As more debt buyers are expanding their legal collection efforts as a means of recovering unpaid debts, the following is guidance about how to approach legal collections in today’s regulatory environment.
Making the decision to file a lawsuit against an individual who owes money has always been a difficult decision. While some have been reluctant to do so in the past, this position has been shifting.
Let’s begin by considering where the legal collections market is heading. Creditors again have an appetite to look at legal strategies. Back when the CFPB was coming up and there was a great deal of regulatory noise, many creditors shifted away from using any kind of legal strategy. This created consolidation among debt collection law firms. At that time many creditors started to shift into a traditional agency placement strategy.
The market trend towards a legal collections strategy is shifting and picking up steam. Creditors – the top 5 to 10 banks – are driving much of this shift because the regulatory environment has calmed down. Plus, the proposed CFPB rule with the seven-call cap has been a driver.
Discussions now center around how the legal collections model can be utilized in the present economic environment. To threaten and even pursue legal action when you are dealing with a consumer or business, you are likely to get more attention when they get a letter from a law firm rather than from an agency. That is a big factor in why this litigation model is coming back into vogue.
In addition, we are in an economy in which unemployment is at low levels. People have jobs and income and they need access to credit. If you need to access credit, no one wants a judgment on their credit report or something that could prevent them from refinancing their home, buying a car or renting an apartment. Those are the types of issues that come up post-judgment. A consumer will have a difficult time pursuing the transaction when the credit report is negatively affected.
As the regulatory climate became more burdensome, creditors were concerned about reputation hits and regulatory issues if they went the legal route.
Whether you are an agency that can forward out a debt to a law firm, an agency with affiliations to law firms as separate entities, or you are a debt buyer with a legal strategy as part of your business model; having the legal strategy is another arrow sitting in your quiver to liquidate an account in the event of any sort of market correction. The more options you have going into a market correction provides a huge long term “annuity” type benefit for the agency, law firm, debt buyer and creditor.
The CFPB vs. states
As the CFPB has pulled back from regulatory actions, some states have increased their consumer protection and regulatory efforts. Some states including PA and NJ have formed CFPB like units.
Nevertheless, there is less concern about what states are doing as long as the BFCB pulls back in terms of moving forward with a legal strategy. This doesn’t mean state movements we are seeing aren’t worth watching. For example, Pennsylvania has a unit inside the government dealing with consumer matters and complaints.
There is no doubt we are going to see states taking more action with bad actors in the market. This will gravitate into the legal collections world. But at the federal level, there has been a relief for the law firms and the legal strategy because people are recognizing this is a part of the industry that can’t be legislated out. That pendulum won’t be shifting back, especially if we go into a tougher economy in the next 12 – 18 months, which many are predicting.
If we go into a market correction and don’t let vendors pursue legal strategies they are going to leave money on the table. Of course, they need to do so in a compliant fashion with meaningful document review, including all the checks and balances everyone has worked so hard to fix as a result of the CFPB’s examination manual and processes they are pushing for vendors to have in place.
Are we expecting to see a ramp-up to the extent every collection agency is pursuing everybody with legal action? There is always going to be an agency channel on every asset class in this industry – for example, government and student loans. The law firm is another angle that will be pursued. They will be blended together. There will never be one or the other. There will not be a movement where everyone gets sued. This will be an issue, for example, in health care. You can’t sue all of your patients because the chances you will get them to come back to the hospital will be slim. There will be a middle ground. We will see many more players adding, having or offering this service line because creditors will want that option.
How will they determine which accounts will end up in the legal bucket? Does the consumer have assets? Do they have a home? Is there a lever they can attach to? Suing someone with a $200 – $300 account is not the right decision. Suing someone with a $3,000 average balance, a good FICO score, their own assets and there is a way of liquidating that account is a good option. To sue just to sue opens an entity up to regulatory scrutiny. Be sensitive and use data and analytics to support the thesis to sue, when to sue and how to approach it.
Final Thoughts
Don’t close the door on the legal strategy. It is open and creditors are beginning to reopen their eyes to realizing legal strategies again. We are going to see much more growth in this part of the marketplace that hasn’t been there for a very long time. We believe this is the right time for this trend to unfold.
About CAS
CAS oversees and executes on M&A engagements, investment opportunities, compliance/regulatory assessments, valuation and expert witness litigation matters for constituents of the Outsourced Business Services (OBS) sector.
