficult
For many debt collection agencies,
though, the fear is not just about regulatory sanctions—it’s about the cost and
time involved in a perceived large-scale IT overhaul. But the technology
framework has transformed as well—the other side of the coin from the consumer
revolution. Driving the consumer mobile revolution has been an explosion of new
technologies and digital offerings, as cloud-based and SaaS products are being
developed and brought to market.
Digital communications can be
complementary to existing “legacy” IT strategies and to each other. It’s okay
to choose different vendors for SMS and email, as long as you have a platform
that can integrate all your channels. Technology that improves an integrated
customer experience and return rates can be implemented without tremendous investments—and
with substantial payoff.
Debt collection agencies should view
the proposed CFPB regulations as a catalyst for an exciting technology
transformation—particularly because embracing such technology won’t be optional
for very long. The normal cycle for lenders and collections agencies to upgrade
technology has been delayed by a good economy; delinquencies are low, even as
Americans borrow more than ever, so companies are pushing tech investments down
But, to be blunt, the economy won’t roar forever. And the CFPB has laid out the road map for desired outcomes. Debt collectors who embrace the mobile revolution now will see a positive impact on today’s revenue and will set themselves up to weather any economic storm that may blow our way. Used strategically, the new rules are a win:win for everyone.
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